There's no "right" way to invest, because it all depends on the person doing the investing. Value, growth, growth at a reasonable price, contrarian, income -- the list of investment styles goes on and on, even including some people who rely on astrology (which is not a highly recommended approach). The problem for a beginner is figuring out which style is right for you, and that takes time.
That's why you'll want to focus on having a strong foundation for your portfolio while you learn. This Vanguard ETF will provide you with just that.
Even Warren Buffett had to learn how to invest
Some people have a greater proclivity for investing than others, but all investors still have to learn what works for them. A great example is world-famous investor Warren Buffett, also known as the Oracle of Omaha. He basically started his career at the knee of Benjamin Graham, who wrote The Intelligent Investor. He taught Buffett to look for value stocks. But Buffett also learned some lessons from Philip Fisher, the author of Common Stocks and Uncommon Profits. Fisher was focused on growth investing. Further, Buffett gives credit to his long-term partner, the now-deceased Charlie Munger, for helping him to shift toward buying great companies at fair prices.
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The point of that very quick rundown isn't that you should invest like Buffett (though that's not a bad idea). It is that even Warren Buffett didn't wake up one day with a fully formed investment approach. It took time, effort, learning, and, perhaps most important, experience. You can learn a lot about investing from a book, but you can't fully understand what it means to have your money on the line until, well, you put your money on the line. It changes things dramatically. So if you are ready to begin investing, be prepared to muddle along trying to figure out what works well with your emotional makeup.
That's why the first investment you might want to consider is Vanguard Total Stock Market ETF (VTI 0.93%). It isn't sexy. It isn't exciting. But it will provide a solid foundation on top of which you can make the experiments necessary to hone your own personal investment approach.
What makes Vanguard Total Stock Market ETF so great?
Vanguard Total Stock Market ETF is an index fund which, as its name suggests, tracks the entire U.S. stock market. It is structured as an exchange traded fund, which means it is very low cost. To put a number on that, the expense ratio (what it costs to own the ETF) is an ultra-low 0.03%. You would be hard pressed to find a cheaper option. You may have to pay a trading commission to buy and sell shares, which depends on your broker (some brokers offer free trades), but it is very liquid and easy to trade, given the assets in the fund total nearly $1.4 trillion and the average daily volume is around 3.5 million shares.
Just being cheap to own and easy to trade aren't enough to make Vanguard Total Stock Market ETF a great starter investment. The key is that it tracks the entire U.S. stock market. There are over 3,700 stocks in the portfolio spread across every major market sector. The ETF is market-cap weighted, so the largest stocks in the market make up more of the portfolio than smaller stocks, which is a fairly common approach to building an index. And it ensures that you will be invested more heavily in the most important stocks, which are likely to be the best performing stocks most of the time.
The good news with Vanguard Total Stock Market ETF is that you won't underperform the market, because you own the market. The bad news is that you can't outperform it either. Basically, you have a well diversified foundation for your equity investments.
The next step in your investing journey is to experiment, in small ways, with different investment approaches. While you are learning, Vanguard Total Stock Market ETF will keep your portfolio grounded even if you make some mistakes. Every investor makes mistakes, and it happens more frequently when they are new.
Buy a few shares of a growth stock and see if you like it. Try value stocks and dividend stocks, too. Keep these experiments small relative to your core holding in Vanguard Total Stock Market ETF and you can learn while still ensuring you aren't going to badly lag the market. As you get more comfortable with the investing style that suits you best, and more confident in your abilities, you can slowly allocate more and more of your portfolio to individual stocks you select, thus reducing your position in Vanguard Total Stock Market ETF over time.
Like investing training wheels
When it comes to investing, you have to learn by doing, but that comes with material financial risks. That is why beginners should start by creating a solid foundation from which to learn, something that Vanguard Total Stock Market ETF provides at a very low cost. No, this ETF is not exciting, but that's the point. It provides the leeway for a beginner to learn the more exciting investment techniques that will one day underpin their long-term investment approach. Or maybe you decide that picking individual stocks isn't for you, in which case Vanguard Total Market ETF could be the only equity investment you ever need. But you'll still need to experiment a little to find that out.
