It's easy to assume the only way to build long-term wealth from your investments is by picking individual stocks at the perfect time. In fact, quite the opposite can be true. Millions of investors have generated substantial wealth from the market by investing in just one fund and holding it for decades -- no sleepless nights required.
I'm referring to the Vanguard S&P 500 ETF (VOO 0.31%), which gives you immediate diversification and doesn't require that you know the latest investing trend to benefit. Here are four reasons why buying the fund now could set you up for life.
Image source: Getty Images.
1. It's diversified across the U.S. economy
This fund tracks the S&P 500 index, giving you exposure to the economy through 500 of the largest publicly traded companies in the U.S. That means your investment is diversified across technology, energy, industrials, healthcare, commercial goods, and other sectors.
As long as the U.S. economy is doing generally well, then there's a good chance the Vanguard S&P 500 ETF is growing right along with it. This saves you the trouble of having to sift through the latest trends and decipher if they're legitimate or track earnings reports to ensure a company is meeting its financial goals.
2. It has a long track record of success
There's no guarantee with any investment, even the Vanguard S&P 500 ETF, and just because the fund has done well in the past doesn't mean it'll do well in the future. Still, the historic gains of the fund are a good indicator of how well the fund tracks the growth of many publicly traded companies.
Since 1957, the S&P 500 has had a historic annual return of about 10%, not adjusting for inflation. If that trend continues, here's how much an initial $10,000 investment could turn into over the coming decades:
| Initial investment | Monthly contribution | Annual return | Years to grow | Final amount |
|---|---|---|---|---|
| $10,000 | $250 | 10% | 10 | $73,750 |
| $10,000 | $250 | 10% | 20 | $239,100 |
| $10,000 | $250 | 10% | 30 | $667,976 |
| $10,000 | $250 | 10% | 40 | $1,700,000 |
Source: Author's calculations.
While your retirement timeline, monthly contributions, and initial investment will likely vary from this example, you can see that just a modest sum invested over time can build into a substantial portfolio size, thanks to compounding interest.
3. You can't beat its low fees
Buying some funds can be a costly endeavor, but not with Vanguard. The company generally charges some of the lowest fees among investment funds, and the Vanguard S&P 500 ETF charges an especially low expense ratio of just 0.03%.
This means that for every $10,000 you have invested in the fund, you'll pay an annual fee of just $3. That's an incredibly low expense and allows you to keep more of the gains the fund makes over decades.
4. You can avoid the temptation to time the market
One of the biggest temptations of investing in individual stocks is to time the market. While there's nothing wrong with riding a new trend, the problem is that many investors jump in and out of the market based on their emotions about the economy -- and that can decimate your returns.
A 2022 study found that $10,000 invested in an S&P 500 index between 1980 and 2022 would have turned into $1.1 million. But if an investor missed just five days of the highest returns over those 40 years, they would have cut their returns down to about $670,000.
So if your crystal ball is a little cloudy these days, just buy the Vanguard S&P 500 ETF, stay invested for many years, and, potentially, come out much further ahead than if you timed the market.
