"The secret of getting ahead is getting started." -Mark Twain
Some things get easier with practice -- riding a bike, playing the piano, speaking a foreign language. Moreover, in each case, a person performs better when they stop thinking about the details and act intuitively, embracing the big picture.
There's an important lesson here for new investors: Don't get scared off by complicated financial concepts, and don't get bogged down in the details. The most important part of investing is just getting started.
Let's dig into why that is, and how even beginners can get ahead in the stock market.
Image source: Getty Images.
The first step
Say you're a new investor. You don't know a T-Bill from a T-Rex. But you have $1,000, and you're ready to start. Where's the best place to invest it? For me, the answer is simple: The SPDR S&P 500 ETF Trust (SPY 0.95%).
In short, the SPY (I'll call it that to keep things simple) is a basket of stocks. Each share of the fund is made up of fractional amounts of many different stocks.
The point of index funds like the SPDR S&P 500 ETF is that they allow investors to buy a large number of different stocks (often high-priced stocks) without having to invest tens of thousands of dollars.
The SPDR S&P 500 ETF is the largest and most frequently traded index fund in the world. It tracks the S&P 500 index, which is made up of the 500 largest American companies, with a few exceptions I won't go into here. The index is weighted by market cap, meaning that the largest companies have the largest impact on the price of the index.
So Apple, the world's largest company, comprises about 7% of the index. The smaller a company's market cap, the smaller its impact on the index's price. Citigroup, for example, comprises only 0.25% of the index, while Southwest Airlines takes up 0.04%.
So when an investor buys one share of the ETF, they're buying, in effect, fractional amounts of 500 different stocks. However, because it's an index, buying one share only costs about $470.
If an investor tried to build a portfolio of these stocks on their own, it would cost far more. For example, buying just one share each of the top 10 holdings of the S&P 500 would cost over $3,500. And that's only 10 stocks -- there would still be 490 left to go.
Why invest in the SPDR S&P 500 ETF?
The best reason to invest in the SPDR S&P 500 ETF is that it is the most simple and straightforward way to invest in a wide swath of the stock market. In one fell swoop, an investor with $1,000 could buy two shares of the ETF and have partial ownership in companies ranging from Tesla and Nvidia to Coca-Cola and Phillips 66.
This provides diversification -- an important financial concept that means spreading out your risk -- across industries and companies of varying sizes.
What's more, the ETF has performed well -- very well -- in recent history. Consider this: A $1,000 investment made in the SPY ten years ago would be worth $3,058 as of this writing. That might not seem all that impressive, but it far exceeds the performance of high-profile stocks like AT&T and Wells Fargo over the same period.
SPY Total Return Level data by YCharts
In summary, beginners shouldn't be intimidated by the complexities of investing. Sure, there are many layers to the metaphorical onion that is the stock market and the larger world of money management. However, new investors should remember that getting started is half the battle.
So for those new to the world of investing, consider the SPDR S&P 500 ETF as a first step on a lifelong investing journey. Your future self may thank you for it.
