The money you have in your retirement savings plan shouldn’t just sit in cash. Rather, you’ll need to invest in that money to fuel its growth, with the ultimate goal of outpacing inflation and amassing as much long-term wealth as possible.
To that end, it pays to look at putting your retirement savings into an ETF, or exchange-traded fund. The upside of ETFs is that they take a lot of the guesswork out of investing and allow you to own a large number of companies with a single purchase.
Now there are different broad market ETFs you could choose to invest your retirement savings in. But here’s one that offers the benefit of true diversification.
Access to the whole stock market
You’ll often hear that it’s a good idea to load your portfolio with S&P 500 ETFs, since they give you a piece of the 500 largest publicly traded companies. But there’s room to invest beyond just the S&P 500. And that’s why it pays to consider the Vanguard Total Stock Market ETF (VTI).
Unlike S&P 500 ETFs, the Vanguard Total Stock Market ETF gives you exposure to large-, mid-, and small-cap companies. And like many ETFs, it comes with a low expense ratio of just 0.03%. That’s important, because you don’t want high investment fees to eat into your portfolio’s returns over time.
What’s also impressive about the Vanguard Total Stock Market ETF is its average annual return of 8.5% since its inception in May of 2001. Now you may find ETFs with a higher return than that. But let’s also keep that return in perspective.
The fund was launched just before 9/11, and it’s held its own in the wake of the Great Recession. Granted, if you look at its recent performance, you may not like what you see. As of March 25, the fund is down 5.27% year to date.
But that’s not shocking seeing as how stocks have spent much of early 2022 in correction territory. And so it’s more important to pay attention to the fund’s average return since inception, as that’s more indicative of how it’s likely to perform over a longer period of time.
A good way to grow wealth
Let’s assume you put $500 a month into your retirement plan over the next 35 years, and you decide to invest that money in the Vanguard Total Stock Market ETF. If the fund performs similarly over the next three-and-a-half decades, you’ll be looking at a retirement account balance of $1.15 million. Extend your investing window to 40 years, and you’ll be looking at an even more impressive $1.77 million.
Now there are other ETFs that might deliver a similar return. And if your goal is to beat the broad market, the Vanguard Total Stock Market ETF won’t help you do that. The goal of the fund is match the market’s performance rather than outpace it. But if you’re happy with an 8.5% return over time, then this may be the perfect ETF for you.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.