There are so many ways to "invest" in the stock market that it can quickly become overwhelming, especially if no one ever taught you the basics. But for the vast majority of people, only a few options stand out as clear winners.
For me, and I believe for most working adults between the ages of 18 and 59½, that winner is VTSAX. You'll be offered plenty of options throughout your career, but this one is hard to beat.
So what actually is it?
VTSAX, Vanguard's Total Stock Market Index Fund, is a total US stock market index fund. When you buy it, you own a small slice of essentially every publicly traded company in the US, thousands of stocks in a single purchase. That makes you incredibly diversified, which is why it works as the core holding for almost every retirement account.
You aren't buying an equal amount of every stock, though. The fund is weighted by market value, so bigger companies make up a bigger share of what you own. That keeps you heavily invested in the market's real winners while still holding the smaller companies that could become the next ones.
It's also cheap. Index funds like VTSAX charge a tiny fraction of what actively managed funds do, so more of your return stays in your pocket.
What's my return?
Historically, the US stock market has returned roughly 10% a year before inflation, or about 6–7% a year after inflation, over long stretches of time. That may not sound like much, but VTSAX is built for long-term growth, and that's where compounding does its magic.
Take this example. Imagine you're 21 and have just come into $50,000. That's not nearly enough to retire on today. But if you invest it in VTSAX and let it grow until you're 65, at a 7% average annual return you'd have about $980,000. That's without investing a single extra dollar over 44 years. Now that's a lot of growth!
So what's the catch?
You won't earn a steady 7% every year. Some years the market will drop, sometimes sharply, and your balance will drop with it. Investing in VTSAX means committing to the long haul and not selling during those downturns.
That's where people get themselves into trouble. They see the market falling, pull everything out, then buy back in once it starts to recover. It sounds like a smart strategy, but almost no one times it perfectly. Some of the market's best days come right after its worst ones, and missing just a few of them can seriously cut into your long-term returns.
But what if I can pick stocks that outperform it?
If you can consistently beat the market over multiple decades, you're in rare company and deserve a spot right next to Warren Buffett. Unfortunately, almost no one can pull this off. Even most professional fund managers fall behind the index over the long run.
Buffett himself has said most people are better off in a low-cost index fund. So for the rest of us, the best option is a well-diversified, low-cost index fund (a.k.a. VTSAX).
The bottom line
You don't need to be a stock-picking genius to build real wealth. Buy the whole market, keep your costs low, and leave it alone for decades. VTSAX lets you do all three in one fund.
