Better buy: Microsoft stocks or all Nasdaq stocks?

If you are considering investing in a software giant Microsoft (MSFT -4.18%), you’re not crazy, and you’re not alone. The company helped shape the computing industry we all rely on today, and while it and the rest of the world have moved beyond personal computers over the past three decades, Microsoft is more relevant today. today than it ever was.

The title also continues to generate gains. Despite falling 20% ​​from last year’s record high, stocks are up more than 300% in the past five years. In fact, the recent lull is seen by many as a buying opportunity.

However, before taking up any position in the admittedly impressive company, there is one question you may want to ask yourself and one alternative choice you may want to consider.

There’s nothing wrong with Microsoft…

To be clear, you could do much worse than take a stake in Microsoft. Not only does its Windows operating system remain the most popular PC platform in the world, but the company is deeply entrenched in the cloud computing, video game and personal productivity software markets. He also owns the professional networking website LinkedIn and has integrated his software well enough with the site to make it a real business building tool. Then there’s the technical stuff of the company that most investors never hear about.

This well-diversified (yet complementary) mix of companies is a key reason why Microsoft has not only do not has failed to deliver year-over-year growth in every quarter since the end of 2017, but also continues to largely accelerate that growth. Recurring revenue is another contributing factor to this persistent growth. Analysts are also looking for the same.

Data source: Thomson Reuters. Table by author.

However, these reliable advancements do not necessarily make Microsoft the best next trade for every investor. There’s a potentially better option, even if you’re looking for tech-driven growth. Indeed, Microsoft’s significant downfall since the middle of last year underscores the very reason why you might want to opt for the alternative.

…but here’s a better idea for most investors

It’s a question some investors don’t want to ask themselves just because they know they won’t like the answer. But you still have to ask yourself: is your portfolio diversified enough right now to even make the venerable Microsoft your next choice?

If you currently have less than 10 stocks and no diversified index funds in your stock mix, the answer to the question is a definite no; you need more breadth and depth before getting into a stock like Microsoft which is clearly capable of dropping double digits in just a few months.

Conversely, if half of your portfolio is made up of index funds and the other half is spread across 10 or more different stocks – and different types of stocks – Microsoft might just be the right addition after its big dive.

A person looks at two chalk arrows pointing in different directions on the ground.

Image source: Getty Images.

What if, however, you find yourself somewhere between these two scenarios (as many investors are)?

Here’s the thing: you don’t necessarily have to give up technology-driven growth to properly diversify a portfolio.

When most investors think of “indexing”, they tend to think of S&P500 (^GSPC -3.63%). Well, they should. Not only is it the most recognized market benchmark in the world, encompassing around 90% of total market capitalization, but it also reflects the overall sectoral diversification of the market. That’s why some people aren’t big fans of indexing, actually — the S&P 500 is bogged down by low-growth stocks from the utilities, financials, telecommunications, and consumer goods sectors.

However, indexing is not necessarily limited to instruments based on the S&P 500. Market capitalization weighting Nasdaq Compound or a comparable exchange-traded fund such as the Invesco QQQ Trust — which mirrors the Nasdaq 100 — are also indexes, but still stacked with tech growth stocks. Among the major constituents of the Nasdaq are You’re here, Amazon, Apple, Alphabetand Microsoft, which is currently its second largest holding…not too far behind Apple.

Yes, you can own a share of all the big tech names the world seems to want with one easy-to-trade fund.

The best plans are plans you can actually stick to

Don’t read the message wrong. If there’s a clear reason you know you should own Microsoft, even if your portfolio isn’t fully diversified yet, buy it. Chief among these potential reasons is the intention to add diversity to your holdings later on, after taking a stake in the software giant while it is down.

Unless you have a clear plan for going fully diversified, most investors will be better served by holding a broad range of stocks representing the Nasdaq Composite first. This may be easier to achieve with the aforementioned Invesco QQQ Trust. Its long-term performance is comparable to that of Microsoft, without imposing all the stress and worry of owning a volatile individual stock like Microsoft.

There is also a larger philosophical conclusion buried in this whole discussion. Simply put, being a successful investor isn’t just about picking a few good stocks. It has a lot to do with managing a portfolio that you can live with, even when the going gets a little tough.

Index funds make this easier to do, while owning individual stocks can invite panicked and errant decisions. Several investors have been rattled by Microsoft in recent months due to its poor performance, but they might regret getting out of those trades once the stock starts to rally.

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