One of the first problems new investors run into is where they should invest. With thousands of publicly traded companies, there's no shortage of companies to choose from, and with the emergence of cryptocurrencies over the last decade, the options have expanded even more.
Between the S&P 500 and Bitcoin (BTC 3.01%), here's what I think is the better first investment.
Image source: Getty Images.
How the S&P 500 works
The S&P 500 is an index that consists of the 500 largest companies in the U.S. by market cap. S&P 500 index funds are funds put together to mirror the index, and different brokerages put together their own funds. If you want to invest in an S&P 500 fund, you have multiple options, such as the Vanguard S&P 500 ETF, SPDR S&P 500 ETF Trust, iShares Core S&P 500 ETF, and more.
The companies in the S&P 500 cover almost every industry you can think of, making it ideal because it gives investors instant diversification. Instead of having to invest in individual companies in varying industries one by one -- and increasing your risk of making a bad investment -- you can just invest into an S&P 500 fund and be instantly invested in top players in respective industries.
The emergence of Bitcoin
Bitcoin is a cryptocurrency that was released in 2009 that has since gone on to be the world's most popular and biggest cryptocurrency by market cap. Bitcoin was revolutionary because it was the first decentralized currency, meaning no central power (like the Federal Reserve) controlled it.
As of February 9, 2022, Bitcoin's price has increased by over 13,570% since its inception, making it one of the most lucrative investments of all time in any asset. Unfortunately, those historical gains don't automatically mean investors can expect similar increases in the future.
Why I'd choose the S&P 500 over Bitcoin as a first investment
If you're just beginning to invest, one of the last things you'll likely want to do while you're still learning and getting used to how markets work is to put your money into an investment that will inevitably experience extreme volatility. By no means is the stock market exempt from volatility, but the S&P 500 has shown to be a lot more stable in the long run.
Another aspect of investing that you'll miss out on if you choose Bitcoin over the S&P 500 is dividends. Along with an increase in asset price, dividends are the other primary way investors make money from their investments. If you invest a set amount into Bitcoin and the price doesn't increase, you don't make any money. If you invest a set amount into the S&P 500 and the price doesn't increase, you should still make money from dividend payouts.
In 2021, the Vanguard S&P 500 ETF had a 1.59% dividend yield. If that dividend yield stayed the same and you invested $10,000 into the fund without ever contributing another dollar, you would've earned over $3,700 in dividends over 20 years -- even if the fund's stock price didn't increase. Being paid for simply holding an investment is not a perk you currently get with Bitcoin.
Diversification is key
While an S&P 500 fund is one investment, the multiple assets within it ensure you're able to reap the benefits of many different companies and industries. One of the pillars of investing is diversification; while the potential upside of Bitcoin may be enticing, you never want all your money in a single asset. Using dollar-cost averaging and making consistent investments in the S&P 500 is one of the best things you can do to accomplish your long-term goals.
