How Should a Beginner Invest in Stocks? Try This ETF.

Are you thinking about getting started in the stock market? If you are, congratulations. Over time, stocks have outperformed all other major asset classes and have been the most reliable way to build wealth over the long term.

Having said that, investing in stocks can seem intimidating at first. With thousands of individual stocks in the market, how are you supposed to know which ones to buy?

Fortunately, there’s an easier way for beginners to get exposure to the stock market that can still produce tremendous long-term returns. Exchange-traded funds, or ETFs, essentially pool investors’ money together and invest in many different stocks in a single investment. And perhaps the best choice for new investors (and experienced investors, too) is the Vanguard S&P 500 ETF (VOO 0.10%).

What is the Vanguard S&P 500 ETF?

The Vanguard S&P 500 ETF is an exchange-traded fund that aims to match the performance of the S&P 500 benchmark index over time. If you aren’t familiar, the S&P 500 consists of 500 large U.S. companies and is widely considered to be the best indicator of the overall stock market’s performance.

In a nutshell, the ETF pools your money together with that of many other investors, and buys all 500 stocks in the index in the same proportions that are used in the index itself. The ETF has a bare minimum of investment fees that are reflected in the performance, so your returns over time should be extremely close to those of the S&P 500.

A “boring” investment with exciting growth potential

It’s a common misconception that the only way to build serious wealth in the stock market is with individual stocks. Many have been told that index funds like the Vanguard S&P 500 ETF are “boring” ways to invest. While I’m a big believer that you can certainly beat the market with a diverse portfolio of individual companies, it isn’t the only way to go.

Consider this. Since 1965, the S&P 500 has delivered a 10.2% annualized return for investors through the end of 2023. Let’s say that you invest $500 per month ($6,000 per year) into an index fund and achieve this rate of return. Here’s how your portfolio could grow over time:

Data source: author’s calculations.

The best investment most people can make?

Even legendary investor Warren Buffett, known as perhaps the best stock-picker of all time, has called S&P 500 index funds the best investment most Americans can make. By doing so, you’re guaranteed to match the market’s performance over time, and as we’ve seen, this has historically been a solid bet. As Buffett said in his 2016 letter to shareholders, “American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead.”

To help prove Buffett’s point, since the start of 2016, the Vanguard S&P 500 has delivered a 215% total return. That means it has more than tripled investors’ money during a period that included the 2020 COVID-19 market crash as well as the 2022 bear market.

VOO Total Return Price data by YCharts

The bottom line is that if you want to start investing in the stock market, even if you plan to build a portfolio of individual stocks over time, an index fund like the Vanguard S&P 500 ETF can be a great way to dive in.