New to Investing? Start With ETFs, Not Stocks

If you’re new to investing, start with index funds like iShares S&P/TSX Capped Composite Index Fund (TSX:XIC).

| More on:
exchange-traded funds

Image source: Getty Images

Are you a new investor?

If you are, you might be very excited about buying “hot stocks” like Tesla, NVIDIA, or Palantir. These stocks have cult followings and are among the first ones new investors run to when they open their brokerage accounts.

Unfortunately, such stocks aren’t always great buys. Often, their extreme popularity means that they fall dramatically when they lose favour. Palantir, for example, is down 47% this year; the other two stocks I mentioned at the start of this article are down a bit less. That doesn’t mean that any of these stocks are bad investments today, but it does illustrate an important point: you never know where a stock’s price will go. Even the most popular stock can come crashing down, and the more popular it is, the further it has to fall.

Index funds are a great alternative

Given that stocks are risky, you might be wondering what you should invest in. If the most popular stocks aren’t safe, which stocks are? That’s a complicated topic — one beyond the scope of this article. But if you’re looking for a relatively safe investment, there is one kind of asset you can consider: index ETFs.

Index ETFs like iShares S&P/TSX Capped Composite Index Fund (TSX:XIC) offer you an easy, low-cost way to get started with investing. They trade on the stock market just like individual stocks do, but they contain massive portfolios of assets instead of just one. Funds like XIC simply buy the exact same stocks that make up a stock market index, such as the Toronto Stock Exchange (TSX) Composite Index. The result is a truly passive investment that doesn’t require too much guess work.

Every single share/unit of XIC has 240 stocks under the hood. That gives you a measure of diversification that reduces your risk (think “don’t put all your eggs in one basket”). Also, funds like XIC can be quite inexpensive. XIC has just a 0.04% fee, which means you don’t lose much of your money to the fund’s managers, as is often the case with actively managed funds.

80% of active fund managers don’t outperform

Speaking of actively managed funds…

They’re another category of asset similar to index funds. Just like index funds, they are pooled collections of many different stocks. However, with active funds, managers pick out stocks trying to beat the market. The goal is to give you a better than average return. Unfortunately, 80% of these funds’ managers can’t beat the benchmark over 10 years. You usually do better with safe, cheap funds like XIC.

Does that mean you should never buy individual stocks?

Having looked at all the points above, it’s natural to ask, “Should I buy individual stocks at all?”

If index funds are so great, then you’ve got to wonder whether there’s any point to buying individual stocks.

Truthfully, for most people, that question just about ends the conversation. The odds of outperforming the indexes are quite low. However, it really depends on what your investing goals are. If you desire to get rich in the stock market, you have no choice but to buy individual stocks: index funds don’t produce life-changing amounts of money. The odds may not be in your favour, but if a truly staggering amount of money is your goal, then individual stocks are where you want to be.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Nvidia, Palantir Technologies Inc., and Tesla.

More on Investing

Hand arranging wood block stacking as step stair with arrow up.
Tech Stocks

3 Canadian Growth Stocks I’d Buy Under $30

These under $30 Canadian growth stocks are well-positioned to capitalize on mega trends such as e-commerce, the electrification of vehicles,…

Read more »

Gas pipelines
Stocks for Beginners

3 Reasons to Buy Enbridge Stock Like There’s No Tomorrow

Enbridge (TSX:ENB) is a superb long-term option. Here's why you should buy Enbridge stock right now and hold it for…

Read more »

money cash dividends
Dividend Stocks

This 8.39% Dividend Stock Can Pay $100 Cash Every Month

Consider investing in this monthly dividend stock at current levels to lock in high-yielding monthly distributions to create a good…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Tech Stocks

Why This Tech Stock Just Jumped 18%

This tech stock just saw shares surge after announcing it was being acquired, but more growth could still be in…

Read more »

Canadian flag
Investing

3 Top-Performing Canadian Stocks That Should Just Keep Winning

Given their healthy growth prospects and solid underlying businesses, the uptrend in these three top-performing Canadian stocks could continue.

Read more »

The sun sets behind a power source
Investing

3 Reasons to Buy Fortis Stock Like There’s No Tomorrow

As far as top dividend stocks are concerned, Fortis (TSX:FTS) remains a top option long-term investors should consider right now.

Read more »

growing plant shoots on stacked coins
Stocks for Beginners

1 Copper Stock to Buy as Copper Prices Shine

The price of copper continues to climb, and more copper production is on the way for this top stock up…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

Here’s the Average TFSA Balance in 2024

The Bank of Montreal (TSX:BMO) says that the average TFSA balance is $41,510, far below the maximum.

Read more »