Five investment options for beginners

From zero Buffet 2.0

Alright, listen up. You’re eager to get in on the market action, but feeling lost? No sweat. Let’s chat about portfolio design. Pick from a range of options - stocks, ETFs, indexed funds - that fit your needs. Five good ones to consider are:

1. Blue Chips - You want to play it safe, you go for the blue chips. These are the tried and true companies that have been around forever. Think Johnson & Johnson, Coca-Cola, and Procter & Gamble. These companies have a solid track record, and they’re not going anywhere.

2. Growth Stocks - You want to be a little riskier, you go for growth stocks. These are the companies that are expanding rapidly and have the potential to deliver big returns. Think Amazon, Facebook, and Tesla. These companies are changing the game, and they’re not afraid to take risks.

3. Dividend Stocks - You want to get paid while you wait, you go for dividend stocks. These are the companies that pay out a portion of their earnings to their shareholders. Think AT&T, Verizon, and ExxonMobil. These companies provide a steady stream of income, and they’re a great option for retirees.

4. Sector ETFs - You want to focus on a particular sector, you go for sector ETFs. These are exchange-traded funds that invest in a specific industry, such as technology, healthcare, or energy. Think SPDR Technology ETF, Health Care Select Sector SPDR Fund, and Energy Select Sector SPDR Fund. These ETFs provide exposure to a specific sector, and they can be a great way to diversify your portfolio.

5. Index Funds - You want to keep it simple, you go for index funds. These are funds that track a specific index, such as the S&P 500 or the Dow Jones Industrial Average. Think Vanguard Total Stock Market Index Fund, iShares Core S&P 500 ETF, and Fidelity 500 Index Fund. These funds provide broad exposure to the market, and they’re a great option for passive investors.

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Diversification is key

There is no free lunch, but diversification offers a cheap one.

Investing is often like riding a rollercoaster. You never know when a sudden twist or turn will leave you HODL-ing (hanging on for dear life). That’s why diversification, often hailed as the “free lunch” of investing, becomes a game-changer. Here are three events that shed some light on the power of diversification and how it can help you navigate the unpredictable nature of markets:

1. The Taper Tantrum The year is 2013, dubbed the “taper tantrum”. Passive investors holding the Barclays US Aggregate index had a rough time, experiencing a downturn of -2%. Yet, amidst this turbulence, Japanese markets soared with a return of 1.9 percent, and European peripheral countries like Italy and Spain rallied impressively with returns of 7 percent and 11 percent, respectively. This unexpected turn of events demonstrates the strength of diversifying across markets, shielding your portfolio from the impact of localized market shocks.

2. The Great Moderation’s Diversification Dilemma Just when we thought the global economy was stable, the so-called “great moderation” phenomenon disrupted the equilibrium. In the prelude to the GFC (global financial crisis), the International Monetary Fund dropped a bombshell. They revealed that individual economies were increasingly dancing to the same tune, eroding the stabilizing force of diversification. This insight opened our eyes to the interconnectedness of global economies, with booming and busting nations moving in sync. Diversification remains the only shield for the perils of correlation.

3. Policy Divergence and Country-Specific Clues: Central bank policies – the stuff that can make or break markets. The US Federal Reserve has stopped quantitative easing, the Bank of Japan keeps expanding its balance sheet. And lo and behold, the European Central Bank gears up to buy sovereign bonds. This divergence sets the stage for divergent economic outcomes, creating a playground for active investors. By keeping a close eye on country-specific factors, we can pounce on hidden opportunities and dance to the beat of unique market rhythms.

Back to macro-basics. Global portfolios consistently outperform country-specific portfolios in terms of returns per unit of volatility (Sharpe Ratios). The benefits of diversification are particularly pronounced during market instability, as different markets react differently to crises. The article also highlights the importance of paying attention to country-specific factors and central bank policies, as they can create divergences and opportunities for active investors. Overall, diversification and active global investing offer valuable advantages in the pursuit of long-term value.

TLDR; Don’t put all your eggs in one basket. Spread your investments across different assets to reduce risk. - Spreading your investments across different asset classes and sectors can help reduce risk and maximize returns.

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Backtesting

Past performance does not reflect future results.

Backtesting is a useful tool for evaluating the effectiveness of trading strategies, but it’s important to be aware of its limitations and potential biases.

• Date: January 2023
• Client: Explore
• Category: Graphic Design

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