If you don’t fancy yourself a stock picker, ETFs offer an accessible investing alternative. But you may wonder about the downside. Does an ETF strategy have the same long-term wealth potential as owning individual stocks?
Rest assured, if you’re targeting millionaire status by retirement, you can reach that goal as an ETF investor. Some would argue that an ETF strategy improves your chances of retiring a millionaire over stocks alone. Read on to find out why, and how much you’ll need to invest to grow that seven-figure balance.
Diversification and long-term performance
If you buy a single share of an S&P 500 ETF, you’ll gain exposure to 500 large, established companies across a wide range of industries. That type of diversification is friendly to your budget and your long-term returns.
Diversification improves long-term returns by lowering volatility. If you own a single stock, your account balance will reflect the full force of every price change on that stock. If you own multiple stocks, the ups of one position can offset the downs of another. That shaves off the harshest edges of price fluctuations — which, in turn, supports stronger long-term results.
The general guideline for achieving appropriate diversification in a stock portfolio is to own 20 or more companies across various economic sectors. Broad-based index ETFs have that level of diversity built in. An S&P 500 ETF holds 500 companies across 11 sectors. A Wilshire 5000 ETF has thousands of positions, also spread across all 11 economic sectors.
Average annual returns
Note that if your timeline is shorter than 20 years, there’s a higher chance your performance will be better or worse than 7% annually. The shorter your timeline, the wider the range of possible results.
How much to invest
There are various ways you can grow an ETF investment into $1 million. For the lowest out-of-pocket costs, you’d make a big, one-time investment today in a tax-advantaged account and leave it invested for decades. For example:
$260,000 invested today at a 7% average return will grow to $1 million in 20 years.
$135,000 invested today at a 7% average return will grow to $1 million in 30 years.
The obvious problem with this plan is that you may not have $135,000 or $260,000 sitting around. The next best strategy is to invest monthly. This method requires you to keep investing, even when the market is in turmoil. In down markets, you get more shares for your dollar — which props up your long-term gain potential.
The table below shows monthly investment amounts needed to reach a $1 million balance under different timelines. All numbers assume the average 7% return and tax-deferred earnings.
Years Until Retirement
Estimated Balance at Retirement
A quick review of the numbers shows an obvious takeaway: The monthly investing budget needed to reach $1 million is far lower when you start earlier. That’s a universal investing truth, whether you’re buying individual stocks or ETFs.
Grow your million
By starting today and allowing yourself enough time, you can retire as a millionaire with ETFs. Relative to picking stocks, your millionaire journey may be less stressful and more straightforward, too.
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