If you're new to investing and don't have a lot of money to get started, don't fret. The best place for new investors to begin is often with exchange-traded funds (ETFs), which will give investors instant diversification through a portfolio of stock holdings. Today, these ETFs can be bought through a number of online brokers with $0 trading commission.
In my opinion, one of the best places for investors to start is with the Vanguard S&P 500 ETF (VOO 1.09%). Vanguard funds are known for their low expenses, and the Vanguard S&P 500 ETF does not disappoint in this regard. The ETF has a minuscule expense ratio of just 0.03%, which on a $200 investment comes out to just $0.06 a year.
Over time, fees can really eat into investment returns as investments get larger. For example, the difference in fees for an ETF with a 0.03% ratio and a 1% expense ratio on a $100,000 investment would be $30 a year versus $1,000 a year. These expense ratio fees are deducted daily from an ETF's net asset value (NAV), so investors don't directly see them. Instead, they affect returns. The prices of most ETFs, particularly index-based ETFs, tend to very closely match their NAVs, which is the value of their underlying portfolios.
A core holding
In addition to its low fees, I recommend the Vanguard S&P 500 ETF for a few other reasons. The ETF tracks the S&P 500 index, which is comprised of the 500 largest companies traded in the U.S. This gives investors a portfolio that generally consists of leading, well-established companies.
The S&P 500 is also a market capitalization (market cap) weighted index, which means that the larger a company is by market cap (its number of shares outstanding multiplied by its stock price), the greater a part of the index's portfolio it represents. A market-cap weighted index lets winning stocks continue to run and become larger parts of its portfolio, while letting underperforming stocks become smaller before they eventually could get replaced.
The majority of stocks are not long-term winners. In fact, according to a JP Morgan study, between 1980 and 2020, 43% of stocks had absolute negative returns, while two-thirds of stocks underperformed the Russell 3000 Index, which consists of the 3,000 largest companies traded in the U.S. However, it was the 10% of stocks that became megawinners that ultimately drove the major market indexes, such as the S&P 500, higher.
The benefits of investing in index ETFs can be seen in the long-term returns of the Vanguard S&P 500 ETF. The fund has generated a total average annual return of nearly 13.1% over the past 10 years and 14.6% since inception, which goes back to September 2010. The ETF was particularly strong last year with a total return of 25%. It's the second straight year that the ETF has returned 25% or more, with it producing a 26.3% return in 2023.
Now after two very strong years, investors may be wondering if this is a still a good time to get into the market. Historically, the answer is yes. According to another JP Morgan study, the S&P 500 has actually hit an all-time high on about 7% of all trading days since 1950. And on about a third of the days on which it has hit a new high, the S&P 500 never saw a lower entry point. Meanwhile, the investment bank has noted that since 1988, if you only invested on days the S&P 500 hit all-time highs, you're more likely to outperform than investing on any other random day.
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Consistency is key
Investing $200 and just stopping there will not make you wealthy. However, it can be the start of building long-term wealth. The key is to consistently put aside money and invest at least a little each month.
This can be done through a dollar-cost averaging strategy, where you invest each month on the same day, regardless of whether the market is performing well or has slumped. The market will move up and down, but over the long term, the direction has always been up.
At an average annual return of 12%, if you were to start with $200 and invest $100 each month, at the end of 20 years, your investment could be worth more than $100,000. Invest $200 a month, and that figure would double. Note that this is for illustrative purposes. Depending on market movements and when you invest, actual returns will be different, but it gives you a good sense of the type of long-term return you can expect.
