You’ll commonly hear it’s important to maintain a diverse mix of investments in your brokerage account. Doing so could be your ticket to not only growing wealth, but protecting yourself from losses during periods of stock market volatility.
Now, there are a few different paths you can take to building a diversified portfolio. You could load up on a few dozen stocks across a range of market sectors. Or, you could load your portfolio with broad market ETFs.
ETFs, or exchange-traded funds, are funds that focus on different indexes or sectors of the market. If you buy shares of an S&P 500 ETF, what you’re effectively doing is investing in the 500 largest publicly traded companies today.
ETFs are a great option for investors who don’t feel comfortable hand-picking stocks, or who don’t want to do all of the research involved. But is loading up on ETFs enough to retire securely? The quick answer is, absolutely — especially if you commit to holding those ETFs for a really long time.
It pays to go broad
The nice thing about ETFs is that they offer instant diversification. And if you hold onto ETFs for many years, you can set yourself up to grow a lot of wealth in your portfolio.
Over the past 50 years, the S&P 500 index has delivered an average annual return of 10% before inflation. This doesn’t mean that’s the return the index has clocked in every year during that time. Rather, that 10% is an average that accounts for both strong years and down years.
But let’s say you were to invest $300 a month in an S&P 500 ETF over 40 years. Let’s also assume you’ll get to enjoy that same 10% average annual return. All told, you’d be looking at growing your portfolio to almost $1.6 million. If that sounds like a large enough nest egg to support yourself during retirement, then it’s pretty clear that you can, in fact, rely on ETFs alone to fund your senior years.
Are ETFs the right choice for you?
One downside of putting money into an ETF is that you’re not getting to choose your stocks individually. And that means your portfolio may not manage to beat the broad market.
If that’s something you don’t find bothersome, though, then ETFs could be a good choice. After all, a 10% return isn’t too shabby.
This isn’t to say that all ETFs will deliver that same 10% average annual return. Remember, that 10% applies to the historical performance of the S&P 500. There are sector-specific ETFs you can invest in that may have a history of lower or higher returns.
The point, however, is that retiring on ETFs alone is more than doable. So if you’re someone who isn’t comfortable with the idea of selecting individual stocks, don’t. Instead, invest more broadly. There’s nothing wrong with falling back on ETFs, and if you commit to holding them for many years, you may end up more than happy with your decision.
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Read More: Can I Retire on ETFs Alone?