Investing can seem like a complex task, especially after turning on the TV and watching the financial news for even just a few minutes. However, it's not as complicated as it first appears to be.
It's always a good idea to have a long-term time horizon, to focus on high-quality businesses, and to hold through the inevitable ups and downs. The only question that remains is whether you want to adopt a passive or active approach. Each path has its own merits.
But if I was starting from scratch with $1,000 ready to invest today, here's what I'd do.
An easy approach to consider
For investors who want a more hands-off approach, buying index funds, like the Vanguard 500 Index Fund Admiral Shares or the Fidelity 500 Index Fund, is a smart choice. They provide a low-cost way to diversify your holdings and gain exposure to the moves of the S&P 500, which is an index of the 500 largest companies in the U.S.
Instead of allocating that entire $1,000 on day one, investors can consider dollar-cost averaging over several months. This means putting a fixed amount into an index fund periodically, say on the first of every month. This allows investors to take advantage of multiple entry price points, which can boost returns.
Because most active fund managers actually lose to the market, owning index funds can be a very good idea. Even Warren Buffett thinks so, as he routinely recommends that most investors would be better off following this course of action.
The active route
While a passive approach is certainly a worthwhile option for many people, I would invest actively. I not only think I can properly analyze stocks to invest in, but I also have the time to research and continuously follow them for updates. For some people, this isn't in the cards, as their time might be limited.
NASDAQ: AMZN
Key Data Points
With $1,000 ready to invest, I think I'd put half of that amount into Amazon (AMZN +0.53%) and the other half into Visa (V 0.94%). Both businesses offer superior products and services in their respective industries.
Amazon doesn't sell millions of products. What it really sells is convenience and speed, thanks to its vast logistics network and popular Prime membership. Moreover, its Web Services division has a leading market share in the cloud computing market.
Visa doesn't extend credit, but it does operate the largest card network in the U.S., processing $14.5 trillion of payment volume in the last 12 months. The company provides the communications infrastructure that facilitates commerce around the world, making itself an essential part of the economy.
NYSE: V
Key Data Points
Moreover, these businesses possess strong economic moats that help them successfully fend off competition. Amazon benefits from powerful brand recognition, enormous scale, data advantages, and network effects. Visa is in a similar boat, with a brand known worldwide for payments innovation and security, as well as network effects thanks to its ability to connect people and businesses. Thanks to the presence of these characteristics that make up their moats, I feel more comfortable and confident in owning both stocks for a long time.
Because Amazon benefits from the growth of online shopping and corporations moving IT spending to the cloud, it should see solid revenue gains going forward. And Visa is in a position to continue fighting the war on cash. Digital payments are only becoming more prevalent.
Both stocks are reasonably valued today. Amazon trades at a forward price-to-sales multiple of 2.4, while Visa sells for a forward price-to-earnings ratio of 27.4. I think these are acceptable prices to pay for what I deem to be outstanding companies. So a $1,000 investment split between these two businesses looks like a smart idea.
