Slow and Steady Investing: Vanguard vs. ARK for Long-Term Gains

The Power of Patience: Long-Term Investing and the Tortoise vs. the Hare

We all know the old sayings: the hare often loses to the tortoise; slow and steady wins the race; patience is a virtue. These aren't just platitudes; they hold particularly true in the world of investing. The idea of investing as a marathon, not a sprint, is crucial to understand.

Why would I prefer holding slower-moving Vanguard funds like the Vanguard S&P 500 ETF (VOO) or the Vanguard Total Stock Market ETF (VTI) over the more aggressive ARK Innovation ETF (ARKK) for the long haul?

The Magic of Incremental Gains

Let's explore the concept of small, consistent improvements. Imagine something getting just 0.1% better each day. This could be your favorite stock increasing slightly, your strength improving incrementally, or a podcast becoming a little more engaging. While unrealistic in its perfect consistency, let's assume this continues for a full year—365 days.

By year's end, this seemingly insignificant daily gain accumulates to an impressive 44% increase. Continue this for two years, and you'll see a 107% gain. Imagine a decade of these small, persistent improvements – you'd be looking at a staggering 3,740% increase!

Now, consider the reverse: a daily decline of 0.1%. It might seem negligible, but by the end of a year, you'd see a 30.6% decrease. After two years, you're left with only 48.2% of the original value. A decade of these small losses results in a dramatic reduction to just 2.6% of the initial value.

The Hidden Costs of Volatility

Consistent volatility, while seemingly exciting, can create a subtle negative pressure. Consider a hypothetical stock that gains 10% one day and loses 10% the next. Starting with $100, a 10% gain brings you to $110. However, a 10% loss the next day isn't $10; it's $11 (10% of $110), leaving you with $99. This translates to a 1% decrease over two days.

Therefore, consistent volatility tends to result in a slightly negative overall trend.

Vanguard vs. ARK: A Tale of Two Strategies

Vanguard funds are inherently more stable than the ARK Innovation ETF. The Vanguard Total Stock Market ETF, designed to reflect the entire U.S. stock market, holds a diversified portfolio of over 3,500 stocks. The S&P 500 ETF tracks the S&P 500 index, comprising around 500 of the largest U.S. companies.

In contrast, the ARK Innovation ETF is an actively managed fund focused on investing in "disruptive innovation" with a much smaller portfolio, typically holding between 35 and 55 stocks. While this strategy offers the potential for higher growth, it also comes with increased risk. With a beta of 2.0, it tends to amplify the S&P 500's movements, both positive and negative.

While the ARK Innovation fund might occasionally outperform the broader market ETFs, the Vanguard Total Market and S&P 500 ETFs often provide more consistent returns and greater peace of mind. Over the past 5 years, they have posted total returns of 116% and 109%, respectively. In comparison, ARK Innovation lost 3% over the same period, significantly impacted by the 2022 inflation crisis and the effects of its inherent volatility.

In conclusion, the ARK Innovation fund from Ark Invest can be an interesting and potentially profitable addition to a well-diversified portfolio. However, Vanguard funds offer the stability and long-term consistency necessary for building a solid investment foundation. Their reliability prevents the negative impact of mathematical volatility over time, making them ideal for a core investment strategy.