Have $1,000 to Invest? Put It In This Index Fund
So you have $1,000 to invest. New to the stock market? We've all been there, and it can be an overwhelming place for the uninitiated. Heck, it can be an overwhelming place for the initiated, too.
So where should you put your $1,000? Two words: index funds.
Keeping it simple
There's very little reason here to get creative. Having a traditional index fund that tracks the broader market is a good way to hedge your bets, while gaining investment exposure to some of the most popular stocks. To me, the iShares Core S&P 500 ETF (NYSEMKT: IVV) fits the bill. The concept here is simple. The fund seeks to track the performance of the S&P 500 index, something that all investors should do to at least some degree. We all like to think we're stock-savvy market beaters. The fact is that it is incredibly difficult to beat the market on an annual basis.
Some of the top-weighted holdings in the fund include Microsoft, NVIDIA, Apple, and Berkshire Hathaway. This in itself showcases the advantage of holding an index fund like this. With one simple investment, you are divested across some of the top performing names in the market. By holding the iShares Core S&P 500 ETF over the last five years, you would have gained 96%.
A great way to learn
Many might think that the passive nature of many index funds could limit returns in comparison to picking individual stocks. While it does certainly limit the potential upside in a perfect world, we don't live in a perfect world. Markets are incredibly fickle, and beating them is remarkably difficult. Nobody has perfect information about the whole market, and even if we did, it would be impossible to always have an up-to-date and perfect analysis of that massive data trove.
Even the pros can suffer underwhelming returns relative to simply investing in funds that track the S&P 500 Index. Being invested in a simple fund that tracks the S&P 500 can help you invest at least some of your capital into an investment vehicle that has delivered compelling, diversified returns over the long run. Moreover, the leading S&P 500 index funds all come with the backing of solid fund managers and very low management fees. It adds up to a robust investing strategy that can make a big difference to your portfolio. As I said, the S&P 500 would have nearly doubled your money over the last five years.
The way I view funds is that you use them to keep up with the market, while concurrently investing in individual securities to try to outpace the broader market on some level. Having a rock-solid index fund foundation will help you branch out with targeted stock picks without risking it all on a single ticker.
The best way to learn how to pick those stocks that can outpace the S&P is by learning through index funds. What better way to learn about the stock market than to study Berkshire Hathaway or Apple? Dig into the holdings of the iShares Core S&P 500 ETF, and study their financials. You'll learn why some parts of the stock market perform better than others. Once you've dipped your toes with something like an S&P 500 ETF, you can expand into tech-focused funds, or small-cap funds, or any other focused fund idea.
It's all a slow learning process, but starting out with index funds is a great way to learn how the stock market works, before diving into individual equities.
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David Butler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Have $1,000 to Invest? Put It In This Index Fund was originally published by The Motley Fool