Why this fund is my first recommendation for new investors | Smart Change: Personal Finance

(James Bromley)

New investor? Welcome to the market.

Of course, even if you are only willing and able to do the job for a short time, you probably already realize that there is no shortage of advice available. Most are well-meaning, and some may be described as “good”. If any of them include a single stock recommendation as your foray into the investing arena, take a moment and give some serious consideration to another tip you’ve probably heard by now: to buy an index fund that represents a broad segment of the market.

However, the index fund that I would recommend is not the one that I’m sure has been highly recommended by other sources.

smarter choice (for most)

You may have read or heard that a file SPDR S&P 500 ETF Trust (NYSEMKT: spy) It is a great way to start your investment journey. Truth be told, if that’s the choice you ultimately make, you’ll actually be off to a good start. This ETF comprises about 80% of the total stock market value, allowing you to participate in continued (albeit cyclical) economic growth without forcing you to become a stock picker.

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But if following the crowd isn’t your thing, you’ll probably be better off with iShares S&P MidCap 400 Index Fund (NYSEMKT: IJH).

Some seasoned investors may be surprised by this choice as a better place to start, but there are specific reasons an average venture capital fund can be a smart choice for newcomers.

While the S&P 500 consists of the companies considered bigThe S&P 400 MidCap Index is made up of mid-sized US companies. It’s not a strict rule, but in general, these organizations do sports a Market value Between $2 billion and $10 billion. This is big enough to ensure they’ve been around for a while but too small to capture the attention of most investors (and the media).

While the S&P 500 companies make up roughly 80% of the stock market’s value and profits, the next largest 400 companies that make up the S&P 400 collectively represent between 10% and 15% of the total US stock market value.

However, it is a particularly strong segment of the investable market. As Standard & Poor’s explains for its index: “A median value exposure generally represents a stage in the typical company life cycle where companies successfully overcome small business challenges, such as raising seed capital and managing early growth.” However, Standard & Poor’s adds, “At the same time, mid-sized companies tend to be quite dynamic and not too large to achieve sustained growth.”

In simpler terms, many of these organizations are in place for investors.

This unique feature shines through with ETF’s long-term results. While the SPDR S&P 500 ETF Trust’s gain of nearly 300% since the beginning of this century mirrors those of the index it represents, the MidCap 400 Index Fund has nearly doubled that performance.

Don’t get too excited just yet, though. Take a closer look at the chart. There can be months And sometimes even years When medium-sized companies lag behind large-cap stocks. These mid-sized stocks have underperformed since the coronavirus spread around the world, for example, creating challenges that big companies can more easily overcome.

If you are really planning to be in the market for the long term, these types of soft patches are not a concern.

Now put yourself in the inevitable second-guessing mode on the road

As I noted above, a stake in the SPDR S&P 500 ETF Trust is still a good option. Or perhaps the smartest option is to split the difference and own a portion of both investments. This way you don’t have to feel like you’re losing the unique positive side of either option.

This is no small matter.

Perhaps the biggest risk for new investors is the ease with which you can lose interest in a long-term holding when you feel that other options may end up doing better. And with a position in the middle caps that has historically outperformed the larger companies, you still hold a smart, risk-adjusted opportunity to do so. This dynamic makes sticking with it less worrying Index based investments When it is psychologically difficult to do it … after extensive selling.

The factor in those middle and uppercase characters as a group may not hit their major lows at the same time, and the temptation to try to time any trade entries and exits is further reduced.

Whatever the case, the S&P MidCap 400 Index Fund still allows new investors to avoid the risky temptation to become a stock picker, especially without building the right foundation for their portfolio first.

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James Bromley He has no position in any of the mentioned shares. The Motley Fool does not have a position in any of the stocks mentioned. Motley Fool has a profile Disclosure Policy.