Want to get into the stock market but don't know where to start? Perhaps you're nervous or a little intimidated by its apparent complexity?
Don't sweat. seriously. It's not as complicated as it first seems. Picking stocks for the first time doesn't have to be a nerve-wracking ordeal. In fact, the best first choice for first-time investors is something very simple. Just tap into the entire market. SPDR S&P 500 ETF Trust (NYSEMKT:Spy).
Instant diversification
It may not be a brand you've heard of. The main reason is that it's not a stock at all. Rather, the SPDR S&P 500 ETF Trust is an exchange-traded fund (or ETF), which is simply a basket of various securities. In this case, the basket holds all the inventory found within it. S&P500 index. You probably know that the S&P 500 is a market barometer, especially since it reflects the value of the market's largest and most important stocks.
This is a simple and easy option. When you buy or sell an ETF, you are buying or selling the entire basket, rather than all the tickers in the basket. There are several benefits to starting a portfolio with such a simple approach, but two stand out the most.
The first of these benefits is instant diversification.
All investors need to understand the importance of diversification. Some stocks are doing well, while others are lagging. The outlook for individual businesses or entire sectors is constantly changing. As a result, your best bet is to have a well-diversified portfolio with exposure to stocks of various sizes, sectors, and regions.
A well-diversified portfolio will not dramatically outperform the overall market, but it will also not significantly underperform. And simply matching the long-term performance of the overall market can provide solid returns that beat inflation.
And the second big benefit of owning an index-based ETF if you have no investment experience is that you avoid the dangerous temptation of trading those popular hype stocks that everyone is talking about. . In fact, this benefit is so important that it deserves a discussion on its own.
The biggest risk for first-time investors
The financial media industry is an interesting industry. We spend a lot of time and energy discussing company performance and interesting company developments. However, not everything in this report is necessarily done with investors' best interests in mind. It is primarily for infotainment purposes. Warren Buffett explains, “Most news is noise, not news.''
But that doesn't prevent investors from acting as news develops. Who could blame them? After all, these headlines can sometimes be downright intoxicating.
But in the same way that drunkenness causes a hangover, chasing the stocks of companies discussed in the media assiduously and often bullishly has its own risks and can often do more harm than good. There is a gender.
In other words, picking individual stocks is difficult enough, even if you have experience and know exactly where and how to find new holding ideas. Without experience, it can be very dangerous. The fact that even professional mutual fund managers consistently struggle to beat the market tells you everything you need to know about that possibility.
For example, 60% of large-cap mutual funds offered to U.S. investors last year underperformed the S&P 500 index, which they had hoped would outperform, according to Standard & Poor's. Over the past five years, nearly 79% of these funds have not kept up with the S&P 500. Over the past 10 years, more than 87% of domestic mutual funds have lagged behind the performance of the S&P 500.
If professionals in these industries struggle to outperform this benchmark, new investors with no experience are similarly unlikely to do so, at least not for very long.
just be patient
None of this is to suggest that individual stock selections will never outperform the market as a whole. It is possible to do so. In fact, small investors have some advantage over mutual fund managers in that their portfolios are not large enough to cause stock prices to fluctuate as they buy and sell. Fund managers who can manage large amounts of money can do that.
It takes time to gather enough wisdom from real-world experience to beat the market. You don't want the act of “learning from your mistakes” to become too expensive. You also don't want to wait to put your money to work, since for most people time in the market is far more taxing to their portfolio than wise stock picking.
The wisest choice is to start with something simple that doesn't require regular monitoring and can still offer attractive benefits. That is the SPDR S&P 500 ETF Trust. As you gain experience, you can always add individual stocks to your portfolio in addition to this ETF.
Remember to be patient with all your possessions. No matter how good a person is, no one becomes an investment millionaire overnight.
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James Brumley has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a disclosure policy.
What's the best way to invest in stocks without any experience? Start with this ETF.Originally published by The Motley Fool
