Simple S&P Index Fund, an Intelligent Investment, Currently Available at an Affordable Price below $1,000
Exchange-traded funds (ETFs) are a modern category of investment tools that offer immediate diversification benefits for investors. There are essentially two types of ETFs: those that mimic an index and those that are actively managed. The latter often provide exposure to specific trends or sectors, such as technology or finance. Index-based ETFs can even track indices constructed to follow a trend, like the Vanguard Information Technology ETF.
Surprisingly, a basic ETF that mirrors an index, like the S&P 500, remains one of the best investments out there. The Vanguard version, titled the Vanguard S&P 500 ETF (VOO -0.40%), is a great choice if you have a thousand dollars to invest. Here's why.
The Warren Buffett approach
Investing in an ETF that mirrors the S&P 500 is a clever method to capture market gains with minimal risk. Over the last ten years, the S&P 500 has seen an average return of 13.7% annually, a consistent and robust performance.
Investing a portion of your funds in this type of investment grants you access to 500 top U.S. companies at any given time. Since an ETF tracks an index, you don't need to worry about which companies to include – that's already taken care of.
Investing sage Warren Buffett recommends that every investor invests in an ETF that mirrors the S&P 500, and Berkshire Hathaway holds two such ETFs in its equity portfolio.
Of course, I'm not suggesting shunning individual stocks altogether. With the right mindset and strategy, many individual investors have a chance to outperform the market. The statistics indicating that money managers rarely beat the market are accurate, but they overlook some crucial advantages for the individual investor. Specifically, money managers have corporate objectives to meet, which can restrict their creativity and investment choices. The individual investor, on the other hand, has flexibility to select almost any stock that aligns with their personal investing goals.
However, this approach is riskier than investing in the broader market. The ideal individual portfolio should consist of around 25 to 30 stocks, but that’s inherently limited. Investing in 500 stocks, including the top U.S. ones, gives you greater diversification while reducing your risk.
More than just the basics
Investing in an ETF that mirrors the S&P 500 might sound mundane, but its track record over several decades proves its success. For instance, the S&P 500 saw a 27% increase in 2024, just weeks away from the end of the year. This considerable return is normally not sustainable every year, but its average performance over time has been impressive.
Vanguard offers over 80 different ETFs, and its S&P 500 ETF, since its inception in September 2010, has delivered annualized returns of 14.9%. That's strong performance required minimal work from the investor.
The reasons I favor Vanguard’s ETF over alternative options are its low expense ratio and extensive track record. The expense ratio, which is the fee that eats into an investor's return, is 0.03%, compared to 0.77% for similar ETFs. The Vanguard ETF, with 14 years of experience, has credibility and reliability.
Finally, this method offers an effective way to safeguard your money in various market conditions over time. For retirees, this becomes even more advantageous, as their investing strategies might shift to embrace safer financial instruments after their portfolio grows.
This investing strategy, as advocated by Warren Buffett, involves investing in an ETF that mimics the S&P 500, such as the Vanguard S&P 500 ETF (VOO), to capture market gains with minimal risk. Over the past decade, the S&P 500 has averaged a return of 13.7% annually, demonstrating its consistency and robust performance.
If you're considering investing, a basic ETF that mirrors an index, like the S&P 500, can provide a solid foundation for your portfolio. This approach to investing your money in finance ensures diversification, as it grants you access to 500 top U.S. companies, eliminating the need to decide which companies to include.
