2 Vanguard ETFs to Buy With $1,000 and Hold Forever

Key Points

• A tiny 0.1% daily gain compounds to a 44% annual return, while a 0.1% daily loss leaves you with just 69% of your starting value after one year.

• Volatility creates a mathematical headwind that slowly erodes returns, even when gains and losses seem to balance out evenly.

• While ARK Innovation can work as a small portfolio holding for excitement, Vanguard's stable index funds are better suited as core long-term investments.

• 10 stocks we like better than Vanguard S&P 500 ETF ›

You know all the old clichés. Unpredictable hares often lose to trudging tortoises. Slow and steady wins the race. Patience is a virtue. Investing is a marathon, not a sprint.

I can hear your eye-rolls all the way from Tampa. But you know, these sayings are timeless because they're true -- especially on Wall Street.

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Let me show you why I'd rather own slow Vanguard funds like the Vanguard S&P 500 ETF (NYSEMKT: VOO) or Vanguard Total Stock Market ETF (NYSEMKT: VTI) than the wilder ARK Innovation ETF (NYSEMKT: ARKK) in the long run.

I promise I won't bore you. At the end of this fun little math adventure, you'll probably agree that the Vanguard funds are great investments to buy with $1,000 and hold for decades.

The magic of tiny daily gains

First, let's play around with some pure mathematics.

Imagine something getting 0.1% better every day. Maybe it's your favorite stock going up by that much each day, or your biceps growing that much stronger, or a podcast getting just a little more interesting. In the real world, this never happens. For the purposes of my thought experiment, the unshakable boost continues for a full year -- 365 days. Stocks don't trade on weekends and holidays but again, I'm not shooting for realism here, just a basic math example.

By the end of that year, this thing has gained 44%. That's how much my unrealistic stock would be up, how much more weight you could lift, or how excellent that podcast is getting. And it only took an easy-to-miss gain of 0.1% per day. Keep it up for two years and you will gain 107%. A full decade of tiny but constant steps in the right direction? That would be a mind-blowing 38-bagger -- a 3,740% improvement.

What if the thing was getting steadily worse instead? A 0.1% decline per day can't hurt too much in the long run. You still end each day with 99.9% of the value/strength/enjoyment you had the day before.

I have bad news, though. By the end of one year, your thing will grow 30.6% worse, leaving you with just 69.4% of the original measurement. I suggest that you grab the smelling salt before contemplating longer time spans. After two years, you'd be stuck with 48.2% of the original investment, or muscle, or podcast quality. Ten years of daily 0.1% drops leaves just 2.6% of the starting value.

The hidden cost of roller coaster stocks

A long streak of small increases is good, a long streak of small drops is bad. Film at 11. Big news. Yawn.

But what about consistent volatility?

Well, let's look at an imaginary but rather thrilling stock (or other thing) that gains 10% one day, then falls 10% the next day, and so on. Again, this is completely unrealistic because nothing actually makes these moves for a long time or with precision. It's still a helpful little math experiment, though.

What you get here is a smaller number of 1% drops.

Start with $100, you get $110 after the first jump. The next day, you lose $11 (10% of $110!), landing at $99. That's a 1% decrease in two days.

Ergo, consistent volatility works out to a modestly negative trend. Every situation is different, of course. Real-world events and economic trends make a bigger difference than the theoretical math effects. Still, it's a real thing. Volatility may feel exciting sometimes, but there's a modestly negative price pressure from frequent price swings.

Boring Vanguard vs. exciting ARK: The numbers don't lie

That brings me back to the two Vanguard funds and Cathie Wood's innovation-focused flagship, which I mentioned earlier.

Any way you slice it, the Vanguard funds are more stable than the ARK Innovation ETF. That's by design. The Total Stock Market ETF reflects the entire U.S. stock market, holding 3,524 stocks at the moment. The S&P 500 ETF naturally tracks its namesake, the S&P 500 (SNPINDEX: ^GSPC) market index. That's currently 504 stocks, as a handful of companies have more than one class of public stock. You can argue that their market cap weighting gives too much influence to trillion-dollar tech stocks, but it's still hard to beat their stability. Both Vanguard ETFs carry a beta value of 1.0, meaning that they tend to perform exactly as well (or poorly) as the S&P 500.

The ARK Innovation ETF is a very different beast. It's an actively managed fund, seeking to invest in "disruptive innovation" with a much tighter portfolio. Most of the time, it will own between 35 and 55 different stocks. This management method holds a greater promise of potential growth, but it's also riskier than simple market trackers. With a beta value of 2.0, it tends to double the positive or negative S&P 500 moves on a daily basis.

Image source: Getty Images.

At times, the ARK Innovation fund will run far ahead of the broad market ETFs. But generally speaking, you'll probably sleep better with the Vanguard Total Market or S&P 500 ETFs in your portfolio. They have posted total returns of 116% and 109%, respectively, over the last 5 years. ARK Innovation lost 3% over the same period, hamstrung by the inflation crisis of 2022 -- and the mathematical quirks of its high volatility provided another tiny headwind.

Long story short, the ARK Innovation fund from Ark Invest can be a fun and potentially profitable minor holding in a diversified portfolio, but the Vanguard funds are the stuff you build entire investment strategies around. Their rock-solid stability doesn't play math tricks on investors over time.

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Anders Bylund has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF and Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.