Starting your investing journey can sometimes seem intimidating. If you only paid attention to the news or social media, you would think investing was all about reading through financial statements or staying glued to the latest business news.
This doesn’t have to be the case, though. Investing is often as simple as following a few rules of thumb that have stood the test of time.
One of those rules of thumb is having a diversified portfolio. You want your portfolio to be diversified because it removes some of the risk in investing by making sure you’re not relying on too few companies to carry the weight. Luckily, achieving this diversification is relatively easy because of exchange-traded funds (ETFs).
ETFs allow you to invest in a wide range of companies or industries with a single investment, and they are a great way for beginning investors to get acclimated to the stock market. If you’re looking to get started investing, look no further than the Vanguard S&P 500 ETF (NYSEMKT: VOO).
An investment in the broader U.S. economy
The S&P 500 (SNPINDEX: ^GSPC) is an index that tracks the largest 500 companies trading on the U.S. stock market. Since these companies cover a wide range of sectors and industries, an investment in an S&P 500 ETF can be viewed as an investment in the broader U.S. economy. When you’re beginning your investment journey, one of the safer bets you can make is on the long-term growth of the American economy (though no investment is risk free).
While the S&P 500 itself is an index, different financial institutions put together their respective S&P 500 ETFs to mirror the index and allow people to invest in it as they would an individual company. If there was a one-stop shop or single investment that could be the foundation of an investor’s portfolio, it would be an S&P 500 ETF — like the Vanguard S&P 500 ETF.
One investment, but a lot of ground covered
The Vanguard S&P 500 ETF is market-cap weighted, so larger companies account for more of the fund. Since many of the largest companies are in tech, so are the top companies in the ETF. Its top 10 holdings (eight of which are tech companies) make up over 32% of the fund.
The current makeup of the ETF is less diversified than in past years, but it still covers all 11 major sectors:
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Communication services: 8.9%
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Consumer discretionary: 10.3%
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Consumer staples: 6%
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Energy: 4%
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Financials: 13.1%
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Health care: 12.4%
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Industrials: 8.8%
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Information technology: 29.6%
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Materials: 2.4%
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Real estate: 2.3%
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Utilities: 2.2%
Having tech stocks lead the charge for the Vanguard S&P 500 ETF has done well for it over the past decade.
Using the Vanguard S&P 500 ETF as the foundation for your portfolio is a great starting point. From there, you can use other investments to complement it and increase your stake in sectors where the ETF could be lacking a bit (like materials, real estate, and utilities).
Focus on investing consistently instead of timing the market
With the S&P 500 near its all-time high price, it’s understandable why investors might be hesitant to invest and instead sit back and wait for the “perfect time.” The problem, though, is that there isn’t a perfect time to invest. You don’t want to get into the habit of trying to time the stock market because that’s a losing game for most people over time.
A better route would be dollar-cost averaging, which involves deciding on a set amount you can invest in a stock or fund and then putting yourself on a schedule to make those investments regardless of stock prices at the time. For example, if you decide you can invest $400 a month into the Vanguard S&P 500 ETF, you could break it down into four $100 weekly investments or biweekly $200 investments.
Dollar-cost averaging is one of the easiest ways to ensure you don’t make the mistake of trying to time the stock market because your investment amounts and dates are (theoretically) set in stone for you. When you’re beginning your investing journey, being consistent is one of the best things you can do. It generally pays off in the long run.
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Stefon Walters has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
How Should a Beginner Invest in Stocks? Try This ETF. was originally published by The Motley Fool