Can a portfolio of ETFs retire a millionaire? The answer is YES. Here’s how a € 20,000 investment could turn into € 1 million by retirement.
Investing in ETFs it is an excellent solution for all types of investors. Thanks to their power of diversification, low costs and an excellent risk-return ratio, they are what many people are looking for in an investment.
If we look at the American market, where the best exchange-traded funds, there are currently about $ 7 trillion invested in ETFs, an increase of about 27% since the end of 2020, and that’s more than seven times the total of just a decade ago in 2010. They have grown at a rate annual rate of around 25% over the past decade, and Bank of America published a study not long ago that ETF assets are projected to reach $ 50 trillion in the United States by 2030.
As investor engagement grows, so too are the number of ETFs. To date, there are over 2,600 different ETFs in the United States; there are ETFs that invest in large areas of the market, as well as indices, sectors, specific investment styles, or just about any market segment imaginable. There are also a growing number of actively managed ETFs, as well as custom ETFs that invest across multiple exchanges or benchmarks.
With so many options available, is it possible to find the perfect ETFs that can send you retirement as a millionaire? Let’s take a look at how and where to invest …
How to build the perfect ETF portfolio
Since ETFs are baskets of stocks, like mutual funds, which are traded on exchanges as a single stock, they are already diversified to some degree. But with so many options, you can get ETFs that range from very aggressive on one side of the spectrum to ultra-conservative on the other, with various risk profiles in between.
So, just like you would a stock portfolio, a portfolio of ETFs it would be diversified by risk profile to better ‘navigate’ between the ups and downs of the markets.
Let’s say you have invested a total of € 20,000 in four ETFs, € 5,000 each. One could be a more aggressive growth ETF, like Invesco QQQ (NASDAQ: QQQ), which invests in the stocks that make up the Nasdaq 100 Index. Invesco QQQ is one of the largest ETFs on the market, with over $ 209 billion in assets. It invests in the 100 largest US non-financial stocks, with approximately 70% in technology and communications services stocks. Over the past 10 years, up to the third quarter of 2021, it recorded an annualized return of 22.4%. The Invesco QQQ ETF since its inception in 1999 has returned approximately 9.7% annually.
Another might be a large cap ETF is theSPDR S&P 500 Trust (NYSEMKT: SPY). This ETF has returned around 16.5% over the past decade through September 30 and, since its inception in 1993, has an annualized return of 10.3%.
Now, we provide further diversification with an ETF for all markets, such as theETF Vanguard Total Stock Market (NYSEMKT: VTI), which invests virtually the entire US investable market of over 4,000 stocks. This ETF has returned around 16.1% over the past 10 years on an annualized basis. Since inception in 2001, it has returned 9% on an annual basis.
Finally, the fourth ETF in the portfolio could be a small cap ETF, such as theETF iShares Russell 2000 Growth (NYSEMKT: IWO). This ETF invests in over 1,200 growth stocks of the Russell 2000 small cap index. Over the past 10 years through September 30, this ETF has returned around 15.8% annually and since the beginning in 2000 it has returned 6.9% on an annual basis.
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The long run to the million euros
The past 10 years have been particularly good for the stock market, as we had one of the longest bull markets in history. We can’t really expect that kind of long-term performance again, but as all of these funds have a long track record, over 20 years, we take their returns from the start and extrapolate them over the next 30 years.
Starting off investing € 5,000 in each of the ETFs mentioned above and adding an amount of 100 euros per month, calculating their growth at the rate of past returns, after 30 years you would have accumulated these amounts …
If the Invesco QQQ recorded an average return of 9.7% after 30 years you would have around € 303,000, while the SPDR S&P 500 Trust would have reached around € 349,000, with an annualized return of 10.3%. The Vanguard Total Stock Market ETF, with its 9% return inception, would accumulate around € 257,000 after 30 years, while the iShares Russell 2000 Growth ETF would have accumulated around € 159,000 over that period with its annual return of 6 , 9%. If you add it all up, you would have around 1.1 million euros after 30 years.
This result is purely hypothetical, as it is impossible to know what the market will do in the long run. But we know that theS&P 500 has returned about 10% per year, on average, since its inception in 1957. It also assumes this is your only retirement investment. If you have an employer-made retirement plan, you may not be able to invest $ 100 a month in each ETF, but maybe you could make $ 50 a month. In this way, the amount obtained after 30 years may not reach one million euros, but if added to your other investments, investing in ETFs would certainly help you achieve that goal. The key is patience and commitment, and this will lead to results.
How to invest in ETFs. The Complete Guide
How to invest in ETFs
Investing in ETFs is easy; you can do it in three steps.
1. Open an account
First, you need to open an account with a brokerage firm or broker. A brokerage firm is an intermediary who facilitates the buying and selling of securities. Opening an account with a brokerage firm or an online broker is not that different from opening a bank account.
There are many different brokerage firms to choose from. Full-service brokerage firms can provide financial advisory services, but they also tend to be more expensive. On the other hand, online brokers could be the best solution for investing in ETFs. Many online brokers offer commission-free trading on stocks and ETFs, so they are of great value.
This is a list of the best brokers that offer the possibility of investing in ETFs:
CFDs are complex instruments and come with a significant risk of losing money quickly due to leverage. Between 62 and 89% of retail investor accounts lose money when trading CFDs. Consider if you understand how CFDs work and if you can afford to take this high risk of losing your money.
2. Find and compare ETFs
After opening your brokerage account or with an online broker, you can start investing in ETFs. ETF costs can vary widely from fund to fund, so it’s important to do your homework and compare them with each other.
Here are some of the features you can compare:
- Administrative expenses: also known as the ‘expense ratio’, these are commissions that are used to maintain the fund.
- Commissions: This is a transaction fee every time you buy or sell an ETF.
- Volume: how many investors are involved in a particular ETF? The more investors there are, the easier it will be to buy and sell.
- Equity investments: which shares does the fund contain? Do you think they will generate strong returns?
- Performance: how much profit did the fund generate? This is an important consideration for long-term investors, not necessarily active traders.
- Negotiation prices: how much is the price per share?
Before buying an ETF, consider your budget and investment goals.
3. Start trading
Once you’ve selected a good ETF, you can place a buy order! Remember that most ETFs are designed to require little or no maintenance. If you are a long-term investor, don’t react impulsively to short-term price fluctuations. Many ETFs tend to deliver solid returns over a long period.
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