Investors employ many strategies in their attempts to beat the market, some more successful than others. But if you have enough time to let your portfolio work for you and are committed to adding more money to it every month, you don't need to beat the market to retire comfortably. You could set up automatic monthly deposits into exchange-traded funds (ETFs) that track broad indexes and wake up in 30 years with a well-padded nest egg.
If that plan sounds sensible to you, consider following it by investing in the Vanguard S&P 500 ETF (VOO +0.82%) and the Vanguard Growth ETF (VUG +0.92%).
Two top ETFs to power your retirement
The Vanguard S&P 500 ETF is exactly what it sounds like. It tracks the S&P 500, an index of 500 of the largest publicly traded companies in the U.S. This index is often used as a proxy for the broader market since its components account for about 80% of the value of all U.S. stocks, so its movements can tell investors a lot about overall market sentiment.
It also gives investors exposure to the top companies in the country. But since it's so widely diversified, it's a relatively low-risk investment. At the same time, as a market-cap-weighted index, its portfolio is more heavily weighted toward larger companies, giving investors the full benefit of the market's strongest gainers.
This Vanguard ETF has been around since 2010, and over that time, it has booked total returns (including dividend reinvestment) at an annualized rate of 14.7%. Over a longer period, the S&P 500's annualized returns have been closer to 10.6%.
The Vanguard Growth ETF, by contrast, follows the makeup of the CRSP US Large Cap Growth index. It only owns about 200 stocks. That's still highly diversified, but its focus on growth stocks makes it riskier than an S&P 500 fund. However, over longer periods of time, most of that risk recedes. This ETF has been around longer, and over the past 20 years, it has delivered annualized returns of around 11.6%. While that 1 percentage point difference from the S&P 500's longer-term average may appear trivial, over long periods, the impact that gap can have on compound growth can be major.
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Vanguard typically charges low fees for its ETFs, which leaves more money in your pocket. The S&P 500 fund's expense ratio is 0.03%, compared with an average of 0.78% for similar funds, while the Growth ETF's expense ratio is 0.04%, compared with 0.95% for similar funds. To maximize your gains while minimizing your risk, you might want to split your investments between the two.
Leading the way to millionaire status
How much money would you have to invest to be well fortified for retirement? Every investor has a different situation, so let's look at a few theoretical scenarios.
First, let's imagine that you recently landed your first job. You're going to invest some money through your company-sponsored retirement plan (to benefit from its contribution matching), but you're also going to supercharge your savings with additional monthly contributions to these two index funds. You only have limited funds to make an initial investment.
If you start with $100 and invest $100 monthly, split evenly between the Vanguard S&P 500 ETF and the Vanguard Growth ETF, you might end up with an annualized return of around 11.1%, based on historical norms. If you do this consistently over 30 years and those prior average growth rates persist, you'll end up with more than $245,000.
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However, let's say you have $10,000 in savings at the start. Using that as your initial contribution, you'd have almost $478,000 after 30 years. Finally, let's say that all stays the same, but you started out early enough to keep going for 40 years. In that case, you'd have close to $1.4 million when you're done.
I think you get the picture. You can change the initial investment, monthly contribution, and amount of years you're investing to get different results. The only thing you can't do anything to change are the annualized growth rates. Those will be what they will be, and there's no guarantee that the market will produce similar results to those it did in the past.
Even if you use this strategy, if you have more tolerance for risk, you can build a diversified portfolio of individual stocks that could help you reach millionaire status even sooner.
