The stock market has turned in some very robust returns in the past couple of years, which is starting to attract new investors. However, investing in individual stocks is not easy.
In fact, one JP Morgan study that looked at individual stock returns in the Russell 3000, which consists of the 3000 largest stocks traded in the U.S., from 1980 to 2020, painted a pretty dire picture. It found that 40% of all stocks in the index suffered catastrophic losses of 70% or more, from which they never recovered.
However, if you look at the stock market as represented by the popular S&P 500 index, it has continually moved higher over the long term. The big reason behind this is that while most stocks underperform the index, the approximate 10% of stocks that are "megawinners" tend to lead the index higher over time.
That's why, for investors just looking to start out, investing in index exchange-traded funds (ETFs) instead of individual stocks is a great place to start. I prefer those from Vanguard due to their reputation as having some of the lowest expenses in the industry. Expenses can eat away at returns over time, especially as balances grow, so it's best to find ETFs with low expense ratios.
Let's look at two Vanguard index ETFs that investors can buy and hold forever, or at least for a very long time into retirement.
The Vanguard 500 ETF
The Vanguard 500 ETF (VOO +0.83%) is a great option for being a core portfolio holding for nearly all investors. The ETF tracks the popular S&P 500 index, which is made up of the 500 largest companies that trade on U.S. stock exchanges.
The S&P 500 is a market-cap-weighted index, which means that the larger a company is by market cap (share price multiplied by shares outstanding), the higher the percentage of the index it makes up. It is this methodology that allows megawinners to flourish and fuel great long-term returns.
The Vanguard 500 ETF has a stellar long-term track record, generating an average annual return of 13.7% over the past decade as of the end of January. Since the ETF was founded in September 2010, it has produced an average annual return of 14.7%. Here is a look at how the ETF has performed over various periods, as of the end of January.
| 1 Year | 3- Year | 5-Year | 10-Year | Since Inception (Sept. 2010) | |
|---|---|---|---|---|---|
| Average Annual Return | 26.3% | 11.9% | 15.1% | 13.7% | 14.7% |
| Cumulative Return | 26.3% | 40% | 102.1% | 261.5% | 623.5% |
Source: Vanguard Group.
The ETF has a low expense ratio of 0.03%, which means that investors get to keep the vast majority of the returns of the fund. For every $500, the fee would only be $0.15.
Image source: Getty Images
Vanguard Information Technology ETF
To add a bit of spice to your investments, the Vanguard Information Technology ETF (VGT +1.59%) is a great option. The ETF tracks the MSCI US Investable Market Information Technology 25/50 Index, which is a technology-focused market-cap-weighted index.
Technology is changing the world we live in, and not surprisingly, the companies at the forefront of these technological innovations, such as artificial intelligence (AI), have grown to become some of the largest companies in the world. The Vanguard Information Technology ETF is a great way to gain additional exposure to leading tech companies.
The ETF's top four holdings make up more than half of its portfolio: Apple (17%), Nvidia (14.9%), Microsoft (13%), and Broadcom (5.8%). Given this top-heavy makeup, the ETF does carry a bit more risk.
However, it also has an astounding long-term track record. The ETF has produced an average annual return of 21.1% over the past decade as of the end of January. Here is a look athow the ETF has performed over various periods.
| 1 Year | 3- Year | 5-Year | 10-Year | Since Inception (Jan. 2024) | |
|---|---|---|---|---|---|
| Average Annual Return | 25.6% | 14.3% | 20.4% | 21.1% | 13.6% |
| Cumulative Return | 25.6% | 49.2% | 152.6% | 577.5% | 1,357% |
Source: Vanguard Group.
The ETF has a low expense ratio of 0.09%. On a $500 investment, this equals a fee of $0.45.
Dollar-cost averaging
While investing with $500 to start is fine, the key is to consistently set aside money each month to purchase additional shares of the ETF. This is done through a strategy called dollar-cost averaging, where investors buy at regular intervals whether the ETF price is up or down. This is a proven strategy that helps build wealth over the long term. Whether the market is zooming higher or has suffered a big pullback, investors should try to avoid timing the market and stick to the strategy.
If you invest $500 and add an additional $100 at the end of each month, it would come out to be around $215,000 at the end of 30 years with a 10% average annual return. Make those additional investments $500 a month, and it would be more than $1 million. Actual results could vary depending on market fluctuations, but this gives you a good sense of the power of this strategy.
