Any money you might need for near-term expenses, goals, or unplanned bills should go into your savings account. But if you have extra money you don’t need for those purposes, then investing it in a brokerage account makes a lot of sense. That way, you’ll have an opportunity to generate a strong return on that money and grow wealth over time.
Now, you’ll often hear that the key to building a successful portfolio is to diversify your holdings. That could mean loading up on different stocks across a range of market sectors.
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But what if the idea of choosing your own stocks makes you nervous? If so, you’re certainly not alone. It can be difficult to determine which stocks are a good fit for your portfolio, especially if you’re fairly new to investing.
Here’s some good news: You can build yourself a nice diversified portfolio without having to bear the stress of hand-picking stocks individually. All you need to do is fall back on exchange-traded funds, or ETFs, instead.
The upside of ETFs
ETFs are funds that trade publicly and aim to match different benchmarks. If you buy shares of an S&P 500 ETF, it’s like putting your money into the 500 largest publicly traded companies in the stock market. You can also buy sector-specific ETFs. For example, if you’re eager to invest in energy stocks but you’re not sure which ones to pick, you could buy shares of an energy ETF instead.
With ETFs, you’re effectively investing in a whole bunch of different companies, only without having to spend the time researching them all. Because of this, ETFs should lend to a nice amount of diversification within your portfolio.
But just as importantly, ETFs can take a lot of the stress out of investing. That’s because you won’t have to rack your brain wondering if you should choose one company over another. Instead, you can buy into a whole bunch of companies in one fell swoop.
Should you give up on buying individual stocks?
Buying individual stocks means doing a lot of research initially, and then keeping tabs on those stocks to make sure their performance is up to par. With ETFs, you still have to keep tabs on your portfolio, but you shouldn’t have to do nearly the same amount of research.
It’s more than possible to build an investment portfolio that consists of both individual stocks and ETFs. So if you decide to largely go the ETF route but there are a few individual stocks that still appeal to you, then by all means, scoop them up.
Similarly, you may want to start your portfolio off with ETFs, but then pledge to add one individual stock per month. That gives you more time to research companies one by one.
There’s certainly lots to be gained by putting money into individual businesses that have the potential to outperform the broad market. But if you’re nervous to do so, there’s absolutely nothing wrong with falling back on ETFs.
Some people never invest outside of ETFs and do perfectly well for themselves. If joining their ranks helps take the pressure off and allows you to sleep more easily at night, that’s well worth it.
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