Sharing a letter from a frustrated investor who recently became a client. If any of this sounds familiar, please feel free to contact me directly.

Dear Todd,

I spent my 20s and 30s making many financial mistakes, from ignoring my retirement fund to racking up debt. A few years ago, I was able to get my finances in a more stable place and that is when I decided it was time to invest.

Without much knowledge or strategy, I decided to buy a handful of individual stocks. I invested in companies I was a consumer of and companies that I thought had promising futures. While it felt like a promising idea at the time, buying these individual stocks has made my investment strategy time consuming and not as profitable as I would like.

Index and mutual funds, which put your money in securities like stocks, bonds, and short-term debt, often yield higher returns.

According to The Balance, in 2021 mutual funds in seven categories averaged an annual return of 11.54%, which is way more than the returns I made on individual stocks.

As I re-evaluate my finances in 2022, here are three reasons why I am considering ditching all my individual stocks for index or mutual funds.

1. My individual stock approach was random

I was so excited to enter the world of investing that I just took a chunk of cash and used it to start buying stocks. I bought stock in companies I thought were promising, and companies that I was a loyal consumer of. While this approach might work for some, it did not lead to the best returns.

Instead, selecting index or mutual funds — even the funds that encompass the companies I bought individual stocks in — could be a better strategy to increase returns since the success is not just based on a single company.

2. I want more variety with my investments 

From the moment I started investing in stocks, I knew the importance of having a variety of categories and companies for my portfolio. In the end, I mostly just invested in tech companies because those were the companies, I knew the most about.
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One perk of putting money in mutual funds or index funds is being able to have a more diverse portfolio. You can choose funds based on the size of the companies, or on categories like S&P 500 index fund, emerging markets, or an international stocks fund.

3. I do not have time to manage my stocks

Over the years, I have bought stock in more than fifteen companies. While I am often tempted to leave the money in the market and not check on them, I have experienced first-hand why that is a bad idea.

One time, one of the companies I was invested in went under, and I lost all my money because I did not pay attention to the news or sell the stock off fast enough.

Since I’m still a rookie at investing, managing my stocks takes a few hours of research a week and forces me to make decisions of when to buy and sell off stock on a daily basis. Index or mutual funds do not require this much research and time.

In the end, I want to spend less time thinking about which stocks to buy and sell. Instead, I want to spend just an hour or so a month looking at my index or mutual funds, and a couple of hours every quarter deciding in which new funds I should invest.

My hope is that this approach makes investing less time consuming and provides bigger returns.