How should a beginner invest in stocks? Start with this index fund.
We know investing is something most people should do, but far fewer people do it. Whenever someone tells me they know they should invest and asks why they don’t, the two most common answers are “I don’t have enough money” and “I don’t know what to do.”
While the former can be a valid excuse (although the ability to purchase fractional shares has made it easier to invest with smaller amounts of initial cash), the latter is usually because someone misunderstood what investing involved. Investing doesn’t have to be difficult, and it shouldn’t be.
In popular culture, we think that being a successful investor means reading financial statements for hours or staying focused on CNBC and other investment news outlets. But that couldn’t be further from the truth. For those who are new to investing S&P 500 Index funds can be a good starting point. Here’s why:
What is the S&P 500 Index?
An index is a collection of stocks grouped together based on predetermined criteria and tracked as one. Indices can be industry focused ( MSCI World Financial index), stock exchange-oriented (Nasdaq Composite), geographic center (Mexican IPC index) or market cap-driven (S&P 500).
The S&P 500 Index tracks the 500 largest publicly traded U.S. companies, making it a great way to gain exposure to the broader U.S. economy. When people refer to “the market” and its performance, they are usually talking about the S&P 500. The S&P 500 is considered a benchmark that reflects the health and trends of the U.S. stock market.
The S&P 500 checks a lot of boxes at once.
Various financial institutions form their own S&P 500 funds to reflect the index. Some of these are mutual funds. When an investor wants to buy or sell shares of a mutual fund, all trades are executed once a day after the end of the session based on the price at which the stock closed. The other is an exchange traded fund (ETF). These stocks trade on the stock market throughout the day like stocks of individual companies, allowing investors to make moves at any time.
All S&P 500 funds are required to hold the same set of assets, so there isn’t much practical difference between the various S&P 500 funds or ETFs, but some popular options include: Vanguard S&P 500 ETF (flight 0.61%). For a novice investor (or even an experienced investor), these three factors can be versatility, simplicity, and low cost. The annual management fee is only 0.03%.
The Vanguard S&P 500 ETF contains top companies from all major sectors.
| sector | asset ratio |
|---|---|
| telecommunication services | 8.6% |
| consumer discretionary | 10.7% |
| consumer goods | 6.3% |
| energy | 4.1% |
| finance | 12.9% |
| health care | 12.7% |
| industrial goods | 8.3% |
| information technology | 29.1% |
| ingredient | 2.5% |
| real estate | 2.4% |
| utility | 2.4% |
Data source: Vanguard 500 ETF holdings data. Data as of November 30, 2023.
Owning 500 or so stocks across a wide variety of sectors ensures that the success (or failure) of your portfolio does not depend too much on too few sectors or companies. Sectors like energy and consumer discretionary can be cyclical, so it’s best to diversify your investments to achieve balance.
The amount of land covered by the index simplifies the process for investors. You don’t have to worry about reading a company’s financial statements, checking quarterly earnings reports, or looking too much into individual stock trends. The only concern is to remain consistent and maintain a long-term perspective.
There are long-term consequences.
Without results, the diversification and simplicity of an ETF aren’t that important, but that’s not the case with the Vanguard S&P 500 ETF. The Vanguard S&P 500 ETF has delivered an average annual return of over 13% since September 9, 2010. first.
VOO total return level data from YCharts.
So $1,000 initially invested in the ETF would be worth nearly $5,500 today. Past results do not guarantee future performance, but they can be a good indicator of potential. The S&P 500 has shown that your money can grow significantly over the long term. For perspective, investing $500 a month for 25 years would result in a total of over $590,000 and an average annual return of 10%.
When you start investing, you want investments that combine reliability and results, and that’s exactly what the Vanguard S&P 500 ETF can deliver.
