In the past decade, the S&P 500 (^GSPC 0.16%) index has produced a total return of 239% (as of June 6). This recent performance extends a long history of the tremendous wealth that patient investors can obtain by putting money to work in the stock market.
But let's say you're new in your investing journey. It can be intimidating trying to navigate the news cycle and figure out what to do with your portfolio. Here's how I'd invest $1,000 if I had to start from scratch today.
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Active versus passive
It's remarkable to see how well certain stocks perform. Take Apple, for instance. The tech giant's shares have soared 14,740% in the past 20 years. Those who were smart and lucky enough to buy and hold the stock have been handsomely rewarded.
While the potential payoff of picking the right companies can be huge, new investors must ask if they really want to go the active route. This strategy requires a time commitment to conduct research. Of course, you'll also need to understand financial analysis and business strategy.
There's also passive investing, which has become more popular in recent memory. This is essentially a buy-and-hold strategy that tracks the performance of a particular index, such as the S&P 500.
For what it's worth, I'd probably do a combination of both of these strategies. Half of the $1,000 would go into low-cost exchange-traded funds (ETF), such as the Vanguard S&P 500 ETF and the Invesco QQQ Trust. This will ensure I have diversified exposure to the broader economy.
The other half of the $1,000 would be used to select individual stocks. I believe I have the basic skill set needed to analyze companies and look at valuation to make smart decisions. A good place to start is to identify businesses you admire and you are a customer of. That way, you already have a basic understanding, and you can build off that research.
A hybrid approach like this, mixing active and passive investing, also lets me slowly test the waters to improve my investment abilities early on. I believe it's a sound method, especially if you want to get better over time.
Time is your ally
Deciding to invest in the market is a wonderful step to take. But first, prioritize bolstering your personal finances. This means tackling any high-interest debt while also building up an adequate emergency fund. After this, you can focus on the stock market.
Besides choosing the exact strategy, whether active, passive, or a combination of both, you need to keep some important factors in mind. I think understanding these things can increase the chances of success.
As a newbie investor, it's tempting to want to time the market. The goal here is to avoid the down days and capture the up days, trying to implement a buy low/sell high approach to maximize profits. While this makes sense in theory, it's almost impossible to do successfully on a consistent basis.
Instead of timing the market, it's best to spend the most time in the market. Investing early and with a long-term mindset that spans decades into the future is proven to work. In this way, you let compounding work its magic.
And don't expect it to be a smooth journey. Volatility is the price you must pay to achieve satisfactory results. This is why it's critical to be psychologically prepared for the inevitable ups and downs.
Investing successfully is simple, but it's not easy. For new investors, it's time to put that $1,000 to work.
