Investing in the stock market is a proven way to build wealth over time. However, investors are often disappointed because their returns are disappointing or because they lost money on stocks and investments they thought were good buys.
Even when investors opt for seemingly safe investments, they can find themselves confused. 3M is a stock that comes to mind. It’s been a strong brand and company for decades, but now, due to legal issues, it’s split its operations and cut its dividend, which for years seemed incredibly safe. Walgreens Boot Alliance is another once-safe stock that had to cut its dividend earlier this year.
Investors who recently purchased shares of these stocks are likely disappointed now, after their short time in the market. Especially if they made the mistake of only taking on a few stocks rather than to diversify their investments.
Stock picking can be risky and time-consuming
Investors exhausted by one or two stock picks may have learned that picking individual stocks can be risky. However, it is the lure of chasing big gains and trying to beat the market that attracts many investors.
It is this gamification of stocks that led Warren Buffett’s right-hand man, the late Charlie Mungerin 2021 to derisively compare erratic behavior on the stock market to what one might observe in a casino. And betting on high-risk stocks can be a dangerous strategy. The risk is real on the stock market. (See this page to help you understand your own risk tolerance.)
Even blue-chip stocks can sometimes offer investors disappointing returns. And while many investors can outperform the markets while diversifying and owning many stocks, it’s not an easy strategy to implement alone, especially if you don’t have time to keep track of all those investments or if you’re not really interested in doing it. SO.
Many investors benefit from sticking with a diversified exchange-traded fund
For many investors, a more suitable strategy might be to purchase exchange-traded funds (ETFs) that track different segments of the market. Through an ETF, you can gain exposure to not only dozens, but hundreds of shares with a single investment.
For example, the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) follows the S&P500 and allows you to benefit from the overall performance of the market. Since each stock takes up a minor portion of the fund, you are not taking on excessive risk with a single investment.
And with a spending rate of just 0.09%, the cost isn’t high. Over time, the fund’s composition could change as new growth stocks emerge and other stocks struggle. Sticking to fund stocks is an easier way to keep up with the market than trying to stay on top of current news and economic developments.
While there will inevitably be declines and bad years, tracking the S&P 500 is a solid way to grow your wealth over time. Since 2000, the SPDR S&P 500 ETF Trust has increased 264%. And taking into account its dividend…
