For many investors, exchange-traded funds (ETFs) should be what they should consider when deciding where to invest. Instead of having to research various industries and individual companies, ETFs allow investors to gain exposure to multiple assets with a single investment. Whether you prefer companies in a certain industry, a particular size, or a mission you align with, there’s an ETF for you.
The best part? With time and persistence, ETFs alone can ensure you become a millionaire in retirement.
The power of composition
Financially, compounding can be either one of your worst enemies or one of your best friends. If you have debt, compounding can take it from seemingly manageable to “Oh oh, now what?” But, when it comes to investing, compounding is a wonderful phenomenon responsible for much of the creation of wealth. Compounding happens when the return you earn on your investments starts generating a return on its own, and it can easily make you a millionaire when used in the right way.
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Let’s take it S&P500, which tracks the 500 largest U.S. companies by market capitalization, for example. Historically, the S&P 500 has returned 10% per year over the long term. Some years it may return less; some years it may come back more; but generally speaking, you can expect annual returns of around 10% over the long term. If you were to invest only in an S&P 500 fund, like the Vanguard S&P 500 ETF (NYSEMKT: VOL) — here’s how long it would take you to reach $1 million at various monthly contributions:
|Monthly contributions||Annual return||Expense ratio||Years up to $1 million|
Assuming you plan to retire at age 67 — which is the full retirement age for people born in 1960 or later, according to Social Security — you could retire a millionaire simply by making regular monthly contributions to the Vanguard S&P 500 ETF from age 36. , 43 or 47, respectively.
Dividends can speed up the process
The example above is only based on the ETF’s share price increasing, but if you add a dividend yield, the time it takes to accumulate at least $1 million decreases. the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) has a dividend yield of 2.75%. If you made the same monthly contributions, but added the dividend yield, here’s how long it would take you to reach at least $1 million:
|Monthly contributions||Annual return||Expense ratio||Dividend yield||Years up to $1 million|
Even in this scenario, a dividend yield of a few percentage points can reduce the total time it takes to accumulate $1 million by several years.
Let time work its magic
For most people, becoming a millionaire solely through ETFs (or any other investment) largely comes down to one thing: time. The earlier you start investing, the better. With consistency and using investment strategies such as dollar cost averaging, many people will find that they can achieve millionaire status without needing an extraordinary lump sum of money to get started. With years of consistency, you may find yourself able to live the retirement life you envision.
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Stefon Walters holds positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.