I remember the first time I decided to hand-pick a specific stock for my portfolio. While the company wound up being a good choice for me (as evidenced by the fact that it still has a place in my portfolio), I remember being quite nervous.
Prior to then, the most I'd done was choose a specific fund to invest in with my 401(k) plan. And while that required some research, I'll admit that the decision wasn't that difficult.
But when you're buying individual stocks, the stakes can be higher, and the legwork can be more intense. That's why it doesn't always pay to hand-pick individual stocks when you're new to investing. Instead, it could pay to take a different approach to assembling your portfolio.
Put your money into the broad market
When you're new to building a portfolio, it's important to make sure your investment mix is nice and diverse. If you go too heavy on a specific market sector, you might see intense losses if that specific segment takes a hit.
Take retail, for example. Many retail stocks were hammered in 2020 on the heels of pandemic-forced shutdowns and the permanent store closures that ensued.
Or look at the losses the tech sector has seen over the past number of weeks. Anyone with 90% of their assets in tech is probably stressed to the max right now.
That's why investing in the broad market might be a better bet when you're starting out. And an easy way to do so is to load up on S&P 500 exchange-traded funds (ETFs).
The S&P 500 is a market index consisting of the 500 largest publicly traded companies. ETFs, meanwhile, are funds that trade publicly that invest in bunches of companies all at once.
When you buy S&P 500 ETFs, you're effectively putting money into the entire stock market rather than banking on a few individual companies to perform well. And that's a smart choice if you're learning the ropes and aren't quite sure what criteria to use to evaluate stocks.
Not only do S&P 500 ETFs take a lot of guesswork out of investing, but they also offer the benefit of instant diversification. That's something that can lead to steady growth while offering protection during periods of market turbulence.
Ease your way in
To be clear, putting all of your money into S&P 500 ETFs has one key drawback: You won't have a chance to outperform the broad market. But if that's not something you're set on doing as a newbie, then it's perfectly OK to fall back on S&P 500 ETFs as you build up your confidence and skill set.
Either way, the most important thing you can do as a newer investor is commit to that role. Don't just invest as a one-time thing, but instead pledge to do so consistently, whether by periodically investing in the broad market or adjusting your strategy as your stock-picking knowledge improves.
There's a lot of money to be made by investing over a long period of time. But starting out with S&P 500 ETFs could make for a very solid foundation.
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