Got $1,000 to invest? Put it in this index fund

So you have $1,000 to invest. New to the market? We’ve all been there, and it can be an overwhelming place for the uninitiated. Heck, it can be an overwhelming place to initiatedalso.

So where should you put your $1,000? Two words: index funds.

Keeping it simple

There is very little reason to be creative here. Having a traditional index fund that tracks the broader market is a good way to hedge your bets while gaining investment exposure to some of the most popular stocks. For me, iShares Core S&P 500 ETF (IVV -0.33%) it fits. The concept here is simple. The Fund seeks to track the performance of the S&P 500 Index, which all investors should do at least to some extent. We all like to think we’re stock market beaters. The fact is that it is incredibly difficult to beat the market on an annual basis.

Some of the fund’s top-weighted holdings include Microsoft, NVIDIA, Appleand Berkshire Hathaway. This in itself shows the advantage of owning an index fund like this. With a single investment, you are assigned to some of the best performing names on the market. By holding the iShares Core S&P 500 ETF over the past five years, you would have gained 96%.

A great way to learn

Many might think that the passive nature of many index funds could limit returns compared to picking individual stocks. While it certainly limits the positive potential in a perfect world, we don’t live in a perfect world. Markets are incredibly volatile and beating them is remarkably difficult. No one has perfect information about the entire market, and even if we did, it would be impossible to always have an up-to-date and perfect analysis of that massive store of data.

Even professionals can have disappointing returns compared to simply investing in tracking funds S&P 500 Index. Being invested in a simple fund that tracks the S&P 500 can help you invest at least a portion of your capital in an investment vehicle that has delivered compelling and diversified returns over the long term. In addition, the top S&P 500 index funds all come with the support of solid fund managers and very low management fees. It adds up to a robust investment strategy that can make a big difference to your portfolio. As I said, the S&P 500 has almost doubled your money over the past five years.

The way I see funds is that you use them to keep up with the market while investing in individual securities to try to outperform the broader market at some level. Having a solid index fund foundation will help you branch out with targeted stock picks without risking everything on a single ticker.

The best way to learn how to pick those stocks that can beat the S&P is by learning through index funds. What better way to learn about the stock market than to study Berkshire Hathaway or Apple? Explore iShares Core S&P 500 ETF holdings and study their financials. You will learn why some parts of the stock market perform better than others. Once you’ve dipped your toes into something like an S&P 500 ETF, you can branch out into tech-focused funds, or small-cap funds, or any other focused fund idea.

It’s all a slow learning process, but starting with index funds is a great way to learn how the stock market works before diving into individual stocks.