When I hear from people who don't invest even though they have the financial means, the most common theme is that it is "too hard" or "too complicated." That's understandable -- but it doesn't have to be that way.
Investing doesn't have to involve hours of research, poring through financial statements, or binging earnings calls like they're your favorite podcasts. Those things are all beneficial, and some people enjoy the process. But many others simply don't have the time.
Thankfully, most investors can reach their financial goals by investing in exchange-traded funds (ETFs) that give them exposure to many companies with a single or few investments. One ETF that can be the perfect option for beginning investors is the Vanguard S&P 500 ETF (VOO -0.20%).
One investment gives you exposure to the broader U.S. economy
Few investments are as effective as an investment in the S&P 500. If you don't believe me, take it from famed investor Warren Buffett, who routinely touts index investing as the only strategy needed to grow wealth over time.
Part of the reason is the amount of ground a market index covers. The Vanguard S&P 500 ETF has companies representing all 11 major sectors, which are broad classifications that include industries within them. Here's how the ETF was allocated as of Feb. 29:
- Information technology: 29.8%
- Financials: 13%
- Healthcare: 12.5%
- Consumer discretionary: 10.6%
- Communication services: 8.9%
- Industrials: 8.8%
- Consumer staples: 6%
- Energy: 3.7%
- Materials: 2.3%
- Real estate: 2.3%
- Utilities: 2.1%
Since the ETF is weighted by market cap, the information technology sector accounts for an unusually large percentage of the fund -- many big tech companies have seen their values skyrocket over the past year or so.
Still, the ETF does an excellent job covering ground across sectors and industries. That's why an investment in the S&P 500 is considered an investment in the broader U.S. economy.
This diversification is important because it ensures that a downturn in a specific sector won't be too harmful to your portfolio. If the information technology sector experiences a slump, your investment will feel the effects, but it won't be too detrimental. Some sectors are cyclical by nature, so having other sectors that can pick up the slack is key to keeping your portfolio relatively stable.
Keep as much of your profit as possible
The Vanguard S&P 500 ETF isn't the only one that tracks the index. However, I think it's a great go-to because of its low fees (expense ratio) compared to other popular options, like the SPDR S&P 500 ETF Trust (SPY -0.23%). The SPDR S&P 500 ETF Trust is the most popular S&P 500 ETF by assets under management, but its expense ratio is more than three times higher than the Vanguard S&P 500 ETF's 0.03%.
For perspective, if you invested $500 monthly and averaged 10% annual returns over 20 years, you'd pay just over $1,100 in fees with the Vanguard S&P 500 ETF. If the same thing happened while invested in the SPDR S&P 500 ETF Trust, you'd paid just over $3,600 in fees. What appears small on paper can make a big difference over time.
The historical returns prove the Vanguard S&P 500 ETF can be a wealth-builder
What matters most is that the Vanguard S&P 500 ETF has proven it can produce great results over the long run.
VOO Total Return Price data by YCharts
Looking back at the Vanguard S&P 500 ETF's performance over the years, a one-time $10,000 investment at its inception would be worth over $60,700 today, considering its total returns (which includes dividends).
You should never use past performances to guess or anticipate future performance in the stock market, but it does give insight into how effective an investment could be. Even with occasional slumps and down periods, the Vanguard S&P 500 ETF's long-term results are impressive for a broad ETF.
That's why your focus should be on investing consistently through thick and thin. You'll likely be thanking yourself for it a decade or two down the road.
Stefon Walters has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
FAQs
How Should a Beginner Invest in Stocks? Start With This ETF.
- The Vanguard S&P 500 ETF contains companies from all 11 major U.S. sectors.
- Its low expense ratio means investors won't pay too much in fees.
- The Vanguard S&P 500 ETF has averaged over 14% annualized total returns since its inception.
An exchange-traded fund, or ETF, allows investors to buy many stocks or bonds at once. Investors buy shares of ETFs, and the money is used to invest according to a certain objective. For example, if you buy an S&P 500 ETF, your money will be invested in the 500 companies in that index.
