Why New Investors Should Consider the Vanguard S&P 500 ETF

Investing can seem overwhelming, especially for beginners facing a variety of metrics and conflicting opinions on stocks. Yet, it remains one of the most effective ways to build wealth over time.

Instead of getting caught up in selecting individual stocks, new investors may find it beneficial to start with an exchange-traded fund (ETF). ETFs provide immediate diversification, removing the stress of timing the market for specific stocks.

Choosing Vanguard for Smart Investing

Vanguard is a highly regarded option for finding worthwhile ETFs. Renowned for its index funds and low fees, Vanguard consistently offers some of the lowest expense ratios in the industry, which can significantly enhance long-term investment performance.

For beginners, simplicity is key. The Vanguard S&P 500 ETF (NYSEMKT: VOO) stands out as an excellent choice. This ETF tracks the S&P 500, which includes about 500 of the largest companies traded in the U.S., making it a solid core holding for investors of all experience levels.

The S&P 500 is market-weighted, meaning larger companies have a greater impact on the portfolio’s performance. This structure has underpinned the index’s impressive performance over time. As successful companies grow, they comprise a larger portion of the index, while failing companies diminish or are removed altogether.

This strategy differs from the common practice where investors often sell winning stocks while holding on to losers. The S&P 500 capitalizes on its winners, significantly boosting overall returns. A J.P. Morgan study revealed that 40% of stocks in the Russell 3000, representing the 3,000 largest U.S. companies, faced catastrophic losses of 70% or more between 1980 and 2020 and did not recover. Moreover, two-thirds of individual stocks underperformed the Russell 3000 during this timeframe, highlighting the advantage of broad market exposure.

The Vanguard S&P 500 ETF has shown remarkable long-term results, delivering an average annual return of 13.3% as of the end of November, with a cumulative return of 249%. For instance, a $500 investment made a decade ago in this ETF would have grown to approximately $1,744 today.

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Investing at Market Highs

Many new investors are hesitant to enter the market, especially given its recent strong performance. Despite this, research from J.P. Morgan indicates that investing in an S&P fund on days it reaches an all-time high has historically produced returns equal to or better than investing on random days. From 1988 to 2020, buying on record high days yielded a 14.6% return after one year, compared to 11.7% on other days.

Since 1950, the S&P 500 has achieved a new high approximately 7% of trading days, indicating that such occurrences are not rare. Additionally, the S&P is projected to mark its second consecutive year of returns over 20%, a feat achieved only eight times since 1950. Typically, the market averaged a 12% return the following year in those instances.

History shows that bull markets tend to last significantly longer than one might expect, with an average duration of around 5.5 years. The current bull market celebrated its two-year anniversary in October, suggesting potential for further gains if past patterns hold.

For new investors searching for suitable options, the Vanguard S&P 500 ETF is an excellent starting point. It also offers benefits for seasoned investors; I have recently added this ETF to my own portfolio.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Geoffrey Seiler holds positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends JPMorgan Chase and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.