There's no denying that the stock market is arguably the best tool the average person has to build long-term wealth. But figuring out what stocks or funds to buy can certainly seem like a daunting task at first. It doesn't need to be complicated, though.
In fact, there's a surefire way for investors to one day get to a $1 million portfolio balance. Investing just $500 a month into the Vanguard S&P 500 ETF (VOO -0.59%) could help get you to the seven-figure mark. Let's take a closer look at this exchange-traded fund (ETF).
Running the numbers
Historically, the S&P 500, which is an index of 500 large and profitable American businesses, has generated a total return of about 10% per year. This might not seem like a lot. However, over many years and decades, the results can be phenomenal.
Assuming that 10% average annual gain holds true going forward, investors who can put $500 in the Vanguard S&P 500 ETF on a monthly basis will see their portfolios eclipse the $1 million mark in about 30 years. If you have the ability to put more money to work and/or if the index registers higher returns, your portfolio will reach $1 million much faster. Put less in or encounter tougher market conditions, and it could take longer.
This dollar-cost averaging strategy means that investors don't need to correctly time the market. Buying at multiple entry points ensures that different prices are being taken advantage of.
Look at the positive traits
The legendary Warren Buffett, who is one of the greatest investors ever, suggests that buying something like this ETF is the smartest move for the average person. That's because it does not require someone to have expert financial analysis skills to be able to successfully pick individual stocks. Moreover, not having to do this can free up a lot of time to do other things and enjoy life. That's extremely compelling for most people, who simply want a passive investment vehicle to direct their savings into.
The Vanguard S&P 500 ETF provides broad diversification to numerous sectors and industries. But to be clear, information technology stocks, like Apple and Microsoft, hold a huge 31% weighting in the fund. There are also much smaller positions in lesser-known businesses.
Having exposure to so many companies means that an investor is essentially betting on the growth and innovation of the U.S. economy as a whole. This has been a lucrative perspective to have, if history is any indication.
Even better, investors aren't being asked to pay a hefty amount to own the Vanguard S&P 500 ETF. It's the opposite, actually. The expense ratio of 0.03% means that for every $10,000 invested, only $3 goes toward the annual fee. In essence, you get to keep more of your returns over time, which is exactly what investors should want.
Keep this in mind
It sounds too easy, doesn't it? Put $500 into the Vanguard S&P 500 ETF on a monthly basis, and eventually you'll become a millionaire. While the math makes sense, investors should keep some under-the-radar factors in mind.
There will undoubtedly be volatility along the way. The S&P 500, no matter how diversified it may be, experiences corrections and bear markets every once in a while. This cannot be avoided. Investors must mentally prepare for the inevitable ups and downs, as being able to handle them is key to achieving strong returns.
It helps to have a long-term mindset. Instead of focusing on the next quarter or next year, investors should turn their attention to the next decade and beyond. This keeps things in perspective, while encouraging patience.
If you're looking for a winning investment idea, then consider the Vanguard S&P 500 ETF.
