If your goal is building a million-dollar portfolio, but you don't know where to start, one of the best investment choices you can make is to buy the Vanguard 500 Index ETF (VOO 0.45%). It isn't exciting, but it is easy, and the long-term performance of the index it tracks has helped many investors achieve their financial dreams. It could do the same for you, even if you don't time your investment perfectly.
Here's what you need to know.
What does the Vanguard 500 Index ETF do?
The Vanguard 500 Index ETF does nothing more than track an index, so it really doesn't do anything itself. The index is doing all the work. In this case, the index is the venerable and widely followed S&P 500 (^GSPC 0.45%).
The S&P 500 is a list of roughly 500 stocks that are selected by a committee to be representative of the broader U.S. economy. The companies in the index are weighted by market cap, so the largest companies have the biggest impact on the index's performance. That's logical, since it basically mimics the real world.
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One of the most attractive features of the Vanguard 500 Index ETF is its low costs. With an expense ratio of only 0.03%, it is one of the cheapest options for investing in the index it tracks. That means that investors are benefiting from nearly all the gains that the index generates over time.
But there's one problem with the Vanguard 500 Index ETF: The index it tracks is trading near all-time highs. That may make some investors worry about putting their money into the ETF. It's a legitimate concern, but history suggests even bad timing won't stop the Vanguard 500 Index Fund ETF from helping you achieve millionaire status, assuming you stick with the fund for long enough.
The charts do the talking for the Vanguard 500 Index ETF
If you had purchased the Vanguard 500 Index ETF just before the bear market that accompanied the coronavirus pandemic-driven recession in 2020, what would have happened? The answer is that you'd have lost some money in the near term, but have still ended up with sizable gains as the market recovered and then went on to set new highs.
The pandemic bear market was a particularly short downturn. What about if you invested in the S&P 500 index just before the deep and long bear market around the Great Recession?
The chart uses the SPDR S&P 500 Index ETF (SPY 0.51%) because the Vanguard 500 Index ETF didn't exist at that point. (The SPDR S&P 500 Index ETF has a higher expense ratio than the Vanguard 500 Index ETF, so it isn't the best S&P 500 ETF option today.)
Once again, the answer is that investors would have experienced some near-term losses. But if investors stuck with the S&P 500 index, they would have still made out OK. The positive outcome for buying and holding the S&P 500 continues if you go back to the dot-com crash and bear market at the turn of the century, too.
The interesting thing here, however, is that what were huge downturns at the time start to look like nothing more than minor drops the longer you hold the S&P 500. Sure, if you have perfect foresight and could time the perfect entry and exit points, you would end up with more money. But there are no crystal balls on Wall Street, and you can't expect perfection. This is why it is so nice to know that even horrible investment timing with the Vanguard 500 Index ETF will still leave you steadily marching toward millionaire status.
The real trick with the Vanguard 500 Index ETF is persistence
The key is to buy and hold for the long term. Or, better yet, buy and keep buying regularly, no matter what is going on in the market, so you benefit from dollar-cost averaging. Becoming a millionaire isn't something that happens overnight -- it is something that you build up little by little, year by year. The sooner you get started, the more likely it is that the Vanguard 500 Index ETF can help you get there.
