Can you withdraw a millionaire with ETFs alone?

This is one of the toughest questions investors need to ask themselves without could crimp my overall return?

A lot of people are taking the old road, and that’s understandable. Much of the financial media machine makes it easy to fall in love with individual stocks by touting stories of high potential stocks. ETFs and mutual funds, on the other hand, aren’t great news or bring massive gains.

In other words, funds are not only relatively boring, but apparently not the most productive path to wealth.

Don’t be fooled, however. You can become a millionaire by investing in ETFs as well as owning individual stocks. In fact, you could do even better by limiting yourself to exchange-traded funds. The trick is to just leave them alone long enough to let them simmer.

Time and consistency are the keys

What does it take to become a self-made millionaire? Not as much money as you might think. But it takes a lot of time and a tremendous amount of self-discipline. Specifically, an investor needs enough self-discipline to keep investing money in the market even when it is difficult (including when the market collapses).

To illustrate this point, let’s look at a hypothetical investor named Jill.

Jill is 30 years old and earns an average income of $ 36,000 per year. She knows a little about the market, including that it’s the only long-term way to beat inflation. But she also knows that she has neither the time nor the inclination to keep an eye on a wallet on a regular basis. She decides to keep it simple by committing to regular purchases of SPDR S&P 500 ETF Trust (NYSEMKT: SPY), connecting it to the overall performance of the market. She can raise an additional $ 4,000 per year for her investment, but even though she expects to receive regular pay raises, new expenses like children and a mortgage are unlikely to allow her to invest the money. extra later in life. She would like to retire at 65 with a million dollars in the bank. Can she do it?

Believe it or not, she can. Assuming an average market return of 9% over 35 years, Jill’s annual investment of $ 4,000 should be worth around $ 940,000 by the time she turns 65. Investing the occasional bonus she receives at work would help her overcome the seven-figure bump. .

Surprised? Don’t be. This amazing growth can be attributed more to capitalization than to Jill’s total contributions of just $ 140,000. She earns a lot of money on the money she has already earned through her investment efforts.

If Jill could have started at age 25, she could have turned a smaller $ 3,000 annual investment in the ETF into $ 1.1 million at age 65.

And that’s exactly the kind of net return you’d expect on the most basic of exchange-traded index funds. Investors could “juice” their results by venturing out of the more notorious stock indexes and taking positions in ETFs representing the fastest growing sectors of the stock market. For example, the SPDR Technology Select Sector Fund (NYSEMKT: XLK) has fared even better than the S&P 500 over the past 20 years, while the IShares US Consumer Discretionary ETF (NYSEMKT: IYC) more than doubled the overall market return for the same period. If the US Consumer Discretionary ETF continues to operate as it has, Jill’s modest but stable investment regime could turn her recurring investment into over $ 2 million, if it were limited to this particular fund.

Data by YCharts.

The flip side: waiting to do something – anything – can cost you dearly. If Jill had waited until she was 35 to start investing in the SPDR S&P 500 ETF Trust, not even an additional $ 1,000 in annual contributions would have allowed her to reach $ 1 million. Allocating $ 5,000 a year over 30 years would leave her only about $ 740,000 by the time she was ready to retire.

Choosing the right actions is difficult

The funny thing is that most investors are arguably better served by taking this much simpler ETF-based approach to investing.

According to data collected by Standard & Poor’s, most actively managed mutual funds underperform their benchmarks. For example, last year only about 42% of mutual funds offered to investors in the United States exceeded the S&P 500. The remaining 58% followed the performance of the broader market.

Think about it for a moment. Most full-time stock picking professionals who are trained (and well paid) to at least keep up with the market don’t.

And the success rate only gets worse the more you lengthen the time frame in question, overturning the argument that the pandemic has created incredibly unusual circumstances. In the past five years, only 27% of domestic funds have beaten the market. In the past decade, only 17% of actively managed US funds have passed the S&P 500. At 20 years, the success rate drops even more.

Which give? The data ultimately points to one of the most overlooked but most dangerous realities of the market: the effort to beat the market often leads to poor decisions that even cause most professionals to underperform it. That doesn’t mean it can’t be done. This is just to point out that, statistically speaking, this is pretty darn hard for most people to do.

Think about the results, not the entertainment

But you just don’t like funds? Or do you like the idea of ​​winning big on an individual stock so much that you just can’t bring yourself to allocate most of your capital to admittedly less sexy investments like an ETF? Fair enough. A simple solution is to allocate a portion of your portfolio to exchange-traded funds with multi-year holding periods and use the rest to select individual stocks.

Just for the sake of discussion, however, ask yourself this difficult question: Is your stock picking effort really getting you closer to your goal, or has it turned into a form of entertainment? Exchange traded funds aren’t that exciting, sure, but they sure get the job done. The key does not wait too long to start.

Just something to think about.