ETFs
Do you have $1,000 to invest in stocks? Put it in this ETF.
Given the relatively small amount of money involved, something that poses less risk and requires less maintenance is the smart choice.
Do you have some extra money that you won’t need for a while and want to invest in the stock market? Excellent choice. Investing in stocks is the most accessible way for anyone to earn strong long-term returns, regardless of the amount invested. The question is: which stocks should you buy?
What about all of them (or at least 500 of the biggest)?
By entering a basket of stocks like the SPDR S&P 500 ETF Trust (TO SPY -0.13%), you’re connected to the vast majority of the US stock market and able to capture all of its overall rise without having to worry about finding and keeping tabs on individual stocks.
And from an odds perspective, this strategy is a much better approach to investing in stocks anyway.
The odds are stacked against stock pickers
If you don’t know them, exchange traded funds – or ETFs – are groupings of shares with at least one common element. As their name suggests, exchange-traded funds are bought and sold just like stocks.
In the case of the SPDR S&P 500 ETF Trust, the common thread is that all of its holdings are members of the S&P500 hint (^GSPC -0.16%). These are 500 of the largest companies in the US market (more or less), representing approximately 80% of the overall value of the nation’s stock market. You also do not need to complete 500 individual transactions to own or liquidate a stake in the SPDR fund (or any other ETF). You simply buy or sell the entire basket whenever you want to enter or exit it.
Boring? Maybe a little bit. However, don’t confuse boring with unrewarding. Indeed, buying and holding a share of the market as a whole is likely to generate higher net returns than hand-picking a few seemingly hot stocks.
It’s true! You see, stock picking is difficult. Like, really hard. It’s so difficult, in fact, that even most professionals can’t do it well enough to consistently outperform the entire market. Data from Standard & Poor’s indicates that over the past five years, nearly 79% of large-cap mutual funds available to investors in the United States have underperformed their benchmark S&P 500 index. Over the past 10 In recent years, this rate of underperformance has increased to more than 87%. Over the past 15 years, 88% of these large-cap funds have lagged the S&P 500. And for the record, the few funds that have managed to beat the market in any of these periods have rarely done so. on another.
Oh, and by the way… it’s not like hedge funds are doing better.
If these well-trained, well-equipped, well-paid fund managers can’t do it, what hope does the average enthusiast have?
Accept (then play) the odds
This surprising reality raises many questions. Chief among them is a simple “Why?” » Why can’t most of this crowd of pros with all the advantages do what is expected of them quietly?
Part of the answer has already been given; It’s simply difficult to determine which stocks are poised to outperform the market over any given period of time. Not only do you need to identify undervalued stocks based on company-specific metrics, but you also need to determine what investors will think of these names at some point in the future. It’s certainly a tall order, no matter how brilliant you are.
And that assumes you can do it! Often, picking winning stocks isn’t just difficult. This is downright counterintuitive to the point of being misleading. Many stocks don’t become attractive prospects until well after most of their gains have been realized; It is not uncommon for a ticker to be near a major high at the time that fund managers are interested in it. Conversely, many professional stock pickers are hesitant to get into poorly performing stocks, even if they are. ideal time to dive shares of a healthy and growing company.
These are, of course, traps that ordinary individual investors can also easily fall into.
So the solution is simple: don’t try to beat the market. Just be content to live up to its performance. Over the long term, the S&P 500 has averaged an annual gain of about 10%. The SPDR S&P 500 ETF Trust is intended to reflect this performance, which it has exhibited primarily since its inception in 1993.
The SPDR S&P 500 ETF Trust Makes Sense for Most People
Keep things in perspective. You may prefer individual stocks over ETFs for a perfectly legitimate reason. Perhaps you are willing and able to do the kind of work and oversight required for individual actions.
Also keep in mind that while most professionals can’t consistently beat the market, small investors have at least one advantage over money managers. In other words, your smallest portfolio doesn’t change the price of a stock as you enter or exit it. Multi-million dollar trades by institutions can do this, which goes against their entry and exit prices.
Overall, for a relatively small amount of money – say $1,000 – tracking down and keeping tabs on even a small handful of individual stocks is more trouble and more risk than that. worth it. Instead, enter the SPDR S&P 500 ETF Trust and forget about it, trusting that time will reward you for your patience and passive at least as much as being active and aggressive.
This might help: There’s no rule against owning a mix of index ETFs and individual stocks.