Motley Fool - Tue Feb 28, 4:15AM CST
Do you think investing your way to millions requires expert stock-picking skills? Think again. Sometimes the best investments are effortless. And therein lies the beauty of exchange-traded funds, or ETFs.
An ETF gives you an automatically diversified basket of investments that you buy and sell exactly as you would trade an individual stock. Because a single ETF spreads your money across many different investments, you don't face the risks that come with picking individual stocks. Keep reading to learn what it takes to retire a millionaire through ETFs alone.
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Can ETFs really make you rich?
In a nutshell: Yes, ETFs alone are enough to make you rich. With just one investment, you can capture the growth of the overall stock market or a certain segment of it.
For example, you can find ETFs that focus on pretty much any industry, investment theme, or region of the globe. Want to invest in artificial intelligence or electric vehicles? There are ETFs for that. Or you can choose ETFs that invest in stocks within a specified market capitalization range or that meet environmental, social, and governance criteria.
Probably the best way to get started is with an ETF that tracks most of the U.S. stock market, if not all of it -- like an S&P 500 ETF. Your money won't get the jaw-dropping returns you would get if you could pick the next Apple (NASDAQ: AAPL) or Amazon (NASDAQ: AMZN).
But for every stock that delivers blockbuster returns, there are many more that turn out to be busts for early investors. Because you're spreading out your risk, your odds of substantial losses are lower with an ETF compared with individual stocks.
Over long stretches of time, the overall market has historically produced wealth-building returns. Take the S&P 500 index, which represents roughly 80% of the value of the U.S. stock market. In the past 30 years, the index has produced a gain of around 800%. Had you invested $100,000 in the SPDR S&P 500 ETF Trust (NYSEMKT: SPY), which aims to replicate the index's returns, shortly after its inception in 1993, you'd have just shy of $900,000 today.
The value of time for ETF investors
ETFs don't deliver get-rich-quick results. So it's important to start investing early and then use a buy-and-hold strategy, giving your money plenty of time to compound.
Going back to our example of the SPDR S&P 500 ETF Trust: That same $100,000 investment that would have grown to almost $900,000 if you'd invested 30 years ago would be worth less than $470,000 had you invested 20 years ago.
How many ETFs do you need?
It's possible to get most of the diversification you need with a single ETF that tracks most of the U.S. stock market. If you want to go beyond the companies in the S&P 500, you could choose a total stock market fund, like the Vanguard Total Stock Market ETF(NYSEMKT: VTI), which will invest your money in nearly 4,000 U.S. stocks.
Still, it's typically wise to invest a small percentage of your portfolio in a bond ETF, since bonds tend to be less volatile than stocks. And as you get closer to retirement, it's smart to raise that percentage. You might want to diversify even further, perhaps by adding a real estate or international ETF.
Building a seven-figure nest egg through ETFs requires time and patience, not luck. If you start investing early enough, a couple of ETFs could easily grow into a million-dollar investment portfolio.
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Exchange-traded funds (ETFs) are a fantastic investment tool for those seeking diversified exposure without the risk of individual stock picking. These investment vehicles allow individuals to access a broad range of assets with relative ease, mirroring the performance of an index, industry, or thematic area. Let's dissect the concepts covered in the article:
ETF Basics:
- Definition and Function: ETFs offer a diversified portfolio mirroring an index or sector. They are traded like stocks, making them accessible and liquid.
- Diversification: ETFs spread investment across numerous assets, mitigating the risks associated with individual stock selection.
- Investment Themes: ETFs cater to various themes like industries (e.g., AI, electric vehicles), market segments, regions, or specific criteria (e.g., ESG).
- Example ETFs: S&P 500 ETFs, like SPDR S&P 500 ETF Trust (SPY), mirror the performance of the S&P 500 index.
Wealth Accumulation with ETFs:
- Wealth Generation: While individual stock picking might yield exceptional returns, ETFs provide more stable growth over time due to risk diversification.
- Historical Performance: The S&P 500 index has shown substantial gains over extended periods, translating into wealth-building returns for ETF investors.
- Time as an Asset: Compounding plays a vital role in ETF investing. Starting early and adopting a buy-and-hold strategy can significantly impact long-term growth.
Strategies for ETF Investing:
- Single vs. Multiple ETFs: While a single ETF tracking the broader market suffices for many investors (like S&P 500 ETFs), diversifying with multiple ETFs, including bonds, real estate, or international markets, can further mitigate risks.
- Risk Management: Bonds are less volatile than stocks and are recommended for a portion of the portfolio, particularly as retirement nears.
- Long-Term Perspective: Building a substantial investment portfolio with ETFs necessitates patience and consistent investment over time.
Expert Opinions and Caveats:
- Expert Opinions: The article doesn't favor SPDR S&P 500 ETF Trust for immediate returns but highlights other stock options. It also mentions experts from Motley Fool, some of whom have personal investments in Vanguard Index Funds-Vanguard Total Stock Market ETF.
- Disclosure: The article reveals affiliations and holdings, disclosing potential biases in recommendations.
By embracing the principles of diversified investing, time, and strategic portfolio construction, ETFs offer a compelling avenue for wealth accumulation. Their ease of access and ability to mirror broader market movements make them an attractive choice for both novice and seasoned investors.
