As Warren Buffett has said, it isn't necessary to do extraordinary things to get extraordinary results. Although it's certainly possible to use individual stocks to build wealth, it isn't the only way. A low-cost index fund that simply tracks the performance of the entire U.S. stock market can be a surprisingly strong and reliable way to grow your portfolio.
One great example is the Vanguard Total Stock Market ETF (VTI +0.53%), which, as the name implies, invests in an index that is designed to represent the entire U.S. stock market. Here's what you need to know about this ETF and why it can be such a smart choice to buy and hold forever.
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The Vanguard Total Stock Market ETF in a nutshell
The Vanguard Total Stock Market ETF doesn't exactly own every stock in the market, but it's not that far off. It owns just over 3,500 stocks in total, and it is a weighted index, meaning larger companies account for a greater share of the fund's assets.
Although it literally owns thousands of stocks, the weighting makes it rather top-heavy. The largest position, Nvidia, accounts for 6.6% of the fund's assets alone, and the fund's top 10 holdings make up 36% of the index. This is significant because if the megacap technology stocks perform poorly, it can drag the entire ETF down.
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Key Data Points
Like most Vanguard ETFs, this one has extremely low costs. It has an expense ratio of just 0.03%, which means that for every $1,000 in fund assets, your annual investment costs will be just $0.30. To be clear, this isn't a fee you'll need to pay -- it will simply be reflected in the fund's performance over time.
A millionaire-maker ETF?
Over the long run, the overall stock market has produced annualized returns of 9%-10%, depending on the exact time frame you're looking at. The Vanguard Total Stock Market ETF has been around for about 25 years, and has delivered 9.2% annualized returns since then -- and keep in mind that this period includes the post-9/11 market slump, the financial crisis, the initial COVID-19 crash, and the 2022 bear market. Over time, the good outweighs the bad.
To illustrate the compounding power of this ETF, let's say you invest $500 per month and let your investment grow over time, and that it averages the same 9.2% rate of return going forward. If you did this, you'd have about $179,000 after 15 years. After 20 years, you'd have about $314,000. After 32 years, you'd have over $1 million.
Of course, past performance doesn't guarantee future returns, and growth won't be in a straight line. But the point is that simply buying a fund that reflects the entire stock market and leaving it alone can have more compounding power than you might think.
