At first glance, investing can seem like a daunting and overly complex task. But it doesn't have to be. In fact, investors who focus on the basics and adopt a long-term time horizon can do incredibly well.
Even better, a seemingly small sum of money, say $1,000, can be put to work in an effective way. A top choice is the Vanguard 500 Index Fund (VFIAX +0.86%). Here's why it should be on your investing radar right now.
The best option for most people
The Vanguard 500 Index Fund tracks the performance of the 500 largest and most profitable companies in the United States. This index contains some of the most dominant technology and internet companies, including Microsoft and Apple. However, the fund also owns shares in smaller under-the-radar businesses, including BorgWarner and Robert Half. Investors gain access to a group of enterprises that essentially turns into a long-term bet on the growth of the U.S. economy.
If history is any indication, this has been a lucrative bet to make. In the past 30 years, a $1,000 investment in the Vanguard 500 Index Fund would have turned into $19,500 today, including dividends. That translates to an average yearly gain of 10.4%. Remember, this return came about from doing absolutely nothing.
Because there is a total of $464 billion of assets (as of March 13) in the Vanguard 500 Index Fund, investors can rest assured knowing that lots of other people have their savings in this investment vehicle as well. Vanguard has been around for almost 50 years, and it's one of the most highly regarded financial firms in the world. Having that kind of peace of mind counts for a lot.
One important factor to keep in mind is the fee structure. The last thing you want to do is pay exorbitant fees that eat away at your returns. The Vanguard 500 Index Fund carries an expense ratio of just 0.04%, meaning you keep more of your gains over time.
If these attractive characteristics aren't enough to convince you, then consider the personal benefits gained. You don't need to spend hours poring over financial statements or listening to earnings calls in an effort to successfully pick single stocks that could be winners. Investing in the Vanguard 500 Index Fund frees up time that you can enjoy however you want.
NASDAQMUTFUND: VFIAX
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Things to remember
To ensure that you have the right mental framework, it's important to keep some critical points in mind.
For starters, it's always smart to maintain a long-term perspective. And by this, I mean a span of decades, not months or quarters. Even though the market is near all-time highs, over 20 or 30 years, your returns will resemble that long-run average of about 10%. In other words, time in the market is the most important variable.
Investors need to have the patience to let their capital build. This isn't a get-rich-quick scheme. The Vanguard 500 Index Fund is meant to be a safe, reliable, and proven method of generating wealth, so stay the course.
Remember that next time there's heightened volatility. If the market tanks, instead of rushing for the exits, understand that the best thing to do is nothing. Remain focused on your end goals.
With $1,000 ready to put to work, investors should look no further than the Vanguard 500 Index Fund. It can help set you up on the path to financial freedom.
