What if I told you that you could be a millionaire by saving 1.5% of your monthly salary? And depending on your age, it could happen well before the average retirement age. This is the miracle of compounding.
Compound interest is the magic that provides massive investment gains over time. For instance, consider an investor who puts $10,000 into an account and earns 10% annually. In the first year, he or she makes $1,000 in interest ($10,000 x 10%); in year two, $1,100 ($11,000 x 10%), and by year 10, the interest is over $2,350, and the original investment has grown to nearly $26,000, as shown below.
Source: Author calculation.
The average annual salary in the U.S. is around $60,000. Here's how to become a millionaire by investing 1.5%, or $900, monthly in a tech-focused ETF.
Why invest in ETFs?
Exchange-traded funds, or ETFs, are excellent options for long-term investors because they contain dozens of different stocks managed by professionals, so you don't have to be an expert stock picker to make tremendous gains. We all wish we could consistently pick winners, but it is difficult. For every successful company, dozens fail. Take search engines. Alphabet's Google Search (NASDAQ: GOOG)(NASDAQ: GOOGL) is the big winner, so we don't think about those that failed, like Infoseek, Excite, Ask Jeeves, AltaVista, etc.
This is why a diverse ETF is advantageous; one company's poor performance won't sink the ship. Other advantages are that ETFs are easy to trade, just like stocks, and tend to have low expense ratios compared to mutual funds.
iShares Global Tech ETF
Technology already plays a gigantic role in society, and it is increasing constantly. Innovation is accelerating. I remember when answering machines and pagers were "cutting edge," then the cellphone, home computer, the internet, global networks, the cloud, and now artificial intelligence (AI). According to RealClear Science, your mobile phone has 1 million times the memory of the Apollo 11 spacecraft. Incredible. This is why tech stocks have been among the best-performing investments and will likely be so in the future. The iShares Global Tech ETF (IXN -0.50%) offers a terrific mix of the best tech stocks.
The iShares Global Tech ETF holds 137 tech stocks but is weighted toward powerhouses like Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Nvidia (NASDAQ: NVDA), and Taiwan Semiconductor Manufacturing (NYSE: TSM). Each of these companies is already tremendously profitable and is a major player in AI, whether it's with semiconductors, software, or consumer products. The focus on large-cap companies mitigates risks; however, the fund also invests in fast-growing companies like Palantir (NYSE: PLTR) and CrowdStrike (NASDAQ: CRWD).
How to reach $1 million
Because tech stocks have exploded over the past two decades, iShares Global Tech has returned more than 840% since its inception in 2001, as shown below.
This amounts to 10.25% compounded annually. There is no guarantee that the fund will continue to perform this way; however, I wouldn't bet against tech stocks, especially with the AI boom under way. If the fund equals its historical return, an investment of $900 at the beginning of each month will return $1.16 million in 25 years -- and this is starting from scratch.
But wealth-building doesn't have to be restricted to your own money; many employers also offer matching contributions for 401(k) and other retirement plans, potentially lowering the individual contribution required to achieve life-changing wealth from a fairly modest investment by today's standards.
