If I Were 25 With $300 a Month to Invest, I'd Skip Picking Stocks and Buy These 2 ETFs
Key Points
With decades to build their portfolios, investors can take on higher-risk, higher-return opportunities.
Short-term volatility may be higher, but if you're willing to ride it out, better returns are often captured over time.
I would target two simple ETFs -- one investing in tech stocks and one investing in growth stocks.
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I'm going to turn 52 later this year, which means I've been investing for about 35 years. Over that time, I've owned savings bonds, mutual funds, and exchange-traded funds (ETFs). I trade stocks every so often. I dabbled in options briefly (which didn't go well). All the while, I learned a lot about what I should and shouldn't be doing.
Looking back over those decades, I'd do a few things differently. I've always invested more on the conservative side, which I don't regret, but I do feel like I missed out on some bigger growth opportunities along the way. Even though I enjoy stock picking and trying to identify winners, I don't think that's the way I would go about it if I had it to do over again. I've had enough hit-and-miss results to know that I have no more aptitude for it than anyone else.
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What I'd do is target simple, higher-risk, higher-growth opportunities using ETFs. No picking single stocks. Just buying the theme at the lowest price possible. That leads me to a pair of Vanguard funds that even a modest $300-per-month investment could turn into six figures or more.
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VGT: The pure-tech play
The Vanguard Information Technology ETF (NYSEMKT: VGT) would help target companies on the cutting edge of innovation. This is the sector with some of the highest risk and highest volatility. But as we've seen with the internet and artificial intelligence (AI) booms, it has the highest upside.
With decades to work with, there's plenty of time to ride out the highs and lows. Even with the tech bubble to deal with, buy-and-hold investors would have enjoyed strong returns over the past quarter-century. This is exactly the type of upside play I should have targeted more in my portfolio when I was younger. A tech fund would have helped me invest in the theme rather than trying to pick individual winners.
VUG: Growth opportunities across the whole market
The logic behind owning the Vanguard Growth ETF (NYSEMKT: VUG) is pretty similar. A mix of value and growth stocks makes sense in a portfolio, but tilting toward higher-growth names would likely have delivered bigger returns over the long term.
The Vanguard Growth ETF doesn't rely solely on the tech sector either (though it's definitely a big part of it). It includes growth companies across the entire U.S. economy. It's modestly more diversified and can perform relatively well when tech isn't necessarily leading the market higher.
The argument for investing in growth is largely the same as the one for investing in tech. Ride out the short term in pursuit of better long-term returns over the course of years and years.
VGT and VUG: A comparison
| Metric | VUG | VGT |
|---|---|---|
| Coverage | U.S. large-cap growth | U.S. tech sector |
| Holdings | 151 | 318 |
| Expense ratio | 0.03% | 0.09% |
| 10-year avg. annual return | 16.4% | 21.9% |
| Sector concentration | Tech-heavy | Technology only |
| Volatility | High | High |
| Best use case | Diversified core growth | Tech sector upside |
Source: Vanguard
To be clear, there is a lot of overlap between these two funds. These two funds are probably best-suited as part of a larger portfolio built around something like the Vanguard S&P 500 ETF or the Vanguard Total Stock Market ETF.
But if you're a younger investor, I think it makes sense to allocate more to the Vanguard Growth ETF and the Vanguard Information Technology ETF in your portfolio. The higher growth potential is worth the short-term volatility.
It's advice I wish I had followed years ago.
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David Dierking has positions in Vanguard Total Stock Market ETF. The Motley Fool has positions in and recommends Vanguard Growth ETF, Vanguard S&P 500 ETF, and Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.
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