Some investors derive pleasure from picking individual stocks, others find the entire process of buying specific stocks a bit overwhelming. But investing doesn't have to be complex. For example, if you are looking to build a high-quality foundational portfolio as quickly and easily as possible, you can do it with just two iShares exchange-traded funds (ETFs): iShares Core S&P 500 ETF (IVV +0.82%) and iShares Core U.S. Aggregate Bond ETF (AGG +0.23%).
Here's what you need to know, and some details on how this simple two-ETF portfolio could help make you a millionaire, given enough time and a steady level of investment.
The two iShares ETFs
The iShares Core S&P 500 ETF focuses exactly on what its name suggests -- it replicates the S&P 500 index. This index is comprised of roughly 500 stocks, but the really important part of this story is that they aren't randomly selected. A committee picks the companies that it believes are the most representative of the broader U.S. economy. So there's a guiding hand of sorts that helps to keep the index relevant with the changing world around it.
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In addition, the S&P 500 index is market-cap weighted. This means that the largest companies are given more investment than smaller ones within the portfolio. During periods of transition, for example from a bull market to a bear market, this can actually be a net negative. But for the most part, the largest companies are usually (though not always) the strongest-performing stocks. So by and large, iShares Core S&P 500 ETF will keep you invested in the most important stocks, with an emphasis on the ones that are performing strongly. In fact, even when the market shifts from going up to going down, the market cap weighting approach will gradually shift the ETF into the new industry leaders (it just won't happen overnight).
iShares Core U.S. Aggregate Bond ETF, meanwhile, is meant to track U.S. investment-grade bonds. Basically, in one fund you are buying "all" of the high-quality bonds available in the domestic market. High-quality bonds are issued by entities, including the U.S. government, that are believed by bond rating agencies to have a high probability of being able to pay their debts, including interest and principal. The index, in this case, is the Bloomberg U.S. Aggregate Bond Index. It is a simple way to provide stability and diversification to a portfolio with a focus on the best quality bonds.
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Both of these exchange-traded funds (ETFs) are quite inexpensive to own, with expense ratios of 0.03%. You would be hard-pressed to find ETFs with lower costs. The only additional cost you may incur is a commission to trade them, though some brokers now allow free trades on ETFs. In effect, with just these two iShares ETFs you can create a high-quality portfolio filled with stocks and bonds. That is, you can create your very own balanced fund.
Start with 60/40 and go from there
So here's the big plan: Take all of the money you have available to invest and split it between iShares Core S&P 500 ETF and iShares Core U.S. Aggregate Bond ETF and rebalance the mix one time a year. Throughout the year focus on saving money and either add those savings to the two ETFs throughout the year or, for a simpler life, add in the cash during your annual rebalancing. That's it. If you can follow that simple approach over your investment lifetime and you invest enough along the way, history suggests you will have a good chance of reaching millionaire status. The key determinant of your success level will be how hard you save.
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The big question you should have at this point is, "What percentage should you put into each ETF?" That's a much harder question to answer, because it gets pretty personal, depending on your risk tolerance and time horizon. More equity exposure will likely lead to more growth, but it will mean higher risk. More bond exposure will lead to slower growth, but will likely be less volatile over time. One well-known and oft-cited Wall Street target is to have 60% in stocks and 40% in bonds.
That's as good as any breakdown, though younger and more aggressive investors should probably feel comfortable with raising the stock target share. However, it probably doesn't make sense to go above 80% in stocks for most investors. And here's the really important thing: You can't give up on the portfolio and start playing around just because of short-term market volatility. You need to pick a target and stick to it for the long term.
It really isn't hard, and two iShares ETFs can get you there
If this sounds like it is too easy, well, the fact is that the process of building a million-dollar nest egg isn't hard to grasp. The hard part is dealing with your emotions along the way. You have to sacrifice current consumption (you need to save hard) so you can put that cash to work in investments like iShares Core S&P 500 ETF and iShares Core U.S. Aggregate Bond ETF. You need to stay focused even when the stock or bond market is going south -- which will happen, likely many times, throughout your investment life (the urge to sell out of fear is hard to fight). But if you can stay the course, history suggests that even this super simple iShares ETF portfolio is enough to slowly build long-term generational wealth.
