Are you looking for a stronger return on your money, but not sure where to start? If you’re thinking of doing it with stocks, you’re looking in the right place. The long-term return of the stock market is stronger than what is achievable with alternatives such as money markets, bonds, commodities or real estate; the average annual return of the market is around 10%.
However, if you have no experience with stocks, the idea can also be daunting. Picking stocks certainly seems more than a little complicated when you’re on the outside looking in.
However, that doesn’t have to be the case. There’s even a simple solution that’s perfect for newcomers. This option requires no special knowledge or experience, nor does it require ongoing maintenance or monitoring. The investment? A share in the SPDR S&P 500 ETF Trust (NYSEMKT: SPY).
But first things first.
The two key features of the SPDR S&P 500 ETF Trust
If you have no investing experience, an explanation of the two key features of the SPDR S&P 500 ETF Trust is in order.
First and foremost, it is an exchange-traded fund (ETF). These are just baskets or bundles of shares that are bought and sold, just like individual stocks such as Coca-Cola or Microsoft. Instead of achieving the diversity you would achieve by owning a variety of individual companies, with an exchange-traded fund you own a portion of all the shares within the ETF in a single transaction. It’s an attractive option simply because managing a number of individual stocks can become very tiring very quickly.
Second, it is an index fund. That just means that the stocks it holds have the exact same names in the same proportion as those of a corresponding market index.
In this case, the index in question is the S&P500 (SNPINDEX: ^GSPC), which houses 500 of the largest and most important (more or less) publicly traded companies in the US stock market. If Standard & Poor’s makes additions, subtractions or adjustments to the index, State Street Global Advisors – which manages this SPDR ETF – will adjust its positions accordingly. This means that the ETF’s shareholders do not have to do anything themselves to keep their investment up to date. And that’s why this is the kind of investment you can keep as your only asset forever.
The point is that there is a strong argument for doing just that.
It’s hard to beat the market. Really difficult.
It’s probably not the exciting path to wealth you were hoping to take. The whole idea actually seems a bit boring: you’ll never beat the market if you’re only in a position to match the market’s overall performance. And for all intents and purposes, the S&P 500 is “the market.”
However, this is still the smartest path for most investors, especially beginners.
Look, no matter how smart you are or how deeply you delve into the art and science of stock picking, it’s unlikely that you’ll ever consistently outperform the S&P 500.
Are you surprised to hear such a discouraging suggestion? Think about this: Most trained and experienced mutual fund managers (mutual funds are a lot like ETFs, except they are only bought and sold at the end of a given trading day) don’t typically beat the market either. Figures from Standard & Poor’s show that over the past three years, nearly 80% of large-cap mutual funds available to investors in the U.S. have underperformed the S&P 500. Over the past decade, more than 87% of U.S. large-cap funds lagged the S&P 500 index. Over the past fifteen years, 88% of these mutual funds could not even keep up with the S&P 500.
And for the record, the rare fund that manages to outperform the market on one of these time frames is not usually one that outperforms the market on another.
Chew on that for a moment. These well-trained and well-equipped professionals usually cannot beat the market, even if they put in full-time effort. If they can’t do it, what hope does a part-time amateur have?
What gives? These managers make the same mistake that many individual investors make, making unwise timing decisions on individual trades. Not only is timing the market nearly impossible to get right. It is often counterintuitive and even impossible.
That doesn’t mean it can’t happen. Small investors have an advantage over most mutual fund managers: their smaller size. You can get in and out of positions without single-handedly changing a stock’s price adversely. Funds have that problem.
Nevertheless, there is a reason why most investors don’t beat the market for long. The higher odds at play here therefore accept average market returns. You could certainly do worse.
Start here… and maybe end here
The good news is that buying the SPDR S&P 500 ETF Trust now doesn’t mean it has to be the only investment you’ll ever own. If you wish, you can add individual stocks to your portfolio later as you add money to your account. You can also sell all or part of your stake in this index-based ETF and use those proceeds to buy other picks. There is a universe of options.
As a starting point for anyone without significant stock picking experience: simpler is better, without making it less productive.
So start with the SPDR S&P 500 ETF Trust if you’re willing to commit to it for several years. Then learn more about investing while keeping pace with the broader market. Then, as you become more comfortable picking stocks, add individual stocks to your portfolio around this core position.
Or do nothing other than buy and hold this exchange-traded fund. Many investors are completely happy with that choice.
Should You Invest $1,000 in SPDR S&P 500 ETF Trust Now?
Consider the following before purchasing shares in SPDR S&P 500 ETF Trust:
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James Brumley has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
What is the best way to invest in stocks without any experience? Try this index fund. was originally published by The Motley Fool
