There's no question the stock market is one of the best tools people have at their disposal to build lasting wealth. The issue for many, though, is that things can seem overly complex and intimidating, especially for newcomers.
But there's good news. Even those with zero experience with the stock market can still benefit. If this sounds like you, all hope isn't lost.
By investing in this top index fund, you are on the path to improving your financial well-being. Here's what you need to know.
A proven approach
If you're a stock market newbie, I think it's smart to invest any starting capital you have in the Vanguard 500 Index Fund Admiral Shares (VFIAX 0.10%). This is an investment vehicle that tracks the performance of the S&P 500, which is an index of the 500 largest businesses in the U.S. Investors gain exposure to various sectors, including popular ones like information technology, financials, healthcare, and consumer discretionary.
Historically, this has been a very lucrative way to invest. The Vanguard 500 Index Fund has registered an average annual return of 10% per year in the last three decades. A $10,000 investment 30 years ago would be worth about $179,000 today, with dividends reinvested. This is truly remarkable.
The great Warren Buffett has said that buying an index fund is the best thing for most people. The fees are not only extremely low, but it's essentially a bet on the ongoing growth of the American economy, as well as continued innovation and ingenuity.
Compare this strategy with going the active route and giving your money to a mutual fund manager. The fees for doing this will usually be much higher. And to add insult to injury, over a 10-year period, 85% of these funds lagged the S&P 500. It's probably a good idea to avoid this.
NASDAQMUTFUND: VFIAX
Key Data Points
Think long term
Buying an index fund seems like a pretty simple move. And it is. But investors also have to remember some important factors that can ensure long-term financial success.
Perhaps the most critical thing to do is to focus on the long term. This means it's best not to try and time the market to buy on the dips and sell at the peaks. This will do your portfolio more harm than good, as studies show that it's just better to remain fully invested through the ups and downs.
In other words, accept volatility as a key part of how the stock market operates. This way, you can be mentally prepared when things do go south, and you won't panic and sell your positions.
Remember, owning an index fund means you have an indirect ownership stake in all of those businesses. Don't forget this reality of being a business owner and being in it for the long haul.
Moreover, the best part of maintaining this mindset is that you don't unnecessarily disrupt compounding returns from working its magic. This has the added benefit of deferring taxes until you sell the index fund, which is likely decades in the future.
If you're someone without any experience, you can certainly do a lot worse than loading up on the Vanguard 500 Index Fund.
