New to Investing? Here's Where to Put Your Money

This article is part of Money's January 2022 digital cover, which features 22 ways to make 2022 the best money year of your life. Browse all 22 articles here.

If you’re brand new to investing, it can be hard to figure out where to start.

But here’s a secret: You don’t have to pick the hottest stocks, or identify which company is going to have stellar returns next quarter. Instead, let a total stock market index fund do the work for you.

Index funds are baskets of securities, like stocks and bonds, that track a specific market index. You’ve likely heard of the S&P 500, for example, which is an index that tracks the stocks of the 500 largest U.S. companies.

Total stock market index funds are the broadest of the bunch. They track wide swaths of the stock market, including large companies like Apple as well as small companies you may not have heard of. Some of these funds are exchange-traded funds (ETFs), which are a type of index fund that can be bought and sold throughout the day like a stock. Others are mutual funds, which can be bought and sold just once a day.

You can invest in total stock market funds via traditional brokerage firms like Fidelity, or newer trading apps like Robinhood.

There are several options. The Fidelity Total Market Index Fund, Vanguard Total Stock Market ETF and Schwab U.S. Broad Market ETF are a few on Morningstar’s list of best core stock funds. While an S&P 500 index fund may also be a good building block for a portfolio, Arnott says these total market funds offer more exposure to smaller companies. So if you’re a first-time investor, they’re probably a better choice.

“Different types of stocks will perform better or worse at different times,” says Amy Arnott, portfolio strategist at research firm Morningstar. “By starting out with a broad market index fund, you’re spreading out your risk instead of placing a large bet on any individual stock or any specific sector of the market.”

It may be tempting to buy individual stocks — especially with all the talk of meme stocks and popular stocks like Tesla that just seem to keep soaring — but it’s so much riskier. In any given year, about 40% of all stocks are likely to have negative returns, Arnott says.

Index funds are also a good alternative because of their cost. Unlike actively managed funds, which take into account the costs of a Wall Street professional choosing which securities to include, passively managed index funds automatically select securities to match the area of the market it tracks. The average fee of active funds in 2020 was 1.04% ($104 of every $10,000 invested) while the average fee of passive funds was just 0.45% ($45 of every $10,000 invested), according to Morningstar. The fees for some total market funds we’ve called out are even smaller: The Fidelity Total Market Index Fund has a fee of just 0.02% and the Vanguard Total Stock Market ETF, 0.03%

But remember, if you’re planning to invest, financial advisors recommend that you first build up an emergency fund of three to six months of your expenses. And while a broad market index fund makes sense for someone investing with an individual brokerage account, which you can open via online brokerage platforms, it’s a different story if you’re investing with a different vehicle, like a 401(k).

If you ARE investing in a 401(k), the default investment choice may instead be a target-date fund. Those funds give you broad exposure to stocks and other asset classes, but also automatically rebalance over time to reduce your risk as you near retirement.

Blackrock’s LifePath Index Retirement Fund, PIMCO's RealPath Blend and the J.P. Morgan SmartRetirement Blend are among Morningstar’s list of the best target-date funds for 2021.

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