When it comes to identifying investments that you can buy and hold forever, there are a few things you should pay attention to. I certainly prefer ETFs because they provide simple, easy access to virtually every corner of the market in a tax-efficient package.
Based on this, investors should check the following:
- Funds that invest in stocks. Over a long holding period, stocks simply have higher return potential than almost any other asset class.
- Broadly diversified funds. A basic long-term buy-and-hold investment should be investing in hundreds, if not thousands, of stocks covering all areas of the market.
- Funds with ultra-low expense ratios. S&P 500 Index (^ GSPC +0.00%) and general stock market funds are readily available with odds of 0.05% or less.
Many people will use Vanguard S&P 500 ETF (FLIGHT 0.07%) for this purpose and I can’t blame them. This is certainly a strong core portfolio holding. However, I prefer to go wider and choose Vanguard Total Stock Market ETF (VTI 0.14%).
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Why VTI works so well as a “forever” investment
The Vanguard S&P 500 ETF is diversified but focuses only on large-cap stocks. This leaves a large segment of the US stock market unrepresented in a portfolio.
The Vanguard Total Stock Market ETF contains nearly 3,500 different stocks of all sizes, representing virtually the entire investment universe of the U.S. stock market.
Over the past few years, large-cap companies have gotten most of the attention because companies like Nvidia (NVDA 1.39%), Alphabet (GOOG 0.48%)(GOOGLE 0.23%)And Microsoft (MSFT +1.69%) stimulate trade in artificial intelligence (AI).
But many people may not realize that iShares Russell 2000 ETF (IVM 0.58%)which invests in small-cap stocks has outperformed the Vanguard S&P 500 ETF by 20 percentage points over the past year!
Investing in the Vanguard Total Stock Market ETF gives you exposure to this important area of the stock market. They generally have higher long-term growth potential, don’t always perform as well as large-cap companies, and can add important diversification benefits to a broader portfolio.
Vanguard Total Stock Market ETF
Today’s changes
(-0.14%) $-0.51
Current price
$368.76
Key data
Daily range
US$366.18 – US$372.24
Range 52 weeks
$304.00 – $374.70
Volume
3.1 million
What Buying VTI Means for Your Portfolio
Most investors talk about picking winning stocks and sectors, but the core of a portfolio should be built around simply being part of the economic growth story.
This does not involve trying to time the market or predict which stocks will perform better at any given time. It’s about simply investing in the entire market with the expectation that the US economy will continue to expand widely over time. With that in mind, you can certainly build on this foundation with tech stocks, international stocks, cryptocurrencies, or anything else.
But the core of the portfolio should be broadly diversified across the market.
Because it is a fundamental investment, the Vanguard Total Stock Market ETF can be held forever. Ideally, investors will top it up regularly over time to build long-term wealth even faster. In my opinion, this is one of the best means for this.
David Dierking has positions in Vanguard Total Stock Market ETF. The Motley Fool has positions in and recommends the Alphabet, Microsoft, Nvidia and Vanguard S&P 500 ETFs. The Motley Fool has a disclosure policy.