It's hard to argue that the stock market isn't a great wealth-building tool for average people long-term. Compounding is like magic, benefiting those who can think in decades, not days.
To add to this, a fantastic investment product to consider is an exchange-traded fund (ETF), particularly one that provides low-cost access to a diversified pool of companies. There's one spectacular ETF that highlights just how powerful investing in the stock market can be. Putting $100 in on a monthly basis could be worth $25,000 a decade from now.
Here's what investors need to know that could seriously improve their financial lives.
Impressive track record
Investors are familiar with the S&P 500 (SNPINDEX: ^GSPC). This is a broad index of 500 leading businesses in the U.S. It's perhaps the most closely watched benchmark of how the overall stock market is doing.
To gain access to this, investors should consider the Vanguard S&P 500 ETF (NYSEMKT: VOO). It's offered by Vanguard, a reputable firm that's been around for five decades. And there are a whopping $1.3 trillion in assets just in this one ETF, showcasing just how much capital is entrusted here.
In the past decade, the Vanguard S&P 500 ETF has generated a total return, which includes dividends, of 208% (as of April 15). This is a wonderful outcome.
For our purposes, let's assume that performance continues over the next 10 years. If you adopt a dollar-cost average (DCA) strategy, adding $100 per month to this ETF for a total of 120 investments, you'd be sitting on a balance of $24,400 in 2035. It's hard to argue with that kind of result.
A DCA strategy is a smart use of capital for two primary reasons. For starters, it allows investors to take advantage of multiple price points, eliminating the need to time the market. All you must do is focus on investing the same amount each month, regardless of what the market is doing.
Secondly, dollar-cost averaging forces investors to build a habit of consistent saving and investing. This is more of a behavioral aspect, but it's certainly important to long-term financial success.
To be clear, though, it's not guaranteed that the S&P 500 will produce the same return over the next 10 years that it did in the past decade. Numerous factors can have a profound impact, like economic growth and changes in other macro variables, technological developments, and geopolitical events.
Still a smart investment
It's impossible to predict what forward returns will be. Nonetheless, investing in the Vanguard S&P 500 ETF is still a very smart choice. Even the great Warren Buffett, who is a legendary stock picker, recommends that the best course of action for most people is to buy a low-cost fund like this.
And this ETF certainly has a low cost. The expense ratio is just 0.03%. To put that in perspective, for every $1,000 invested, only $0.30 is paid in fees annually. This supports Vanguard's operations to continue offering their products to customers.
Investors also don't need to possess the necessary skills, whether that's financial modeling or industry expertise, to pick individual companies to buy. By avoiding this altogether, this frees up so much time to focus on other things more important to you.
Simplicity is often the best way to go. Investing $100 monthly into the Vanguard S&P 500 ETF could reap huge rewards by 2035. It takes some discipline and patience, but the outcome will be worth it.
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Neil Patel has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
