Putting money to work in the stock market is a smart way for people to start building lasting wealth. The initial mental hurdle, though, is that things can seem very complicated at first. And this might keep investors on the sidelines.
But it doesn't have to be this way. Investing in stocks can be incredibly simple. In fact, even small sums of capital can go a long way.
If you've got $1,000 you're ready to invest in the new year, put it in an S&P 500 index fund, like the Vanguard S&P 500 ETF (VFIAX +1.02%). Here's why that's a smart idea.
Providing the right exposure
Turn on the financial news, and you'll quickly see that the S&P 500 is one of the most-talked about topics. It's a broad index that contains the 500 largest companies in the U.S. Maybe even more important, these are some of the most profitable businesses around.
Market participants use the S&P 500 to gauge how stocks are performing in any given time period, as it is widely regarded as an adequate representation of what's going on. From an investor's perspective, putting money behind this gives one thorough exposure to the growth of the American economy. Historically, this has been a very lucrative bet.
The Vanguard S&P 500 ETF is a smart choice because it's offered by a reputable firm that was founded about 50 years ago. The fund itself is one of the biggest, with $937 billion in assets. That should give investors some peace of mind that their money is in a safe place.
One of the most important things to pay attention to is the fee structure. The Vanguard S&P 500 ETF has an expense ratio of just 0.04%. This means that of that $1,000 you're investing, only $0.40 goes to the fund sponsor yearly. In this case, investors would keep more of their money over time, which can increase returns.
NASDAQMUTFUND: VFIAX
Key Data Points
Another critical factor to understand is the fund's track record. Over the past 40 years, the Vanguard S&P 500 ETF has risen at a compound annual rate of 11.2% (dividends included), which would have turned $1,000 into nearly $70,000 today. That's not too shabby for a completely passive strategy.
An annualized gain like that might not seem impressive at first, but when you consider that a whopping 95% of active fund managers lose to the S&P 500 over a 20-year stretch, you'll realize that by going this route, you'd be setting yourself up to perform better than the so-called experts. It almost seems like a no-brainer decision.
Besides being beneficial from a purely financial perspective, investing in this index fund requires no added time to research individual stocks or figure out asset allocation decisions. It can be automated, and it's low maintenance. And this strategy frees up one's time to focus on what they care about most, whatever that may be.
The smart approach
Investors looking to supercharge their returns can invest an additional small sum on a monthly or quarterly basis in addition to that initial $1,000 outlay. This is called dollar-cost averaging, and over a long period of time, it can do a wonderful job increasing someone's nest egg.
If you invested $1,000 40 years ago in the Vanguard S&P 500 ETF, plus another $50 a month, you'd be looking at a balance of $461,000 today, compared to the $70,000 I mentioned, without the added monthly cash infusions. That's not even in the same ballpark.
This strategy points to how time in the market is much more important than trying to time its ups and downs, which is a losing activity. Moreover, investors benefit from building a habit of saving consistently.
The numbers speak for themselves, making the Vanguard S&P 500 ETF a smart addition to your portfolio.
