Investing in the stock market is one of the most effective ways to build wealth over time. Fortunately, stock ownership in the United States has been the highest in years. Today, 62% of Americans own stocks across individual and retirement accounts. Unfortunately, that’s still roughly 4 in 10 people who don’t.
Investing can be as simple or complex as you want to make it. One common mistake many new investors make is diving headfirst into riskier strategies like individual stocks and options. If you’re just starting, consider buying a high-quality index fund instead.
One that stands out for its simplicity and eye-popping long-term results is the Vanguard S&P 500 ETF (NYSEMKT: VOO). Here’s what you need to know.
Why index funds are perfect for beginners
There are countless funds you can invest in. Professionals actively manage some, while others follow a part of the stock market or the broader market itself. Index funds are the simplest way to go, which makes them great for beginners.
An index is a sample representing something larger. In the stock market, indexes are groups of stocks that represent the broader markets. When someone wants to know how the stock market is doing, they don’t look at the thousands of individual stocks in the market; they look at market indexes.
Some of the most popular indexes in the United States are the Dow Jones Industrial Average, the Nasdaq Composite, and the S&P 500.
Naturally, an index fund is an investment fund that mimics a stock market index. The Vanguard S&P 500 ETF tracks the S&P 500, for instance.
Index funds are great for beginners because they instantly diversify your money across many stocks, so you don’t have all your eggs in one basket. For example, the S&P 500 is an index of 500 prominent U.S. companies. Every share of the Vanguard S&P 500 ETF you buy technically means you own little pieces of these 500 companies.
What makes the S&P 500 so great
In addition to easy diversification, the modern-day S&P 500 has established itself as the stock market’s gold standard since its creation in the 1950s. The index represents the most prominent companies in America, arguably the world’s most innovative economy.
As a result, the S&P 500 has appreciated tremendously over the years, creating immense wealth for those who invest alongside it:
The index’s secret is that it’s market-capitalization weighted. In other words, the larger and more successful companies represent more of the index. This means that the index constantly leans toward winning stocks, and companies that continually struggle are removed from the index if a better up-and-coming company is waiting in the wings. It’s such a well-built system that most Wall Street professionals don’t outperform the S&P 500 over the long term.
Here is your game plan for getting started
If you’re patient enough, the S&P 500 has never lost you money. The index is positive over every 20-year rolling period in its history. However, that doesn’t mean you should pile in without a second thought.
The truth is that the S&P 500 is expensive today by historical standards. At the same time, trying to time the market by guessing when it might go up or down doesn’t work either.
Instead, consider a dollar-cost-averaging strategy. That means slowly buying a little at a time. Sometimes, you’ll buy when the market is up, other times when it’s down. However, you’ll slowly average to something in the middle that leaves room for investment returns as the market works its magic over the long term.
Regularly investing in the S&P 500 and waiting is a simple but powerful way to build wealth. It is perfect for beginners and experienced investors alike.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
What’s the Best Way to Invest in Stocks Without Any Experience? Try This Index Fund. was originally published by The Motley Fool
