For some, retirement is a lofty goal many years away where for others it's an almost-daily thought. Regardless of what camp you fall into, retirement is something everyone should be saving for. Just stashing money in a bank account or under the pillow won't provide enough return to survive in retirement -- today's 7.9% inflation rate underscores this fact.
Anyone saving for retirement (which should be everyone) needs to invest in order to grow their savings to a meaningful amount. Many different avenues exist, but I think there are three solid ways to achieve the goal of retirement.
Image source: Getty Images.
1. Index funds
Not everyone has the appetite to invest in individual stocks and that's OK! Stocks are the best-performing assets over the long term, and investors can gain exposure to every U.S. stock through the Vanguard Total Stock Market ETF (VTI -0.79%). This market-cap-weighted ETF has heavy exposure to the biggest companies like Apple and Microsoft, as they are the two largest companies traded on the U.S. exchanges. It also includes thousands of smaller companies, many of which will fail, but a few will grow into massive businesses and rival the rise of Netflix or Amazon.
When buying an index fund, beating the market isn't the focus -- matching the market is. Considering the S&P 500 has returned 10.67% annually since 1957, this isn't a terrible strategy. By purchasing an index fund with no intent to sell until the money is needed for retirement, investors can feel confident in just basic index investing.
2. Focused ETFs
ETFs (exchange-traded funds) are another great tool investors have at their disposal. In 2020, there were more than 7,000 ETFs available with more popping up every month. These can be broad, like the total stock market index fund, or more focused on a particular sector or theme.
For example, cybersecurity has been a trend in the world lately with the heightened Russian threat. Investors may not know which companies are the best, so they can choose cybersecurity-themed ETF, like the Global X Cybersecurity ETF.
However, if investors are doing the work to pick themed ETFs, it isn't too much extra work to get into a more rewarding form of investing.
3. Individual stocks
In 2021, 20% and 15% of large-cap mutual funds and growth mutual funds, respectively, outperformed their S&P 500 benchmark. If the big boys can't do it, why should individual investors with fewer resources even attempt it? The answer? We have time on our side.
Mutual funds and other firms have to answer to investors quarterly, so they are focused on short-term movements. This causes high tax rates and funds to sell solid performers to offset the losers. Individual investors have no one to answer to quarterly and can afford to take a long-term view of their investments.
Individual-stock picking is a great complement to having an index fund or ETF to gain broad market exposure. By pinpointing trends and choosing the best companies within those movements, investors can generate market-crushing returns. This approach isn't for everyone -- investors must have the mindset of holding a stock for three to five years and have the stomach for significant price swings.
As of March 24, the S&P 500 is down about 6% from its all-time high. However, many growth stocks, including Twilio and PayPal, are down more than 30% from their all-time highs.
PYPL Total Return Level data by YCharts.
Still, anyone who has held these stocks for over five years or more has done just fine.
PYPL Total Return Level data by YCharts.
With both businesses still executing at a high level, the stock prices will eventually rebound. Benjamin Graham, the famed investor who taught Warren Buffett, once said: "In the short run, the market is like a voting machine -- tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company." The key to being an individual stock investor is to stick around long enough to ensure business results have a long enough time to affect stock sentiment.
If investors can squeak out two or three percentage points in increased annual performance over 30 or 40 years, the results can be incredible, as seen in the table below by just investing $100 per month, starting with $0.
| Return Over Different Time Periods For $100 Per Month Invested | |||
|---|---|---|---|
| Return Rate | 20 Years | 30 Years | 40 Years |
| 10% (Market Average) | $68,730 | $197,392 | $531,111 |
| 11% | $77,043 | $238,825 | $698,191 |
| 12% | $86,462 | $289,599 | $920,509 |
| 13% | $97,136 | $351,839 | $1,216,445 |
Source: Investor.gov
The key is simple: Invest early, invest often, and invest well. Doing these three tasks will set anyone up for a great retirement.
