April 25, 2024

What’s the Best Way to Invest in Stocks Without Any Experience? Start With This Index Fund

Investing offers a great way to directly benefit from America’s economy. But getting started in investing can be intimidating. There are thousands of stocks to choose from and all sorts of information (both good and bad) pulling you in multiple directions. It’s a situation ripe for developing analysis paralysis.

A potential cure for this paralysis offers a simple way to invest and a great way to get started for those without experience. All you need is a willingness to take action and the patience and fortitude to endure the inevitable volatility of owning stocks.

The solution is buying shares in an exchange-traded fund (ETF) like the Vanguard S&P 500 Index Fund ETF (VOO 0.05%). Below, I’ll explain what’s so great about this particular ETF and why it should be among the first stocks you look at as you build your portfolio.

Why index funds rule

Buying stock in individual companies can be remarkably rewarding, even life-changing — if you pick right. However, there is more risk in choosing individual companies, and it requires more time on the investor’s part to learn about the business and monitor how it progresses over time. You want to monitor the companies you invest in to ensure you are buying and selling shares when it is most opportune for you. This can be tricky for investors who are just starting.

By comparison, investing in index funds can be like hitting the “easy” button. Index funds own groups of stocks or bonds and trade under a single ticker (usually through an ETF). They’re designed to mimic the performance of an index like the S&P 500, the Nasdaq Composite, or the Dow Jones Industrial Average.

^SPX Chart

^SPX data by YCharts.

What do you notice in the above chart? The major indexes have hit periods of turbulence but have always recovered and increased. In other words, following these indexes will likely make you money over time. Index funds are a low-stress tool to hop on that growth wagon.

Reasons to pick the Vanguard S&P 500 Index Fund ETF

There are many index and exchange-traded funds, so why consider this one? It boils down to a few simple (but fantastic) traits that make the Vanguard S&P 500 Index Fund stand out.

First, the fund mimics arguably the best index out there, the S&P 500. The S&P 500 is a committee-managed group of stocks representing 500 of America’s most prominent companies. In other words, it’s an elite club where only exceptional companies reside. If you’re trying to find the best stocks to invest in, you’ll find many of them here.

The average yearly return of the S&P 500 is 10.04% over the last 30 years, as of the end of December 2023 (assuming dividends are reinvested). Don’t expect that return every year (the index fell 18% in 2022 for instance and was up 24% in 2023). And past performance is no guarantee of future performance, but that long-term average is just that.

Second, investors pay little to own this Vanguard S&P 500 index fund. All funds charge a fee to compensate the fund managers for maintaining the fund. This is called the expense ratio. Be careful how much you pay because a high fee can undermine your investment returns over time. Fortunately, the Vanguard S&P 500 index fund charges a meager fee, just 0.03%. On a $1,000 investment, that’s 30 cents a year in fees.

Lastly, Vanguard created and operates the fund. Vanguard is the world’s largest mutual fund company and second-largest ETF company. The company doesn’t have shareholders; the fund-holders own Vanguard’s equity. It’s a bedrock in the investing community, representing somewhere trustworthy to invest your money.

How you can get started building wealth

This article’s title stipulates you don’t need experience to succeed, so you can rest assured that getting started is simple. All you need is an investment account to initiate the transaction. The Vanguard S&P 500 Index Fund trades under the stock ticker VOO.

Don’t jump in with two feet by investing all your funds simultaneously. Remember, even the S&P 500 goes through bouts of volatility, so the wise approach is to buy a little at a time, slowly building your investment. This is called dollar-cost averaging. This approach will ensure you don’t buy at a high price only to see the market take a wrong turn, leaving you underwater on your whole investment.

Slowly buying shares of the Vanguard S&P 500 Index Fund and sitting on them long-term is arguably the surest path to making money in the stock market.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

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