If you are new to investing, there is a lot of beginner advice that you can come across. Some of it is fairly sound, but other advice is commonly shared but absolutely horrible advice. It can be tempting to try and simplify your investment portfolio, especially if you are knew to the practice and do not have any idea of where to start putting your money around. While the instinct is not to overcomplicate, there is something to be said about purposeful complication of things.
One of the worst things you can do is follow the advice that many people circulate: invest in the S&P 500 and you’ll be fine. There’s nothing wrong with the S&P 500, but this advice is a gross oversimplification. Here’s a breakdown of some of the things you should consider before blindly investing your money:
Don’t Put Your Eggs In One Basket
The Standard & Poor’s 500, otherwise known as the S&P 500, or the S&P, is a stock market index that collected American stock based on 500 of the biggest companies that list their common stuck on the NASDAQ and NYSE. It is one of the most well-known stocks in the country, and possibly even in the global economy. It has so many index mutual funds and exchange traded funds that it is have become very much enveloped into the idea of what it means to be invested in the market. Indeed, it is often a very good indicator for the health of the stock market. However, there are some things to consider before dumping all of your money into this index.
First off, the S&P is not very diversified, putting you in danger if it does not do well. One of the basic tenants of investing is that you have to diversify your portfolio, so that you guard against everyday risks present in the stock market. Investing solely in the S&P can expose you to a lot of risk, making it awful financial advice.
These funds (index funds) are generally a good marker for an investment asset. The S&P deals with the 500 biggest companies in United States. This means that it is a great asset for many huge companies, way more than you would have had by just investing in one type of company. That being said, there are thousands of other companies out there that are not included in the fund and that are doing particularly well.
Take Advantage of Small Companies
Small and Medium Sized Enterprises (SMEs) make up more than half of the global economy. There are plenty of these companies not just in the United States, but in many other countries in Asia, Australia, and Europe. There are plenty of other indexes that can be checked out.
One index just simply isn’t enough in this ever changing global economic landscape. If you want to ensure true diversification of assets, you have to look beyond the stereotypical financial avenues, so that you can ensure you are getting the most out of your money.
Index funds are low cost and low risk so that makes them a very easy to get into in the beginning of your investing. However, investing in one fund is easy. What is complicated is to go beyond that and really take advantage of your portfolio. The historical average of the S&P is great, but that does not really help you when things go array in the market.
You Don’t Have To Go It Alone
There are plenty of resources that can help you make sure you are diversifying correctly. One idea is to consider target date funds or even robo advisors, tools that center on creating an automatic diversified portfolio including both bonds and stocks. There is always the option of getting a financial advisor but unless you are investing a lot of money or have been doing this for a while, it may not be worth the money to hire on in the first place. These automatic options give you a way to try your hand at getting in without breaking your budget in the meantime.
Achieving True Diversification
The best thing you can if you are in the habit of handpicking your own stocks is to make sure you have a good mix of United States and international stocks, as well as multiple indexes represented. Diversification of types of companies is very important, but you also want to make sure you get diversification of markets. Although the markets are linked to a certain extent across border lines, they are not always doing the same way. Sometimes the European or Asian market may be having a much better day than the U.S. market; sometimes it is the other way around.
When the 2008 financial crisis hit, not every market was hit in much of the same way. It’s important to ensure your assets are adequately spread across the globe that you can ensure protection against that sort of systematic shock to the market. Most people only think to invest in the U.S. market, figuring that anything that happens cannot affect every industry they are invested in. That sort of thinking is limited, as was exposed in the 2008 crisis. Industries that have seemingly nothing to do with each other can often be found to be linked with one another in ways that are not evident at the time of investment. It’s impossible to know what happens to your money after you put it in the market.
Remember that a good way to make sure your risk is moved around is also to invest in bonds along with your stocks, since bonds usually serve as a good way to lower risk. If you have someone you know and trust to give you financial advice, that’s always a great idea as well. A certified financial planner can help you figure out the current ins and outs of the market while you are getting settled into the investment rhythm.
Investing can have its complications, but it does not have to be impossible. If you heed this advice while you are investing, you are sure to start making much more sophisticated decisions that are sure to benefit you much more in the long term.