Investing can be easy and it can be difficult. It’s easy because, over time, the market has produced historically strong returns. In fact, stock investing is one of the best ways to create long-term wealth.
However, picking individual stocks is not easy. In fact, a JP Morgan The study found that between 1980 and 2000, two-thirds of stocks underperformed, while 42% had negative returns overall. During that time, 40% of stocks experienced catastrophic declines of 70% or more, from which they never fully recovered. Complicating matters is the fact that many of the stocks experiencing these large declines were trading at reasonable valuations based on past P/Es, and often had healthy and profitable balance sheets.
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Despite this, the market keeps marching upwards, usually 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 increase returns, I generally believe that most investors are better served by having at least one exchange-traded fund (ETF) as their core holding constant dollar cost averaging. And one of the best ways to do this is by Vanguard S&P 500 ETF (NYSEMKT: VOO).
The best ETF to own
The Vanguard S&P 500 ETF tracks S&P 500offering investors an instant portfolio of the largest 500 publicly traded companies in the US The ETF has a strong track record, generating average annual returns of 14.1% over the past five years and 15.6% over the past ten years. That’s also similar to its average 15.2% annual return since inception in September 2010.
Index ETFs and the S&P 500 work very well because they allow their winners to win and their losers to disappear. This plays directly into JP Morgan’s research and is why many professional fund managers struggle to beat the index. That’s because, instead of letting their winners run, professional investors tend to reduce their risk management positions and double down on the losers they believe in. The result is that only about 14% of actively managed funds have managed to beat the S&P 500 over the past 10 years.
So instead of trying to beat the index, one of the best things you can 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 amount every month for a long time. That will help you build wealth over time. Invest $500 a month in an ETF with a 15% annual return over a 30-year period, and you’ll have about $2.8 million when you’re done.
