Pros and cons of index funds vs. individual stocks

A binder labeled "invest," sitting on a table with a pair of glasses, a pen, and some charts


The market’s steep slide during the coronavirus crisis has exposed the pros and cons of buying individual stocks and purchasing index funds that provide exposure to a broad basket of stocks in one purchase — like people do with their 401(k)s.

If there’s a lesson in Wall Street’s rapid descent into a bear market for the first time since 2009, it’s this: There’s no such thing as risk-free stock investing, especially in the short run.

“Every investment carries risk,” says Arielle O’Shea, investing and retirement specialist at NerdWallet.

It’s the magnitude of potential price changes that individual investors need to be aware of when building portfolios. A single stock, for example, is subject to far greater share-price moves than, say, an index fund or exchange-traded fund that tracks the 500 large-company stocks in the Standard & Poor’s 500.

A binder labeled "invest," sitting on a table with a pair of glasses, a pen, and some charts

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Since the S&P 500’s closing high on Feb. 19, the index has lost 32% of its value and all 11 major industry groups it tracks are in the red, S&P Dow Jones Indices data show. Losses range from a 22.4% drop for companies that sell consumer staples like toilet tissue and disinfectant wipes to a 61.8% plunge for energy companies.


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