Investing can be as simple or as complicated as you make it out to be. You can try and read charts and predict price movement using complex algorithms, or you can forget all that and stick to a simpler approach. Being overconfident when it comes to investing can be dangerous and actually do more harm than good.
The reality is that investing in stocks doesn’t have to be intimidating or overly complex. A simple approach can be much more effective than a complex one.
For example, of the easiest strategies for new investors is to invest in an ETF which will give them a variety of different stocks without having to individually buy all of them or undergo a complex decision-making process to determine which ones to buy and which ones to ignore.
The benefit of ETFs
The BMO Monthly Income ETF (TSX:ZMI) is a good fund that can tick off all the boxes for investors. Offering a good mix of stocks and bonds, the fund gives investors a very balanced, safe option. The sectors that the ETF invests in are also very stable as well, with the majority coming from real estate, financial services, and utilities.
There isn’t a whole lot of risk for investors here, and with the ETF averaging a beta of around 0.5, investors won’t have to expect or worry about big swings in its valuation, even if the markets themselves are volatile.
Since the beginning of the year, the fund has risen a modest 6%. While that’s not a whole lot to get excited about, especially as the TSX is up 15% during the same period, the ETF also provides investors with a dividend.
Over the past 12 months, the fund has averaged a yield of 4.46%. That’s an added bonus for income investors, and while combined with the ETF’s returns that would still be short of the TSX’s performance, over the longer term it could provide a lot more stability, especially in years where the TSX may not be doing so well.
Bank stocks offer appealing alternatives as well
Investors looking for better returns can seek out individual stocks, they just have to be aware of the risks. For example, you could invest in Royal Bank of Canada (TSX:RY)(NYSE:RY), which has performed a bit better than the ETF this year, rising around 8%.
And if we look at over the past five years, the bank stock has done much better, rising 24% compared to the 8% returns of the TSX.
The danger is that in a year that RBC’s stock isn’t performing too well, investors who aren’t diversified will go down for the ride as well. Having more stocks to hold is always more advantageous to ensure all your eggs aren’t in one basket, and ETFs offer the maximum benefit when it comes to diversification.
For income investors, the downside is that Royal Bank pays a slightly lower dividend, at about 4.2%. The quarterly payments won’t be as frequent. But it’s hard to go wrong with Royal Bank as an investment, as the stock can also provide a great deal of stability and offer strong returns as well.
Whether you pick an ETF or a big bank stock, you’ll be putting yourself in a good position to grow your portfolio’s value over time.
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Fool contributor David Jagielski has no position in any of the stocks mentioned.