Investing in stocks is a smart strategy for growing wealth over time. Over the past 50 years, the stock market has delivered an average annual 10% return, as measured by the S&P 500 index. At that same return, a $10,000 investment in stocks today could leave you with a portfolio worth more than $452,000 in 40 years.
But buying stocks is something you’ll want to put a lot of thought into. That means researching each and every stock you add to your portfolio. If you choose your stocks at random, you could face some pretty unfavorable consequences.
You might end up with poor performers
There are many solid businesses that deserve a place in your portfolio. But if you load your brokerage account with random stocks, you might end up with a number of companies that don’t do a good job of managing their money and earning profits. The result? Less money for you.
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It’s important to look at a given company’s financials before buying its stock. A company that’s loaded with debt may be a company that’s in trouble — and one you’re better off avoiding.
You might end up with a portfolio that lacks diversification
You need to make sure your portfolio is diversified. That way, if a single company or market sector takes a beating, you won’t necessarily see the value of your portfolio plunge right away. But if you choose your stocks at random, you might end up owning shares of numerous companies within the same market segment. And that’s not a good thing.
Let’s say you end up in a situation where 80% of your portfolio consists of tech stocks, and the tech sector gets hammered. You could see the value of your investments plummet. On the other hand, if tech companies only comprise 20% of your portfolio, the damage may not be nearly as severe.
When researching stocks just isn’t your thing
Some people don’t have the time, patience, or desire to research stocks on an individual basis. If you’re one of those people, don’t sweat it. Hand-picking stocks isn’t for everyone, and it’s better to be honest with yourself than simply fall back on a plan that has you adding stocks to your portfolio at random.
A better bet for someone in your shoes may be to load your portfolio with S&P 500 ETFs, or exchange-traded funds. These publicly traded funds seek to track and invest in S&P 500 companies, so by buying them, you’re effectively adding many stocks to your portfolio without having to research them one by one.
There are also segment-specific ETFs you can look at. You may, for example, decide to buy shares of an energy ETF, bank ETF, tech ETF, and so forth so you’re investing in different sectors of the market without having to dig deeply into individual companies’ finances.
Choosing stocks at random is a move that might backfire on you. If you’re not up for research, there’s absolutely nothing wrong with falling back on ETFs.
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