Investing can be complicated. There are all types of metrics and jargon to learn about, and everyone seems to have a different opinion when it comes to individual stocks. As such, for those just starting out, deciding where to begin can be a difficult.
That said, investing in stocks is still one of the best ways to create wealth over the long term. However, instead of trying to pick a portfolio of individual stocks, one of the best options for new investors to start is with buying an exchange-traded fund (ETF). ETFs bring instant diversification, and new investors don’t need to worry about when is the best time to buy or sell individual stocks.
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One of the best places to find attractive ETFs is with Vanguard. Vanguard has long been known for its index funds and low fees. Fees can play a big role in investment performance over the long term and Vanguard has always had some of the lowest expense ratios around.
When starting out, a good rule of thumb is to keep it simple. As such, I think one of the best ETFs for investors to start with is the Vanguard S&P 500 ETF(NYSEMKT: VOO). It is also a great core holding for investors of any level of experience. The ETF tracks the performance of the S&P 500, which includes roughly 500 of the largest companies traded in the U.S.
The index and ETF are both market-weighted, which means that the larger a company is, the bigger its influence on a portfolio. It is this characteristic that has helped the S&P 500’s strong performance over the years. As companies grow and become more successful, they become a larger and larger part of the index, while companies that struggle become a smaller percentage or eventually are cut from the index.
This is the exact opposite approach that so many investors take, most of whom look to reduce stakes of their winners and double down on their losers. However, the S&P 500 lets its winners turn into megawinners, and these megawinners are what ultimately drives the index’s strong returns. In fact, demonstrating how difficult it can be picking individual stocks, a J.P. Morgan study showed that among stocks in the Russell 3000, which represents the 3,000 largest companies traded in the U.S., 40% of them suffered what it called catastrophic losses between 1980 and 2020, which it defined as declines of 70% or more from which the stocks never recovered. Meanwhile, two-thirds of individual stocks underperformed the Russel 3000 during this period. This means the index’s gains are the result of stocks that outperform by wide margins.
The success of the Vanguard S&P 500 ETF and investing in a broad market-weighted index can be seen in the ETF’s long-term returns. The ETF has generated an average annual return of 13.3% as of the end of November, with a cumulative return of 249%. That means that if you invested $500 in the ETF a decade ago you would now have about $1,744.
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Now, it’s no secret that the market has been on a strong run, which may make some nervous about investing now in the Vanguard S&P 500 ETF.
However, research from J.P. Morgan has shown that investing in an S&P fund only on days that it has hit all-time highs is just as good or even better than picking any other random day. According to its study, between 1988 and 2020, buying an S&P fund on days it hit an all-time produced a return of 14.6% one year later compared to 11.7% on random days. The investment bank also noted that since 1950, the S&P 500 hit a new high on about 7% of all trading days, so it is not an uncommon occurrence.
It’s also notable that the S&P is on course for its second straight year of returning 20% or more. This has occurred eight other times since 1950, with the market rising the next year six of those times. The average turn was 12% during those years.
The simple fact is that bull markets can last quite a long time, with the average rally lasting about 5 1/2 years since 1950. The current bull market just hit its two-year anniversary in October, so the market could have quite a bit of time left to run if history is any indicator.
As such, for new investors looking for something to buy, the Vanguard S&P 500 ETF is a great place to start. It’s also a nice place to invest for seasoned investors, as well, and I myself have been a recent buyer of the ETF.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Geoffrey Seiler has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends JPMorgan Chase and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
