Stocks and Index Funds: Why People Use Them for Long-Term Growth

After talking about deposits and bonds, there’s still one asset that everyone keeps mentioning when they talk about “real investing”:

Stocks.

For some people, stocks look exciting.
For others, they look scary and stressful.

In this post I’m not trying to become a “stock guru”.
I just want a simple understanding:

• What a stock actually is

• Why people use index funds instead of picking stocks one by one

• Where this fits in my money layers, and what kind of risk my brain has to accept

(Still the same disclaimer: this is not financial advice, only personal learning notes.)

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Quick recap: my money layers

From previous parts, my simple map looks like this:

1. Safety – Savings / Emergency Fund

   • For daily life and emergencies

   • Kept very liquid, very low risk

2. Parking – Deposits

   • For money I won’t touch for 6–12 months

   • Slightly better return, low risk

3. Growth – Bonds + Stocks (or Funds)

   • For money I can leave for years

   • Higher potential return, higher risk

Stocks live in Layer 3, on the riskier side compared to bonds.

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What is a stock, really?

Plain version:

A stock is a small piece of a company.
When I buy a stock, I become one of the owners.

If the company:

• Grows its profits

• Expands its business

• Survives many years

then my little slice can become more valuable.

Stock returns can come from two places:

1. Price increase – the market is willing to pay more per share

2. Dividends – part of the company’s profit is paid out to shareholders

Of course, the opposite can also happen:

• If the business fails or earnings shrink,

• The stock price can fall a lot, sometimes to almost zero.

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Why do people bother with stocks if they’re so volatile?

Because over long periods of time, strong businesses have the potential to grow faster than cash, deposits, or bonds.

Boring summary:

• Cash = safest, but easily eaten by inflation

• Deposits = slightly better, still quite safe

• Bonds = medium risk, medium return

• Stocks = higher risk, higher potential return

For long-term goals like retirement or financial independence, many people use stocks (often through funds) because:

• They want their money to outgrow inflation by a bigger margin

• They have years, not months, to stay invested

But the keyword is potential. There are no guarantees.

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Individual stocks vs index funds

When it comes to stocks, there are two main paths:

1. Picking individual stocks

This is when I choose specific companies:

• “I want to buy Company A, B, C because I believe in them.”

This requires:

• Time to study financials, business models, risks

• Emotional strength to hold when one company gets bad news

• Accepting that I can be very wrong

For most beginners (including me), this is quite advanced.

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2. Using stock index funds

An index fund is like a basket that holds many stocks at once.

Very simplified idea:

• There is a stock index, for example “top 30 / top 50 / top 500 companies in a market”.

• The fund tries to copy that index.

• When I buy 1 unit of the fund, I get a small slice of all those companies together.

Benefits:

• Diversification – if one company performs badly, others can balance it

• I don’t need to pick winners individually

• I’m investing in the “overall market” instead of betting on a single name

Of course:

• The fund price still goes up and down with the market

• It is not risk-free

• But it’s usually simpler than trying to be a stock analyst on my own

For this mini-series, the main idea I want to keep is:

Individual stocks = concentrated risk.
Index fund = spread-out risk across many companies.

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What kind of risk do I have to accept with stocks?

With stocks or stock funds, I have to make peace with these possibilities:

1. Big price swings

   • It’s normal to see -10%, -20%, sometimes more in bad periods.

   • Even strong markets had temporary drops before they went higher again.

2. Uncertain timing

   • No one can guarantee “this year will be good”.

   • Sometimes years feel flat or negative before recovery.

3. Emotional stress

   • When I see red numbers, my brain wants to “do something”.

   • The hardest part is often staying calm and not panic-selling at the worst time.

Because of this, stocks are usually considered suitable only for long-term money:

Money I can leave for 5–10+ years, not money I might need next year.

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How I imagine a simple stock / index fund role in my plan

I don’t need a complex strategy.
At a basic level, I see stocks / index funds like this:

• Goal: long-term growth above inflation

• Time horizon: ideally 5–10+ years

• Source of money: only from Layer 3 (after safety and deposits are okay)

• Emotion rule: “Don’t invest money I will cry over if it drops 30% on screen.”

In practice, that can look like:

• Every month, a small fixed amount automatically goes into a stock index fund.

• I ignore short-term noise and only review my plan a few times a year.

• I remind myself that this is a marathon, not a sprint.

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How much in stocks vs bonds vs deposits?

There is no magic formula, but my simple thinking:

• If I am very cautious:

  • More in bonds and deposits, less in stocks

• If I am okay with volatility and have many years:

  • More in stocks, some in bonds, smaller part in deposits

Different people use different rules (50/50, 60/40, etc.), but I don’t want to trap myself with one rigid number.

What matters for me:

1. I still sleep well

2. I’m not forced to sell at the worst time

3. The percentage in stocks matches my real personality, not social media pressure

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Red flags before I touch any “stock-related” product

Because the word “stock” is often used to sell risky things, I keep a few warning lights in my head:

• “Guaranteed high return” + “no risk” → ❌

• Secret tips, VIP groups, or paid signals → ❌

• I don’t understand how the product actually makes money → pause and research

• I’m investing only because I’m scared of missing out → pause again

If something needs a lot of pressure tactics to sell, it’s usually not the calm, boring long-term investing that I want.

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Closing: slow & boring is still progress

After going through this mini-series, my own map looks like this:

• Savings / emergency fund → protect my today

• Deposits → protect my near future

• Bonds & stocks (especially through funds) → grow my far future

It’s okay if I’m not ready to jump into stocks immediately.
Even just understanding where they fit and what risk they carry is already one big step ahead of my past self, who only saw them as a scary red and green chart.

In real life, my progress might look slow and a bit boring:

• Some months just go to savings

• Some months a little to bonds or deposits

• Some months a small contribution to index funds

But as long as I move in the direction of more clarity, more stability, and more intentional choices, that already counts as growth.

If this is your first time thinking about stocks, you might like to see the full map instead of only one piece.
I shared my overall view here:
What Is Investing? A Simple Map Before I Touch Stocks.
For how I combine deposits, bonds, and stocks into one plan, you can read:
Putting It All Together: My Simple Investing Map for the Next 10 Years.