A million dollars is no longer the financial benchmark it once was. Nonetheless, a seven-figure fortune is nothing to scoff at. Achieving a million-dollar nest egg through stock selection is astounding for novice investors. However, it is also laborious and requires substantial time to study the market. Not everyone is capable of investing the necessary effort and time, nor are they necessarily motivated to do so.
The good news is that you can become a self-made millionaire without constantly monitoring your portfolio. ETFs, or exchange-traded funds, can perform the same function as individual equities, if not better.
The Firepower of ETFs
This premise will be contested by many people, which is quite reasonable. Most members of the financial media machine report the news in a manner that suggests investors should frequently purchase and sell equities. Conversely, advising individuals to buy and keep index funds for years does not attract an audience or attract advertising, which ultimately pays the investment media industry.
Don’t be deceived, however. A simple exchange-traded fund, such as SPDR S&P 500 ETF Trust (SPY -0.96%), an investment in the broad market, can do the task. Considering the index fund’s average annual return of 9%, a $5,000 yearly investment made in it for 33 straight years will yield $1 million. Although saving an additional $5,000 may be difficult for some, it is a desirable objective for investors who can extend their budgets.
The S&P 500 (GSPC -1.01%) is one of many indexes to invest in, and it should not be the first index you consider. The iShares Core S&P Mid-Cap ETF (IJH -1.12%) provides exposure to the S&P 400 Mid-Cap Index if you are a serious long-term investor who can tolerate a little more volatility. The stock has averaged a 10% return over the past three decades. It would take you only 31 years to reach a million dollars if you invested $5,000 per year (and reinvested the gains) in the same mutual fund.
However, there are other viable ETF alternatives. Given sufficient time, an even more volatile Technology Select Sector SPDR Fund (XLK -1.64%) yields even greater returns, and over the past two decades, it has averaged 13% returns. At that rate, a $5,000 monthly investment in the exchange-traded fund would yield $1 million in 28 years.
You are not obligated to invest in only one ETF. Any combination of these alternatives or other varieties of ETFs can generate a million dollars over time. In reality, such a portfolio may be a far superior choice than one comprised of dozens of different equities but not for the reason you might think.
The correct mindset is fifty percent of the struggle.
There are clear distinctions between individual equities and exchange-traded funds (ETFs). The best of these distinctions, though, is not readily apparent. This is the rationale for investors selecting funds over equities.
As previously stated, the financial news industry frequently urges investors to attempt timing stock selections. People are encouraged to purchase equities when they appear to be underpriced. Similarly, they must sell equities that appear to have risen too quickly and far.
The issue is that neither the media nor investors are adept at market timing. When investors are not adequately committed to long-term holdings that are held for far longer than any near-term, volatility-driven stock movements may continue, this sort of activity often costs more than it saves.
The core philosophy of the majority of exchange-traded funds, however, avoids the danger of poorly timed stock trades. Most investors purchase ETFs with a truly long-term outlook, intending to hold them through good and bad times, thereby capitalizing on their strength. With such a plan in place before the onset of difficulties, it is far simpler to maintain these positions when other investors are selling their shares. This implies that you are wholly involved in the market during its turning points, thereby participating in its positive potential. Those with a long-term perspective don’t need to worry about the market’s short-term fluctuations because they have reason to anticipate substantial gains given sufficient time in the market.
And it is a significant issue. The path to millionaire status encourages stock market investing and rewards those who can leave their portfolio alone and allow time to do the majority of the heavy lifting. ETFs are one of the simplest ways to achieve this objective.