Planning for retirement may sometimes be a complicated and difficult task because of the many choices available. You might look ahead to locking in returns from a long-term investment such as a 401(k) plan. And you might wonder whether you should complement that by also investing in stocks or other investment securities separately -- or whether you should turn to real estate. And the list goes on.
Any of those things could be a valuable piece in your retirement portfolio and may greatly grow your wealth. But one investment in particular might be the easiest and most efficacious of the bunch -- and its past performance has shown it could grow a small initial investment, if contributed to regularly -- into $1 million over the long run.
I'm talking about an index fund that allows you to bet on the top companies driving the day's economy. Let's check it out.
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Reflecting the S&P 500's performance
This fantastic fund that you can count on over time is the Vanguard S&P 500 ETF (VOO -0.98%). This exchange-traded fund mirrors the performance of the S&P 500 index, a benchmark that has delivered a 10% average annual gain since the late 1950s.
The great thing about ETFs is they allow you, with just one simple purchase, to immediately invest in many companies according to a particular theme -- from industry to investment style. They also, such as in this case, may offer you exposure to a major benchmark. And in all of these cases, they provide you with instant diversification. This lowers your risk because instead of depending on just a few stocks, you're exposed to many players -- so if certain ones go through tough times, others may compensate.
Now you might be wondering: How do I buy an ETF? Is it complicated or involve fees? The good news is it's easy and cheap, as long as you go for one with a low expense ratio. ETFs trade daily on the market just like a stock, making it a snap to buy or sell them. They come with fees, reflected as expense ratios, but if you choose an ETF with a ratio of less than 1% you won't have to worry about these fees hurting your returns.
The Vanguard S&P 500 ETF, with an expense ratio of only 0.03%, clearly is a reasonably priced option. Now, let's talk about why this particular instrument makes a fantastic addition to your retirement portfolio. The S&P 500 always has advanced over the long run, thanks to its composition of strong well-established industry leaders. So, if you invest for many years, it's extremely likely you'll score a win, and if the index continues at an average annual gain of 10%, your victory could be quite significant.
How does this index win over time?
How does the index manage to consistently come out ahead? It regularly evaluates -- and replaces as needed -- members to ensure that it holds the biggest companies driving the economy. So, by investing in an instrument that tracks the S&P 500, you'll always be invested in the most compelling stocks of the times.
All of this sounds terrific, but now you might wonder: How much should I invest to potentially reach $1 million? And this is where the magic of compounding comes in. To get the most out of your Vanguard S&P 500 ETF investment, it's a great idea to make an initial investment, then add a smaller amount monthly over a number of years.
Let's consider this example, with the idea that the average annual gain over time will be 10%. If you invest $1,000 initially in the fund, then add $300 to it every month over 35 years, the value of your investment could top $1 million. You can scale these figures up or down to suit your own particular situation, and you'll find that even if you make smaller investments, you still could end up with a pretty impressive result several years down the road.
The key here is to contribute regularly over many years so that you can take advantage of compounding and benefit from the index's generally positive movement over time. And you won't have to worry about which stocks to choose at what moment or manage short-term turbulence in the market. Instead, you can sit back, relax, and let the benchmark work for you. So, if you want $1 million in retirement, this easy, low risk investment might be the perfect addition to your plan.
