Saving in an IRA or 401(k) is only half the job of securing a comfortable retirement. The other half is choosing investments that give you a fighting chance at growing your nest egg over time. That's not an easy thing, given that assets with higher growth potential also come with higher risk. But if you're still decades away from retirement, the Vanguard Russell 1000 Growth ETF (VONG -1.06%) might balance risk and reward in just the right way.
This exchange-traded fund is designed to mimic the performance of the Russell 1000 Growth Index, which includes select growth-oriented companies from the Russell 1000. The Russell 1000 tracks 1,000 of the largest publicly-traded companies in the U.S., while the smaller growth index tracks about half as many positions, chosen for their higher price-to-book ratios and higher projected and historical growth rates. Comparing returns, the 10-year average annual return of the Russell 1000 Growth Index exceeds 17%, while the same measure for the complete Russell 1000 is closer to 14%.
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The Vanguard fund, likewise, has delivered 10-year average annual pre-tax returns of 17.11%. Sadly, that doesn't mean you can bank on that growth rate in your retirement portfolio going forward, for a couple reasons. One, a fund's past performance is never a promise of what the future will hold. And two, you shouldn't put 100% of your retirement savings into a single U.S. equities fund anyway. You should stay diversified, possibly with exposure to fixed income, real estate, and international markets as well.
Having said that, adding a high-growth fund into the mix could raise your portfolio's overall returns and boost the size of your nest egg.
How returns affect growth
The table below shows how a 1% change in annual investment returns can affect your portfolio balance over the course of 20 years. The monthly contribution of $562 is reasonable if you make $50,000 annually, you contribute 10% of your salary, and you're earning an additional 3.5% employer matching contribution.
|
Monthly Contribution |
Real Rate of Return |
Balance After 20 Years |
|---|---|---|
|
$562 |
5% |
$231,001 |
|
$562 |
6% |
$259,667 |
|
$562 |
7% |
$292,761 |
|
$562 |
8% |
$331,029 |
|
$562 |
9% |
$375,352 |
|
$562 |
10% |
$426,765 |
Table by author.
Note that real returns are net of inflation. A real return of 10% equates to growth before inflation of 12% or 13%. That's an aggressive growth goal considering that the long-term average annual return of the S&P 500 is about 10% before inflation.
Timeline and risk
The Vanguard Russell 1000 Growth ETF has an expense ratio of 0.08% and net assets of $8.1 billion. Its portfolio includes 450 U.S. stocks and is heavily weighted toward the technology and consumer discretionary sectors. The top 10 holdings make up nearly 46% of total net assets as of this writing.
Your retirement timeline is a major factor in determining whether a high-growth fund like the Vanguard Russell 1000 Growth is right for you. Yes, the fund has produced double-digit returns in the past, but the trade-off is volatility. The fund's portfolio includes hundreds of smaller companies like Zoom, Zillow, and Herbalife, alongside larger companies like Apple and Amazon. The little guys are appealing, because they can grow faster than their larger counterparts, but their share prices also tend to swing more dramatically.
If retirement is 15 or more years away, you can make that trade-off without losing too much sleep. You don't need to cash anything out for a while, which means you can afford to ride out the short-term volatility for a shot at higher growth. Plus, you might only be checking your account balance a few times a year anyway. But if retirement is within five years, it's wise to temper your high-growth focus and build more stability into your investments. That's because don't want to see a big dip in your savings value just as you are about to retire. At that point, the Vanguard growth fund makes less sense as a core position in your portfolio.
