When I first started to invest, it was both exciting and overwhelming. At the time, I wanted to jump in with both feet and, well, that led to more than a few mistakes as I learned about investing and, more importantly, about myself. Exchange-traded funds (ETFs) didn't exist when I began my investing journey and index funds weren't nearly as popular. But both are now big on Wall Street and new investors should use them to their advantage.
Here's one index-based ETF I think would be a strong foundation for a new investor's portfolio.
Investing is easy to do but hard to learn
The problem with investing is that it is shockingly easy to do, even easier now than when I started out. Today you can open a brokerage account on your phone and make free trades with services like Robinhood Markets and SoFi Technologies. Online trading is ubiquitous today, but I remember when you had to actually call a broker to make a trade. If I had a free trading app in my pocket at all times when I started investing I probably would have been day trading, which is a high-risk endeavor that most investors should avoid.
Image source: Getty Images.
New investors, meanwhile, shouldn't go near day trading because they haven't built up the experience to know how they want to invest. A much better choice for newbie investors would be to simplify. And there's no better way to do that today than with index-based ETFs.
One of the best options is the Vanguard Total Stock Market ETF (VTI +0.76%). This is a big fund, with roughly $1.6 trillion in assets. That size spreads the costs around, allowing the ETF to have a very low expense ratio of just 0.03%. On Wall Street that's practically free.
The key here, however, is in what the ETF does. As its name implies, it tracks the entire U.S. stock market. It is market cap weighted, so the largest stocks have the heaviest weighting in the fund. Simply put, in one investment you own all of the market. That ensures that you won't underperform stocks in the broadest possible sense. If you paired this stock ETF with the Vanguard Total Bond Market ETF (BND +0.26%), which is the bond market sister of the Vanguard Total Stock Market ETF, in say a 60% stock/40% bond mix, you would have a two-ETF portfolio that could last you a lifetime.
NYSEMKT: VTI
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Why go so broad with the Vanguard Total Stock Market ETF?
The key reason for using the Vanguard Total Stock Market ETF and, perhaps, the Vanguard Total Bond Market ETF, is that you create a strong foundation for your portfolio. You never have to buy another investment, but you can when you are ready. And you can take your time to dip your toes into investing in individual stocks as opposed to jumping in with both feet.
For example, if you know you should invest in stocks but don't know where to start, the Vanguard Total Stock Market ETF solves the problem quickly. Buying it means you own stocks -- all of them. Now the pressure is off and you can go read a few books on the topic of investing, such as the iconic title The Intelligent Investor by Benjamin Graham, the man who helped train Warren Buffett. Don't know those names? Take some time to learn about them and find out why Buffett has earned the nickname the Oracle of Omaha.
NASDAQ: BND
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If Graham and Buffett don't resonate with you, try Philip Fisher's Common Stocks and Uncommon Profits. He, too, was a foundational force in Buffett's investment life, but his approach was more growth-oriented. Graham's approach was value-based. It probably wouldn't hurt to read a book like Investing for Dummies, either. I wish I had that book when I started since it would have provided a very broad-based look at investing. The real goal is for you to find an investment approach that makes sense to you before you start buying individual stocks.
The learning process takes time, which is why owning the market with an ETF like the Vanguard Total Stock Market ETF is such a good plan. You will be invested while you learn. And when you decide to try out an investment approach, you can just peel off a little bit of money to get your feet wet, say 5% to 10% of your investable assets. It doesn't matter if that isn't a huge sum; Robinhood lets you buy fractional shares. What is important is that you start slowly and don't risk losing it all out of the gate. Trust me, that's a terrible feeling.
Don't rush into investing, take it slow
The big picture here is that, instead of taking on more risk than you can handle, buying a broad-based ETF like the Vanguard Total Stock Market ETF (and maybe pairing it with the Vanguard Total Bond Market ETF to create a balanced portfolio) allows you to focus on learning. In time you'll get more and more comfortable and will put more money to work in individual securities. Or you'll decide you don't enjoy investing and can simply revert back to the broad-based index ETF approach. That's not a bad outcome at all. However, if my personal experience is any indication, it's highly likely you'll get the investing bug and find a lifelong passion.
