As we've written before, a volatile market can provide choice investment opportunities. It's when stocks are on sale, after all, that savvy types go shopping. What's more -- counterintuitive though it may seem -- turbulence is good news for new investors, too. It means they have a chance to begin building their nest eggs on the relative cheap.
With that in mind, this commentary begins a three-part series on smart moves that brand-spanking-new investors ought to consider as they test the market's waters.
First up: building your portfolio around solid large-cap stocks.
Anchors aweigh
Just about every investor should anchor his or her portfolio to a well-diversified basket of large-cap stocks, and one terrific no-muss, no-fuss way of doing that is to invest in rock-solid mutual funds.
Specifically, you may want to consider an index pick such as Vanguard 500 (FUND:VFINX), an S&P tracker that provides ample exposure to such big boys as ExxonMobil (NYSE:XOM), General Electric (NYSE:GE), and Citigroup (NYSE:C). This fund has been tough as nails to beat over the years, and best of all, its expense ratio is a mere 0.18%.
Lump-sum investors, meanwhile, can go an even cheaper route by plunking down their moola in the popular S&P-tracking SPDRs (AMEX:SPY) exchange traded fund (ETF). Since ETFs trade like stocks, you'll have to pay a commission each time you buy and sell them, but the expense ratio is a dirt cheap 0.10. (To learn more about ETFs, browse our ETF Center.)
Get active
That said, investing exclusively in index funds means that you're pretty much destined to lose to the market each year by about the amount of the fund's annual expenses. Fools can and should do better than that, which is why active management can be a good thing -- in particular, in pairing passive picks like Vanguard 500 with the cream of the fund industry's actively managed crop.
One fund worth considering is Neuberger Berman Socially Responsive (NBSRX). It targets the market's big boys, too, but the fund's strategy diverges from the Vanguard fund's in several significant ways. For starters, the management team here presides over a portfolio of just 33 names, a compact collection that includes behemoths such as Novartis (NYSE:NVS) and Texas Instruments (NYSE:TXN). What's more, the companies the fund holds have made it through an obstacle course of social criteria that includes rigorous screens against, among other things, tobacco and firearms.
The results? This fund has beaten the S&P over one-, three-, five-, and 10-year trailing periods. Not too shabby, eh?
That's a wrap
Now that we've covered large-cap stocks being anchored in your portfolio, the next step -- part two of our series -- is to look at portfolio diversification to for market volatility. We encourage you to get the inside scoop on our Motley Fool Green Light service. In the newsletter and on our information-packed companion website, we have tips aplenty for folks who are trying to a grip on their financial future -- smart ways to begin your investing career most definitely included.
This article has been updated by Foolish research associate Katrina Chan and was originally published on July 6, 2006, by Shannon Zimmerman. Katrina does not own shares in any of the companies mentioned.
Neuberger Berman Socially Responsive is a Champion Funds recommendation. The Fool has a strict disclosure policy.
