If you're considering taking a position in Apple (AAPL 1.27%) following its 8% pullback so far in 2022, you're not alone. Price drops of this size are nothing unusual for this stock and have proven to be great buying opportunities amid what's become a reliable long-term uptrend. As it turns out, making the world's most popular smartphone -- and supporting its sales with a robust app ecosystem -- is a lucrative business. Apple is the world's biggest and most profitable company for a reason.
However, before taking a swing on a single stock, it's useful to at least consider a better-balanced alternative like a mutual fund or exchange-traded fund (ETF) that mirrors a blue-chip index like the Dow Jones Industrial Average (^DJI -0.11%). Let's see why.
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Why Apple looks so juicy
Admittedly, Apple is a very compelling investment prospect. While they've not moved in a straight line, Apple shares are up 27% for the past 12 months, higher by 140% for the past two years, and up by nearly 300% since this point in 2019.
And well they should be. The $2.7 trillion company has continued to grow even when it arguably shouldn't have. It turned last fiscal year's $366 billion worth of revenue into net income of nearly $95 billion, shrugging off the impact of the pandemic. That gross revenue total was (another) record.
iPhone revenue growth seems particularly unstoppable, supported by growing interest in the apps the devices operate. All told, the company sold $192 billion worth of iPhones last year and leveraged them to drive more than $68 billion worth of digital content. Apple's services business, in fact, ramped up another 27% year over year.
Simply put, Apple looks bulletproof. The company's growth shows no signs of slowing down despite lingering chatter about smartphone sales leveling out. And, to the extent smartphone saturation and competition will eventually catch up with the company's iPhone sales, Apple's got a proven plan B that many companies would be thrilled to call their plan A. That's more than a little exciting.
Except, maybe Apple isn't your best next trade, especially if it's one of your first-ever trades.
The flavors you're not getting when you bite into Apple
To be clear, you could certainly do much worse than jumping into an Apple stake. It's a proven company, and a proven stock.
Make no mistake, though. When you own Apple, you're not just betting on one company, or even on just one kind of business. You're mostly betting on the iPhone, and what the iPhone can do for the company. See, more than half of 2021's top line stemmed from iPhone sales, and though the company's $68 billion services business only makes up about 18% of its total revenue, the bulk of that $68 billion is generated by iPhone users.
In other words, one unexpected iPhone misstep could produce outsize problems for the company.
That's not a risk you run when buying a basket of diversified stocks like the Dow Jones Industrial Average. Not only does no single company account for more than a tenth of the index's value (with most of them making up less than 5% of its value), the Dow is highly diversified even within itself. Technology stocks are the biggest single sector, yet they still only make up 22% of the index's weight. Financials, healthcare, and discretionary stocks are well represented in the Dow as well. The only segment of the market that's not represented by the Dow Jones Industrial Average is the utilities sector, and only because it's got its own Dow index.
This is no minor detail. While diversification may often feel like unnecessary defense, that's a judgment being made when times are good. You diversify a portfolio to protect it from all the unknowns. If you wait to start diversifying after certain pockets of the market are running into turbulence, you're already too late.
Just food for thought
Like any other piece of investing advice, take this one with a grain of salt. It may not be right for you. If your portfolio already has a well-diversified foundation consisting of index funds, you can afford to venture into higher-risk, higher-reward singular positions like Apple. You may also be eyeing Apple as a more speculative, short-term position that supersedes a long-term mindset. Nothing is ever completely unjustified.
For most investors, though -- and particularly anyone just starting to build a portfolio -- a basket of blue chips like the Dow is the first position you should take on, and should remain the core of your holdings.
Bottom line? Doing a little too much stock picking and not enough indexing is an easy way to unnecessarily chip away at a portfolio's value, even when Apple is one of those picks.
