Crafting a retirement portfolio out of individual stocks alone is tough even for expert stock pickers. It isn't enough to select a handful of winners. You also need to mitigate risk by diversifying. That means investing across many different companies and stock market sectors.
Fortunately, there's an easy way to fuel your retirement fund while also mitigating risk. Investing in an exchange-traded fund, or ETF, allows you to invest across hundreds of different companies with a single purchase. One no-brainer choice that could make you a millionaire retiree is the Vanguard S&P 500 ETF (VOO -0.29%).
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How the Vanguard S&P 500 Index ETF can make anyone a millionaire
The Vanguard S&P 500 Index ETF is a simple S&P 500 index fund. But investing in the S&P 500 index is the most predictable way to build wealth, provided you're willing to invest for the long term and stay invested through the market's ups and downs. The S&P 500 index is made up of 500 of the largest, most successful companies in the U.S., representing more than 80% of the American stock market.
Investing in Vanguard's S&P 500 ETF automatically makes you an investor in all 500 of those companies, which span all 11 stock market sectors. As of Feb. 28, 2022, the fund's five largest holdings were:
1. Apple
2. Microsoft
3. Google parent company Alphabet
4. Amazon
5. Tesla
Over the past 50 years, the index has produced average annual returns of about 10%, though actual returns in a given year can vary significantly. Some years, the index loses value, though the odds of gains are higher than the odds of losses in any given year. Between 1972 and 2021, the index has had positive returns in 41 out of 50 years.
But if you want Vanguard's S&P 500 ETF to make you a millionaire, your best bet is to ignore what the S&P 500 does during any single year. Practicing dollar-cost averaging -- which means you invest on a regular schedule, regardless of the stock market's performance -- and allowing your money to compound is a reliable way to generate wealth.
If you'd started with a $500 investment in the S&P 500 index back in 1982 and consistently invested $500 a month, you'd have nearly $3 million today. Not too shabby, considering you invested just $240,500.
Famed billionaire Warren Buffett has said that investing in a low-cost S&P index fund is the best way for most investors to build wealth. Vanguard's S&P 500 ETF has some of the lowest fees you can find. Its expense ratio is just 0.03%, meaning you'd spend just $3 of a $10,000 investment on fees.
How do you invest in the Vanguard S&P 500 ETF?
Because Vanguard S&P 500 is an ETF, you can buy and sell shares with a brokerage account, just as you would an individual stock. But if you really want to capitalize on those gains, using your Roth IRA to buy Vanguard's S&P 500 ETF is a smart move.
With a Roth IRA, you never get a tax break on the money you contribute. But your growth and withdrawals are completely tax-free, assuming you wait until you're 59 1/2 and have had the account for at least five years. The $3 million you'd have after 40 years in the example above would be 100% yours in retirement.
If you want the Vanguard S&P 500 ETF, or any investment, to make you a millionaire retiree, it's essential that you start ASAP. Time is the most powerful weapon you have as an investor. Don't delay, even if you don't have much money to start with.
