3 Reasons to Ditch All My Individual Stocks for Index and Mutual Funds

  • When I first started investing, I just bought a bunch of individual stocks which led to poor returns.
  • I think I’m going to ditch all of my individual stocks in favor of mutual and index funds.
  • I hope this makes investing less time consuming, diversifies my portfolio, and improves my returns.
  • Read more from Personal Finance Insider.

I spent most of my 20s making a lot of financial mistakes, from ignoring my retirement fund to racking up debt. A few years ago, I was able to get my finances in a more stable place and that’s when I decided it was time to invest.

Without a lot of knowledge or strategy, I decided to buy a handful of individual stocks. I invested in companies I was a consumer of and companies that I thought had promising futures. While it felt like a good idea at the time, buying these individual stocks has made my investment strategy time consuming and not as profitable as I’d like.

Index and mutual funds, which put your money in securities like stocks, bonds, and short-term debt, often yield higher returns.

According to The Balance, in 2021 mutual funds in seven categories averaged an annual return of 11.54%, which is way more than the returns I made on individual stocks. 

As I re-evaluate my finances in 2022, here are three reasons why I’m considering ditching all my individual stocks for index or mutual funds. 

1. My individual stock approach was random

I was so excited to enter the world of investing that I just took a chunk of cash and used it to start buying stocks. I bought stock in companies I thought were promising, and companies that I was a loyal consumer of. While this approach might work for some, it didn’t lead to the best returns.

Instead, selecting index or mutual funds — even some that encompass the companies I bought individual stocks in — could be a better strategy to increase returns since the success isn’t just based on a single company. 

2. I want more variety with my investments 

From the moment I started investing in stocks, I knew the importance of having a variety of categories and companies for my portfolio. In the end, I found that I mostly just invested in tech companies because those were the companies I knew the most about.

One perk of putting money in mutual funds or index funds is being able to have a more diverse portfolio. You can choose funds based on the size of the companies, or on categories like S&P 500

index fund

, emerging markets, or an international stocks fund.

3. I don’t have time to manage my stocks

Over the years, I’ve bought stock in more than 15 companies. While I’m often tempted to leave the money in the market and not check on them, I’ve experienced first-hand why that’s a bad idea.

One time, one of the companies I was invested in went under, and I lost all of my money because I didn’t pay attention to the news, or sell the stock off fast enough.

Since I’m still a rookie at investing, managing my stocks takes a few hours of research a week and forces me to make decisions of when to buy and sell off stock on a daily basis. Index or mutual funds don’t require this much research and time. 

In the end, I want to spend less time thinking about which stocks to buy and sell. Instead, I want to spend just an hour or so a month looking at my index or mutual funds, and a couple of hours every quarter deciding which new funds I should invest in.

My hope is that this approach makes investing less time consuming and provides bigger returns.

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