You might think that the only way to generate strong investment returns is to try and successfully pick individual stocks that can be huge winners over time. But investors might be surprised to learn that great returns can be achieved by simply buying and holding an exchange-traded fund (ETF).
For example, something like the Vanguard S&P 500 ETF (VOO 0.17%) has historically been an excellent choice for patient long-term investors. As we look ahead, though, can this popular ETF turn you into a millionaire?
Hard to beat
As the name suggests, the Vanguard S&P 500 ETF tracks the performance of the broader S&P 500, which consists of the 500 largest, most profitable companies based in the U.S. There are businesses of all sizes, all the way from the $3.4 trillion Microsoft to the $15.9 billion News Corp. Investors gain exposure to the growth and innovation that happens in this country. Historically, that's been a winning bet.
Since its inception in September 2010, the Vanguard S&P 500 ETF has produced a total return, which includes dividends, of 548%. That translates to a stellar annualized gain of about 14.3%. This performance undoubtedly beats most active fund managers out there, despite costing a lot less. The annual expense ratio is just 0.03%, meaning you keep more of your money over time.
Had you invested $155,000 in the Vanguard S&P 500 ETF at its inception, you'd have $1 million today. That's a fantastic result for a passive investment vehicle.
Of course, it helps that the ETF was launched on the heels of the Great Recession. And for most of the past 14 years, the stock market experienced a strong bull market on the backs of extremely low interest rates and an accommodating Federal Reserve.
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Keep the right mindset
It's anyone's guess what the Vanguard S&P 500 ETF's returns will look like going forward. There are numerous factors that can affect the fund's performance in the years ahead. Perhaps inflation remains elevated for longer than anticipated, which will keep interest rates higher for longer. This might pressure the potential for stocks.
You also might be wondering if now is still a good time to invest, particularly as the S&P 500 sits in record territory. We all want to be able to correctly time the market, buying at the lows and selling at the highs. But this is impossible to do accurately on a consistent basis. In fact, you're likely to cause more harm to your portfolio by doing this.
The best thing to remember is that time in the market matters most. Over long periods of time, the stock market goes up. It rewards patient investors that can handle the near-term ups and downs and maintain their focus on the next couple of decades, as opposed to the next couple of quarters. That means it's all about investing early and often.
One way to seriously boost your returns is to adopt a strategy known as dollar-cost averaging. Instead of only investing a single up-front amount, you can regularly add savings, say monthly or quarterly, to your portfolio. Based on the S&P 500's historical average yearly return of 10%, if you invest $10,000 today in the Vanguard S&P 500 ETF, while also buying $100 more every month, you'd be a millionaire in 40 years.
But regardless of what annualized returns the Vanguard S&P 500 ETF is able to produce going forward, those investors who can put in more money and that have a longer time horizon can drastically increase their chances of becoming millionaires. It really is that simple.
