Investing
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Putting your money into a total stock market index fund is a simple way to invest.
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You get the benefit of immediate diversification with little legwork.
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You may not get the returns you’re after with this approach.
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Generally speaking, the money you save for retirement isn’t money that should sit in cash.
It’s okay to keep a small portion in cash, and to increase your cash position as you get closer to ending your career. However, while you’re in the process of building wealth, it’s important to load up on assets that lend to steady growth. For the most part, that means putting your money into the stock market.
In that regard, you have choices. You could build yourself a portfolio of individual stocks. Or, you could put your money into a total stock market index fund.
This Reddit poster is considering the latter. And while it’s not a bad strategy per se, there are some pros and cons to consider.
The upside of going all-in on a total stock market index fund
As the name implies, a total stock market index fund aims to match the performance of the stock market as a whole. It’s a bit different from another popular investment strategy, which is loading up on S&P 500 index funds.
The S&P 500 consists of the 500 largest publicly traded companies by market capitalization. And the S&P 500 is generally considered pretty representative of the broad market.
The difference between an S&P 500 index fund and a total stock market index fund is that the latter encompasses a wider range of companies, including mid- and small-cap stocks that aren’t large enough to make it into the S&P 500.
The benefit of putting your money into a total stock market index fund is getting an instantly diverse portfolio. You can also take a hands-off approach to managing your portfolio if that’s the path you prefer.
Some people are honest with themselves in that they don’t have the time or patience to actively manage a portfolio. With a total stock market index fund, you technically don’t have to.
The downside of going all-in on a total stock market index fund
While a total stock market index fund is a relatively easy way to invest, it may not be the best choice for you. First, you should know that any time you invest in the stock market, you risk losing money.
It’s a smart idea to invest in stocks when retirement is many years away. However, if you’re getting closer to that milestone, you shouldn’t have all of your money in a total stock market index fund. It’s just too risky.
Also, while investing in a total stock market index fund might help you score pretty strong returns through the years, you won’t beat the market like you could potentially do with a portfolio of hand-picked stocks. You’ll need to figure out what savings goal you have and whether a total stock market index fund is likely to help you achieve it.
If you like the idea of building a more customized portfolio but feel overwhelmed by the idea, find yourself a financial advisor. An advisor can help you put together a portfolio based on your investing horizon, income, and savings goals.
A total stock market index fund may be part of that strategy. But branching out beyond that point could result in returns you’re a lot happier with.
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