Got $1,000 to Invest in Stocks? Put It in This ETF.
Got a little extra money you won't be needing for a while and want to put to work in the stock market? Excellent choice. Investing in stocks is the most accessible way for anyone to achieve solid long-term returns on whatever amount of money they invest. The question is, which stocks should you buy?
How about all of them (or at least 500 of the biggest)?
By stepping into a basket of stocks like the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) you're plugged into the vast majority of the U.S. stock market, and you're positioned to capture all of its overall upside without all the hassle of finding and keeping tabs on individual stocks.
And from an odds-making perspective, this strategy is a far better approach to investing in stocks anyway.
The odds are stacked against stock-pickers
If you're not familiar with them, exchange-traded funds -- or ETFs -- are groupings of stocks with at least one common element. Just as their name suggests, exchange-traded funds are bought and sold exactly 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&P 500 index (SNPINDEX: ^GSPC). These are 500 of the U.S. market's biggest companies (more or less), accounting for roughly 80% of the domestic stock market's overall value. You don't have to place 500 individual trades to own or liquidate a stake in the SPDR fund (or any other ETF), either. You simply buy or sell the entire basket when you want in or want out.
Boring? Maybe a little. Don't confuse boring with unrewarding, though. Indeed, buying and holding a piece of the broad market is likely to result in higher net returns than hand-picking a few seemingly hot story stocks.
It's true! See, picking stocks is hard. Like, really hard. It's so hard, in fact, that not even most professionals can do it well enough to consistently outperform the overall 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 underperformed their benchmark S&P 500. For the past 10 years, that underperformance rate has been ratcheted up to more than 87%. Over the course of the past 15 years, 88% of these large-cap funds lagged the S&P 500. And for the record, the few funds that managed to beat the market in one of these time frames rarely did so in another.
Oh, and by the way ... it's not like hedge funds are faring any better.
If these well-trained, well-equipped, and well-paid fund managers can't do it, what hope does the average amateur have?
Accept (and then play) the odds
This surprising reality raises lots of questions. Chief among them is a simple "Why?" Why can't most of this crowd of pros with every advantage do what's quietly expected of them?
Part of the answer's already been given; figuring out which stocks are poised to outperform the market during a set time frame is just difficult to do. Not only do you need to identify which stocks are underestimated based on company-specific metrics, but you must also determine how investors are going to feel about those names at a particular point in the future. That's a tall order to be sure, no matter how brilliant you are.
And that's assuming you're able to do it at all! Often, picking winning stocks isn't just difficult. It's downright counterintuitive to the point of being deceptive. Plenty of stocks don't become compelling prospects until well after most of their gains have been made; it's not unusual for a ticker to be near a major high by the time fund managers become interested. Conversely, many professional stock-pickers are wary of stepping into poorly performing stocks even though that's the ideal time to dive into shares of a healthy, growing company.
These of course are traps that ordinary individual investors can easily fall into as well.
The solution, therefore, is simple -- don't try to beat the market. Just be content to match its performance. Over the long haul, the S&P 500 has averaged an annual gain of right around 10%. The SPDR S&P 500 ETF Trust is meant to mirror this performance, which it mostly has since its inception back 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're willing and able to do the sort of homework and monitoring required for individual equities.
Also bear in mind that even though most professionals can't consistently beat the market, smaller investors enjoy at least one advantage on fund managers. That is, your smaller portfolio doesn't change a stock's price while you're getting in or out of it. The multimillion-dollar trades that institutions are making can do that, working against their entry and exit prices as a result.
On balance, for a relatively small amount of money -- say $1,000 -- tracking down and keeping tabs on even just a small handful of individual stocks is more trouble and more risk than it's worth. Step into the SPDR S&P 500 ETF Trust instead and forget about it, having faith that time will reward you for being patient and passive at least as much as being active and aggressive will.
This might help: There's no rule that says you can't own a combination of index-based ETFs and individual stocks.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends S&P Global. The Motley Fool has a disclosure policy.
Got $1,000 to Invest in Stocks? Put It in This ETF. was originally published by The Motley Fool