Written by Kay Ng of The Motley Fool Canada
New investors just beginning their investment journey can be overwhelmed with all the information available. Especially if you want to consider investing in stocks. where should i start? How do you decide which key sectors to invest in, choose quality businesses, and read financial statements? As you can see, it can get complicated quickly.
The good news is that you don’t necessarily have to do everything. An easy way to start building wealth is to buy a basket of stocks via an Exchange Traded Fund (ETF) that allows for instant portfolio diversification. ETFs are much easier to build positions over time than individual stocks.
Diversify your investments with ETFs
A good start is to buy an ETF that offers broad market exposure. In this aspect SPDR S&P 500 ETF Trust (ASX:SPY) is a better buy iShares S&P/TSX 60 Index ETF (TSX: Siu). The former is a proxy for the US stock market and the latter is a proxy for the Canadian stock market.
SPY’s current sector weights are 25% Technology, 14% Healthcare, 14% Real Estate, 14% Financial Services, 10% Consumer Goods, 8% Telecom Services, 7% Consumer Staples, 5% Energy, and 3% Utilities. , and 2.5% of the basic material.
Compare that to XIU’s sector weightings: Financial Services 35%, Real Estate 35%, Energy 18%, Industry 11%, Basic Materials 10%, Technology 7%, Communications Services 6%, Consumer 5% Utilities. 3% in consumer staples, 3% in consumer staples, and 0% in healthcare.
Of course, if you’re well educated and comfortable dabbled, there’s nothing stopping you from buying multiple ETFs or supplementing your ETF portfolio with individual stock positions.
For now, we will continue the discussion of ETFs.
Small companies grow faster than large companies (if the former group survives and thrives), so investing in small-cap ETFs such as: . Vanguard Small Cap Growth ETF (NYSEMKT:VBK).
Small caps have underlying businesses that are more likely to go bankrupt than large companies. Therefore, if you invest in individual small-cap stocks, you are more likely to lose your entire investment, if not most of it, compared to investing in large-cap stocks.
It is therefore much safer to diversify risk across a basket of small caps (e.g. via small cap ETFs) in pursuit of higher long-term growth. Currently, VBK holds approximately 695 shares. The top four sector weightings are 20.5% for Healthcare, 19.0% for Industry, 18.9% for Technology, and 15.7% for Consumer Discretionary.
Lessons learned from stupid investors
In the long run, the stock market rose and brought wealth to investors. Moreover, the stock market has historically outperformed other asset classes. However, buying individual stocks can be a daunting task and can lead to concentration risk, especially when you’re first starting a portfolio.
You can invest in ETFs like SPY to generate solid wealth over time. For more diversification, there are also bond ETFs. Either way, building a position is easy once you buy a few ETFs that create a diversified portfolio. If you take care to buy more units during bear markets, your assets should grow significantly over time.
Post 3 ETFs to Build Wealth Over the Next Decades in The Motley Fool Canada.
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Fool contributor Kay Ng has a position in the Vanguard Small-Cap Growth ETF. The Motley Fool recommends the Vanguard Index Fund – Vanguard Small Cap Growth ETF. The Motley Fool’s U.S. headquarters has a disclosure policy.