When it comes to building wealth, most experts agree that investing is essential. It helps your money outpace inflation and creates opportunities for long-term growth. There are many ways to invest, and each has its own risks and rewards.
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Investing in individual stocks can be lucrative if prices rise, but it also carries significant risk. If the company you’re investing in collapses, faces a scandal or loses shareholder confidence, you could lose everything. Weigh these risks carefully and decide whether stock-picking aligns with your goals. Here are five signs it may be time to step back from buying individual stocks and invest differently.
1. You’re Spending Too Much Time
Investing in individual companies requires extensive research and constant monitoring. Warren Buffett believes you should only invest in businesses you fully understand, saying, “The most important thing is to … define which ones you can come to an intelligent decision on and which ones are beyond your capacity to evaluate.”
Gaining that much knowledge can take hundreds of hours, not to mention ongoing attention to related news, earnings reports and analyst forecasts. If you find yourself spending too much time tracking the market, consider choosing strategies that require less day-to-day involvement.
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2. You’re Losing Sleep
Individual stocks can be volatile. The roller-coaster ride of watching your stocks go up and down can be exhausting and keep you up at night. Knowing your risk tolerance — how much you’re willing to lose — is crucial. If most of your money is tied up in just a few stocks, your risk of losing it all increases significantly. When your investments are causing anxiety and sleepless nights, it’s time to diversify.
3. You’re Chasing Trends
Trends matter, but investing based on hype is dangerous. Fear of missing out can push you into decisions without proper research. Trend-driven investments often rise quickly but collapse just as fast, leaving you exposed to steep losses. If your strategy is mainly chasing what’s popular, it’s time to explore steadier alternatives.
4. You’re Underperforming
Investing in individual stocks allows you the opportunity to beat the market when your decisions lead to gains. However, if your investments are consistently falling short of benchmarks, such as the S&P 500, it’s time to switch up your strategy to something more reliable.
Keep in mind that it’s not uncommon for individual investors to underperform the market. Many fund managers fail to do it as well. A report by SPIVA U.S. Scorecard reported that active large-cap U.S. equity managers underperformed the S&P 500 by at least 50% in 19 years between 2001 and 2022. The highest percentage of underperforming managers came in 2014, when 87% of them failed to beat the market.
5. You’re Lacking an Exit Strategy
It’s easy to put money into a stock, but it’s more difficult to know when to take your money out. Exit strategies are plans you make to minimize losses, protect gains or achieve goals. Many investors lack a clear understanding of when to exit, which can lead to increased risk and loss. Knowing how long you plan to invest, how you’ll measure the performance, when to get out and how you’ll exit are essential when investing in a volatile market.
Better Ways To Invest
There are many alternatives to individual stocks that can offer more stability, less stress and competitive returns. A key principle is diversification: Blending stocks, bonds, mutual funds and commodities reduces risk and smooths out volatility.
One of the simplest diversification tools is an index fund. Buffett recommends putting money into an S&P 500 index fund, which tracks 500 major companies and about 80% of the U.S. stock market. Because markets generally rise over time, holding index funds long term requires little research while still delivering strong returns.
Real estate is another option. Instead of only buying a home, consider income-generating properties. Investor Grant Cardone notes that rental real estate builds wealth in two ways: steady monthly income from tenants and long-term appreciation of property value. This combination can make real estate a powerful addition to a diversified portfolio.
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This article originally appeared on GOBankingRates.com: 5 Key Signs You Should Stop Buying Stocks
