The Motley Fool: Index funds can help the uncertain investor

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The Fool’s Take

If you’re eager to invest in stocks but don’t feel confident studying and selecting individual companies on your own, you can simply invest in one or more index funds that track broad indexes of stocks. Here are some with low fees and impressive track records:

— The Vanguard S&P 500 ETF tracks the S&P 500 index of 500 of America’s biggest companies, which together make up around 80% of the total U.S. stock market’s value.

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— The Vanguard Total Stock Market ETF encompasses just about the entire U.S. stock market, including medium-sized and small companies.

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— The Vanguard Growth ETF is focused on companies growing at a faster-than-average clip. Growth stock investors seek above-average returns, and this ETF has delivered them over the last few years, though it won’t necessarily do so every year.

— The Schwab U.S. Dividend Equity ETF contains about 100 dividend-paying stocks, and it recently sported a dividend yield of 3.5%.

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— The Vanguard Real Estate ETF is worth considering if you’re bullish on the real estate market. It encompasses dozens of real estate investment trusts (REITs) — companies that own lots of properties and earn income by renting them out. REITs often pay meaningful dividends.

Ask the Fool

From T.O. of Carson City, Nev.: I noticed that both Meta Platforms and Alphabet (parent companies to Facebook and Google, respectively) started paying dividends this year. And Apple increased its dividend payment. Is something going on here?

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The Fool responds: Companies should always be using the money they generate in the most productive ways. When they’re young or growing briskly, they typically need to reinvest all their earnings in furthering their growth — perhaps by hiring more people, building more factories, buying more advertising and so on. But as they grow, they can end up with more money than they have good uses for. At that point, they might consider paying out some of their earnings to shareholders as a dividend.

Both Meta Platforms and Alphabet have grown huge and are generating boatloads of free cash flow ($43 billion and $69 billion in 2023, respectively). So it makes sense for them to initiate a dividend if they have money to spare. It’s also common for dividend-paying companies to increase their payout over time — often annually. That’s what Apple did this year.

From S.F. of Beaverton, Ore.: What’s a phased retirement?

The Fool responds: It involves retiring in stages, not all at once, and it can take many forms. Instead of completely separating from your employer, for example, you might cut back to working part-time. Once you officially retire, you might also keep part-time or seasonal hours for a while. With a phased retirement, you can have some extra income coming in for years. It can also help you psychologically to ease into retirement bit by bit. Some people don’t do well when they’re suddenly fully retired, feeling a little lost and at loose ends.

The Fool’s School

If you want to start investing in stocks, you’ll probably want to open an account with a good brokerage. (You may also be able to invest in stocks via your 401(k) account or other means.) Even if you already have one, there may be a better one for you out there. Here are some factors to consider as you compare contenders for your stock-buying business:

— Think about how you’ll do business with your candidate. If you favor in-person transactions, look for a brokerage with locations near you. If you are fine with interacting over the phone or online, you can consider almost any brokerage.

— Think about your investing style. If you buy stocks only every now and then and aim to rarely sell, commission costs may not matter that much. But if you plan to trade frequently — which we don’t generally recommend — you’ll want to compare costs; note that many solid brokerages these days offer free stock trades. Simply investing in stocks — or stock index funds — for many years is a good way to build long-term wealth. But if you’re interested in more complex (and often riskier) investing, such as using short-term trading, derivatives like options and futures, or commodities, see what each contender offers in those areas.

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— Consider the basics for each candidate. This includes minimum required balances; fees for withdrawals, wire transfers, over-the-phone trading or other transactions; margin interest rates (if you expect to invest with borrowed money); and more. Most big brokerages offer some research on stocks and other investments; if you expect to take advantage of research reports, see what each one offers. If you plan to invest in mutual funds, see which contenders offer access to funds you might want. Some brokerages these days even offer banking services.

Do some online digging, searching for terms such as “best brokerages” or “brokerage ratings” to see what others have to say about brokerages you’re considering. (Or visit us at Fool.com/the-ascent/buying-stocks.) You may stumble upon a great one you hadn’t even considered.

My Dumbest Investment

From R.P.: My most regrettable investment move was waiting for a pullback before investing.

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The Fool responds: That’s a common and often costly mistake — people often wait for a pullback before investing in particular stocks or the overall stock market.

It can make sense to wait a bit to buy a stock you want to own if you’ve studied it and have determined that it looks quite overvalued; investing at that point can lead to regrets if it soon falls closer to its fair, or intrinsic, value. (Of course, it might instead keep rising in value for a while, becoming even more overvalued.) To be on the safe side, aim to buy into stocks when they’re undervalued, or at least somewhat fairly valued.

With the overall stock market, no one really knows what it will do this year or next. So it’s not smart to wait for a drop in price, because it may never arrive. If the stock you want to buy seems reasonably or attractively valued, and especially if you’ll be investing in installments over a long period, jump in — perhaps via a low-fee, broad-market index fund such as one that tracks the S&P 500. And keep regularly adding money through market upturns and downturns.

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