By investing in an S&P 500 ETF, investors can take advantage of the growth of the U.S. economy.
The good thing about financial goal-setting is that there are no right or wrong goals; just goals that fit your personal situation and ambitions. Some people aim to retire early, while others set their sights on a huge purchase. Regardless of the case, the $1 million mark has long been a significant milestone for many people.
If you're looking for an exchange-traded fund (ETF) that has shown it has the ability to take you to millionaire land, look no further than the Vanguard S&P 500 ETF (VOO 0.53%). Since its September 2010 inception, the Vanguard S&P 500 ETF has produced admirable returns, averaging just over 12% annual returns and 14% annual total returns (which include dividends).
Past performance never guarantees future performance, so you don't want to believe you can predict what will play out. However, if you assume this trend continues, $500 monthly investments would cross the $1 million mark in around 25 years by averaging 14% total returns. If you go with the more "conservative" 12% figure, it would hit the $1 million mark in around 27 years.
The power of compound interest in investing
Arguably, the most powerful force in investing is compound interest (or compound earnings, as some refer to it). In investing, compound interest occurs when the money you make on investments begins to make money on itself.
To see it in action, imagine you invest $500 monthly ($6,000 annually) and earn 10% annual interest. The following chart shows how compound interest works its magic when you reinvest your profits to begin earning interest:
| Year | Starting Balance | Interest Earned | Ending Balance |
|---|---|---|---|
| 1 | $6,000 | $600 | $6,600 |
| 2 | $6,600 | $660 | $7,260 |
| 3 | $7,260 | $726 | $7,986 |
| 4 | $7,986 | $799 | $8,785 |
| 5 | $8,785 | $879 | $9,664 |
Calculations by author. Numbers rounded to the nearest dollar.
Had you removed the $600 in earned interest after each year, you would've only made $3,000 in those five years versus roughly $3,664. By putting your interest to work and letting it compound, you can reap the full benefits of compound interest -- which makes hitting the $1 million mark more attainable.
So, why the Vanguard S&P 500 ETF?
By no means is the Vanguard S&P 500 ETF the only ETF that can turn $500 monthly investments into $1 million. However, the ETF is a great choice because it can act as a one-stop shop for investors. It has the trifecta: diversification, blue chip stocks, and low cost.
To begin, the ETF contains companies from all 11 major sectors, ensuring investors get exposure to various industries that make up the U.S. economy. In fact, the amount of ground the S&P 500 covers makes an investment akin to an investment in the broader U.S. economy by most accounts. It's not foolproof, but history has shown that it's one of the safer long-term bets you could make.
It's also not just the amount of companies held in the ETF; it's the type of companies. The ETF has well-established market leaders leading the way and contains every blue chip stock on the U.S. stock market (using inclusion in the Dow Jones as criteria since there's no official list).
Cost-wise, the Vanguard S&P 500 ETF's 0.03% expense ratio is one of the lowest on the stock market, equaling a meager $0.30 per $1,000 invested. That ensures investors keep more of their gains to themselves instead of paying them out in fees.
Focus on remaining consistent, no matter what
Plenty of people have become millionaires by investing in an S&P 500 ETF, but consistency is key. It can be easy to want to try to time the market -- avoiding investing when prices are high and going all in when prices are low -- but you should avoid that if you can.
A better approach would be using dollar-cost averaging. In this case, you could break down your $500 monthly investments into $125 weekly, $250 bi-weekly, or whatever works best for your personal situation. The key is to remain consistent regardless of how stock prices look at the time. This can help reduce the impact of volatility and put you in a better position in the long term.
Stay patient and play the long game, and you'll be in a great position to be rewarded with a seven-figure investment.
Stefon Walters has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
