What is the difference between buying index funds and buying stocks? Index funds belong to one kind of stocks and also invest in stocks, but they are very different from our direct investment in stocks. When we buy an index fund, we buy a basket of stocks at once, which is more than the number of stocks we buy directly, and it also has a long life.
Difference 1: One of the greatest advantages of index funds is longevity, but the average life of individual stocks is only 15 years. When we buy index funds, we don't have to worry about whether they will still exist in the future, and whether our investment will cost nothing. But when we buy individual shares, we need to be concerned about whether the company can operate for a long time.
Difference 2: Index funds do not have black swan risk, but individual stocks often have black swan risk. Black swan risk is a sudden and unpredictable risk. Such risks are often encountered when investing in a single stock, such as the well-known“ Turn off the lights and eat noodles ”We can learn about the event. Individual stocks are likely to encounter Black Swan risk, even the recognized bull stock Moutai is likely to encounter such an event. This kind of unpredictable risk will hardly appear in index funds. The reason is that the index fund includes dozens or even hundreds of stocks, and the problem of a single stock does not have much impact. Index funds will also be upgraded to further reduce this unpredictable risk.
Difference 3: Index funds can avoid the risk of permanent losses, and a single company may go bankrupt, or be privatized and delisted. For example, Nokia. Once the company goes bankrupt or delisted, our principal cannot be earned back from the company, which is the risk of permanent loss of principal. There is no such risk in index funds. The rules of index funds are formulated in advance. Index funds will not choose companies with losses and financial problems. Index funds will buy dozens of hundreds of stocks. Even if the decline is limited, it will never fail.
Difference 4: Index funds obtain the average return of individual stocks. Index funds are a basket of stocks, and the return of index funds is the average return of this basket of stocks. Although we all want to get high returns, the risk of buying a stock is still too great, and we will lose money if we are not careful. But buying index funds can easily obtain the average return of this basket of stocks. Index funds can obtain average returns and avoid most risks, so index funds are the most suitable stock assets for ordinary investors.
Compared with individual stocks, there are many advantages of index funds, so index funds become the only type recommended by Buffett in public.
