Is the Vanguard S&P 500 ETF a maker of millions?

It’s possible, and it’s easier than you think.

Investing can be as complex or simple as you want it to be. Fortunately, keeping it simple can be a reliable way to make big money in the stock market. Exchange traded funds (ETF) is like pressing the “easy button” on investing. These funds hold large portfolios of individual stocks but trade under a single ticker symbol, allowing investors to easily gain exposure to dozens or hundreds of stocks.

Which ETF is best? This is a difficult question, but the Vanguard S&P 500 ETF (VOO 0.27%) has a strong argument to be at the top of the list. This unique ticker can help you create life-changing wealth if you give it enough time.

What is the S&P 500?

The U.S. stock market includes thousands of publicly traded companies. Yet when people talk about the “market” on television or online, they are usually referring to the S&P500. It is an index of 500 of the largest and most valuable publicly traded companies in America. Although there are thousands of public companies that are not part of the index, these 500 giants together represent about 80% of the total value of the U.S. stock market.

A committee governs the S&P 500 and determines which companies should be included. The committee occasionally removes companies if they fail and their values ​​plummet, replacing them with promising companies. The index’s annual churn rate is in the low single digits, so new companies are gradually permeating the index.

There is no doubt about its results. For those who invest in all its components, the S&P 500 has proven to be a remarkable wealth-creating machine over time:

^SPXTR data by Y charts.

The index, like the market itself, can be volatile at times. It can increase by 20% one year and fall by 15% the following year. But over the long term, the S&P 500 has historically appreciated at a average annualized rate of 10%. This means that an investment would double on average every seven years. THE Vanguard S&P 500 ETF is designed to mimic index composition and investment returns.

Why is it so effective for creating wealth?

The effectiveness of the S&P 500 comes down to two constant characteristics:

First, the S&P 500 only includes companies based in the United States. The United States has been among the world’s best-performing economies for many years, meaning domestic businesses are growing and performing well. Consolidating the best of this group into a single index almost guarantees investors benefit from the best of the U.S. economy.

Second, many S&P 500 companies pay dividends. Dividends are good for several reasons. These are direct investment returns paid regularly in cash to investors, and they have had a significant impact on the index’s long-term total returns, particularly for shareholders who reinvest them automatically. Remove reinvested dividends from the equation and you’d miss out on about half of the S&P 500’s total returns since the late 1980s.

^SPX data by Y Charts

Additionally, dividends are cash expenses for a company. A company cannot continually pay dividends if it is not profitable enough to support these expenses. Dividend stocks may get a bad reputation as “boring” investments, but their long-term contributions to a portfolio are anything but.

Here’s how to become a millionaire with the Vanguard S&P 500 ETF

Do you want to invest in the S&P 500? Buy shares of the Vanguard S&P 500 ETF. It’s so simple.

If you regularly invest a reasonable amount over the long term, your ETF holdings could make you a millionaire, assuming the S&P 500 performs close to its historical averages (compound return of about 10% on average, without taking into account inflation). Depending on how much you invest, here’s how long it will take you to reach millionaire status:

Starting amount Monthly contribution Time to reach $1 million

As you can see, it’s all about numbers. There is always time to invest.

Starting earlier means you won’t need to contribute as much each month. That’s why it’s so smart to start investing when you’re young and time is on your side. However, it is never too late to start. This means you’ll have to make a bigger financial effort to reach that seven-figure goal, but if you’re older and later in your career, you’re probably also making more money than when you started.

Whatever it is, formulate a plan and take action. No investment is a sure thing, but investing in the Vanguard S&P 500 ETF might be as close as you can get if you buy and hold, add funds to your position regularly, and give it time.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

Source