Investing can be both simple and difficult. It's simple because, over time, the market has historically produced strong returns. In fact, stock investing is arguably one of the best ways to create long-term wealth.
However, individual stock picking is not easy. In fact, a J.P. Morgan study found that between 1980 and 2000, two-thirds of stocks underperformed, while 42% had absolute negative returns. Meanwhile, 40% of stocks experienced catastrophic declines of 70% or more, from which they never fully recovered. Making things even more difficult is that most of the stocks experiencing these huge declines were trading at reasonable valuations based on forward P/Es, and generally had healthy balance sheets and were profitable.
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Despite this, the market consistently marches higher, generally led by a small group of megawinners. These megawinners typically account for about 10% of all stocks and are the driving force behind the market's long-term gains. While investing in individual stocks and finding these megawinners can be rewarding and boost returns, I generally believe that most investors are best served by also having at least one index-based exchange-traded fund (ETF) as a core holding to dollar-cost average into consistently. And one of the best ways to do this is with the Vanguard S&P 500 ETF (VOO +0.61%).
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A top ETF to own
The Vanguard S&P 500 ETF tracks the S&P 500, giving investors an instant portfolio of the 500 largest publicly traded companies in the U.S. The ETF has a strong track record, generating an average annual return of 14.1% over the past five years and 15.6% over the past decade. That is also similar to its 15.2% average annual return since its inception in September 2010.
The ETF and S&P 500 index perform so well because they let their winners win and their losers fade. This plays exactly into the J.P. Morgan study and is why most professional fund managers struggle to beat the index. It's because, instead of letting their winners run, professional investors tend to reduce positions to manage risk and double down on losers they have conviction in. The result is that only about 14% of actively managed large-cap funds have been able to beat the S&P 500 over the past 10 years.
So instead of trying to beat the index, one of the best things to do is invest in it with the Vanguard S&P 500 ETF. You can start with an amount like $500, but the key is to invest that same amount every month over a long stretch. That will help you build wealth over time. Invest $500 a month in the ETF with a 15% annual return over a 30-year time span, and you'll have around $2.8 million when you're done.
