Better Buy: Nike or All 30 Dow Jones Stocks?

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If you’re mulling a fresh investment in Nike (NYSE: NKE), you’re not crazy, and you’re not alone. The stock’s 33% sell-off this year is enticing. The popular sports apparel brand is clearly subject to challenges like broken supply chains and major military invasions. But it’s also a name with real long-term staying power. Shareholders who have historically bought on dips like the current one have been well rewarded.

Before you dive into this Dow Jones Industrial Average constituent while it’s relatively cheap, you may want to take a step back and make sure it fits into your bigger picture. It may not be quite right for everyone.

Start out with safety in numbers

Nike is a leading name in the global athletic apparel market, and it outright dominates the athletic footwear market, selling $46.7 billion worth of goods last year, up 6% despite lingering challenges linked to the COVID-19 pandemic.

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The continued growth of its e-commerce operation, as well as the ongoing expansion of its own brick-and-mortar retail footprint, get much of the credit. But so does the brand name itself. Vistaprint says Nike’s “swoosh” is the fourth-most recognized company logo in the U.S., behind those of Apple, McDonald’s, and Coca-Cola. That’s a powerful reach into consumers’ psyches, and a key reason this year’s projected 8% revenue growth is expected to accelerate to 10% growth next year.

This growth outlook, however, doesn’t inherently make Nike a buy, particularly if your portfolio is not yet rounded out with at least 10 different — and different kinds of — stocks. A figure closer to 20 is preferable, and even then, Nike isn’t necessarily one of the “best first 20.”

The better, easier starting option? Buy a broad-based index fund like the SPDR Dow Jones Industrial Average ETF Trust (NYSEMKT: DIA), which is meant to mirror the performance of the aforementioned Dow Jones Industrial Average.

It’s not the riveting foray into the market that most newcomers want; it’s not exactly thrilling to veteran investors, either. It’s a smart trade all the same, though, for the simple fact that it plugs you into a basket of blue chip stocks you can count on for the long haul. If it was the only equity investment you ever owned while you needed the growth that only equities can provide, it wouldn’t be a misstep.

The challenge with such a holding is resisting the temptation to cash it in and aim for bigger returns than most indices can offer. Many (too many) investors presume that a more active approach translates into bigger gains.

Nothing could be further from the truth, though, and there are some eye-opening data to support the claim.

Seriously, consistently successful stock-picking is hard

One would think the mutual fund industry as a whole would be made up of the world’s most prolific stock pickers. After all, fund companies have access to all sorts of data and tools, and also have deep pockets to pay the most qualified people top-dollar to manage their funds.

Such an assumption, however, is off-base at best.

S&P Global crunches the numbers every year, and every year finds the same thing. That is, most of the large-cap mutual funds offered to U.S. investors fail to outperform the S&P 500. Last year, 85% of funds trailed the S&P 500’s 27% advance.

Think about that. In a year where it was very difficult to not make pretty good money in the market, most of the presumed best-of-the-best couldn’t even do the one thing they’re supposed to do. The figure of 85% is more or less in line with past years as well.

And giving these professionals more time doesn’t help much, if any. For the past five years, 74% of large-cap funds underperformed their key benchmark. For the past 10 years, 83% of large-cap mutual funds trailed the S&P 500’s performance. The numbers don’t look considerably better for mid- and small-cap funds, and neither value nor growth funds appear to offer any sort of edge for fund managers limiting their picks to just these categories.

The moral of the story is, if the full-time professionals struggle to do it, part-time amateur stock-pickers could struggle just as much — if not more — to beat the market.

Just food for thought

There are exceptions to every rule, of course — even a rule of thumb like this one. It’s entirely possible you do have the mental toolset needed to consistently beat the market by identifying its top stocks. Nike’s got a good chance of being one of those names; it’s certainly outperformed the market for the better part of the past couple of decades.

NKE data by YCharts

Still, until you’ve got a fully diversified foundation for your portfolio consisting of stocks less volatile than Nike, this particular pick isn’t the best possible bet, and certainly not a great first pick, or even one of a first few picks for a new portfolio.

Start with a simpler, easier-to-own holding like the SPDR Dow Jones Industrial Average ETF Trust, and then feel free to stop there if you’re not interested in keeping tabs on a bunch of individual stocks. Plenty of others have done this very thing, with no regrets.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Nike, and S&P Global. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola, long March 2023 $120 calls on Apple, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.