FAQ

Question:

if it’s a bad idea to try and learn how to pick your own stocks, why is it okay to buy Index Funds which are themselves collections of hand-picked stocks?

Answer:

General ETFs and index funds - those targeted at a large asset class such as international large companies in the developed markets - allow an individual to get exposure to a large number of companies, which helps in the following ways. One major benefit is reduced transactions costs. An individual would spend a considerable amount of money in purchasing all of the necessary companies while the cost of the index or fund is spread across the many investor owners.

These funds also reduce the time and effort that would be necessary to monitor and adjust to company and market changes. Furthermore, they allow one to develop an overall portfolio with exposure - if warranted in one's own circumstances - to all the publicly traded markets. There are over 12,000 publicly traded companies in 45 countries available for consideration to any investor.

This diversification is important to reduce risks that have no expected return such as concentration risks often associated with purchasing only a handful of stocks. Diversification also helps reduce the stress of trying to determine the "winners" as a recent study showed that excluding the top 25% of the markets performers each year from 1926 to 2012 would have eliminated the entire compound average annual returns associated with the US stock market, which was 9.6%.