When the stock market gets wobbly, we suggest making a shopping list of stocks you can pick up at lower prices. But it’s hard to pull the trigger on shares in a single company if you think prices will fall further.
Here’s another idea: Invest some money every few weeks in a diversified stock exchange-traded fund.
“It is nearly impossible to predict a market bottom,” says Danielle Miura, a certified financial planner in Ripon, California. By investing a little bit of money in an index fund every month, you take on lower risk than you would by buying shares in one stock, and you put your money to work at the same time.
That brings us to three core funds: iShares Core S&P 500 ETF and its small- and midsize-company counterparts, iShares Core S&P Small-Cap ETF and iShares Core S&P Mid-Cap ETF. These plain-vanilla index funds track different parts of the market, so there’s no overlap in holdings.
Of course, the big kahuna is the Core S&P 500 ETF. Over the past year, the fund has slipped, in line with the broad stock index. The fund’s top holdings include the usual suspects, including Microsoft (down 26 percent in the past 12 months as of mid-November), Amazon.com (down 43 percent) and Alphabet (down 35 percent). The fund’s best performers have been traditional energy companies, including ExxonMobil, a top 10 holding, up 77 percent, and Chevron, up 59 percent.
Over the past 12 months, iShares Core S&P Small-Cap has lost 16 percent. Companies in the fund’s benchmark S&P small-company index must pass a profitability criterion, which gives the ETF a high-quality tilt. Energy stocks were among the ETF’s leaders, but shares in health care firm Lantheus Holdings are up 90 percent thanks to the firm’s new diagnostic imaging agent that helps doctors treat prostate cancer patients.
The mid-cap index fund, iShares Core S&P Mid-Cap, has declined 13 percent. Energy stocks led this index, too, including top holding EQT, a natural gas producer, which soared 95 percent.
Smart investors will build up some exposure to small- and midsize-company stocks now, because they tend to outperform in the early stages of an economic recovery. After the recession in the early 2000s and at the end of the great financial crisis, for instance, small and midsize shares outperformed their large-company counterparts.
(Nellie S. Huang is senior associate editor at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)
