Allow me to begin this column with an assumption: If you've got $1,000 to invest in the stock market, and you're thinking hard about where to put that money, you probably don't already have $100,000, $1 million, or several million dollars already invested. If you've got $1,000 to invest, you're probably contemplating your first investment.
And that's great! Everyone's got to start somewhere. Most of us investors started right about where you are right now -- with $1,000 or so to invest, and a very real fear that, if we invest it in the wrong stock, it could all just vanish.
So let's try and make sure that doesn't happen to you.
Diversification is your friend
The best way to ensure you don't lose everything all at once is to split your money up and invest it in several different stocks -- a concept we call "diversification."
Now, between the arrival of fractional share ownership and zero-commission stock trading, it's theoretically possible for you to put $10 or so into each of 100 different companies, or $1 each into 1,000, and get near-infinite diversification. But today I'm going to suggest something a bit different: Split your money three ways -- investing roughly one-third each into two stocks you know and love, and the final third into an S&P 500-mimicking exchange traded fund such as the SPDR S&P 500 ETF (NYSEMKT:SPY).
Why? Simple. When you look at your portfolio statements online, you will see the performance of all three investments side by side. Over time, this should be able to tell you whether you're better off picking specific stocks yourself, or simply buying the S&P 500 ETF and accepting the market's average return. (Hint: Over the past 100 years, that's averaged about 10% per year -- much better than you'll get from any bank account.)
Now, which stocks should you pick? That's going to feel like searching for a light switch in the dark. You don't know precisely what you're looking for. You don't know what kinds of businesses suit you best. So I'm going to err on the side of caution here and suggest a couple stocks with well-known brands (so they won't be too unfamiliar to you), high quality businesses, and defensible valuations: Disney (NYSE:DIS) and Apple (NASDAQ:AAPL).
Everybody knows Disney. Whether you fell in love with the classic fairy tales, you're a Star Wars buff, or you're a fan of Marvel superheroes, chances are you like at least something that Disney makes. And that interest you've got in the products is going to help motivate you to keep an eye on the company and see how it's doing over time.
Currently, Disney's in something of a rough patch profits-wise. It's rolling out a new streaming service, Disney+, which is going to cost some money, and contributed to a 24% decline in profits last quarter. Coronavirus concerns are probably going to take a toll on its flagship parks business (Disney's biggest revenue contributor) in the not too distant future. Nevertheless, analysts polled by S&P Global Market Intelligence believe Disney's profits will begin growing again as soon as next year, and with Disney now owning most of the major entertainment franchises you can think of (I don't think they own Shrek or D.C. Comics -- yet), this company's lock on the entertainment business is all but unbreakable.
Valuation-wise, Disney stock sells for 23.5 times trailing earnings, which is cheaper than the average stock on the S&P 500 -- but Disney is anything but an average company. I think an investor could do a lot worse than buying a superior business at a below-average price. With Disney stock down a bit since the start of the year, now's a great time to do that.
Here's another stock that needs no introduction. (In fact, I wouldn't be too surprised to learn you are reading this article on an iPhone right now!) In contrast to Disney, whose stock is down slightly so far this year, Apple shares are up more than 10% -- but still selling for almost the exact same P/E ratio (25.8) as the S&P 500 average.
But is Apple only an average stock? Let's see. Last quarter the company reported iPhone sales worth $56 billion -- 68% more than in the previous quarter. Its earnings per share of $4.99 crushed analyst predictions of $4.55. That sounds anything but average to me.
And this year Apple is looking to grow sales and profits even more as it begins shipping its first wave of 5G-enabled smartphones. The company's first 5G release, the iPhone 12, should generate impressive profit margins as it capitalizes on pent-up demand for the technology among Apple users still nursing along their iPhone 8s and Xs in anticipation of 5G. And for anyone who balks at the price tag, Apple's planning to unveil a budget-priced iPhone SE2 this year as well.
Those should punch up Apple's profits nicely this year, and add to the 10% gain Apple stock is already enjoying.
SPDR S&P 500 ETF
Finally, a few words about the S&P 500 ETF. We'll be using this one as our "control group", the "stock" to which you compare your other stocks to see how well you picked. But that doesn't mean it can't be a winning investment in and of itself.
Representing America's 500 largest publicly traded companies, the SPDR S&P 500 ETF includes instant diversification, so that a disaster at one company won't greatly damage your returns. It exposes you to a wide swath of business types -- fast-growers, dividend payers, and value stocks. And it's as easy to buy and sell as any individual stock.
I think you can actually do just fine as an investor owning nothing but an S&P 500 index fund. But it's possible you can do better than average, and that will be good to know before you begin putting larger amounts of money into the market.
With these three stocks to start with, it shouldn't take long to find out.