Is index investing right for you?

Image courtesy of Sailom at freedigitalphotos.net

Image courtesy of Sailom at freedigitalphotos.net

When investing in the stock market there is always risk.  There is a way to spread that risk over many stocks (portfolio) instead of just a few companies.  You can invest in an index.

An index is a statistical measure of the changes in a portfolio of stocks.  Some examples of indices are the S&P 500 (SPX), Russell 2000 (RUT), and NASDAQ Composite (NDX).  These indices represent a portfolio (a group) of stocks.  Unfortunately you cannot buy the index itself but you can invest in an Exchange Traded Fund (ETF) that represents the index.  The ETF for the  S&P 500 is SPY, Russell 2000 is IWM, the Dow Jones Industrial Average is DIA and the NASDAQ is QQQ

The benefit to this type of investing as opposed to individual stocks is that the risk is lower because you have a portfolio of a group of stocks.  For instance the S&P 500 is a group of 500 mid-cap stocks and the Russell 2000 is a group of 2000 small cap stocks.  It is instant diversification across a whole grouping of stocks.

Which would you rather invest in and why?  Individual stocks or an index?  Please comment.

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