Investing the minimal sum of $200 in the most optimal Vanguard Index ETF at present moment
If you're new to investing and don't have a lot of cash to start with, don't sweat it. A fantastic starting point for novice investors is often exchange-traded funds (ETFs), which provide instant diversification through a collection of stock holdings. Lucky for us, these ETFs can now be purchased through several online brokers offering $0 trading commissions.
In my humble opinion, the best place for beginners to begin is with the Vanguard S&P 500 ETF (VOO 0.96%). Vanguard funds are well-known for their low expenses, and the Vanguard S&P 500 ETF doesn't disappoint in this regard. The ETF boasts a minuscule expense ratio of just 0.03%, which translates to $0.06 a year on a $200 investment.
Over time, fees can significantly impact investment returns, especially as investments grow. For instance, the difference in fees between an ETF with a 0.03% ratio and one with a 1% expense ratio on a $100,000 investment would amount to $30 a year versus $1,000 a year. Despite not directly seeing these fees, they do affect returns.
A Core Holding
Besides its low fees, I recommend the Vanguard S&P 500 ETF for a few more reasons. The ETF tracks the S&P 500 index, which encompasses the 500 largest companies traded in the U.S. This means the investor will have a portfolio primarily made up of leading, well-established companies.
The S&P 500 is also a market capitalization (market cap) weighted index. This indicates that the larger a company is by market cap (number of shares outstanding multiplied by stock price), the more significant a part of the index's portfolio it represents. A market-cap weighted index allows winning stocks to continue growing and become increasingly prominent in the portfolio, while underperforming stocks shrink and may eventually be replaced.
Using data from a JP Morgan study, it's been found that between 1980 and 2020, 43% of stocks demonstrated negative returns, and two-thirds of stocks underperformed the Russell 3000 Index, which includes the 3,000 largest companies traded in the U.S. However, it was the 10% of stocks that became megawinners that ultimately drove major market indexes, such as the S&P 500, higher.
The benefits of investing in index ETFs can be seen in the long-term returns of the Vanguard S&P 500 ETF. The fund has generated a total average annual return of nearly 13.1% over the past 10 years and 14.6% since its inception in September 2010. The ETF was particularly strong last year, producing a total return of 25%. It has returned 25% or more for two consecutive years, with a 26.3% return in 2023.
Now, after two impressive years, investors may be wondering if it's still a good time to dive into the market. Historically, the answer has been yes. According to the same JP Morgan study, the S&P 500 has hit an all-time high on about 7% of all trading days since 1950. Furthermore, on approximately one-third of the days when the S&P 500 has achieved a new high, the entry point never declined. Since 1988, if you had invested only on days the S&P 500 hit all-time highs, you were more likely to outperform than investing on any other random day.
The Power of Consistency
Investing $200 and stopping there won't make you wealthy, but it can be the first step in creating long-term wealth. The key is to consistently save and invest a little each month. This can be accomplished through a dollar-cost averaging strategy, where you invest each month on the same day, regardless of the market's performance.
The market will inevitably rise and fall, but throughout history, it has gone up. If you were to start with $200 and invest $100 each month, at the end of 20 years, your investment could potentially be worth more than $100,000. If you invested $200 a month, your investment could exceed a quarter of a million dollars. Keep in mind that these figures are only for illustrative purposes, and actual returns will vary based on market movements and investment timing.
Enrichment Data:
Investing in the Vanguard S&P 500 ETF (VOO) has numerous long-term benefits and performance characteristics. Here are the key points:
- Historical Returns:
- Compound Annual Return: Over the past 30 years, the VOO has achieved a compound annual return of approximately 10.86%.
- Long-Term Performance: Since its inception in September 2010, the VOO has generated a total average annual return of nearly 14.6%.
- Risk Management:
- Diversification: The ETF tracks the S&P 500 index, which includes 500 large-cap U.S. stocks, reducing the impact of individual stock performance.
- Standard Deviation: The standard deviation of the VOO over the past 30 years is 15.12%, indicating moderate volatility.
- Dividend Yield:
- The VOO has provided a 1.24% dividend yield in 2024.
- Historical Performance Trends:
- The ETF has shown impressive performance in recent years, with a total return of 25% in both 2023 and 2024.
- Investment Strategy:
- Consistent investing is crucial in building long-term wealth. A dollar-cost averaging strategy can help achieve this.
- Expense Ratio:
- The VOO boasts a minuscule expense ratio of 0.03%, which is extremely beneficial for long-term investors.
To maximize your returns when investing in finance, consider opting for low-cost options like the Vanguard S&P 500 ETF. Its expense ratio of 0.03% is significantly lower than many other funds, saving you money in the long run.
To effectively build wealth through investing, it's essential to practice disciplined saving and investing consistently over time, following a strategy like dollar-cost averaging.
