Consistently Investing in a Single ETF: Your Path to Million-Dollar Status?

Investing can be a complex, jargon-filled world filled with endless options. Olivier Le Moal/ShutterStock

We all dream of having substantial wealth. For many people, though, the stock market is a golden ticket. In spite of that, investing can be a complex, jargon-filled world filled with endless options.

However, what if we told you that a relatively simple approach could make you a millionaire? Well, it’s possible. Find out how by reading on.

Understanding ETFs

Let’s briefly discuss ETFs before diving into the strategy. An exchange-traded fund (ETF) tracks an underlying index, such as the S&P 500. ETFs are essentially baskets of securities that diversify your risk across multiple companies instead of buying individual stocks, where your investment is concentrated in one company.

Warren Buffett, one of the world’s most successful investors, has often urged investors to use index funds to simplify investing. He recommends investing in a low-cost S&P 500 index fund instead of actively managing an investment.

The Power of Compounding and Dollar-Cost Averaging

Two powerful concepts are at the heart of long-term investing: compounding and dollar cost averaging.

• Compounding. According to Albert Einstein, this is the eighth wonder of the world. It is essentially how you earn interest on interest. As time goes on, the growth can become exponential.
• Dollar-cost averaging. This strategy involves regularly investing a fixed amount in a particular investment, regardless of share price. By buying more shares when prices are low and fewer when prices are high, you can reduce the impact of market volatility.

The Single ETF Strategy

Unlike stocks, exchange-traded funds (ETFs) are baskets of securities. From stocks to bonds to commodities, ETFs track various asset classes.

With a low-cost ETF tracking a broad market index (such as the S&P 500), you can achieve diversification without the complexity of picking individual stocks. This strategy is often referred to as “passive investing.”

Why a Single ETF?

• Simplicity. ETFs simplify decision-making and reduce management fees over stock portfolios.
• Diversification. Investing in a broad-market ETF gives you access to hundreds of companies, reducing the risk involved with investing in individual stocks.
• Low costs. Investing in ETFs with low expense ratios allows you to keep more of your returns.
• Automation. You can automate investments to ensure consistent contributions without taking any action.

The Million-Dollar Equation

The following three factors contribute greatly to reaching a million dollars through ETF investing:

• Initial investment. In general, the larger your starting amount, the faster you may reach your goal.
• Contribution amount. You can significantly accelerate your investment growth by making regular contributions.
• Rate of return.Although past performance does not guarantee future results, historical market returns can provide a general benchmark.

Here’s an example. Based on a $10,000 investment contributing $500 per month and a 7 percent annual return (historical average for S&P 500):

• The amount you could accumulate in 20 years is approximately $547,000.
• Increasing your initial investment, adjusting your contributions, or extending your investment horizon are all possibilities for reaching a million dollars.

ETF Obstacles

Of course, becoming a millionaire is not without its challenges. Your investment journey can be affected by market fluctuations, economic downturns, and personal setbacks. However, it’s important to keep a long-term perspective while making investments.

• Commissions and expenses. Despite their lower expense ratios and trading commissions, exchange-traded funds still incur expenses.
• Underlying fluctuations and risks. An ETF tracks an underlying index, so its performance is tied to its performance. A market downturn can negatively affect the value of an ETF.
• Low liquidity. It may be difficult to buy or sell shares of some ETFs, especially those tracking niche markets, due to low trading volumes.
• Capital gains distributions. You can face tax obligations even if you do not sell your shares if you own an ETF that distributes capital gains.
• Lump sum vs. dollar-cost averaging. The timing of your ETF investment can have a significant impact on returns. It is possible to mitigate market fluctuations by using dollar-cost averaging.
• Leveraged ETFs. These ETFs can increase returns by using derivatives, but they can also be extremely volatile and risky.
• ETFs vs. ETNs. While similar to ETNs, they are backed by the issuer, not by assets. As such, credit risk is associated with them.
• Reduced taxable income flexibility. Unlike mutual funds, ETFs typically generate taxable income, which limits tax-loss harvesting opportunities.
• Underlying value. Due to market conditions, the ETF’s price may differ from its net asset value (NAV).
• Issues of control. An ETF’s underlying holdings are limited in control by investors.

Mitigating Risks

In order to meet these challenges, consider the following:

• Diversification. To reduce risk, spread your investments across different ETFs.
• Research. Before investing, make sure you are familiar with the ETF’s underlying assets, fees, and risks.
• Long-term perspective. Instead of focusing on short-term changes in the market, aim for long-term goals.
• Tax efficiency. You may want to consider ETFs or investment accounts that are tax-efficient.
• Rebalancing. Make sure you review your ETF portfolio periodically to determine if it needs to be rebalanced.

Is It for Everyone?

For many investors, the single ETF strategy is the right approach. Some people, however, may not be able to make use of it. As such, before making a financial commitment, consider the following:

• Risk tolerance. Investing in a conservative strategy might be better if you have a low-risk tolerance.
• Time horizon. Investors with short-term investments may experience increased volatility.
• Financial goals. It is important to consider your specific financial goals when selecting an investment strategy.

The Million-Dollar Question

By investing in a single ETF, how long does it take to become a millionaire? The answer depends on several factors, including your investment amount, the ETF’s performance, and your investment timeframe. However, it is possible to accumulate substantial wealth by consistently investing over several decades based on historical market returns.

By John Rampton

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.