You’ve probably heard people say, “Nothing is forever.” This applies to almost all aspects of life. I think it’s almost accurate in investing too, but not quite. If there is such a thing as a timeless investment, it is probably an index fund. After all, anything can happen to any company, but indexes represent groups of stocks chosen as a sample of the broader market.
A potentially timeless index fund that you can buy and hold forever, it is Vanguard S&P 500 ETF(NYSEMKT: VOO). This exchange-traded fund (ETF) is my favorite index fund to gain exposure to the S&P500 index, perhaps the most special market index in the world.
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Here are five reasons why the Vanguard S&P 500 ETF should be a permanent part of your investment portfolio.
Diversification is one of the most important parts of responsible investing. Has anyone ever told you not to put all your eggs in one basket?
The same idea applies to an index fund. You can do all your homework, but sometimes things go wrong at companies that no one can predict. By spreading your money across several investments, you ensure that one mistake or bad breakthrough doesn’t have a catastrophic impact on your portfolio.
The Vanguard S&P 500 ETF tracks the S&P 500, an index of 500 of America’s leading companies. In other words, one share of the index technically means you own a small piece of hundreds of individual companies. Buying an S&P 500 index fund like this is the easiest way to diversify your portfolio.
If there’s any index you want to follow, it’s the S&P 500. Since expanding to 500 companies in 1957, this index has created staggering wealth for investors:
^SPX data by YCharts.
The methodology is simple but effective. A committee selects from leading American companies that meet specific criteria.
The index is weighted by market capitalization, so a company that is flourishing and growing gets a higher weighting. In doing so, it essentially leans towards winning shares. If a company does not perform, it can be dropped from the index and replaced.
It has worked so well that most professional investors underperform the S&P 500 over the long term.
The nice thing about the Vanguard S&P 500 ETF is that it costs almost nothing to own. Most exchange-traded funds charge an expense ratio, which is a fee for the fund’s managers. The Vanguard S&P 500 ETF’s expense ratio is just 0.03%. This means that you pay €0.30 annually for every €1,000 you invest.
The low costs of this fund are a sneaky good feature. Costs can vary, but in general the more actively a fund is managed, the higher the costs. And while in life you often get what you pay for, that is not always the case with mutual funds. High costs do not guarantee high returns (again, most professionals lag behind the S&P 500).
Ironically, high fees can do more harm than good over time because they add up. Please note that the costs are based on your total amount invested, not on your profit.
You can put your money in Vanguard’s funds with confidence. The company’s history dates back to the 1970s. Today it has more than $9 trillion in assets under management. It is the world’s largest mutual fund company and the second largest ETF company behind it BlackRock.
Importantly, those who invest in Vanguard funds own the company, not individual shareholders in the company itself. Because the same people who put their money into Vanguard’s funds own the company, this helps align interests and reduce the potential for conflict. The size and structure of the company should give investors the confidence to buy and hold.
Data per YCharts.
Finally, the S&P 500 offers a little bit of everything, making the Vanguard S&P 500 ETF suitable for almost any portfolio. You’ve already seen the staggering appreciation of the index over the years. Do you like dividends? The index pays one that currently yields 1.3%. Overall, the S&P 500 has historically generated a total annualized return of about 8%.
If you invest in the S&P 500 and historical trends hold, your money will double approximately every nine years. So $10,000 turns into $160,000 over 36 years, underscoring the impact compounding can have if given enough time to work its magic.
Whether you’re young and just starting out or a retiree trying to stretch your savings, the Vanguard S&P 500 ETF deserves at least a spot in your portfolio. It could be, dollar for dollar, the best long-term investment you can make.
Consider the following before buying shares in Vanguard S&P 500 ETF:
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
5 Reasons to Buy and Hold This Index Fund for Life was originally published by The Motley Fool
