Better Buy: Microsoft Stock or Every Nasdaq Stock? | Smart Change: Personal Finance

(James Bromley)

If you are thinking of investing in a software giant Microsoft (NASDAQ: MSFT)You’re not crazy, and you’re not alone. The company has helped shape the computer industry we all depend on today, and while it and the rest of the world have overtaken PCs over the past three decades, Microsoft is as relevant today as ever.

The stock is still losing ground as well. Although it’s down 20% from a record high last year, shares are up more than 300% over the past five years. In fact, many view the recent calm as a buying opportunity.

Before stepping into a position at the impressive company, there is a question you may want to ask yourself and an alternative option you may want to consider.

Nothing wrong with Microsoft…

To be clear, you can do a lot, much worse than go into a stake in Microsoft. Not only is its Windows operating system still the world’s most popular computer platform, the company is delving into the cloud computing, video games, and personal productivity software markets. She also owns a professional LinkedIn website and has combined its software with the site very well to make it a real business building tool. Then, there are the technical things the company does that most investors don’t even hear about.

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This well-differentiated (but complementary) mix of business is a big reason not only Microsoft has not It has failed to generate year-over-year growth in every quarter since late 2017, but it’s also still broadly accelerating that growth. Recurring revenue is another factor contributing to this continued growth. Analysts are looking for more of the same, too.

Data source: Thomson Reuters. Scheme by the author.

However, this credible advancement doesn’t necessarily make Microsoft the next best deal for every investor. There is likely to be a better option, even if you are looking for technology-led growth. In fact, Microsoft’s big slide since the middle of last year underscores why you should 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 the same question must be asked: Is your portfolio diversified enough now to make the venerable Microsoft your next choice?

If you currently own less than 10 stocks and there are no diversified index funds in your holding mix, the answer to the question is “no”; You need more breadth and depth before getting into a stock like Microsoft that is clearly capable of making double-digit withdrawals in just a matter of months.

Conversely, if half of your portfolio is made up of index funds and the other half is spread over 10 or more different stocks – and different types of stocks – Microsoft may be the right addition after the big drop.

Image source: Getty Images.

However, what if you are somewhere between these two scenarios (like many investors)?

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

When most investors think of “indexing,” they tend to think of Standard & Poor’s 500 (SNPINDEX: ^GSPC). Well, they should. It is not only the most famous market standard in the world, accounting for about 90% of the total market capitalization, but also reflects the overall diversification of the market segment. That’s why some people aren’t such a fan of indexing, in fact — the S&P 500 is bogged down by falling stocks from the utilities, financials, telecoms, and consumer goods sectors.

Indexing is not necessarily limited to S&P 500-based instruments. Weighted market value Nasdaq Composite Or a similar exchange-traded fund such as Invesco QQQ Trust – which mirror the Nasdaq 100 – are also indices but they are still stacked with technology growth stocks. Among the largest components of Nasdaq TeslaAnd AmazonAnd appleAnd the alphabetand Microsoft, which is currently the second largest company with … not far from Apple.

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

The best plans are the ones that you can actually stick to

Do not misread the message. If there’s an obvious reason you know you should own Microsoft, even if your wallet isn’t fully diversified yet, buy it. Among these possible reasons are plans to add diversity to your holdings at a later time, after entering into a stake in the software giant while it is down.

Unless you have a clear plan to make this move toward complete diversification, though, most investors will be better served by owning a broad mix of stocks that represent the Nasdaq Composite Index first. This may be easier to achieve with the aforementioned Invesco QQQ Trust. It can be compared in the long run to Microsoft’s performance, without imposing all the stress and anxiety of owning a volatile individual stock like Microsoft.

There is a larger philosophical meal buried in all of this debate, too. This means that being a successful investor isn’t entirely about picking a few big stocks. A lot of that has to do with managing a portfolio that you can live with, even when things get a little messy.

Index funds make this easier, while owning individual stocks can invite panic and wrong decisions. Many investors have been alienated from Microsoft in recent months due to its poor performance, but they may regret not continuing those deals once the stock starts to recover.

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John Mackie, CEO of Whole Foods Market, an Amazon company, is a member of The Motley Fool’s Board of Directors. Susan Fry, CEO of Alphabet, is a member of The Motley Fool’s board of directors. Alphabet is owned by James Bromley (A Shares). The Motley Fool owns and recommends Alphabet (A stock), Alphabet (C stock), Amazon, Apple, Microsoft and Tesla. Motley Fool recommends the following options: long March 2023 calls worth $120 on Apple and short March 2023 calls worth $130 on Apple. Motley Fool has a disclosure policy.

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