Investing in the right stock at the right time can result in substantial returns. One investor managed to turn a $300,000 investment in Nvidia (NASDAQ:NVDA) into more than $20 million after a few years.
Even though it turned out well for the investor, it’s risky to put all of your eggs in one basket. Financial personality Graham Stephan recently made that point and mentioned that he only invests in index funds. He then explained why he has a diversified portfolio and touted its benefits.
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All Of Your Investments Won’t Fall At The Same Time
When you invest in individual stocks, there is a chance that one of your picks tumbles by 50%. Some investors can withstand one of their positions losing 50%, but it’s difficult to recover if their entire portfolio drops by that amount.
If the asset that fell by 50% only makes up 1% of your portfolio, it’s not a big deal. Some of your other investments can pick up the slack and minimize your overall losses.
Stephan also invests in various assets based on their risk. He has index funds which follow major benchmarks in the stock market, but he also invests in U.S. Treasuries. Those treasuries usually stay flat while paying interest. These assets aren’t likely to endure sharp losses for their investors.
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Investing In Funds Lets You Save A Lot Of Time
Stephan doesn’t make money by investing in the right stocks. He makes most of his money from his YouTube channel, and he needs as much time as possible to put out more content. That’s part of the reason why he doesn’t deal with individual stocks. The moment you buy individual stocks, you will spend more time looking at your portfolio and staying on top of the news.
It’s possible that you miss out on some returns by investing in index funds instead of individual stocks. Every index fund contains stocks that will outperform the index fund, but the few extra points of alpha aren’t worth it for every investor.
You can let fund managers do the work and stay on top of investments. Investors can also look at passively-managed index funds that have low expense ratios. If you narrow your focus to passive funds, it’s possible to find ETFs and mutual funds that have expense ratios below 0.10%.
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Not Every Investor Wins The Lottery
Very few investors turn $300,000 into $20 million. It’s a life-changing return, especially given the initial investment. However, not every stock becomes the next Nvidia. It’s possible that the $300,000 could have turned into $150,000 after a few bad quarters.
Even if you pick a stock that grows by more than 1,000% in a few years, many of those stocks endure sharp downturns that can cause investors to rush for the exits. It’s especially true for investors who have put their entire life’s savings into a single stock.
Diversifying your portfolio minimizes the emotional impact of a stock losing value. It can help you stay firm if you believe investors overreacted to a company’s earnings report. If you put all of your money into a single stock, it may not go well. You may have a more difficult time thinking about anything other than that stock.
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This article $20M From One Stock? Graham Stephan Warns Against Betting It All Like This Investor Did originally appeared on Benzinga.com
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