This Underrated Investment Has Built More Wealth Than Most Investors Realize -- and History Says Now Is a Smart Time to Buy
For beginners, investing in the stock market seems very intimidating. This activity can easily be made way more complicated than it needs to be. However, even the simplest strategies can yield tremendous results in the long term.
It's time to learn about an underrated investment that has built more wealth than you might realize. And history says that now is a smart time to buy.
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During the past decade, the S&P 500 index has generated a total return of 323% (as of Sept. 14). If you invested $10,000 in a related exchange-traded fund (ETF), like the Vanguard S&P 500 ETF (NYSEMKT: VOO), then you'd have more than $42,000 today. On an annualized basis, the average total return of 15% is spectacular.
Most investors might not realize that what looks like a boring ETF could be such a lucrative portfolio addition. However, Warren Buffett , viewed by many as the greatest investor ever, has long understood the power of keeping things as simple as possible.
In Berkshire Hathaway 's 1993 shareholder letter, the Oracle of Omaha suggested that the "know-nothing investor" should buy an index fund to own a large group of businesses representative of the U.S. economy.
In the 2013 letter, Buffett wrote that he has instructions for after his death that 90% of his cash be invested in "a very low-cost S&P 500 index fund." He said, "My advice to the trustee could not be more simple."
That advice has proven to be extremely valuable. Buffett famously made a bet in late 2007 that a group of hedge funds could not outperform the S&P 500 index over a 10-year period starting in 2008. After nine years, the benchmark's total return was significantly higher than that of the so-called expert capital allocators. The professional money managers all came up alarmingly short.
This shows just how powerful owning something like the Vanguard S&P 500 ETF can be. It's a hassle-free approach to gaining market exposure. And the results speak for themselves.
The stock market is currently not too far off its record high. So, you might wonder why now is a good time to invest. It all comes down to having the right mindset. When you're a long-term investor with decades of compounding ahead, the timing of when you invest doesn't really matter. What actually has the most impact is that you start putting money to work early and often.
The data backs this up. According to research from Bank of New York Mellon , even if you invested at all-time highs, which would essentially make you a terrible market timer, you made money. During the following 12 months after a peak, the average return was 9.7%. And over the five-year stretch after investing at a record, the average annualized return was 8.6%.
These figures are higher than if you didn't invest at an all-time high. That's a surprising realization. And it supports the idea that market participants should stay fully invested at all times. Avoid trying to time the market, even though the fear-inducing headlines, whether they relate to interest rates or inflation, geopolitical conflict, or artificial intelligence, create never-ending noise.
Investors are also better served by thinking past just putting a lump sum amount of money to work initially. Your portfolio's performance can be greatly boosted by dollar-cost averaging (DCA) periodically. Let's say you invest $10,000 upfront in the Vanguard S&P 500 ETF, while also adding $100 every month after the first allocation. In 30 years, the balance would be almost $382,000 (assuming a 10% annualized return). That number is more than double the $175,500 total had you not followed a DCA approach.
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Neil Patel has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy .
