If you're looking to build a hefty war chest for retirement, it's a good idea to focus on stocks -- at least with your long-term investing.
Check out the table, offering the returns of various asset classes between 1802 and 2021, per Wharton Business School professor Jeremy Siegel:
|
Asset Class |
Annualized Nominal* Return |
|---|---|
|
Stocks |
8.4% |
|
Bonds |
5% |
|
Bills |
4% |
|
Gold |
2.1% |
|
U.S. dollar |
1.4% |
Data source: Stocks for the Long Run, Jeremy Siegel.
*A nominal return, as opposed to a "real" one, is one that excludes inflation.
Image source: Getty Images.
Here's how your money could grow over time at an 8% growth rate:
|
Growing at 8% for |
$6,000 invested annually |
$12,000 invested annually |
|---|---|---|
|
5 years |
$35,192 |
$70,399 |
|
10 years |
$86,919 |
$173,839 |
|
15 years |
$162,913 |
$325,825 |
|
20 years |
$274,572 |
$549,144 |
|
25 years |
$438,636 |
$877,271 |
|
30 years |
$679,699 |
$1,359,399 |
|
35 years |
$1,033,901 |
$2,067,802 |
|
40 years |
$1,554,339 |
$3,108,678 |
Data source: Calculations by author via Investor.gov.
Clearly, an 8% average annual gain over a long period can indeed set you up for life. You might achieve it by investing in a simple S&P 500 index fund, such as the Vanguard S&P 500 ETF -- which encompasses 500 of America's biggest companies.
If you want to build that war chest more quickly, you might add some growth stocks to your mix, perhaps via a growth-oriented exchange-traded fund (ETF).
Here's another way to try to juice your portfolio's growth: by investing in a bunch of smaller companies. For that, many people look to the iShares Russell 2000 Growth ETF (IWO +2.60%). It's an index fund focused on smaller companies that are growing at a respectable clip. (Remember that ETFs are funds that trade like stocks, making it easy to get in or out of them.)
NYSEMKT: IWO
Key Data Points
Meet the iShares Russell 2000 Growth ETF
First off, here's how the ETF has performed:
|
Over the past... |
iShares Russell 2000 Growth ETF average annual gain |
|---|---|
|
Year |
18.69% |
|
3 years |
14.33% |
|
5 years |
8.86% |
|
10 years |
9.63% |
Data source: iShares.com, as of Oct. 31.
That might seem pretty good, but compare it to the overall S&P 500's performance over the same periods:
|
Over the past... |
iShares Russell 2000 Growth ETF average annual gain |
vs. Vanguard S&P 500 ETF |
|---|---|---|
|
Year |
18.69% |
21.48% |
|
3 years |
14.33% |
22.63% |
|
5 years |
8.86% |
17.58% |
|
10 years |
9.63% |
14.60% |
Data source: iShares.com and Vanguard.com, as of Oct. 31.
While smaller companies tend to have greater growth potential than huge ones, they don't always outperform. Still, they sometimes do, and they can help diversify a portfolio. An environment of lower interest rates (facilitating easier borrowing, to further growth) and moderating inflation can help many small-cap companies grow.
What's in the iShares Russell 2000 Growth ETF?
You might reasonably wonder just what's in the ETF. As of Nov. 18, it encompassed 1,090 companies, with an overall price-to-earnings (P/E) ratio of 26.5.
Here are its top 10 holdings:
|
Stock |
Percent of ETF |
|---|---|
|
Bloom Energy |
1.59% |
|
Credo Technology |
1.46% |
|
Fabrinet |
1.05% |
|
IonQ |
0.96% |
|
Kratos Defense and Security |
0.83% |
|
Guardant Health |
0.81% |
|
Nextpower |
0.75% |
|
Madrigal Pharmaceuticals |
0.74.% |
|
BridgeBio Pharma |
0.73% |
|
Ensign Group |
0.71% |
Data source: iShares.com.
You probably are not familiar with many of these companies, as they're not the bigger, more well-known businesses you'll find in the S&P 500. You'll also note that no single company makes up a significant portion of the ETF. That's not the case in the S&P 500, which has become very concentrated, with close to 40% of its assets in just its top 10 holdings, such as Nvidia, Microsoft, and Apple.
Such concentration is a risk: While the market and those big stocks will reward shareholders when times are good, if those few stocks tumble, the S&P 500 index could fall hard.
Alternatives to the iShares Russell 2000 Growth ETF
Still, if you're looking to include more small companies in your portfolio, you have other choices beyond the iShares Russell 2000 Growth ETF.
For example, you might just invest in the Vanguard Total Stock Market ETF (VTI +1.16%). This ETF aims to include nearly all U.S. stocks, including small and medium-sized companies that are not included in the S&P 500.
Here's how the ETF has performed:
|
Over the past... |
Vanguard Total Stock Market ETF average annual gain |
|---|---|
|
Year |
12.63% |
|
3 years |
19.50% |
|
5 years |
13.72% |
|
10 years |
13.62% |
Data source: iShares.com, as of Nov. 18.
It strikes a nice balance between the iShares Russell 2000 Growth ETF and the S&P 500 index fund.
Another possibility is the Vanguard Small-Cap ETF, which includes more than 1,300 companies -- both fast growers and more value-oriented ones.
However you go about it, think about whether your portfolio would do well with some smaller companies in it -- and if so, how you might go about adding them.
