I know; my headline makes a big promise. The “ultimate guide” to anything can be several books long, offering deep dives into every strategy and idea imaginable.
But when it comes to building sustainable wealth in the stock market, I work with a very short list of strategies that have been proven to produce strong results over time. You don’t have to be the first to find the next big thing, and you don’t have to take out a second mortgage to finance your stock-buying plans.
It’s all about time, patience and unwavering investing habits. This is even more true when it comes to rock-solid assets like the Vanguard S&P 500 ETF(NYSEMKT: VOO). In a perfect world, you can set up an automatic dollar-cost averaging plan, forget about it for decades, and reap the rewards when it’s time to collect the required minimum distributions (RMDs) to support your golden years.
Let me explain.
VOO Total Return Level data according to YCharts
Making consistent investments over time serves a number of important purposes.
The main idea is to put more of your money to work over time. I don’t know your personal budget, but let’s say you can afford to send $100 to your stock broker every month. That is $12,000 per decade, but is distributed in small portions to make it easier to meet budget burdens.
If you let that money generate stock returns over the long term, your wealth will grow very consistently. The S&P500(SNPINDEX: ^GSPC) The market-tracking index has delivered an average total return (including reinvested dividend payments) of 13.7% per year since 1995.
$100 invested in an S&P 500 index fund would have been worth about $362 at the time. Add another $358 for the $100 you invested the next month, and… you get it. A large number of small investments can build enormous value over time.
I can’t estimate the future accurately, to double digits, but I can look back at previous long-term periods to predict what might happen next. For example, investing $100 per month in the Vanguard S&P 500 ETF over the past ten years amounts to a total investment of $12,000. But the resulting position in the Vanguard fund would now be worth $26,540. That’s a market-based gain of 121%, and these gains tend to compound over time.
So there is real value in making many small investments over a long period of time. Believe it or not, that’s exactly how investing geniuses like Warren Buffett built their fortunes, even though they may have started with a bigger budget.
The next trick is to take emotion out of the investment process. You shouldn’t try to time the market, and you shouldn’t look for the biggest winners in a given economy. By making the same investment every month, regardless of the stock or fund price and other variables, you get more shares when they are cheap, and fewer when they are expensive. This effect softens the impact of price increases and decreases by adding consistent value to your portfolio with every transaction.
It’s even better if you automate this process and take the element of human emotion out of the stock purchasing process. You don’t even have to remember to hit the “buy” button every month when your 401(k) investment is automatically deducted from your monthly paycheck. If your employer doesn’t offer that retirement option, most stock brokers can take similar action.
Charles Schwab offers the Schwab Personalized Indexing service, which automates the process of withdrawing money from your bank account each month and investing it in something like the Vanguard S&P 500 ETF.
It is a two-part process Robinhood. First, you set up a monthly money transfer to fund the investment account, and then you can make a recurring investment to purchase some Vanguard fund shares each month.
E*Trade via Morgan Stanley has a similar two-step approach, but also offers an auto-investing service that lets you select your fund (not stocks!), investment amount, time between trades, and funding account in one package.
These are the brokers I have access to. Other platforms may use different names, but they should all offer a combination of automated money transfers and zero-click investment plans. And that’s the best way to manage a dollar cost averaging system.
Why am I using the Vanguard S&P 500 ETF in these examples? Because it’s really hard to go wrong with some S&P 500 tracker like the SPDR S&P 500 Trust(NYSEMKT: SPY) or iShares Core S&P 500 ETF(NYSEMKT: IVV) funds. These are the largest and most popular ETFs (Exchange Traded Funds) on the market, and they all reflect the diverse S&P 500 index with minimal management fees. I prefer the Vanguard version, mostly out of respect for Vanguard founder Jack Bogle, but the other two are equally good choices.
The S&P 500 trackers won’t beat the market because they simply reflect Wall Street average returns, but that’s good enough for most people. And you can try other popular funds from well-known fund managers, with similar results. As long as you stick with respectable names, low costs, and large baskets of high-quality stocks, you’ll be fine. Again, the most important thing is to put your money to work, and many ETFs will do a great job over the long term.
So there you have it. There are no big secrets here, just a handful of very simple concepts that anyone can use. There may be bumps and potholes in the road ahead, but the market is quite resilient and on an upward trend over the long term. Keep it simple, make it automatic, forget about your investment plan for years and years and maybe thank me with a fruit basket in 30 or 40 years. Exponential growth works wonders in the long term.
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Charles Schwab is an advertising partner of Motley Fool Money. Anders Bylund holds positions in Vanguard S&P 500 ETF. The Motley Fool holds and recommends Vanguard S&P 500 ETF. The Motley Fool recommends Charles Schwab and recommends the following options: Short December 2024 $67.50 calls on Charles Schwab. The Motley Fool has a disclosure policy.
The Ultimate Guide to Investing in the Vanguard S&P 500 ETF for Maximum Return was originally published by The Motley Fool
