What’s the Best Way to Invest in Stocks Without Any Experience? Start With This ETF

Are you getting cold feet about investing in stocks? With so many stocks, it can be confusing deciding where to begin. This ETF could be a good start.

| More on:
exchange traded funds

Image source: Getty Images

The stock market can be tricky and full of jargon. You have probably invested in a popular stock only to realize losses. Many stock market lessons of buying the dip, selling the rally, or buying undervalued stocks are easier said than done. How do you know the stock is undervalued or the stock price is down? That knowledge comes from experience. How can you start investing in stocks with no experience? 

Investing in stocks without experience 

Investing in individual stocks can be risky as they are exposed not only to industry and macro risks but also company-specific risks. Even the market leaders have perished on Wall Street due to poor management, competition, consolidation, or too much debt. And even experts like Warren Buffett make mistakes.  

These mistakes happen because the market is unpredictable. If everyone in the market made rational decisions based on the company’s strengths, there would be no volatility. Markets run on investor sentiments in the short run and then price in the fundamentals in the long run. 

Investing in this unstable and dynamic market without any experience is a challenge. But diversification can help you thrive. Instead of investing in just one stock, you can invest in 20 stocks of the same sector but different company sizes. Or you can invest in 100 stocks of different sectors of similar size (large caps or mid caps). 

Instead of focusing on which stock to invest in, you can focus on your investing strategy and leave the stock-level diversification to Exchange-Traded Funds (ETF). 

Start investing in stocks with this ETF 

ETFs mirror the market index by investing in the stocks listed on the index with similar weightage. One ETF you can invest in is the Horizons S&P/TSX 60 Index ETF (TSX:HXT). It mirrors the top 60 stocks by market cap across diverse sectors trading on the TSX. The S&P updates the index every quarter, giving you exposure to the large caps. If a stock’s performance reduces its market cap, it is replaced by another stock on the index during the quarterly rebalancing of the index.

Since HXT ETF mirrors the index, it also rebalances the portfolio to give market returns. While the market ETF can diversify your portfolio and rebalance it automatically, it cannot outperform the market. The ETF has given an average annual return of 9.99% in the last five years. It surged 28.8% in 2021 when the market was in a bull run, followed by a 1,246% dip in 2022 when the market corrected

You can use this volatility to your advantage by investing a small amount every month in the ETF. In a bull market, you may get fewer units and in a bear market more units. In the long term, your average cost per unit will be lower, giving you higher returns than a term deposit while reducing risk through diversification. 

Up your investing game with an ETF portfolio 

The market returns are not enough to build wealth in the long term. As you start gaining some experience in investing, you can adopt different investing strategies. You can determine an asset allocation, let’s say 40% in large caps, 30% in sector stocks, 30% in commodities and REITs. Suppose you are bullish on the technology sector, like the 2023 Chat GPT frenzy or the 2021 cryptocurrency boom. 

You can catch up to these trends early by investing in the Horizons NASDAQ-100 Index ETF, which tracks Nasdaq stocks. Or you can opt for the Purpose Bitcoin CAD ETF, which has Bitcoin as the underlying asset. The sector-specific ETFs can help you catch onto the tech bull run without going bonkers on which stock to pick.

You can invest a lump sum in a growing trend and rebalance once your target is achieved. Suppose you are bullish on the tech sector and expect the Nasdaq ETF to surge 50% and convert your $1,000 into $1,500. Once the ETF meets the target, you can remove the $500 profit and invest it in another sector you are bullish on, thereby rebalancing your portfolio.

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 Puja Tayal has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Stock Market

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Tuesday, May 28

Besides Scotiabank’s earnings, the important U.S. consumer confidence numbers will remain on TSX investors’ radar today.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Monday, May 27

Rising commodity prices could lift the main TSX index today as the U.S. market remains shut for Memorial Day.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Friday, May 24

The main TSX index seems on track to end the week in the red as it currently trades with 1.2%…

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Thursday, May 23

Weakening commodity prices could pressure the main TSX index at the open today as investors await more economic releases from…

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Wednesday, May 22

Overnight declines in commodity prices could pressure the TSX index at the open today as investors await the Federal Reserve’s…

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Tuesday, May 21

After surging to a fresh all-time high on Friday, the main TSX index may remain volatile today as investors access…

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Friday, May 17

TSX investors may remain cautious today ahead of the long Victoria Day weekend.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Thursday, May 16

TSX stocks may remain volatile as investors speculate about the Fed’s future monetary policy moves in response to the recently…

Read more »