4 Things To Understand Before Picking Individual Stocks Over Index Funds
A recent survey by U.S. Bank found that 44% of Americans are first-generation wealth builders because they grew up without family members who shared wealth-building strategies. The results show that 72% of Americans feel investing has become more complicated, and 66% feel pressure to keep up with investing trends. It’s understandable that someone looking to invest in the stock market may be confused about whether to invest in individual stocks or choose index funds.
MoneyLion consulted with investment advisors about whether you should own individual stocks or index funds, and which is better for your portfolio and finances overall.
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1. Consider Your Understanding of Securities Before Deciding
Bruce Maginn, an investment advisor at Solomon Financial, recommended that an investor answer the following questions before investing in an individual stock to determine if they can outperform a diversified portfolio of index funds:
Do you have time and willingness to research industries and companies in depth?
Do you have the skill to determine the appropriate size and timing of buys and sells?
Do you have the behavioral discipline to remain patient and rational during periods of market turbulence?
Do you have the knowledge to understand taxes and manage gains and losses efficiently?
Before you make a decision, you want to ensure that you know what you’re getting yourself into. When you invest in an index fund, you’re buying a pool of stocks, which takes the guesswork out of the equation.
Maginn elaborated, “If the answer is no to any of these questions, the investor should consider utilizing multiple index funds across different asset classes to develop these skills and behaviors before moving even a portion of their serious portfolio into individual stocks.”
You don’t want to invest your hard-earned money into just one stock because you may not be able to handle the volatility.
2. Index Funds Offer Diversification To Reduce Risk
“For most investors, the scale and diversification of holding an index fund far outweighs the cost (expense ratio), which is increasingly minimal (many asset class index strategies are down to less than 0.05%),” said Dan Phillips, BMO's Chief Investment Officer.
When you allocate your money to an index fund, you’re investing across numerous companies and gaining the benefit of having management on your side. While you can try to pick stocks on your own, you could just let the professionals do their job so you can focus on increasing your income, giving you more money to invest.
3. You Can Allocate a Percentage to Individual Stocks
While Maginn doesn’t recommend getting started with individual stocks, he pointed out that when an investor’s serious money is diversified across index funds and other asset classes, there’s nothing wrong with using some “fun money” to explore individual stocks.
For example, if you take a deep dive into an industry and its companies, you may find that one stock stands out. If you truly believe the company has attractive long-term prospects and want to test your stock-picking skills, then using a small portion of your fun money to do that can be a useful way to gain experience without taking on a huge risk.
4. Individual Stocks Allow You To Invest in a New Industry
If an individual stock has little or no relation to the investments in your existing portfolio of index funds, adding it can provide additional allocation, per Maginn. This may also help strengthen your portfolio during market volatility. There usually isn’t a one-size-fits-all solution in personal finance and investing, since every individual has their own level of risk tolerance.
The Final Word on Index Funds vs. Individual Stocks
The experts agreed that investing in both individual and index funds can be a win-win. However, if you don’t have the time and energy to research individual stocks, industries and the overall economy, then you would be much better off investing in an index fund.
As a passive investor, you won’t have to stress over market swings and the volatility seen in recent years. Only about 13% of active U.S. large-cap funds survived and outperformed the average passive competitor over the decade ending June 2026, per Morningstar data.
The good news is that just because you invest a significant portion of your savings in index funds, that doesn’t mean you don’t have room in your portfolio for individual stocks of companies you believe in.
“You can gain valuable investing experience by researching and owning individual stocks, but also keep your assets diversified by owning index funds,” Maginn concluded.
Editor’s note: Investing involves risk, including the possible loss of principal. Always consider your individual circumstances and consult with a qualified financial advisor before making investment decisions.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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