Investors who buy individual stocks have a tough road ahead of them if they want to beat the market averages. This week there was a study done that said that TV personality Jim Cramer from CNBC’s Mad Money doesn’t beat the market with his charitable trust. If he can’t beat the overall market, what chance do you or I have?
For me, picking and investing in stocks is fun and sort of a hobby but if I were to look at the numbers, I’m sure I would find I don’t beat the market either. I pick some winners but I always seem to pick some real stinkers too and that brings down my percentages.
What Should Beginners Do?
Honestly, as a long term investor, if I were just starting out right now (May 2016) I would pick an ETF or two that mirrors the markets. I would put some money in those ETFs at regular intervals so that I would be buying when the market is both going up and going down. This is called “dollar cost averaging” and while there is some debate over whether this is a good strategy, I would do it now because I feel uneasy about the market. The stock market has been very volatile for the last year and a large number of experts agree that we will continue to see volatility and weakness for the rest of this year.
What ETFs Track The Major Indexes?
- SPY – tracks the S&P 500 which consists of 500 large companies listed on the NYSE and NASDAQ. You can find out more information about SPY and what companies it consists of here.
- IWM – tracks the Russell 2000 index which gives you exposure to 2000 smaller companies. Smaller companies carry with them more downside risk but the returns can be greater as well. Here is more information about IWM.
- QQQ – tracks 100 of the largest non-financial companies on the NASDAQ. It is often thought to be a technology fund because of its high exposure to many of the top tech companies in the world. Read more about it here.
- DIA – mirrors the Dow Jones Industrial Average which consists of 30 “blue chip” stocks and you can read more about DIA here.
- VTI – the Vanguard Total Stock Market ETF gives you expose to large, mid, and small-cap companies that are in the NYSE and NASDAQ. You can read more about VTI here.
Any and all of these ETFs could be potential investments for beginners and experienced investors alike who just want to put their money in the market and forget about it. Unlike individual stocks, you don’t have to worry much about company specific news that can drastically move the stock price of your stocks. All these ETFs pay a dividend and have varying expense ratios but they are generally low. Again, for anyone who wants to invest in stocks but doesn’t have the time or energy to devote to trying to pick the winners and avoid the losers, buying an ETF that tracks the overall market is the best decision you can make.