Alphabet vs. the S&P 500: Which Is the Better First Investment?

If you’re reading this, you’ve certainly heard of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). The company is, of course, parent to search engine giant Google, as well the world’s biggest streaming video platform YouTube. It also owns the Android mobile operating system. Almost needless to say, if you connect to the world wide web at all, you’re likely doing so through one of Alphabet’s platforms.

Its position as the internet’s middleman, so to speak, is a key reason the company has only failed to grow quarterly revenue on a year-over-year basis twice in the past 10 years, and one of those instances is linked to the arrival of COVID-19 in North America in early 2020. The company’s more than offset that lull in the meantime.

Yes, nascent investors are, understandably, easily enamored by Alphabet, if for no other reason than they’re already so familiar with it.

If you’re just starting out in the stock market, though, resist the temptation to dive into a familiar, individual pick just because you know it well. While it’s a less-than-thrilling option, the first investment you really should make is a stake in a boring ol’ S&P 500 (SNPINDEX: ^GSPC) index fund like the SPDR S&P 500 (NYSEMKT: SPY) exchange-traded fund.

Beating the market is just hard to do

Don’t get too deflated just yet if you expected to hit the ground running as a stock-picker extraordinaire. Alphabet is a fine second pick as long as you’re truly committed to holding it for the long haul and diversifying further.

For nascent investors, though, a portfolio’s foundation is best laid with broad-based index funds for one specific reason: Beating the market by picking stocks is just plain hard to do. Indeed, you’re not likely to do it, especially if you’re just starting out. Your best bet is to begin by merely trying to match the market’s long-term performance.

Image source: Getty Images.

That can be a tough pill to swallow. Take some solace in the fact, however, that not even most professional stock-pickers actually “beat” the market.

Standard & Poor’s keeps tabs on the data, comparing U.S. mutual fund managers’ performances to the overall market’s. Last year’s scorecard? Nearly 80% of mutual funds doing business in the United States trailed the performance of the S&P 1500, which measures the health of large-, mid-, and small-cap stocks.

While it’s tempting to give this crowd a break by suggesting small- and mid-cap stocks are tricky to navigate, the fund industry’s performance actually worsens when you limit your look to just the market’s largest names. A little over 85% of U.S. mutual funds failed to perform as well as the S&P 500 in 2021.

And things worsen when you give the pros more time. For the past three years, two-thirds of U.S. mutual fund managers have underperformed the S&P 500. That figure ratchets up to three-fourths for the past five years. Over the course of the past 10 years, 83% of U.S. fund managers haven’t kept pace with the overall market’s gains.

Think about that. Despite access to all sorts of tools and data the average investor doesn’t have — not even most full-time professionals — successfully out-pick the S&P 500’s performance. It’s a testament to just how touchy picking stocks truly is.

Start smart, finish with the fun

None of this is meant to discourage new investors from owning a few good individual stocks. You could certainly do worse than owning a stake in Alphabet, even if it’s the only name you own at first.

The funny thing is, putting all your eggs in just one basket — particularly if you’re a new investor — can really get in your head. That is to say, when one company’s shares have to perform well and have to sidestep any serious setbacks, you start to second-guess yourself. That’s how mistakes happen, like bailing out of a failing stock right before it starts to rebound or not doing regular checkups on the companies you’re holding.

If you own a basket of 500 stocks, though, that sort of temptation never even becomes part of the equation. Indeed, the temptation is significantly lessened when the bulk of your initial holdings simply represent the market as a whole, acting as a buffer for any outsized volatility one individual stock might dish out.

Bottom line? Start out by seeking safety in numbers. Add the more exciting stuff once the groundwork’s been completed.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. James Brumley owns Alphabet (A shares). The Motley Fool owns and recommends Alphabet (A shares). The Motley Fool recommends Alphabet (C shares). The Motley Fool has a disclosure policy.

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