When you're choosing investments for your portfolio, the number of options you have can be overwhelming at times. Between individual stocks, exchange-traded funds (ETFs), mutual funds, and more, the opportunities are seemingly endless.
Exchange-traded funds can be a smart investment for many reasons. For one, they require significantly less research than individual stocks. Each ETF may also contain hundreds or thousands of stocks, creating an instantly diversified portfolio with just one investment.
Choosing the right ETFs, though, can be tricky. While everyone will have different investing styles and preferences, there are a few ETFs in my portfolio that I plan to hold forever.
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1. Vanguard S&P 500 ETF (VOO)
S&P 500 ETFs are powerhouse investments, and it's never a bad idea to have this type of fund in your portfolio. The Vanguard S&P 500 ETF (VOO +0.20%) tracks the S&P 500 index, which means it's designed to follow the performance of the index as closely as possible.
The S&P 500 index is one of the best representations of the stock market as a whole. So when you invest in an S&P 500 ETF, you're essentially following the market. This can reduce your risk, because although the stock market does experience short-term volatility, it's historically always recovered from downturns to earn positive returns over time.
Despite its relative safety, this ETF also packs a punch. Since its inception in 2010, the Vanguard S&P 500 ETF has earned an average return of more than 15% per year.
That said, these returns may be unrealistic over the long term, as the market has experienced an incredible bull market since 2010. Historically, the S&P 500 itself has earned an average return of around 10% per year.
Still, though, 10% average annual returns can add up over time. If you were to invest, say, $300 per month while earning a 10% average annual return, you'd have around $592,000 after 30 years.
2. Vanguard Total Stock Market ETF (VTI)
The Vanguard Total Stock Market ETF (VTI +0.18%) is a broad-market fund that aims to track the performance of the overall stock market.
This fund is more expansive than the S&P 500 ETF, as it contains more than 4,000 stocks from small-cap, mid-cap, and large-cap stocks -- compared to the S&P 500 ETF that only contains stocks from 500 large companies.
In general, the more stocks included in an ETF, the lower its risk. If a few stocks within the fund don't perform well, it likely won't have much of an effect on the fund's overall performance.
This ETF has historically earned an average rate of return of close to 9% per year since its inception in 2001. While that is slightly lower than the S&P 500's historical performance, this fund does contain a wider variety of stocks and greater diversification. For some investors, slightly lower returns are a worthwhile trade-off.
3. Vanguard Growth ETF (VUG)
The Vanguard Growth ETF (VUG +0.31%) includes stocks that are more likely to earn above-average growth, and this ETF can help supercharge your savings.
With 287 stocks, this fund does provide less diversification than the others on the list. In addition, around three-quarters of the stocks in this ETF are from only two industries -- technology and consumer discretionary -- which creates even less diversification and also increases its risk.
However, because this ETF only contains growth stocks, it can help your money grow much faster.
Since its inception in 2004, this fund has earned an average rate of return of close to 12% per year. If you were investing $300 per month while earning a 12% average annual return, you'd end up with around $869,000 after 30 years.
While this fund is higher-risk, pairing it with the S&P 500 ETF as well as the Total Stock Market ETF can reduce that risk and create a well-diversified portfolio. These three funds are some of the strongest investments in my portfolio, and I intend to continue investing in them for as long as possible.
