Investing can be very daunting for new investors. After all, these stock buyers are risking their hard-earned money on the belief that the broader market or individual stocks will grow over time. But there's no guarantee, and investors will always be privy to only a portion of information about the companies they invest in.
The key for new investors is not to try and do too much at the beginning. Know your limits, and avoid placing a big bet until you start to figure out how things work and conduct research. Also, refrain from trying to short stocks or invest in complex derivatives.
New investors should ultimately focus on investing in less-risky financial assets with high diversification, so all of their eggs aren't in one basket. This is where exchange-traded funds (ETFs) come in handy. ETFs trade like stocks and are highly liquid, but also hold a basket of stocks, making diversification easy. Here are two that can help new investors build a strong foundation.
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1. SPDR S&P 500 ETF Trust
New investors should practice investing in the broader benchmark index, the S&P 500 (^GSPC 1.35%), and an easy way to do this is through the SPDR S&P 500 ETF Trust (SPY 1.34%). The S&P 500 is a benchmark that investors use to gauge the performance of the broader market. The index comprises roughly 500 large-cap stocks in the U.S., spanning various sectors.
Requirements for inclusion into the S&P 500 are a market cap of at least $22.7 billion, being publicly traded for at least a year, positive earnings over the previous four quarters, and a large number of shares that are publicly available. Most fund managers judge their performance by whether they beat the market.
NYSEMKT: SPY
Key Data Points
Another thing to understand is that the S&P 500 is weighted by the market cap of its constituents in order to replicate the actual composition of the market as good as possible. That's why so much of the S&P 500 is currently dominated by the "Magnificent Seven" stocks, which include companies such as Nvidia, Microsoft, and Apple. These tech conglomerates are believed to be the largest beneficiaries of the burgeoning artificial intelligence (AI) sector, and now all have market caps exceeding $1 trillion, with most of them boasting multitrillion-dollar market caps.
It's true that this dynamic has removed some of the inherent diversity that was once more closely associated with owning the broader benchmark. It's also true that a cohort of investors believes the market is currently overvalued. However, long-term investors have historically performed well by owning the broader market, so if you have a 10- to 30-year time horizon, I still think you will do well.
Additionally, there is no better way to understand investing than by following the S&P 500 and observing what drives it higher and lower.
For investors who feel the index is too risky right now, or are investing on a much shorter time horizon, they can buy an equal-weighted S&P 500 index that is not market-cap weighted.
2. Schwab U.S. Dividend Equity ETF
Another foundational ETF for new investors to buy is the Schwab U.S. Dividend Equity ETF (SCHD 0.27%). This ETF holds a basket of stocks that pay dividends and also have strong fundamentals, including profitability, which allows them to continue paying and growing their dividends. Dividends are payments, typically made by mature companies on a quarterly basis, to reward shareholders or compensate them for their investment.
So, if an investor owns 100 shares of a stock and the company is paying an annual dividend of $1 per share, that investor will receive $100 each year, so long as the company can keep paying its dividend. Dividends can be a predictable source of passive income.
Some of SCHD's top holdings are known as Dividend Kings, referring to companies that have paid and increased their annual dividend for at least 50 consecutive years. Examples include Coca-Cola, PepsiCo, and AbbVie.
NYSEMKT: SCHD
Key Data Points
At the end of November, SCHD had a trailing-12-month dividend yield of more than 3.7%, which I consider to be very strong. Additionally, SCHD has been making dividend payouts to shareholders since the fund's launch in 2011, and has also grown the dividend consistently, so I think investors can buy SCHD with confidence.
Ultimately, I think it's a good investment strategy to own some ETFs and stocks for appreciation, and others for more predictable dividends.
