Can ETFs Alone Make You Retire a Millionaire? | Smart Change: Personal Finance

Let’s go over the main reasons to invest in ETFs as a perfectly reasonable way to achieve a seven-figure net worth.

One of the main keys to successful investing is to keep your investment expenses as low as possible. Many investment options, such as actively managed mutual funds, come with recurring fees that can significantly affect your portfolio balance. In the words of the great Jack Bogle, founder of Vanguard, “Back comes and goes. But the fees are forever.”

This does not mean that all ETFs have low expenses, but many have low expenses – especially if we are talking about broad market ETFs. boxes like Vanguard Total Stock Market ETF It operates on very low expense ratios, in the ballpark of 0.05% or less annually. On a $10,000 balance, that adds up to $5 a year — not a bad deal.

The trading fees for most ETFs are also very low, especially if you use one of the online discount brokers, such as Fidelity, Charles Schwab or Vanguard. If you buy internally traded ETFs, or ones that are branded with the company you’re trading with, you probably won’t pay any trading commission at all. This means that you will not have to worry about additional costs when you enter or exit the center.

As said before, putting all your eggs in one basket is rarely a good idea—especially when it comes to saving for retirement. Investing in ETFs is a great way to diversify your money since ETFs represent baskets of stocks from different industries and sectors. Some of them even cover global stocks, which means you won’t need to buy more than a few ETFs to have a fully diversified portfolio.

Diversification also reduces the overall risk of your portfolio. If you are investing in individual stocks, you are relating yourself to the company’s own risk (sometimes called “unsystematic risk”) for the particular companies you have chosen. On the other hand, ETFs often contain hundreds of stocks and isolate you from the poor performance of any one company.

All of this means that ETFs can provide beneficial diversification at very low costs, which is great value for the everyday investor.

ETFs are widely available to any retail investor with an internet connection, which makes them attractive for a number of reasons.

First, unlike hedge funds, private equity funds, or even most stock-picking financial advisors, there is no minimum investment to buy ETFs. You don’t need to really be a millionaire to buy ETFs, which many people find attractive on the face of it. Furthermore, investment options with high fees are often unable to beat the long-term investment returns that ETFs can achieve, especially after accounting for expenses.

Then, the days of calling a stockbroker to buy a stock for you are completely behind us, as the practice has been deemed completely outdated, especially by the younger generations. You can buy ETFs directly from your phone without any hassle at all, or you can create a setup within your account to buy new shares automatically.

Finally, passive ETFs do not require constant management by the investor. Funds created to track broad markets are meant to be left alone for extended periods of time. Compound ETF returns can easily make you a millionaire if you are able to hold the underlying funds long enough. In other words: ETFs save time and effort.

Exchange-traded funds are really attractive to the everyday investor for a number of reasons, but their overall value and time-saving nature are clearly two things that most people can fall behind. There is no real reason to overcomplicate your investing life when there are products like ETFs.

If you’ve already invested in individual stocks, you might consider building a portfolio of ETFs around your existing trades. Alternatively, if you are starting from scratch, it makes sense to start with ETFs and build satellite sites from there. Either way, it’s worth taking a look at the benefits that ETFs have to offer as a way to save in the long run.

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Sam Swenson, CFA, CPA has positions at the Vanguard Total Stock Market ETF. Motley Fool has positions in and recommends a Vanguard Total Stock Market ETF. Motley Fool has a disclosure policy.