Last year, the S&P 500 declined 19% -- not a drop that investors want to see when it comes to their hard-earned savings. Besides potentially turning investors off to the stock market in 2023, a negative performance from the most widely followed index could dissuade new investors from even getting started.
In fact, because it's so rare to see the S&P 500 post two straight down years, now could be one of the best times ever to start putting your money to work. For someone who's starting from scratch, here's how to approach investing in the stock market in 2023.
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Active or passive
The first important question to ask yourself is if it's best to go the passive route or adopt active management. Because the majority of active investment funds lose to the market in any given year, going passive might be the right move. It's low-maintenance, it can be automated, and it doesn't require much of a time commitment.
A worthwhile exchange-traded fund (ETF) to consider is the Vanguard Total Stock Market ETF. This is a low-cost option that attempts to track the performance of the entire investable U.S. stock market, giving you solid exposure. Adding cash to this regularly, say monthly or quarterly, will put you ahead of most other investors out there.
On the other hand, if investors have the time to conduct their own research on specific stocks, and they believe that they possess the necessary skills to do this successfully, then a more active mindset could be worthwhile.
Focus on familiar names
If an investor were starting all over today, and they decided that an active approach was the right way to go, I think it's best to start with familiar businesses.
To keep it incredibly simple, investors could just look at the companies that they are customers of on a regular basis. This gives them key insights into the other side of the transaction when these businesses introduce new products or services, change their marketing or pricing strategy, or enter new markets. It might not seem like a big deal, but I think being an actual customer can be extremely valuable from an analytical perspective when trying to size up the prospects of a particular company.
However, this strategy will likely keep businesses that sell mainly to other businesses off the list. And that's fine. There are a ton of potentially lucrative investment opportunities within consumer-facing enterprises.
It's also a really good idea to find companies you are interested in learning about further. Focusing on businesses that you get excited about will keep you engaged during the initial research process as well as when you're continuously following the company. I think this is an important factor that most people don't consider.
I'm particularly interested in streaming entertainment, digital advertising, digital payments, and e-commerce. Not only are these sub-sectors I enjoy following, but they are broad secular trends that have long runways for continued growth. And this translates to sizable investment opportunities.
Taking everything into account, if I were starting from scratch today, I'd invest in big tech stocks like Amazon and Alphabet. These massive corporations are involved in a lot of different industries, often dominating whatever market they enter. They cover all the areas that I'm interested in, plus they have a ton of growth potential in the years ahead. What's more, both stocks are down more than 30% in the past 12 months. Amazon and Alphabet are a good starting point for anyone's portfolio.
I'd also look at fintech leader Block. Block's intense focus on providing a superb user experience has resulted in the business being a top choice for small merchants looking for an effective solution at upgrading their point-of-sale setups. And the company's Cash App is a favorite among people seeking an elegant personal finance tool that could be a substitute for using a traditional bank. Block's shares are trading at a price-to-sales multiple that is well below their historical average of 6.5.
With the turn of the calendar into a new year, investors can always find ways to optimize their portfolio management strategies. Don't get discouraged by 2022's negative performance. Instead, stay focused on the long term.
