Investing in the stock market is one of the easiest and most effective ways to build wealth, but choosing the right investments is key. That can be challenging, though, when there are seemingly endless options.
Everyone's preferences will be slightly different, so there's no one-size-fits-all approach when it comes to deciding where you want to put your money. However, there's one investment that I plan to keep in my own portfolio for as long as possible: the Vanguard S&P 500 ETF (VOO -0.22%).
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What is an S&P 500 ETF?
An ETF, or exchange-traded fund, is a collection of stocks bundled together into a single investment. Some ETFs include stocks that are all from a particular industry, while others are broader and include a wider variety of companies.
An S&P 500 ETF, then, is an investment that aims to mirror the S&P 500 index itself. This means it includes the same stocks as the index, or roughly 500 stocks from the largest and strongest companies in the U.S.
One reason I'm investing heavily in the Vanguard S&P 500 ETF is that it's more likely to recover from downturns. The S&P 500 itself has a long history of recovering from corrections and crashes, and while there are never any guarantees with investing, it's extremely likely it will rebound from any future downturns, as well.
In addition, this type of investment is low maintenance. The fund includes hundreds of strong stocks from a variety of industries, so I don't need to worry about choosing individual stocks, researching companies, or deciding whether it's time to sell. All I have to do is invest a little each month and then let the fund do the rest of the work for me.
Is this investment right for you?
An S&P 500 ETF is a great option for those who want to take a hands-off approach to investing. If you prefer to avoid the heavy research involved in buying individual stocks, this is a much easier option.
It's also possible to make a lot of money with S&P 500 ETFs over time. The index itself has historically earned an average rate of return of around 10% per year, so its annual highs and lows have averaged out to around 10% per year over time. If you were investing, say, $300 per month while earning a 10% average annual return, you'd have close to $600,000 after 30 years.
One downside to this type of investment is that it can't earn above-average returns. Because an S&P 500 ETF is designed to follow the performance of the market, it's impossible for it to beat the market. For many investors, the ease of investing in an S&P 500 ETF outweighs the lower returns. But if your primary goal is to beat the market, this may not be the investment for you.
In addition, you don't have as much control over your investments as you would if you were buying individual stocks. You can't choose the stocks within the fund. While that may not be a deal-breaker for many investors, it could be a disadvantage if there are certain companies you'd rather not invest in.
The Vanguard S&P 500 ETF can be a fantastic investment for many people, but it's not right for everyone. By considering your preferences and your ideal investing approach, it will be easier to decide whether it belongs in your portfolio.
