If you’re a new investor, then picking stocks to hold in a portfolio can be a bit intimidating. For some, this task could prevent them from partaking in the stock market altogether. However, don’t fear; there are alternatives that would work just fine. Investors could opt to invest in one of the stock market indices, which would remove the need to study up on different companies. Instead, investors would be making a bet that the economy as a whole will be more valuable in the future.
Invest in the S&P 500
One of the most popular indices to invest in is the S&P 500. This is an index that tracks the performance of 500 large American companies. Some of the most popular companies in the world are included in the S&P 500, which should make it easier for investors to understand this index.
What’s interesting about the S&P 500 is that many retail investors are unable to beat this index over the long term. This is often because most investors don’t abide by Foolish principles. For example, when the market experiences a major drawback, like the one we’ve been experiencing lately, many investors panic sell. This can result in major losses and often lead to investors missing out on some of the market’s best days. In 2019, Warren Buffett even stated that he can’t beat the S&P 500.
So, how would someone invest in an index? You can do that by investing in exchange-traded funds (ETFs). Buying shares of an ETF is similar to buying a basket of companies, which spreads your risk across a large number of entities. In this case, you’d be spreading your risk across 500 different companies. That can lead to less volatility over time. In Canada, there are many ETFs which track the performance of the S&P 500. The two most popular may be Vanguard S&P 500 Index and iShares Core S&P 500 Index.
What if I’m set on picking stocks?
Of course, some of you reading this article may be thinking, “Can I still invest in the S&P 500 but continue to pick stocks?” The answer is yes. If you look at the S&P 500, you’ll notice that the index is market cap weighted. That means that the largest company in the index will affect its performance much more than any of the smaller companies listed. That means, if investors were to buy shares of the largest companies included in the S&P 500, then they’d be able to track the index’s performance over time.
If you’re interested in doing that, while keeping a diversified portfolio, then I would suggest the following stocks. Picking up shares of Apple and Microsoft would give you exposure to the massive American tech industry. Berkshire Hathaway and Johnson & Johnson would provide exposure to the financial and healthcare industries, respectively. Finally, adding Proctor and Gamble to your portfolio would add exposure to the consumer staples sector.
