Over the past couple months, I’ve had a few close friends start investing in the stock market. It isn’t uncommon for them to ask, “What do you think I should do?” Without explicitly telling them what to do, I often say what I would do if I had to start over. Now that I’ve been able to invest for a while, looking back at the decisions I would change is a welcomed chance to reflect. With that said, here’s how I’d spend $3,000 if I had to start over from scratch.
This would be the first thing I buy
The easy answer would be to tell someone to start with a broad market index. An example would be the Vanguard S&P 500 ETF (TSX:VFV). This would give an investor the opportunity to get used to everyday market movements, while limiting risk. The S&P 500 features many companies that Canadians will be familiar with, including Amazon, Apple, Microsoft, and Tesla. These large-cap companies tend to be less volatile compared to smaller, up-and-coming companies that experience a lot of stock movement based on investor sentiment.
Getting familiar with broad market ETFs will also be a good starting point for investors to find companies they’re interested in. When I first started investing, I skimmed the top holdings across many ETFs in addition to reading articles on The Motley Fool to get a sense of the investment landscape.
Add some growth to your portfolio
After that, I would look for companies that could give my portfolio a bit of a boost in terms of growth. In Canada, Shopify (TSX:SHOP)(NYSE:SHOP) would be a good company to consider as a starter stock. It provides investors the opportunity to invest in an established blue-chip company, while holding a company with massive growth potential.
For those that are unfamiliar, Shopify provides merchants with a platform and all the tool necessary to operate online businesses. Over the past year, the company has seen a massive boost in active merchants. Currently, there are more than 1.1 million businesses that use Shopify to power their online stores. As e-commerce continues to grow in penetration across Canada and around the world, investors can expect Shopify to help lead the way.
Add a stock that has a history of compounding returns
The stock market is really about compounding your returns. If you were to earn a 1% return on your $3,000 portfolio, you’d end up with $3,030. The next day, if you were to gain another 1%, your portfolio would grow to $3,060.30. It may seem like a small difference at first, but those returns can snowball very quickly. The same goes for individual stocks. Companies that have been able to steadily compound returns over a long period would have made investors much richer.
For example, Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) has managed to produce an annual average return of 15.95% since August 1995. That would have turned a $10,000 investment into more than $471,000 today. Although Brookfield is a more established company, it does give investors a lot to be excited about from time to time. Recently, Brookfield announced that it would be partnering with Tesla to develop North America’s largest sustainable neighbourhood.