Investing for retirement is a long-term process. Oftentimes, people put decades into building their nest eggs. The two keys to success? Growing your money and avoiding catastrophic setbacks along the way. Slow and steady is usually the winning formula.
That makes index funds a fantastic component to any retirement portfolio. Stock market indexes represent groups of individual stocks based on a specific market sector, country, or investing strategy. They sometimes represent a broad sampling of the market as a whole. Index funds give investors instant, straightforward diversification that can set them up for long-term success.
They won't make you rich overnight. However, when your money compounds at an annualized rate of 7% to 10%, it will double every seven to 10 years. That could make you a millionaire over three or four decades, especially if you continually add to your savings over time. Here are four excellent index funds to consider buying and holding to get started on your journey.
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1. Vanguard S&P 500 ETF
The U.S. stock market is the world's largest and a commonsense starting point for any long-term investor. The S&P 500 is the most famous U.S. market index, a group consisting of 500 prominent publicly traded companies. Historically, the S&P 500 has been a wealth-building wonder. Each dollar invested in the S&P 500 in 1989 has since grown by over 38 times, and the index has returned an annualized rate of about 8% since 1928.
However, you can't invest directly in it. So, consider the Vanguard S&P 500 ETF (VOO -0.61%). Vanguard is one of the industry's most trusted names for investment funds, and this particular index fund features very low fees, allowing investors to keep almost all their money as it grows over time. Even most professionals struggle to outperform the S&P 500 consistently, so there's no need to overthink your retirement portfolio.
2. Invesco QQQ ETF
Investors can add some upside to their retirement portfolio with the Invesco QQQ ETF (QQQ -1.40%). This index fund follows the Nasdaq-100, the largest companies in the technology-leaning Nasdaq Composite index, and has outperformed the S&P 500 since its inception in 1999. Roughly 60% of the fund is technology, so it's a strong choice for those looking to invest in innovative growth opportunities like artificial intelligence.
The caveat here is that technology companies often command higher valuations and can be pretty unpredictable over time. Therefore, technology stocks tend to be more volatile. The Invesco QQQ ETF has gone through some dramatic drawdowns throughout its history, so investors will want to keep that in mind when allocating retirement savings to it.
3. Vanguard Real Estate ETF
Real estate is a classic investment for passive income, but most individuals lack the capital or know-how to own properties. That is where real estate investment trusts (REITs) come into play as alternatives. These publicly traded companies acquire and lease all sorts of real estate. A REIT will usually focus on a specific property type, such as residential, commercial, or industrial buildings, or a particular type of tenant.
With so many choices in real estate, investors can simplify things with the Vanguard Real Estate ETF (VNQ 1.68%). It follows the MSCI US Investable Market Real Estate 25/50 Index and holds over 150 different REITs. That's instant diversification across almost every property type you can imagine. The fund's current effective adjusted distribution yield is 2.8%, and it has produced total annualized returns of 7.4% since its inception in 2004.
4. SPDR S&P Dividend ETF
Dividends are a potent wealth-building force when given enough years to compound, snowballing to a level where they could even pay your bills in retirement. Rather than try to comb the market for the best dividend stocks, investors could opt for the SPDR S&P Dividend ETF (SDY 0.79%). It tracks the S&P High Yield Dividend Aristocrats® Index, which focuses on blue-chip companies with established histories of increasing their dividends for at least 20 consecutive years. (Note: Dividend Aristocrats® is a registered trademark of Standard & Poor's Financial Services LLC.)
The fund offers a nice blend of growth and income. It has an estimated blended anticipated earnings growth rate of 7.9% over the next three to five years, and the fund's distribution yield is currently 2.5%. Therefore, investors can reasonably expect high-single digit to low-double-digit annualized total returns over the long term, and could reinvest the dividends along the way to maximize how their money compounds over time.
