Key Points
"Buy and hold" investing with a well-diversified mix of stocks is a good way to build long-term wealth.
Two of Vanguard's broadest ETFs -- VTI and VXUS -- own more than 12,000 stocks combined.
Vanguard sees small-caps, value stocks, and international shares outperforming in the next 30 years.
Being a "buy-and-hold" investor sounds simple, but it can be harder to do in real life. When stocks are wobbly, when the tech-heavy Nasdaq-100 goes into a sell-off, when economists question the economic value of artificial intelligence (AI), it's easy to get nervous and make fear-driven moves based on short-term news.
But for most people who are not professional investors or money managers or hedge fund executives, the best investment strategy is often just to buy and hold. Buy stocks in a diversified portfolio like the S&P 500 index. Keep buying stocks as often as you can.
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And then: hold them. Don't sell. Hold them for years -- five years, 10 years, or more. Don't try to day trade, don't try to move in and out of the market, don't try to sell your stocks based on a hunch about what the market will do tomorrow. If you're really in it for the long run, buy-and-hold investing can generate significant wealth for everyday investors.
My two favorite stock exchange-traded funds (ETFs) are low-cost index funds. They're simple. They're "boring." But these two ETFs together let me own basically all the stocks in the world.
Let's look at why I'm going to keep buying and holding the Vanguard Morningstar Total Stock Market ETF (NYSEMKT: VTI) and the Vanguard Total International Stock ETF (NASDAQ: VXUS) for years to come -- through good times and bad, booms and busts.
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1. VTI: 3,519 U.S. stocks of all sizes (not just the S&P 500)
Buying an S&P 500 ETF is a great way to quickly own a diversified portfolio of the 500 largest publicly traded companies in America. But the Vanguard Morningstar Total Stock Market ETF (VTI) is even more diversified than that. VTI owns 3,519 U.S. stocks. This fund has delivered average annual returns of 10.95% for the past five years.
Why do I want to own VTI instead of an S&P 500 ETF? Because I want all the small-caps and mid-caps, not just large-caps. Vanguard research forecasts that in the next 30 years, U.S. small-cap stocks could outperform U.S. large-cap stocks, and U.S. value stocks could outperform U.S. growth stocks.
I don't believe that the same stocks that are winning today are always going to keep winning forever. The market might rotate away from tech stocks. The biggest gains of AI tools might go to healthcare companies and banks, not necessarily to today's major tech names. In the long run, I'd rather own thousands of U.S. companies of all kinds, not just a few stocks in one volatile industry.
In case the current AI boom turns into a bear market for high-flying growth stocks, the value stocks and small-cap stocks in the VTI portfolio might help deliver steadier gains in the long run. I don't want to bet too much on any one U.S. stock or sector. VTI lets me hedge those risks. I'm not trying to beat the market. Instead, I will happily take whatever return the entire U.S. stock market will give me, and I'm going to keep buying and holding VTI.
2. VXUS: 8,901 stocks from international markets
Not only do I not know which stock or sector will be the best for the long run, I also don't know for sure if America will have the best stock market for the long run. It might. America has a dynamic economy. We work hard, we innovate, we create must-have technologies and powerful brands that keep consumers spending.
But what if the rest of the world goes on a long winning streak? What if America wobbles, or falls behind? What if the dollar loses its buying power against international currencies? In case any of those things happen, I want to own some international stocks as part of my diversified portfolio. The Vanguard Total International Stock ETF (VXUS) offers an impressive mix of 8,901 global stocks representing Europe (35.4% of the fund), the Pacific (29.3%), emerging markets (26.6%), and other regions of the world.
VXUS has delivered average annual returns of about 8.1% for the past five years. But its future could be brighter than the S&P 500. Along with U.S. small-caps and value stocks, Vanguard is bullish on international stocks. Its long-term outlook expects international stocks to outperform U.S. stocks by a substantial margin of 1.3% to 3.3% per year for the next 30 years.
There's no guarantee that either of these ETFs, or any stock or ETF, will be "safer" in case of a tech stock sell-off. It's also possible that today's biggest names in tech will keep winning and outperforming the rest of the market for the foreseeable future.
But I want to own everything: global stocks, U.S. stocks, small-cap, value, large-cap, and more. I don't know of a better way to lock in long-term gains from stock market investing than just to "buy all the stocks" and hold on to them for years to come.
Ben Gran has positions in Vanguard Morningstar Total Stock Market ETF and Vanguard Total International Stock ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.