Do you think investing your way to millions requires expert stock-picking skills? Think again. Sometimes the best investments are effortless. And therein lies the beauty of exchange-traded funds, or ETFs.
An ETF gives you an automatically diversified basket of investments that you buy and sell exactly as you would trade an individual stock. Because a single ETF spreads your money across many different investments, you don't face the risks that come with picking individual stocks. Keep reading to learn what it takes to retire a millionaire through ETFs alone.
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Can ETFs really make you rich?
In a nutshell: Yes, ETFs alone are enough to make you rich. With just one investment, you can capture the growth of the overall stock market or a certain segment of it.
For example, you can find ETFs that focus on pretty much any industry, investment theme, or region of the globe. Want to invest in artificial intelligence or electric vehicles? There are ETFs for that. Or you can choose ETFs that invest in stocks within a specified market capitalization range or that meet environmental, social, and governance criteria.
Probably the best way to get started is with an ETF that tracks most of the U.S. stock market, if not all of it -- like an S&P 500 ETF. Your money won't get the jaw-dropping returns you would get if you could pick the next Apple (AAPL +0.88%) or Amazon (AMZN +0.92%).
But for every stock that delivers blockbuster returns, there are many more that turn out to be busts for early investors. Because you're spreading out your risk, your odds of substantial losses are lower with an ETF compared with individual stocks.
Over long stretches of time, the overall market has historically produced wealth-building returns. Take the S&P 500 index, which represents roughly 80% of the value of the U.S. stock market. In the past 30 years, the index has produced a gain of around 800%. Had you invested $100,000 in the SPDR S&P 500 ETF Trust (SPY +0.35%), which aims to replicate the index's returns, shortly after its inception in 1993, you'd have just shy of $900,000 today.
The value of time for ETF investors
ETFs don't deliver get-rich-quick results. So it's important to start investing early and then use a buy-and-hold strategy, giving your money plenty of time to compound.
Going back to our example of the SPDR S&P 500 ETF Trust: That same $100,000 investment that would have grown to almost $900,000 if you'd invested 30 years ago would be worth less than $470,000 had you invested 20 years ago.
How many ETFs do you need?
It's possible to get most of the diversification you need with a single ETF that tracks most of the U.S. stock market. If you want to go beyond the companies in the S&P 500, you could choose a total stock market fund, like the Vanguard Total Stock Market ETF (VTI +0.41%), which will invest your money in nearly 4,000 U.S. stocks.
Still, it's typically wise to invest a small percentage of your portfolio in a bond ETF, since bonds tend to be less volatile than stocks. And as you get closer to retirement, it's smart to raise that percentage. You might want to diversify even further, perhaps by adding a real estate or international ETF.
Building a seven-figure nest egg through ETFs requires time and patience, not luck. If you start investing early enough, a couple of ETFs could easily grow into a million-dollar investment portfolio.
