Is it better to buy funds and spiders than individual stocks?

Question

I was watching a finance show over the weekend and Ben Stein said unless your name is Buffet it's hard to pick individual stocks well. A safer way is to buy funds. I am thinking of getting spy which is a composite of the S & P index. Are these safer bets than individual stocks?

Answer 1

Yes, investments in ETF and funds, especially index funds, are a safer investment than investing in individual stocks. The reason: when you buy SPY, for example, you are buying into 500 shares, some of which go up and and some of which go down. Some of the moves of these 500 individual stocks cancel one another out. When you only own a handful of stocks, it is much likelier that all of them go up or down at the same time, which makes them riskier. The returns of a combination of 500 stocks is normally much more stable than the return of a combination of 5 stocks.

Answer 2

My general answer would be yes.  There are many sites online that suggest "lazy man's portfolios" or the like.  You can be well-diversified with 6 or so ETFs.  

You are mitigating the risk when you purchase funds or ETFs, as if one stock tanks, you have the whole rest of the basket to make it up.  If you buy the one stock and it tanks, you are in trouble.

With our clients, we suggest an individual portfolio of stocks and bonds at around the $350,000 level.  Of course these portfolios are managed by professionals, not the client.