Liam Gibson, Wealth of Geeks
There’s no doubt Americans are worried about the economy. With recent bank failures, heightened inflation, interest rate hikes, and the near-endless warnings of a seemingly impending recession, the news cycle has been chilling, and consumers are getting the jitters.
In May, consumer sentiment in the United States sunk to its lowest point in six months. Despite this, the stock market in 2023 has quietly proved resilient, defying the media’s gloomy mood music and slowly clawing back some lost ground from last year’s historic market rout.
At the mid-point of 2023, the market looks as unpredictable as ever. Volatility has been the norm since the pandemic, yet new investors have not been deterred from wading into these turbulent waters.
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The rise of investor generation
Recent years have seen a boom in stock market participation. One study by Charles Schwab found that around 15% of all investors participating in the American stock market in 2021 had started investing for the first time in 2020. At the time, this younger cohort showed more optimism about the market outlook than their older and more experienced peers. They make up what Schwab dubs the “investor generation.”
In today’s turbulent world, marked by a fast-changing economy and highly-fluid job market, learning to invest is becoming a vital life skill for securing one’s financial future. This article will look at the investment outlook for the remainder of 2023 and consider how newcomers can get started amid this unique investment landscape.
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Gradual momentum
After last year’s humbling rout, the stock market has moved forward in fits and starts this year.
The broad-based S&P 500 market index has made a series of short rallies, meeting resistance at the 4,200 points before backing down again to hover under the 4,000-point level.
Several nail-biting events have given investors pause. The recent regional banking crisis, lingering recession fears, and, most recently, a debt-ceiling standoff in Congress have kept a firm lid on any rallies. Some ground has been covered nonetheless. The stop-start staggered advances have nudged the S&P 500 up almost 10% year-to-date.
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Learning curve for newcomers
There is a steep learning curve involved in successfully investing in individual stocks. This is why investing in the S&P 500 is one of the most popular methods for newcomers. There are several popular funds, including the SPDR S&P 500 ETF Trust (SPY), iShares Core S&P 500 ETF (IVV) or Vanguard S&P 500 ETF (VOO).
By offering exposure to the whole market, ETFs like these are relatively less volatile than single stocks, which are more likely to go to zero. These funds might not ever ‘beat the market’ in the short term (they are the market, after all), but most outperform the majority of mutual fund managers. Another bonus is that by buying low-fee ETFs, investors can avoid active management fees of and keep more of their earnings.
This diversified approach is like a dragnet that scoops up the value of the entire market, or as Jack Bogle, founder of Vanguard, was fond of analogizing, like buying the proverbial haystack, instead of looking for the needle. Yet, depending on market conditions, sometimes, taking a more targeted approach can pay off.
For instance, the tech-heavy NASDAQ composite index has driven much of the market gains this year as investors bet big on the future profits generated by artificial intelligence.
The Nasdaq is just continuing a long-standing winning streak. The tech index has delivered roughly double the earnings of the broader market over the last 15 years, with the Nasdaq boasting a compound annual growth return (CAGR) of around 16% to the S&P 500’s 8%.
For beginner investors who want exposure to the speculative frenzy of tech, Invesco QQQ Trust (QQQ) and iShares NASDAQ-100 ETF (ONEQ) are among the most popular ETFs in this space. Their fees, at 0.20% each, are higher than the above S&P 500 fund fees yet lower than actively-managed tech-focused funds like Cathy Wood’s ARKK, at 0.75%.
Although artificial intelligence (AI) may be the hottest investing trend of today, that doesn’t mean it is immune from speculative bubble effects. When tech stocks take a beating, other timeless assets may come in handy.
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Good as gold
A well-diversified stock portfolio is a good place for first-time investors to start. Yet those who want to shield their portfolio with some alternative assets may need to look beyond stocks. Commodities like gold can be perfect stabilizers to a portfolio as the mineral often increases in value during stock market collapses and periods of economic turmoil.
For instance, amid the 2008 global financial crisis, gold reached historic highs, testing almost US$1,000 per ounce. This year it has breached new records, now valued at around US$2,000.
The easiest way to coat your portfolio in gold is through ETFs like SPDR Gold Shares (GLD) or iShares Gold Trust (IAU). For extra security, you can buy physical gold coins or bars from reputable dealers, but this requires considerations such as secure storage and potential additional costs.
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Safeguard wealth
Investing is one of the building blocks of personal finance education. It may seem intimidating for newcomers to the market. However, it usually beats the alternative. Leaving money to sit idle in a high-inflation environment only guarantees a decline in purchasing power and net worth.
With a diversified portfolio that includes dividend stock, and commodities such as gold hedging assets like gold, investors can generate passive income and mitigate inflationary risks. Patience and discipline are key. Yet the compounding effect of long-term investments has historically proven fruitful. Despite short-term volatility, those who keep at the investing game over the long haul can potentially safeguard their wealth.
