When I was asked to pick one stock that I'd recommend to put in a baby's portfolio for the next 18 years, I simply couldn't do it. It's not that I couldn't come up with great companies. There are plenty out there, and in Disney (NYSE: DIS), General Electric (NYSE: GE), Johnson and Johnson (NYSE: JNJ), and Motley Fool Stock Advisor pick Starbucks (Nasdaq: SBUX), among others, my fellow Fools have presented several very attractive options.
But I can't get over the hurdle of trying to pick just one company to beat the market over such a long time period. So many unforeseen things could happen to even the best of companies between now and 2024 that would cause the stock to lag the market: massive lawsuits, the emergence of a dominant competitor, macroeconomic changes, or an industry that shrivels away. The list of potential perils for any one company, even the bluest of the blue chips, goes on and on.
I don't have a crystal ball to predict that kind of stuff. So what would I give a baby to lock away and hold for the next 18 years? A plain ol' index fund. For this, I recommend the Vanguard 500 Index (FUND: VFINX), which aims to match the performance of the S&P 500.
What do you get with the Vanguard 500 Index? Low fees, low risk, and rock-solid performance. You get a fund with an annualized return greater than 12% a year since its inception in 1976. While returns over the next 18 years may not match those of the last 20, I think it's likely that returns will be between 7%-10% a year for baby, and that's a pretty good start for building a portfolio that will last a lifetime.
I love picking individual stocks, and I think it's possible for investors to get better returns with carefully selected stocks than with index or mutual funds. But the key here is that you have to be able to follow your companies closely and sell if your investment thesis falls apart.
If you can't do that, then I think it's best not to invest in the broader market rather than individual companies. You don't have to beat the market to receive healthy returns, but you do need to join it. A low-cost index fund like the Vanguard 500 Index allows you to make money for the long term with a lot lower risk than you'd get from picking a single company.
A joyful abundance of Foolishness awaits your little tyke. Click here to see what other financial gifts are in our Foolish baby shower basket for your littlest loved ones.
Motley Fool biotech analyst Charly Travers loves to pick stocks but does not own shares of any company mentioned in this article. The Fool's disclosure policy is here.
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