As I learned more about investing, I can’t stop but to think about index fund. There have been many advocates for index fund, and I’m one of them, at least for now. But in this post I’d like to take a more neutral standpoint, and give you a better idea of what should be your primary focus in investing, i.e. index fund vs individual stock picking.

FYI, index fund is a mutual fund (or other types of hodgepodge stocks/bonds) that mimics financial indexes such as the S&P 500. The goal of an index fund is to replicate the movement of an index, so the performance of, say S&P 500, would be the same as the performance of the fund.

Why is index fund the way to go?

First off, I’d like to tell you some benefits of investing in index fund, and I believe it should be your primary asset if you don’t have a lot of background on investing (and you don’t plan to learn about it either). Here are some significant benefits that would hopefully make you go out and invest right now:

1) Easy and therefore good for busy people like us

2) Low cost, means more money to spend on latest gadgets such as iPhone, iPod, Mac

3) Good returns if you can ride out the recession that happens every 10 years or so (average annual returns of 8%)

Wait, everybody loves the hot stocks!

On the other hand, why are some people against individual stock picking? Well, it’s difficult, possibly costly, and time consuming. But it’s sexy. If you pick a stock and tell your friends about it, you’d suddenly look smart and money savvy. If you pick an index fund and tell your friends about it, they’d first ask you what it is and then shrug you off because it sounds boring. “Set if and forget it? Forget it man.”

Here are some advantages of stock picking:

1) Huge rewards if you get it right. If you manage to pick the superstar stock, your returns would most likely reach hundreds of percent. Imagine if you bought Google, Microsoft, Berkshire Hathaway when they first got public. I don’t think you’d be reading this blog any more!

2) The research and analysis will give you a good background on different types of industries, possibly helping you in your own career, especially if you’re in the financial services field (or just business in general)

3) Simply sexy.

These days, investing is all done online. So, no need to deal with the brokers or whoever and you can get set up in less than an hour (I should’ve timed myself, probably like 27.594578 minutes for me because I had to search for some documents)

Successful Example

Warren Buffett is a good example of a master in stock picking, and his efforts have been rewarding thus far. Could he have become the 2^nd richest person in the world if he had invested mainly in index funds? I doubt so. But it takes time and efforts, and a lot of courage (possibly money to lose too). However, it’s doable if you have the passion and talents (read: good at numbers). After all, Warren Buffett also started from a blank paper, just like most of us.

Kevin Rose, the founder of Digg, is a big fan of fundamental investing. And he picks his stocks. I haven’t heard anything about Digg going down because of that, but then again who knows how much of money he put into his investment (which comes from us Digging, what a brilliant way to make money).

Anyhow, don’t stop yourself from doing it because a personal finance expert tells you so. Find out more about it, maybe try picking a stock or two by running your own analysis, and dive in.

Easy Way to Get Started

A good way to get started is to sign up for Investopedia Stock Simulator and invest with virtual money. A drawback is that you might not take it as seriously as if you had invested with your own money. But every bit helps when you don’t have either money or expertise, or both.

If you finally figure out that it’s too much work (and it is!), then it’s probably a good idea to go along with index fund. That’s actually what I did too. I figured I wouldn’t have enough passion and time to put into stock picking, so I invested in target retirement fund, which consists of several index funds (I talked a little bit more in this post). It saved me a lot of time and brain power so I could focus on writing for this blog, which is my primary focus now.

My final thought is that if you’re just starting out, you might want to check out individual stock picking and see if it works out for you. If you figure that it’s too much trouble, I’d suggest you go for index funds. And if you mean to learn stock picking, but somehow just keep procrastinating, start with your index fund investing first and go from there. After all, you can have both index fund and individual stocks in your portfolio, and that’s what I have.

Do you invest?

What’s your investing strategy?

Are you a firm believer in index fund? Or individual stocks?

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