I know; my headline makes a big promise. The "ultimate guide" to anything could be several books in length, offering deep dives into every thinkable strategy and idea.
But when it comes to building durable wealth in the stock market, I'm working with a really short list of strategies proven to deliver strong results over time. You don't have to find "the next big thing" before anybody else, and you don't have to take out a second mortgage to finance your stock-buying plans.
It's all about time, patience, and unshakable investing habits. That's only more true when dealing with rock-solid assets like the Vanguard S&P 500 ETF (VOO -1.04%). In a perfect world, you can set up an automatic dollar-cost averaging plan, forget it for several decades, and reap the rewards when it's time to collect the required minimum distributions (RMDs) to support your golden years.
Let me explain.
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The benefits of consistent investing
Making consistent investments over time serves a couple of important purposes.
- The main idea is to put more of your money to work over time. I don't know your personal budget, but let's imagine you could afford to send $100 to your stockbroker every month. That's $12,000 per decade but doled out in small portions to make the budgeting burden easier to carry.
- Letting that cash generate stock returns over the long haul will grow your wealth very consistently. The S&P 500 (^GSPC -1.11%) market-tracking index has delivered an average total return -- including reinvested dividend payouts -- of 13.7% per year since 1995.
- $100 invested in an S&P 500 index fund back then would be worth about $362 today. Add another $358 for the $100 you invested the next month, and...you get the drift. A large number of small investments can build enormous value over time.
- I can't divine the future with precision down to the double-digit decimals, but I can look back to earlier long-term periods to preview what might happen next. Investing $100 per month in the Vanguard S&P 500 ETF over the last 10 years, for instance, works out to a total investment of $12,000. But the resulting Vanguard fund position would be worth $26,540 by now. That's a market-based gain of 121%, and these profits tend to grow larger over time.
So, there is real value in making many small investments over a long time. Believe it or not, that's exactly how investing geniuses like Warren Buffett built their fortunes, though they may have started with a larger budget.
Automating your investments
The next trick is to take emotion out of the investing process. You shouldn't try to time the market, and you don't have to seek the biggest winners in any particular economy. By making the same investment every month, regardless of the stock or fund price and other variables, you get more shares when they're cheap and fewer when they're expensive. This effect smooths out the impact of price jumps and value drops by adding a consistent value to your portfolio in every transaction.
It's even better if you automate this process, taking the element of human emotion out of the stock-buying process. You don't even have to remember to hit the "buy" button every month if your 401(k) investment is an automatic deduction from your monthly paycheck. If your employer doesn't offer that retirement option, most stock brokerages can perform a similar action.
- Charles Schwab offers the Schwab Personalized Indexing service, which automates the process of requesting money from your bank account and investing it in something like the Vanguard S&P 500 ETF every month.
- It's a two-part process with Robinhood. First, you set up a monthly money transfer to fund the brokerage account, and then you can create a recurring investment to buy some Vanguard fund shares every month.
- E*Trade by Morgan Stanley has a similar two-step approach, but it also provides an "automatic investing" service that lets you select your fund (no stocks!), investing amount, time between transactions, and funding account in a single package.
These are the brokers I have access to. Other platforms may use different names, but they should all offer some combination of automated fund transfers and zero-click investment plans. And that's the best way to manage a dollar-cost averaging system.
Why the Vanguard S&P 500 ETF works so well
Why am I using the Vanguard S&P 500 ETF in these examples? Because it's really hard to go wrong with that one or another S&P 500 tracker, such as the SPDR S&P 500 Trust (NYSEMKT: SPY) or iShares Core S&P 500 ETF (NYSEMKT: IVV) funds. These are the largest and most popular exchange-traded funds (ETFs) on the market, and they all mirror the diverse S&P 500 index with minimal management fees. I prefer the Vanguard version mostly out of respect for Vanguard founder Jack Bogle, but the other two are equally fine choices.
The S&P 500 trackers won't beat the market since they simply reflect Wall Street's average returns -- but that's good enough for most people. And you can try other popular funds from household-name fund managers, with similar results. As long as you stick with respectable names, low fees, and large baskets of high-quality stocks, you'll do fine. Again, the most important part is to put your cash to work, and many ETFs will do a great job in the long haul.
Simplicity pays off over the years
So, there you have it. There are no big secrets here, just a handful of very simple concepts anyone can use. There may be bumps and potholes in the road ahead, but the market is quite resilient and trends upward in the long run. Keep it simple, make it automatic, forget all about your investment plan for years and years, and maybe thank me with a fruit basket in 30 or 40 years. Exponential growth really works wonders over a long time.
