When it comes to investing, no investment strategy fits everyone. Some are comfortable with taking risks and investing solely in individual stocks. Others might not have the time, desire, or risk appetite to do so, instead swaying toward exchange-traded funds (ETFs).
No matter your strategy, many investors crave the stability and reliability of having their core holdings in an ETF. This is my strategy, and the bedrock portion of my portfolio has been built on one ETF in particular: the Vanguard S&P 500 ETF (VOO -0.07%). This fund is suited for my portfolio -- 54% of it to be exact -- and here's why it might be right for you too.
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Buying the entire U.S stock market
Many experts warn against excess concentration in any single stock, and 54% of one's portfolio in just one security is undoubtedly concentrated. That said, this situation is different. The Vanguard S&P 500 invests in the 500 or so largest U.S. companies, mirroring the traditional S&P 500. This includes a wide range of stocks, everything from Apple to Johnson & Johnson. Therefore, while I might have a heavy concentration in this one ETF, it still contributes to a diversified portfolio.
What's great about this ETF is you barely have to pay anything to own it. The expense ratio -- the percent of your investment a fund charges each year to manage your money -- is just 0.03%. In other words, if you invest $1,000 into this ETF, they will only charge 30 cents annually. Comparatively, similar index funds can have expense ratios closer to 0.80%, a far higher fee that can eat into your returns long term.
A tried and true solution to deliver stable returns over the long haul
The Vanguard S&P 500 ETF has done a stellar job at replicating the performance of the overall S&P 500. Since the ETF's inception in 2010, it has returned an average annual return of 12.54%, not far from its benchmark's performance of 12.56% over the same period. That's the beauty of this ETF: It's not trying to beat the broad market but rather mirror it to achieve solid returns for the long haul.
Investors have a bright future assuming this performance can continue over the long term considering the S&P 500 hasn't seen a negative return on a rolling 20-year basis over the past century, according to Crestmont Research. In other words, if you owned the S&P 500 for any 20-year period dating back to 1919, you would have seen positive returns. While past performance doesn't guarantee future results, the chances of this continuing are high as long as the United States remains a global economic leader.
For an investor with multiple decades in front of them, they should aim to own a fund that can consistently match the market and provide those steady returns. The Vanguard S&P 500 ETF has proven it can do that. And as my core investment, this portion of my portfolio serves as my "safe" money -- money I can count on by the time I retire.
With time on my side, I'm letting compounding build the returns for me. If the past is any indicator, that's all that's needed too. Since 1871, the S&P 500 has returned a compound annual growth rate of 9.37%. If that continues for the next 40 years, just $10,000 today could become worth nearly $360,000.
Why 54%?
No strategy fits all, but some investors want to leave some dry powder to invest in individual stocks, myself included. That's why only 54% of my portfolio is in this ETF. The rest is in individual stocks like MercadoLibre, Chipotle Mexican Grill, and many more.
Why? Because I enjoy researching new companies, finding innovative ideas and businesses, and learning more about the world around me. While the goal is to generate solid returns for my retirement, I also have the potential to beat the market with this strategy.
This might be a perfect balance for me, but it might not be for you. No two investors are precisely alike, so finding what works best for you is critical. However, if you're looking for a stable ETF to build your portfolio around, the Vanguard S&P 500 could be the one.
