Starting your journey as a stock investor can feel overwhelming. With a vast array of investment strategies and countless stocks to choose from, where should you even begin? The good news is that you don’t need to pick individual stocks or time the market to start growing your wealth. One of the best ways to start is with index funds — specifically, the S&P 500.
Why the S&P 500 is a smart choice
The S&P 500 index is often considered the gold standard for passive investors. It tracks the performance of 500 of the largest and most influential companies in the U.S., making it a solid representation of the economy. According to The Wall Street Journal, “Over the past decade, only 27.1% of actively managed funds benchmarked to the S&P 500 beat it on average each year.” This means that even professional fund managers often struggle to outperform the market.
Investing in the S&P 500 index fund allows you to passively own a slice of top-performing companies like Apple, Microsoft, Amazon, and Tesla, which together make up a nice portion of the index’s value. For instance, Apple leads the pack, accounting for about 7.1% of the S&P 500. By holding shares in an index fund that tracks this group, you gain diversified exposure to the U.S. economy with minimal effort.
Simple and diversified: Why index funds work for beginners
When it comes to investing, simplicity is key for beginners. Index funds, especially those that track major benchmarks like the S&P 500, allow you to invest in a broad swath of companies without needing to pick individual stocks. The S&P 500 itself is highly diversified, with the largest sectors being information technology (31%), financials (14%), consumer discretionary (11%), and healthcare (11%).
Additionally, you don’t have to worry about making frequent decisions or market timing. Many investors choose a strategy called dollar-cost averaging, which involves investing a fixed amount regularly. This allows you to buy more shares when prices are low and fewer when they are high, helping to smooth out the impact of market volatility over time. You can also buy on meaningful pullbacks when the market offers opportunities.
Another easy-to-use investment vehicle is an exchange-traded fund (ETF), which tracks an index like the S&P 500. ETFs are essentially index funds that trade on stock exchanges, giving you the flexibility to buy or sell throughout the trading day. Both index funds and ETFs are excellent low-cost options, with fees typically much lower than actively managed funds.
Starting in Canada: A solid option for new investors
For Canadian beginners, a great place to start with a Canadian focus is with Vanguard FTSE Canada All Cap Index ETF (TSX:VCN). This fund offers broad exposure to the Canadian stock market, including large-, mid-, and small-cap stocks. It mirrors the performance of the FTSE Canada All Cap Domestic Index, which makes it an excellent choice for investors looking to invest in Canada.
The fund is weighted with 35% in financials, 17% in energy, and 11% in technology, among other sectors. Over the past decade, it has delivered an annualized return of about 8.9%. With a management expense ratio of just 0.05%, VCN is one of the most cost-effective ways for Canadians to gain broad exposure to their domestic market. The fund also pays a quarterly cash distribution, yielding approximately 2.6%, adding the potential for regular income.
The Foolish investor takeaway
By starting with an index fund like the S&P 500 or the Vanguard FTSE Canada All Cap ETF, you’re setting yourself up for a simple, diversified, and cost-effective investment strategy that will serve you well for years to come. Whether you’re in the U.S. or Canada, passive investing through index funds is a fantastic way for beginners to start building wealth without the complexity of stock picking.
