Investing is something that most people know they should do, but much fewer people do it. Whenever someone tells me they know they should invest and I ask why they don't, the two most common responses are: "I don't have enough money" and "I don't know how."
The former may be a valid excuse (although the ability to buy fractional shares has made investing easier to do with smaller amounts of upfront cash), but the latter is typically because someone has been misled about what investing involves. Investing doesn't have to be, and shouldn't be, difficult.
Popular culture has people thinking that being a successful investor means reading financial statements for hours or staying laser-focused on CNBC and other investing news outlets. But that couldn't be further from the truth. For people new to investing, an S&P 500 index fund can be a great starting point. Here's why.
What is the S&P 500 index?
An index is a collection of stocks that are grouped together based on pre-determined criteria and tracked as one. Indexes can be industry-focused (the MSCI World Financials index), stock exchange-focused (Nasdaq Composite), geography-focused (Mexico IPC index), or market cap-focused (S&P 500).
The S&P 500 index tracks 500 of the largest public U.S. companies, and it's a good way to get exposure to the broad U.S. economy. When people refer to the "market" and its performance, they're generally talking about the S&P 500. It's considered the benchmark for the U.S. stock market, reflecting its health and trends.
The S&P 500 checks off a lot of boxes at once
Various financial institutions put together their own S&P 500 funds to mirror the index. Some of these are mutual funds. When investors wish to buy or sell shares in a mutual fund, all trades are executed once a day, after the end of the session, based on the prices at which the component shares closed. Others are exchange-traded funds (ETFs). Shares of these trade on the stock market all day, like shares of individual companies, allowing investors to make moves at any time.
Since every S&P 500 fund must hold the same set of assets, there are not many tangible differences between various S&P 500 funds or ETFs, but a popular option is the Vanguard S&P 500 ETF (VOO 1.00%). For novice investors (or investors of any experience), it can be a trifecta, offering diversification, simplicity, and low cost. Its annual management fee is a miniscule 0.03%.
The Vanguard S&P 500 ETF contains top companies from all major sectors:
| Sector | Percentage of Assets |
|---|---|
| Communication services | 8.6% |
| Consumer discretionary | 10.7% |
| Consumer staples | 6.3% |
| Energy | 4.1% |
| Financials | 12.9% |
| Healthcare | 12.7% |
| Industrials | 8.3% |
| Information technology | 29.1% |
| Materials | 2.5% |
| Real estate | 2.4% |
| Utilities | 2.4% |
Data source: Vanguard 500 ETF holdings data. Data as of Nov. 30, 2023.
Having 500 or so stocks across so many different sectors ensures that your portfolio's success (or lack thereof) doesn't rely too much on too few sectors or companies. Sectors like energy and consumer discretionary can be cyclical, so it's good to have diversified investments to balance them out.
The amount of ground the index covers also simplifies the process for investors. There's no need to worry about reading companies' financial statements, keeping up with quarterly earnings calls, or looking too much into individual stock trends. Your only concern should be remaining consistent and keeping a long-term perspective.
The long-term results have been there
The diversification and simplicity of an ETF won't matter too much if the results aren't there, but that's not the case with the Vanguard S&P 500 ETF, which has averaged annualized returns of over 13% since its Sept. 9, 2010, inception.
VOO Total Return Level data by YCharts.
So, $1,000 invested in the ETF at its inception would be worth almost $5,500 today. Past results don't guarantee future performance, but they can be a good indicator of potential. The S&P 500 has shown it can grow money significantly over the long run. For perspective, $500 monthly investments over 25 years would total over $590,000, averaging 10% annual returns.
When you're beginning to invest, you want an investment that can combine reliability and results, and that's exactly what the Vanguard S&P 500 ETF can provide.
