First off, you may ask, “How do I invest in the overall market?” The best way to do that is to invest in index ETF’s such as the SPDR S&P 500 ETF, which is a “stock” that you can invest in that tracks the gains of the S&P 500. So that means if the overall market (S&P 500) rose 21.7%, then SPDR would rise 21.7%. By buying the market’s ETF (such as Dow Jones or S&P) you are literally buying the market, not individual stocks listed on the market.
Why Invest in the Overall Market?
So why should you invest in the overall market instead of individual stocks?
- Unless you have really big connections with the management of a company, you should invest in that company’s stock. “When investing in individual companies, you need to get really up close to observe the company. Just by reading the company’s financial statement and paying attention to press releases won’t do you any good. That’s common knowledge, and has already been discounted by the markets. You need to understand the company’s competitiveness, ability to increase revenue, where it plans on expanding, etc. Only management knows this sort of stuff (or at least knows the truth about this stuff), hence you shouldn’t invest in individual stocks unless you have big connections with management.” On the other hand, if you invest in the overall market, you won’t need “insider” connections. I know this sounds like insider trading, but it’s not. By investing in the overall market, you don’t need to look at all that nitty-gritty stuff. This leads to my next point.
- Less factors to think about. When investing the the overall stock market, there’s less factors to think about. You don’t need to think about the individual industry’s future. You don’t need to worry about if the company is going to increase market share in the market. You don’t need to worry about how it’s going to keep its costs down. When investing in individual stocks, you also need to predict the future of the entire market. Is a recession coming along? Are the boom times over? By investing in the overall market, there becomes less to focus on. All you need to think about is “Does the government want the stock market to go up or down, how will the government manipulate the overall market, are the economic fundamentals becoming worse? etc”
- By investing in the overall market, you only need to look at the big picture. By investing in individual stocks, not only do you have to look at the company’s individual fundamentals (micro), but also at the macro economy.
- Investing in the market ETF is less time consuming. Most people who buy stocks tend to buy multiple companies. But if you’re going to buy just the market, then you have less to think about. More time for yourself to enjoy life!