Investing in the stock market can be daunting at times, especially during periods of high volatility. But it's also a wealth-building method that could help you reach long-term financial security if you use it well.
Obviously, to profit and prosper, choosing the right investments is a critical step. Exchange-traded funds (ETFs) can be a fantastic option for many people, as they require little management on your part.
Not all ETFs are created equal, and some are better investments than others. But at least one ETF has a track record that suggests that it could turn steady investments of $100 per week into a holding worth $1.3 million or more by the time you retire: the Vanguard S&P 500 ETF (VOO 0.87%).
Why invest in an S&P 500 ETF
The Vanguard S&P 500 ETF tracks the S&P 500, which means it includes the same stocks as the well-known benchmark index and aims to mirror its performance. The S&P 500's components are 500 of the largest companies in the U.S. By investing in this ETF, you'll have stakes in all of those stocks too.
There are several advantages to investing in an S&P 500 ETF, including:
- Immediate diversification: With just one investment, you'll own hundreds of stocks across a wide variety of industries. Diversification can help reduce your risk, because if a few stocks in the fund don't perform well, they won't sink your entire portfolio.
- Protection against recessions: No investment is immune to volatility. But there's never been a recession yet that the U.S. stock market hasn't recovered from. While this ETF will still take hits in the short term when the market falls, both the market and this broad-market ETF are extremely likely to bounce back.
- Long-term growth: The S&P 500 itself has a long track record of averaging positive returns. While there are no guarantees in investing, you can rest easier with an S&P 500 ETF knowing your money is likely to grow over time.
Another advantage of the Vanguard S&P 500 ETF, specifically, is that it has rock-bottom fees, with an expense ratio of just 0.03%. That's lower than many other similar ETFs, and it could save you thousands of dollars in fees over time.
Finally, perhaps one of the best perks of investing in an S&P 500 ETF is that it requires next to no effort on your part. All of the stocks are chosen for you, and you never need to worry about when to buy or sell. Simply invest whatever you can afford, then let the fund take care of the rest.
Reaching millionaire status
Turning your investments into this ETF into a position worth $1 million or more will take most investors a long time, but it's possible -- especially if you're able to invest consistently.
Historically, the S&P 500 index has averaged total returns of roughly 10% per year. While you won't see those 10% returns year after year -- and in some years, inevitably, the value of the index will drop -- the annual positives and negatives should average out over the decades to around 10% per year.
If you're earning a 10% average annual return and investing $100 per week, here's approximately how much you could accumulate over time:
| Number of Years Investing $100 a Week | Total Portfolio Value |
|---|---|
| 20 | $275,000 |
| 25 | $472,000 |
| 30 | $790,000 |
| 35 | $1,301,000 |
| 40 | $2,124,000 |
Data source: Author's calculations via Investor.gov
To reach $1.3 million in total savings, you'll need to invest consistently for around 35 years. But note that with even a few more years, you could wind up with significantly more.
Even if you don't have 35 years to invest, though, you can still accumulate a substantial nest egg. When it comes to investing, time is your most valuable resource. The earlier you get started, the more likely you will be to reach your wealth-building goals.
Downsides to consider before you buy
While the Vanguard S&P 500 ETF can be a fantastic long-term investment, there are some disadvantages to consider.
For one, you have no control over the individual stocks within the fund. If there are certain companies in the index that you'd rather not invest in, you don't have the option to avoid them.
Also, this type of investment can, by definition, only earn average returns. An S&P 500 ETF follows the market, so it's impossible for it to beat the market. And the same broad diversification that prevents a few poorly performing stocks from excessively dragging down your returns prevents the market's biggest winners from giving your portfolio as much of a boost.
So if you're looking to maximize your returns, and you're ready to do the serious work involved in picking individual stocks and keeping track of the components of your own portfolio, you may do better with that approach than by investing in an ETF.
The Vanguard S&P 500 ETF can be a smart option for many people, but it's not right for everyone. If you're looking for a hands-off investment that can help you earn a lot of money over decades, it could be a great fit for your portfolio.
