Most Experts Say Buy Index Funds. Charles Payne Says Do This Instead
If you’re seeking advice about investing, one of the most common insights you’ll get from experts is to go with index funds instead of individual stocks. The logic makes sense, especially for newer or more risk-averse investors: By offering a wider assortment of securities that track a specific market index (such as the S&P 500), index funds inherently offer greater diversification while helping to mitigate risk.
That said, other experts think that skipping individual stocks could mean forfeiting an opportunity to see real gains. Charles Payne, host of “Making Money with Charles Payne” on FOX Business Network and CEO of Wall Street Strategies, is one of them. He thinks investors should be more willing to consider whether stock picking might suit them better — and he shared his reasoning with GOBankingRates as part of our Top 100 Money Experts series.
Payne acknowledges the reasons why other investors might go with index funds, since they’re generally easier and safer than picking up individual stocks. That said, investing always means taking on risk — which presumes a desire for a reward, or return.
He thinks playing it safe with an index fund may mean you’re missing the chance to pick up high-performing stocks. To offer a real-life analogy, Payne likens the scenario to playing a neighborhood game of football or basketball as a kid.
“When neighborhood children gather to play a game of basketball and football, they elect captains who, in turn, select their teammates. Each goes for the person who they think is best, eventually coming down to the least desirable choices,” he said. “Index funds have the best choices and the worst choices. They are over-diversified and designed not to lose, but rather to win and outperform. It is much better to own a portfolio of your top picks that you have selected.”
In other words, Payne believes broad funds can dilute top performers, while a concentrated list of your best ideas may capture more upside.
However, one thing Payne doesn’t want you to do is blindly buy up every supposedly hot stock that has the internet abuzz.
Instead, he wants you to use excitement as a catalyst for deeper research into the company’s overall health and how well positioned it is within its field. Ask yourself if its products will be in demand well into the future. Every three months, all publicly traded companies file quarterly reports that can provide key answers.
“I always urge new investors not to worry about things like price-to-earnings (P/E) ratios,” he said. “Instead, see if the industry is growing. Will people want more or less of a product or service in the future? Will people pay more for the better mousetrap (in terms of profit margins)? Has the company demonstrated a history of solid execution?”
According to Payne, you might find guidance about which stocks are worth taking a chance on by looking around your own life. Odds are, if you’re a fan of certain products or services, other people are, too — making the company that makes those products or performs those services a worthy investment.
“Owning individual stocks means you own part of a business. Sometimes we know which companies we want to own because we have used their products or services,” he said. “Often great investments are right under our noses — products and services we trust and pay for, but never take the time to consider if they are publicly traded.”
Payne says there are certain circumstances where an investor should consider index funds, like when they’re protecting a large portfolio where growth takes a back seat to preserving capital.
He also encourages people who are curious about a particular industry to start with an index fund for it, and then take the time to learn which companies are the high performers. From there, he says, you can begin to own those standout companies separately.
“If you don’t want to do the homework to protect money that comes from 40 hours a week of blood, sweat and tears, then settle for funds,” he said. “You must be invested in the stock market.”
Everyone has their own unique goals and needs as investors. Owning index funds offers a simple, lower-maintenance approach to investing — it’s no wonder that many financial advisors encourage investors to take this route.
That said, experts like Charles Payne encourage investors to consider purchasing stocks individually after conducting careful, ongoing research. Whichever path you choose, consider consulting a fiduciary financial advisor first.
This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Have a question of your own? Share it on our hub — and you’ll be entered for a chance to win $500.
This article is for informational purposes only and does not constitute financial advice. Investing involves risk, including the possible loss of principal. Always consider your individual circumstances and consult with a qualified financial advisor before making investment decisions.
