In investing, there's no need to invest in individual stocks to achieve strong returns over time. Don't get me wrong. I own about 40 different individual stocks and completely believe it's possible to beat the market over time. But even if you simply match the market's performance through the magic of index fund investing, you might be surprised at the results.
With that in mind, here are five simple index funds that could help set you on the path to a million-dollar retirement portfolio, and with minimal ongoing effort on your part. We'll also look at how you can use these to grow your portfolio to a seven-figure sum before you retire.
Five simple index funds to buy and hold for decades
To be fair, there are hundreds of solid index funds that could make excellent retirement investments for you. But if I were to start a portfolio from scratch today and could only choose five index funds, here's what they would be:
- Vanguard S&P 500 ETF (VOO +0.82%): There's a solid case to be made that if you were only going to buy one index fund, it should be this. The Vanguard S&P 500 ETF will track the performance of the benchmark S&P 500 index over time, which has historically averaged annual returns of about 10%. And with a rock-bottom 0.03% expense ratio, you'll get to keep most of the index's gains.
- Vanguard Real Estate ETF (VNQ +0.24%): Real estate investment trusts, or REITs, are often thought of as boring investments. However, many people don't realize that not only have REITs slightly outpaced the S&P 500 over the long run, but they've done so with significantly less volatility.
- iShares iBoxx Investment Grade Corporate Bond ETF (LQD +0.42%): While you're young, you should have most of your money in stocks, but it's still a good idea to put some of your money into fixed-income investments and to gradually shift your allocation toward them as you get older. This index fund invests in corporate bonds and currently has a 4.4% yield with relatively low downside risk.
- Vanguard Russell 2000 ETF (VTWO +0.76%): In full disclosure, this is the index fund I've been buying recently. It invests in a broad basket of small-cap stocks, and while small caps have underperformed their large-cap counterparts, they tend to produce similar or even better returns over long periods of time.
- Vanguard International High Dividend ETF (VYMI +0.68%): It can be a smart idea to diversify some of your portfolio into stocks based outside of the United States. Since dividend stocks tend to be relatively mature with stable cash flows, I like to use this ETF to get international exposure (and a 4.3% dividend yield).
VOO Total Return Price data by YCharts.
How can you turn these into a million-dollar retirement portfolio?
Let's assume for a second that you'll average 10% returns annually with these index funds. Here's how much you would need to invest per month (total, not in each fund) to reach a $1 million nest egg, depending on how long you have until your retirement:
|
Years Until Retirement |
Monthly Investment to Reach $1 Million |
|---|---|
|
20 years |
$1,455 |
|
25 years |
$847 |
|
30 years |
$507 |
|
40 years |
$188 |
Data source: Author's own calculations. Amounts rounded to the nearest dollar.
One extremely important takeaway from this chart is the earlier you get started, the easier it will be to reach your goals. Someone who starts buying index funds when they're 40 years from retirement has to save less than one-fourth as much per month as someone who waits until 25 years from retirement.
It's also worth noting that many people want to retire with significantly more than $1 million, so this chart can be adjusted to give you an idea of how much to invest. For example, if you want to retire with a $3 million nest egg, simply multiply the appropriate monthly investment in the chart by three.
Of course, there's no way to know exactly how these index funds will perform over the next few decades. We also don't know what the market will be doing when you retire. If you anticipate retirement in 2050, for example, there's no way to know if we'll be in the middle of a deep recession or a period of extreme economic prosperity.
Having said that, a basket of these five index funds, combined with the tax-advantaged compounding of retirement accounts and steady investments over time, can put you on the path to a financially secure retirement regardless of what the economy does in the meantime.
