We are currently in the teeth of a bear market, which is typically defined as a market that has lost 20% or more of its value within a specific time frame. As of June 27, the major barometer of the market, the S&P 500, was down about 18% year to date, but had been down over 20% earlier in the month — and may reach that threshold again.
Investors who are new to the market may look at the performance of the S&P 500 and think twice about investing in it via a mutual fund or exchange-traded fund (ETF). Would a popular stock like Amazon (NASDAQ: AMZN) be a better option for a first-time investor? Letʻs take a look.
Start slow and keep it simple
The best advice anyone ever gave me when starting out is, start slow and keep it simple. With investing, there is a lifelong learning curve, so the longer you do it, the more knowledgeable you become about building a portfolio and how different stocks and industries react through various market cycles.
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To keep it simple, look to the tried and true — a blue chip stock that has navigated the markets and ups and downs over the years and is a leader in its industry. There are few bigger companies than Amazon, the massive online retailer that is the fifth-largest company in the world by market cap — which is the total value of its shares.
It is a particularly good time to consider Amazon because the company just completed a 20-for-1 stock split in early June — so investors that already held Amazon saw one share split into 20 shares. This was done because the stock price had gone so high, up over $2,000 per share due to decades of rapid growth, that it may have priced out many investors, including a lot of first-time investors. Now, with the stock split, new investors can buy one share of Amazon for about $114 per share.
Since the stock split went live on June 8, the share price has tumbled even further and is down 31% year to date. But its valuation remains extremely high, with a forward price-to-earnings ratio of 65, up from 52 at the start of the year and 57 at this time last year. This means that the market is expecting higher growth than the actual projected growth.
Amazon is certainly feeling the effects of inflation and a slowing economy, but it is still the world’s largest online retailer, and its Amazon Web Services business, which offers cloud-based services for businesses, is a leader as well. But keep in mind that Amazon has consistently grown its e-commerce market share over the years, reaching over 50% market share in 2021 despite growing competition.
Is the S&P 500 a better first investment?
Amazon is, of course, part of the S&P 500, which is an index of the 500 largest U.S. companies by market cap. You can invest in this index through various ETFs, as all of the major ETF providers have an ETF that tracks the performance of the S&P 500.
Over the last 10 years, the S&P 500 has had an annualized return of about 11.5% (as of June 27), and over the past 30 years has returned about 8% on an annualized basis. The S&P 500 is a great first-time investment because it gives you access to the 500 largest companies in the world at any given time, reflecting the changes that occur in the markets over the years. Plus, it gives you great diversification, with over 500 stocks, so while some might be down at any given time, others will likely offset the losses with gains.
An ETF that tracks the S&P 500 is essential element of a portfolio — even Warren Buffett has two S&P 500 ETFs in his Berkshire Hathaway portfolio.
But the opportunity to get Amazon after the stock split, and the market swoon, seems too good to pass up right now. It has consistently grown its e-commerce market share over the past decade and still dominates, with its next closest competitor Walmart having only about a 6% market share at the end of 2021.
Amazon has averaged a 26% annualized return over the past 10 years, as of June 27, and remains an excellent long-term investment, despite the fact that the next 12 months could remain rocky and the stock appears overvalued.
But looking beyond the near term, Amazon will certainly bounce back from this market swoon, and the stock split should help to bring in more new investors in the long run.
Both Amazon and an S&P 500 ETF should be part of a portfolio, but at this time, after the stock split and with the price down 31%, Amazon looks like the better choice.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.