Investing in the stock market is a tried-and-true way to build wealth over time. Many times, however, investors are left disillusioned because their returns are underwhelming or they’ve lost money on stocks and investments that they thought should have been good buys.
Even when investors go with seemingly safe investments, they can get burned. 3M is a stock which comes to mind. It has been a solid brand and business for decades, but now, due to legal problems, it has split its operations and slashed its dividend, which for years looked to be incredibly safe. Walgreens Boots Alliance is another once-safe stock that had to cut its dividend earlier this year.
Investors who recently bought shares of those stocks are probably disappointed now, after their short stint in the market. Particularly if they made the mistake of loading up on only a few stocks rather than diversifying their investments.
Stock picking can be risky and time-consuming
Investors burned by a stock pick or two might have learned that picking individual stocks can be risky. However, it’s the allure of chasing big gains and trying to beat the market that attracts many investors.
It’s this gamification in stocks that led to Warren Buffett’s right-hand man, the late Charlie Munger, in 2021 to derisively compare erratic behaviors in the stock market to what someone might observe in a casino. And betting on high-risk stocks can be a dangerous strategy. Risk is real in the stock market. (Check out this page for help understanding your own risk tolerance.)
Even blue chip stocks can sometimes provide investors with underwhelming returns. And while many investors can outperform the markets while diversifying and holding many stocks, it’s not an easy strategy to do on your own, especially if you don’t have the time to keep track of all those investments or aren’t really interested in doing so.
Many investors are better off sticking with a diversified exchange-traded fund
For many investors, a more suitable strategy may be to buy exchange-traded funds (ETFs) tracking different segments of the market. Through an ETF, you can get exposure to not just dozens but hundreds of stocks through just one investment.
For example, the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) tracks the S&P 500 and allows you to benefit from the market’s overall performance. Since each stock takes up a minor piece of the fund, you aren’t taking on any oversize risk with a single investment.
And with an expense ratio of only 0.09%, the cost isn’t high. Over time, the fund’s composition could change as new growth stocks emerge and as other stocks struggle. Sticking with shares of the fund are an easier way to keep up with market changes than trying to stay on top of business news and developments.
While there will inevitably be dips 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 risen by 264%. And when factoring in its dividend payments, the total returns are around 466%.
The downside, of course, is that by investing in a fund that mirrors the S&P 500, you can’t possibly outperform it. If you’re confident in your stock-picking abilities, creating your own customized portfolio may still be what you prefer to do. But it’s definitely not the only way to make money in the stock market.
Investing in stocks doesn’t need to be complicated
Ultimately, your investing strategy can be as simple or complex as you want it to be. Want to invest in dozens or perhaps hundreds of stocks and not worry about tracking all those companies? Go the ETF route. Do you follow the stock market on a daily basis and are you familiar with the latest trends and developments in the market? Do you have a handle on what makes a stock undervalued or overvalued? Then picking individual stocks may be the better option for you.
There’s no one-size-fits-all strategy that is going to be suitable for everyone. And if your goal is just to make a good return without having to beat the market, then opting for an ETF which mirrors the S&P 500 may be the optimal strategy for you.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.
Making Money in the Stock Market Can Be Easy, Even if You’re Not Great at Picking Stocks was originally published by The Motley Fool
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