Investing in the stock market is a great way to accumulate long-term wealth. However, it’s not easy picking the right investments. I believe that the trick to building wealth over the years is to pick an exchange traded fund (ETF) and invest in it regularly for a long time.
Where I’m looking
For my own portfolio, I’m interested in the S&P 500. This is widely considered the most important index in the US. It contains 500 large companies that are selected by a committee. Firms must have a big enough market cap, have at least 10% of shares outstanding and meet liquidity and profitability requirements.
It includes big-name companies such as Microsoft, Apple and Amazon. In terms of industries, the index includes a variety of sectors such as technology, retailers and banking.
One issue is that the index only includes companies from the US. It’s true that many of these companies derive some of their earnings from outside the US, but this percentage has been falling over time.
Another downside of buying the S&P 500 is that I limit my returns to those of the index. I could be wrong, but by perhaps by picking individual stocks I might be able to outperform it.
However, this index allows me to invest in a massive 500 companies by holding a single share. For me, it’s a low-cost way of diversifying across companies and sectors. I’m happy to forgo the possibility of a higher return from investing in individual companies for the ease of this diversification.
How much can I earn with an S&P 500 ETF?
Although the index does experience short-term volatility, it has recovered from every crash it’s ever experienced. It’s also earned an average rate of return of around 10% per year since 1957.
By my calculations, assuming a 10% annual return, by investing £50 a month in an S&P 500 ETF for 25 years I’d have close to £70,000.
Of course, I know it might not achieve that return and some believe the S&P 500 is overvalued. Though nothing is certain in investing, I’m hopeful that in the future we might see a strong performance. That’s why I think that by investing consistently over a long period of time, this ETF can be an unstoppable way of building wealth.
Selecting an ETF
As such an important index and essential barometer of US stock market health, it’s no surprise that there are lots of ETFs available. Most, if not all, of the major investment firms offer such a fund.
The largest one listed in the UK is iShares Core S&P 500 UCITS ETF worth over $57bn. The cheapest one is Invesco S&P 500 UCITS ETF with an ongoing charge of 0.05%.
For my own portfolio, I’ve chosen Vanguard S&P 500 ETF, which takes a middle path in terms of size ($38bn) and costs (0.07%).
I believe that a long-term outlook and giving my money as much time as possible to grow is key to building retirement wealth. I’m going to continue investing as much as I can afford each month into this ETF as part of a balanced portfolio.