How Should a Beginner Invest in Stocks? Try This ETF.


Are you thinking about getting started in the stock market? If you are, congratulations. Over time, stocks have outperformed all other major asset classes and have been the most reliable way to build wealth over the long term.

Having said that, investing in stocks can seem intimidating at first. With thousands of individual stocks in the market, how are you supposed to know which ones to buy?

Fortunately, there’s an easier way for beginners to get exposure to the stock market that can still produce tremendous long-term returns. Exchange-traded funds, or ETFs, essentially pool investors’ money together and invest in many different stocks in a single investment. And perhaps the best choice for new investors (and experienced investors, too) is the Vanguard S&P 500 ETF (NYSEMKT: VOO).

What is the Vanguard S&P 500 ETF?

The Vanguard S&P 500 ETF is an exchange-traded fund that aims to match the performance of the S&P 500 benchmark index over time. If you aren’t familiar, the S&P 500 consists of 500 large U.S. companies and is widely considered to be the best indicator of the overall stock market’s performance.

In a nutshell, the ETF pools your money together with that of many other investors, and buys all 500 stocks in the index in the same proportions that are used in the index itself. The ETF has a bare minimum of investment fees that are reflected in the performance, so your returns over time should be extremely close to those of the S&P 500.

A “boring” investment with exciting growth potential

It’s a common misconception that the only way to build serious wealth in the stock market is with individual stocks. Many have been told that index funds like the Vanguard S&P 500 ETF are “boring” ways to invest. While I’m a big believer that you can certainly beat the market with a diverse portfolio of individual companies, it isn’t the only way to go.

Consider this. Since 1965, the S&P 500 has delivered a 10.2% annualized return for investors through the end of 2023. Let’s say that you invest $500 per month ($6,000 per year) into an index fund and achieve this rate of return. Here’s how your portfolio could grow over time:

Years

Amount You’ve Invested

Investment Value

5

$30,000

$36,777

10

$60,000

$96,546

15

$90,000

$193,684

20

$120,000

$351,553

30

$180,000

$1,025,101

40

$240,000

$2,804,134

Data source: author’s calculations.

The best investment most people can make?

Even legendary investor Warren Buffett, known as perhaps the best stock-picker of all time, has called S&P 500 index funds the best investment most Americans can make. By doing so, you’re guaranteed to match the market’s performance over time, and as we’ve seen, this has historically been a solid bet. As Buffett said in his 2016 letter to shareholders, “American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead.”

To help prove Buffett’s point, since the start of 2016, the Vanguard S&P 500 has delivered a 215% total return. That means it has more than tripled investors’ money during a period that included the 2020 COVID-19 market crash as well as the 2022 bear market.

VOO Total Return Price ChartVOO Total Return Price Chart

VOO Total Return Price Chart

The bottom line is that if you want to start investing in the stock market, even if you plan to build a portfolio of individual stocks over time, an index fund like the Vanguard S&P 500 ETF can be a great way to dive in.

Should you invest $1,000 in Vanguard S&P 500 ETF right now?

Before you buy stock in Vanguard S&P 500 ETF, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard S&P 500 ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $771,034!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of July 8, 2024

Matt Frankel has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

How Should a Beginner Invest in Stocks? Try This ETF. was originally published by The Motley Fool



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