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Your investment strategy: Index funds vs. Individual security selection

All investments carry risk. It pays to be choosy and mix up your holdings in a diversified portfolio.  

All investments carry risk. Exposure to loss, and an investor’s appetite for taking chances, influence investment behavior and the design of your investment portfolio. While some investors thrive when the stakes are high, most investors are more temperate and defensive in building wealth.

Investment strategies are built around the role of risk-taking. Where you fall (conservative, moderate, or aggressive) is reflected in your approach to investing. Being sensible and choosing strategies that align to your risk tolerance are fundamentals of investing.

Passive investors might focus on low-cost index funds, a type of mutual fund with a portfolio designed to match or track the composition of a stock index. No matter which type of index fund an investor chooses, though, they are getting every stock in that index, including the good, the bad, and the ugly companies.

Active investors may choose to select individual stocks and build a personalized portfolio, seeking out opportunities to outperform the indexes. Stocks are selected based on research that sheds light on the underlying fundamentals and performance predictions for the company. An investor can actively manage their own portfolio or work with a money manager who selects individual stocks for them.

More control

Individual security selections within certain asset classes can give investors more overall portfolio control than investing in an index class. Investors can take a more targeted approach when investing individual securities related to an investment strategy. Instead of buying all securities in an index, investors can only buy the best company stocks when they are investing in individual securities.

The best stock pickers don’t abandon the fundamentals. They research the value of the underlying business, rather than the value of the securities or trying to time the market.

Investors also have greater control over tax consequences in selecting stocks. Investors can better target sales for a tax gain or loss with individual securities than they can by selling in an index fund. If you are investing $100,000 in an S&P index versus investing in 10 individual companies within the index, and you need to create a loss to offset gains, an investor can sell just one company rather than selling the entire position.

With individual security selection, investors can also better control the level of risk you take. Investors that buy into an S&P 500 fund assume a shared level of risk. But if the investor wants to dial up or dial down their level of risk, it’s easier to do with individual securities.

Income varies among the two strategies as well. Investors that want a regular income stream from dividends or a better chance of growth might prefer stocks as opposed to an index, which tends to be more watered down by diversification when it comes to income. And, portfolios where investors manage individual stock selections may tend to lose less in a downturn than index funds.

A mixed approach

Both strategies have their place and time. Knowing when to re-balance your mix will help investors carry an appropriate level of risk relative to their growth aims.

Individual stock selection takes more research than investing in index funds, which is what we’re here for. We manage the process, provide the guidance, and help our clients get as much growth out of their portfolio at an appropriate level of risk. Set up some time with your Wambolt advisor if you want to review your investment strategies and asset allocation.


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This commentary on this website reflects the personal opinions, viewpoints and analyses of the Wambolt & Associates employees providing such comments, and should not be regarded as a description of advisory services provided by Wambolt & Associates or performance returns of any Wambolt & Associates Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Wambolt & Associates manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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