Why put a lot of work into trying to beat the market year after year when you can match the market's return with almost no effort? That's the core reasoning behind making exchange-traded funds (ETFs) a big part of your investing strategy.
There are many ETFs that replicate the returns of large indexes like the S&P 500, essentially allowing you to outperform most professional fund managers with just one simple investment.
You might be surprised at the long-term gains that are possible when you commit to steadily adding cash to an ETF like the Vanguard Total Stock Market Index Fund (VTI 1.06%) over many years. A few hundred dollars per month of savings placed into this fund could grow into over $1 million in a few decades.
Why buy an ETF?
An ETF is a collection of stocks bundled into one investment. You'll get to own a stake in hundreds or even thousands of individual stocks by owning just a single share of these funds. That diversification is valuable as it helps protect your portfolio against sharp declines.
The Vanguard Total Stock Market Index Fund is one of the best ETFs you can choose. It has a rock-bottom expense ratio, meaning there's almost no drag on your returns from fees. You'll get exposure to all U.S. public companies, essentially covering the wider market's returns. Some of its largest holdings are among the most successful companies on the market. Microsoft and Apple take up the top two positions in the fund, for example.
Getting to over $1 million
The fund has returned 12% per year over the past decade, which is on par with the S&P 500's gains over that time. At that rate, investing just $250 per month would allow you to accrue an over $2.3 million portfolio in 40 years. Your contributions would be $120,000 over that time, and compounding returns would take care of all the rest.
Of course, stock market returns are highly variable from year to year. The next several decades might not look like the past one for U.S. businesses, as well. It makes sense, then, to take a conservative approach to projecting long-term returns. Yet even if this fund delivers 10% gains from here, you'll still see over $1 million in your portfolio after 40 years of investing.
Risks in owning this ETF
You minimize several risks by owning an index fund like this one, including the possibility that you'll be overexposed to just one or two stocks that end up dramatically underperforming the market. It's important to realize, though, that the Vanguard Total Stock Market Fund is not immune to big declines.
The fund's top investments are skewed toward members of the "Magnificent Seven" stocks, which have rallied in the past year and thus are trading at elevated valuations today. These factors raise the risk that the fund could drop sharply along with the wider market during the next pullback. Tech stocks tend to be among the hardest hit once fears spike over a recession, after all.
That's why it makes sense to aim for steady purchases of this ETF over time. That way, you can ensure that you aren't making a huge commitment just before the market heads lower. You can use dollar-cost averaging to smooth out that volatility, as well. Yet the important thing is to stick with your investing plan through the market's inevitable ups and downs. That's the surest path toward incredible investing returns over the decades.
