There can be a lot of unnecessary fluff surrounding investing, and unfortunately, this can be a deterrent for many people looking to begin. If you scroll social media or listen to certain media platforms, you might think being a good investor involves spending countless time analyzing charts or reading financial statements.
While deep analysis has benefits, it can sometimes be counterproductive for beginner investors because it brings more confusion than clarity. Instead, investors can simplify the process and still achieve great results. It all begins with exchange-traded funds (ETFs), which are listed on stock exchanges like individual companies.
Specifically, I believe one ETF should be the go-to for investors without experience: the Vanguard S&P 500 ETF (VOO 1.35%).
NYSEMKT: VOO
Key Data Points
Start by investing in the broader U.S. economy
I'm sure you've heard the phrase, "Don't put all your eggs in one basket." In investing, this means having diversification within your portfolio. ETFs are great options for any investor, but they can be especially useful for new investors because they allow you to invest in hundreds or thousands of stocks with a single investment.
The Vanguard S&P 500 ETF, which mirrors the S&P 500 index, allows you to invest in roughly 500 of the largest public U.S. companies by market capitalization. Because of these companies' size, influence, and sectors, an investment in the ETF can be viewed as an investment in the broader U.S. economy.
The economy and stock market aren't directly linked (although they each influence the other), but many experts use the S&P 500's performance to gauge the health of the U.S. economy. As a new investor, one of the safer bets you can make is on the economy. It's not foolproof by any means, but it has been resilient over the long haul.
Why the Vanguard S&P 500 ETF in particular?
The S&P 500 itself is an index, but different financial institutions put together their own respective funds to mirror the index. Although the Vanguard S&P 500 ETF is a popular S&P 500 ETF, it's not the only one. In fact, it's not even the most popular (that would be the SPDR S&P 500 ETF Trust).
That said, I recommend the Vanguard S&P 500 ETF because of its low expense ratio, which is the annual fee charged as a percentage of your total investment. The Vanguard ETF's expense ratio is 0.03%, which equals $3 per $10,000 invested. In comparison, the SPDR S&P 500 ETF's expense ratio is 0.0945%.
To see how this little difference can add up over time, let's assume you invest $500 monthly into each ETF and average 10% annual returns. Here's how the value of your investments would compare after different numbers of years:
| Years Invested | Value of Investment With 0.03% Expense Ratio | Value of Investment With 0.0945% Expense Ratio |
|---|---|---|
| 10 | $95,500 | $95,200 |
| 20 | $342,500 | $340,000 |
| 30 | $981,400 | $969,500 |
Calculations by author. Values rounded to the nearest hundred.
Don't underestimate how slight differences in expense ratios can translate to material differences in money spent on fees. There's no tangible difference between S&P 500 ETFs because they mirror the same index, so I recommend the cheaper option.
It's always best to keep a long-term mindset
One of the first things new investors will notice is how much volatility there is in the stock market. Even world-class companies and funds experience ups and downs with their stock prices, and the Vanguard S&P 500 ETF is no exception.
If you're not careful, you can find yourself reacting to these short-term movements in the market instead of focusing on the long term, which matters most. The good news is that the Vanguard ETF has averaged around 14% annual total returns since its inception.
VOO total-return price data by YCharts.
There's no way to predict if this trend will continue, but being led by some of the greatest companies in the world is a recipe for sustained success. Instead of worrying about short-term price movements, focus on making consistent investments in the ETF and trust the long-term growth potential.
