There are so many investment options out there that even the best investors in the world don’t know about all of them. The sheer variety of stocks, cryptocurrencies, and other investments can overwhelm beginners, but getting started with investing can actually be quite simple.
While everyone has their own investment goals and timeline, there’s one investment that’s a pretty good fit for a lot of people, and if I could only invest in one thing, that’s what I’d choose.
It checks a lot of important boxes
When investing, you want to maximize your earnings while reducing your risk of loss. So there are a few things you want to focus on. First, you want to invest in strong companies. These companies typically have some sort of advantage over their competition, like brand name recognition, a unique product, or low prices.
When weighing a company’s value to you, you should focus on its long-term growth potential rather than its recent performance. Ideally, you should hold your investments for at least five to seven years before selling, so you should only invest in companies you believe will perform well over this time frame.
Diversifying your savings is also key to protecting your nest egg. Most people do this by investing in multiple companies across several sectors. But diversifying doesn’t always have to involve a ton of separate investments.
If you invest in an S&P 500 index fund, you get an ownership stake in 500 of the largest publicly traded companies in the U.S. This spreads your money around between several companies, many of which are at the top of their industries. And while historic performance is no guarantee of future returns, the S&P 500 index has a compound average annual growth rate of 10.7% per year. Even many of the top actively managed mutual funds can’t match that, especially once you factor in fees.
S&P 500 index funds are among the most affordable investments around, with expense ratios — annual fees all shareholders pay — as low as 0.03% in some cases. This means you only pay $3 per year for every $10,000 you have invested in the account. And that helps you hold onto a lot more of your earnings.
How to invest in one
S&P 500 index funds are available through many companies. They usually have “S&P 500” in their name somewhere. They’re all pretty similar, but they may have slight differences in terms of how much of your money is invested in each stock and what you pay in fees.
Compare a few of them before you decide which one you’d like to invest in. Look at their performances compared to the index itself, and the expense ratios you’ll pay to own the funds, in order to determine which offers the greatest value.
A few notes
While an S&P 500 index fund can be a great foundation for your portfolio, it has its limitations just like any other investment. For one, while it diversifies your savings to a degree, it keeps all your money in large, U.S.-based companies. You may want to invest some money in international stocks, for example, to diversify your portfolio even further.
And you probably don’t want all your money in stocks either, especially if you’re nearing retirement. Moving some of your savings to less risky investments like bonds can help you protect what you have. A good rule of thumb is to keep 110 minus your age in stocks and the remainder in bonds. So that’s 70% in stocks if you’re 40 and 60% if you’re 50.
You also have to be prepared for some ups and downs no matter what you invest in. This is just part of investing. Even the most stable companies have good quarters and bad ones, so don’t get too worried if you lose a little money from time to time. Keep focusing on the long term.
10 stocks we like better than Walmart
When our award-winning analyst team has an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Stock Advisor returns as of 2/14/21
The Motley Fool has a disclosure policy.