Achi news desk-
Canadian investors may encounter many arguments for or against index funds and stocks. When it comes to investing, some may believe that clicking once and getting an entire index is the way to go. Others may believe that stocks provide much more growth.
So let’s settle it once and for all. Which is the better investment: index funds or stocks?
Case for Index funds
Index funds can be considered a great investment for a number of reasons. These funds usually track a broad market index, such as the S&P 500. By investing in them you gain exposure to a diverse range of assets within that index, which helps spread your risk.
These funds also tend to have lower expense ratios compared to an actively managed fund. All they do is track an index rather than a team of analysts constantly changing the fund’s investment mix. This means lower costs, and lower fees for investors.
Funds also tend to have more consistent returns compared to individual stocks, which can see significant fluctuations in value. So you may enjoy a general market trending upwards over the long term. This long-term focus can then benefit investors from the power to compound returns, increasing wealth significantly over time.
A case for stocks
That doesn’t mean stocks can’t be a great investment too. Stocks have historically provided higher returns compared to other asset classes over the long term. When you invest in stocks, you are buying ownership of stakes in a company. This ownership then entitles you to a share of the company’s profits through earnings or dividends.
Investing in a diverse range of stocks can then help spread risk. While an index fund makes the choice for you, Canadian investors can choose the stocks they invest in, creating the perfect diversified portfolio for them.
What’s more, stocks are quite liquid. This means you can easily buy and sell them on the stock market, providing you with cash whenever you need it. What’s more, this can be useful during periods of instability in the economy, providing a hedge against inflation and the ability to sell to offset income.
In some jurisdictions too, even if you lose out on stocks you can apply capital losses, reducing overall tax liability in the process. And although it can be challenging, capital gains can also allow you to even beat the market!
So which is best?
I’m sure some people won’t like this solution, but investing in both is definitely the best route to take. If you are set in your ways, that can mean you are missing out on the potential returns you could achieve by investing in these two investment strategies.
A great option that would provide diversification is to invest in strong Canadian companies, while also investing in diversified global index funds. For example, consider the Vanguard FTSE Global All Cap Ex Canada Unit Index ETF (TSX:VXC), which gives investors a mix of global equities, all with different market caps. This gives you a diverse range of investments that have seen tremendous growth over time.
This index does not invest in Canada, so you can then pair that with Canadian investments. Think about the dullest areas of the market, and these can provide the safest investments! For example, we always need utilities. So invest in a company like Hydro One (TSX: H) can provide long-term growth. What’s more, it’s a younger stock compared to its utility peers, providing a longer runway for growth. And with a dividend yield of 3.15%, you can earn extra passive income too.
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