How do I choose my first ETF? ›
Before purchasing an ETF there are five factors to take into account 1) performance of the ETF 2) the underlying index of the ETF 3) the ETF's structure 4) when and how to trade the ETF and 5) the total cost of the ETF.
Is Voo a good investment for beginner investors? ›
Vanguard S&P 500 ETF (VOO)
For example, a young investor looking for long-term growth may pick a low-cost U.S. equity ETF like VOO, which tracks the S&P 500 index. Historically, this index has delivered excellent performance, but has also been quite volatile, so a high risk tolerance is essential.
How many ETFs should I own as a beginner? ›
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
How much should I invest in an ETF for the first time? ›
You can put $500 in a stock ETF and $500 in a bond ETF to achieve a diversified two-asset-class portfolio which, though simple, can be a great start toward building a portfolio appropriate for your goals. ETFs can be a simple way to build incrementally toward your long-term plan.
Are ETFs beginner friendly? ›
The low investment threshold for most ETFs makes it easy for a beginner to implement a basic asset allocation strategy that matches their investment time horizon and risk tolerance. For example, young investors might be 100% invested in equity ETFs when they are in their 20s.
How does ETF work for dummies? ›
ETFs are bought and sold just like stocks (through a brokerage house, either by phone or online), and their price can change from second to second. Mutual fund orders can be made during the day, but the actual trade doesn't occur until after the markets close.
What is the initial investment for an ETF? ›
Minimum initial investment
The amount of money you'll need to make your first investment in a specific mutual fund. (ETFs don't have minimum initial investment requirements beyond the price of 1 share.)
Is it better to buy individual stocks or ETFs? ›
Stock-picking offers an advantage over exchange-traded funds (ETFs) when there is a wide dispersion of returns from the mean. Exchange-traded funds (ETFs) offer advantages over stocks when the return from stocks in the sector has a narrow dispersion around the mean.
The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.
Is it OK to just buy one ETF? ›
The one time it's okay to choose a single investment
You wouldn't ever want to load up your portfolio with a single stock. But if you're buying S&P 500 ETFs, this is the one scenario where you might get away with only owning a single investment. That's because your investment gives you access to the broad stock market.
What fund is best for beginner investors? ›
Index funds are popular with investors because they promise ownership of a wide variety of stocks, greater diversification and lower risk – usually all at a low cost. That's why many investors, especially beginners, find index funds to be superior investments to individual stocks.
Which type of investment is best for beginners? ›
10 ways to invest money for beginners
- High-yield savings accounts. A high-yield savings account enables you to earn far more interest than you could with a traditional savings account. ...
- Money market accounts. ...
- Certificates of deposit (CDs) ...
- Workplace retirement plans. ...
- Traditional IRAs. ...
- Roth IRAs. ...
- Stocks. ...
- Bonds.
Commonly cited rules of thumb suggest subtracting your age from 100 or 110 to determine what portion of your portfolio should be dedicated to stock investments. For example, if you're 30, these rules suggest 70% to 80% of your portfolio allocated to stocks, leaving 20% to 30% of your portfolio for bond investments.
Should I start with ETFs or stocks? ›
Stocks can be a great investment in some circ*mstances, while ETFs can be better in others. But for new investors, exchange-traded funds solve many problems, and they're an easy way to earn attractive returns — so they're a great starting point.
What do you actually own when you buy an ETF? ›
There is no transfer of ownership because investors buy a share of the fund, which owns the shares of the underlying companies. Unlike mutual funds, ETF share prices are determined throughout the day. A mutual fund trades only once a day after market close.
Are ETFs or index funds better for beginners? ›
The Bottom Line. Both index mutual funds and ETFs can provide investors with broad, diversified exposure to the stock market, making them good long-term investments suitable for most investors. ETFs may be more accessible and easier to trade for retail investors because they trade like shares of stock on exchanges.
