Investing can be fraught with unnecessary problems, and unfortunately, this can be a deterrent for many people who want to start investing. As you scroll through social media or listen to certain media platforms, you may think that to be a good investor you need to spend countless hours analyzing charts and reading financial statements. not.
Although deep analysis has its benefits, it can also be counterproductive for novice investors as it creates more confusion than clarity. Instead, investors can simplify the process while still achieving great results. It all starts with exchange-traded funds (ETFs), which are listed on stock exchanges just like individual companies.
Specifically, I think one ETF is the go-to for inexperienced investors. Vanguard S&P 500 ETF (VOO 0.96%).
Start by investing in the broader U.S. economy
You've probably heard the saying, “Don't put all your eggs in one basket.” In investing, this means diversifying within your portfolio. ETFs are a great option for any investor, but they're especially useful for novice investors because they allow you to invest in hundreds or thousands of stocks in a single investment.
The Vanguard S&P 500 ETF mirrors the S&P 500 Index and provides exposure to approximately 500 of the largest publicly traded companies in the United States by market capitalization. Because of the size, influence, and sector of these companies, an investment in an ETF can be considered an investment in the broader U.S. economy.
Although the economy and the stock market are not directly related (although they do influence each other), many experts use the performance of the S&P 500 to gauge the health of the U.S. economy. As a new investor, one of his safer bets is to bet on the economy. It is by no means foolproof, but it is resilient over time.
Why the Vanguard S&P 500 ETF in particular?
The S&P 500 itself is an index, but various financial institutions combine their own funds to reflect the index. The Vanguard S&P 500 ETF is a popular S&P 500 ETF, but it's not the only one.In fact, it's not even the most popular one (it's SPDR S&P 500 ETF Trust).
That being said, I recommend the Vanguard S&P 500 ETF because of its low expense ratio, which is the annual fee based on your total investment. The Vanguard ETF has an expense ratio of 0.03%, which equates to $3 per $10,000 invested. In comparison, the SPDR S&P 500 ETF has an expense ratio of 0.0945%.
To see how this small difference adds up over time, let's assume you invest $500 each month in each ETF and the average annual return is 10%. Comparing the value of your investment after various years:
| Investment years | Investment value with expense ratio of 0.03% | Investment value with an expense ratio of 0.0945% |
|---|---|---|
| Ten | $95,500 | $95,200 |
| 20 | $342,500 | $340,000 |
| 30 | $981,400 | $969,500 |
Calculations by the author. Values are rounded to the nearest hundred.
Don't underestimate how small differences in expense ratios can lead to big differences in the amount spent on fees. The S&P 500 ETF reflects the same index, so there is no discernible difference. Therefore, we recommend cheaper options.
It's always best to keep a long-term mindset
One of the first things new investors notice is the high volatility of the stock market. Even world-class companies and funds experience ups and downs in stock prices, and the Vanguard S&P 500 ETF is no exception.
If you're not careful, you can end up reacting to short-term movements in the market instead of focusing on the long-term, which is most important. The good news is that the Vanguard ETF has averaged an annual total return of about 14% since its inception.
VOO Total Return Price Data by YCharts.
There is no way to predict whether this trend will continue, but being led by the world's leading companies is a recipe for sustained success. Rather than worrying about short-term price fluctuations, focus on investing consistently in ETFs and trusting in their long-term growth potential.
Stephon Walters has a position in the Vanguard S&P 500 ETF. The Motley Fool owns a position in and recommends the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
