The reason for the passive index fund is that it has multiple stocks to spread the risk. This is called diversification. Like in a garden, multiple seeds, spread out into different companies. Index means a specific group of selected companies which are used to represent the market they are in. Passive means that there are low maintenance fees. The average investor pays about 3.75% in fees per year.
Its a good idea to look at mathematical ways to purchase stocks at a cheaper price. This includes dollar cost averaging and rebalancing.
There are two 10% rules, that may apply, one for index funds and the other for individual stocks. Never invest more than 10% in individual stocks. If you do, it is very much a gamble. Ten percent, here, refers should include all of your assets, not just your stock portfolio.
When the index fund rises or falls 10%, look into rebalancing. This means, if the target allocation is $20,000, and the price jumps 10% to $22,000, sell $2,000 to take the profit. However, keep an eye out for fees required during a sale. With large amounts invested, companies should allow you to make free trades, to minimize these fees.
This post was reposted from http://finlit.biz/retirement-2/index-funds-versus-individual-stocks/, originally written on April 30th, 2014.
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