For many investors, exchange-traded funds (ETFs) should be the thing to consider when deciding where to invest. Instead of having to research multiple industries and individual companies, ETFs allow investors to gain exposure to multiple assets with a single investment. Whether you prefer companies in a certain sector, a particular size, or a mission you’re aligned with, there’s an ETF for you.
The best part? With time and persistence, ETFs alone can ensure you retire a millionaire.
The power of compounding
Financially, compounding can be one of your worst enemies or one of your best friends. If you have debt, compounding can take it from seemingly manageable to “Uh oh, now what?” But, in investing, compounding is a wonderful phenomenon that is responsible for much of the wealth creation. Compounding happens when the return you get from your investments starts to earn a return on itself, and it can easily make you a millionaire when used the right way.
let’s take the S&P 500, which tracks the 500 largest US companies by market capitalization, for example. Historically, the S&P 500 returns 10% per year over the long term. Some years, you may return less; some years, it may come back more; but, generally speaking, you can count on about a 10% annual return over the long term. If you were to invest in only one S&P 500 fund, like the Vanguard S&P 500 ETF (NYSEMKT: VOO) — this is the time it would take to reach $1 million with multiple monthly contributions:
|Monthly Contributions||annual return||expense ratio||years up to $1 million|
Assuming you plan to retire at age 67, which is the full retirement age for people born in 1960 or later, according to Social Security, you could retire a millionaire simply by making regular monthly contributions to the Vanguard S&P 500 ETF starting at age 36. . , 43 or 47, respectively.
Dividends can speed up the process
The example above is based solely on the increase in the ETF’s share price, but if you add a dividend yield, the time it takes to accumulate at least $1 million decreases. The Vanguard High Dividend Yield ETF (NYSEMKT: VYM) It has a dividend yield of 2.75%. If you made the same monthly contributions, but added the dividend yield, here’s how long it would take you to reach at least $1 million:
|Monthly Contributions||annual return||expense ratio||Dividend yield||years up to $1 million|
Even in this scenario, a dividend yield of a couple of percentages can shave years off the total time it takes to accumulate $1 million.
Let time do its magic
For most people, becoming a millionaire solely with ETFs (or any investment) largely comes down to one thing: time. The sooner you start investing, the better. With consistency and using investment strategies such as dollar cost averaging, many people will find that they can achieve millionaire status without needing an extraordinary lump sum of money to get started. With years of consistency, you can find yourself living the retirement life you envision.
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Stefon Walters has positions in the Vanguard S&P 500 ETF. The Motley Fool has positions and recommends the Vanguard High Dividend Yield ETF and the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.