The investments you choose can make or break your portfolio, especially during periods of volatility. It's becoming more likely that a recession is on the horizon, and if that happens, there's a chance the market will take a tumble. Not all stocks will be able to recover, so it's especially important right now to ensure you're investing in the right places.
While everyone's investing preferences will be different, there are two powerhouse Vanguard ETFs I'm stocking up on -- and I plan to hold these investments for as long as possible.
1. Vanguard S&P 500 ETF
The Vanguard S&P 500 ETF (VOO 1.00%) tracks the S&P 500 index. It includes the same stocks as the index and aims to mirror its performance.
The S&P 500 contains stocks from 500 of the largest and strongest companies in the U.S. across a wide variety of industries. With just one share of this ETF, you'll own a stake in all of the stocks within the index.
There are several distinct advantages of the S&P 500 ETF:
- Instant diversification: Because this fund includes hundreds of stocks across multiple sectors, it provides immediate diversification -- which can limit your risk. Even if a few stocks don't perform well, they won't sink your entire portfolio.
- A strong track record: The S&P 500 has a decades-long history of recovering from even the worst bear markets, recessions, and crashes. While no investment is immune to short-term volatility, this ETF is almost guaranteed to recover from downturns.
- Minimal effort on your part: This fund can make a fantastic "set it and forget it" type of investment. You never need to worry about researching individual stocks or deciding when to buy or sell. By simply investing consistently and giving your money time to grow, you can build wealth with minimal effort.
Given enough time, it's possible to earn hundreds of thousands of dollars or more with this investment. Historically, the S&P 500 has earned an average return of around 10% per year, so all the annual highs and lows have averaged out to roughly 10% per year over decades.
If you were to invest, say, $200 per month while earning a 10% average annual return, here's approximately how much you'd accumulate over time:
| Number of Years | Total Savings |
|---|---|
| 20 | $137,000 |
| 25 | $236,000 |
| 30 | $395,000 |
| 35 | $650,000 |
| 40 | $1,062,000 |
Source: Author's calculations via Investor.gov.
You don't need to be a stock market expert to make a lot of money with this ETF, but the sooner you get started, the easier it will be to generate long-term wealth.
2. Vanguard Growth ETF
Perhaps the biggest downside to an S&P 500 ETF is that it can only earn average returns. It's designed to follow the market, so it's impossible for it to beat the market. This is where a growth ETF can be beneficial.
The Vanguard Growth ETF (VUG 1.82%) contains 241 stocks with the potential for above-average growth, and it's designed to outperform the market. This ETF, in particular, can be a smart choice because it effectively balances risk and reward.
Around half of this fund is made up of blue chip stocks like Apple, Visa, Nvidia, and Home Depot. While these companies may have the potential for above-average growth, they're also juggernauts in their industries -- which can limit your risk.
At the same time, though, this ETF also contains plenty of smaller stocks with the potential for explosive growth. These stocks are higher risk than the blue chips, but if any of them become juggernauts in their own right, you could see substantial earnings.
Over the last 10 years, this ETF has earned an average rate of return of around 13% per year. While that may not sound significantly higher than the S&P 500's returns, $200 per month at a 13% average annual return would amount to around $2.4 million after 40 years.
Whether or not this ETF will earn those types of returns consistently is uncertain. This fund is riskier and more volatile than the S&P 500 ETF, but there's also the potential for higher earnings.
These two ETFs can complement each other well, balancing risk and reward -- which is why I plan to keep them in my portfolio for the long haul. By considering your goals and tolerance for risk, it will be easier to decide whether either is a fit for your portfolio, as well.
