How to Become a Millionaire
Updated: Jun 3, 2023
*Not financial advice - your money, your choice*
In this post in less than 4 minutes we'll cover:
A simple investment strategy I use that can help you retire with millions
Index funds
Mutual funds
ETFs
Index funds are an umbrella term that includes mutual funds and exchange-traded funds (ETFs).
They are typically portfolios constructed to match or track components of benchmark financial market indices (S&P 500, DOW, NASDAQ, etc.) so they can be automated; these are called passively managed ETFs/mutual funds/index funds.
These are particularly cool because re-structured based on a benchmark index or any other criteria that the firm that runs the ETF/fund wants AND you don't have to pay capital gains taxes when the firm sells stuff.
To use an analogy, a passive ETF/mutual fund is like a chameleon.
It blends into whatever the benchmark index structure is as if it were a rainforest canopy.
So, if the surroundings are 50% green and 50% brown then it will change to also be 50% green and 50% brown (or at least very close to 50/50).
Chameleon from freepngimg.com
Active ETFs/mutual funds/index funds are different in that they are not automated. They are managed by real humans like you and me and are subject to the same faults. Oftentimes, actively managed funds don't outperform the market... they also tend to have higher expense ratios (management fees) to pay the people that manage the fund… so what’s the point then?
So long as the fund manager outperforms the market by more than their fee costs, they’re worth it. But, chances are they won't be able to pull that off in the long term.
Table from Performance Investing Group
Most passively managed funds are preferable as they usually have lower expense ratios (fees), offer broad market exposure, and low portfolio turnover typically only costing $3-10 per year (Bankrate.com).
They are great core holdings in IRAs and 401Ks because they tend to provide a consistent return on investment (ROI).
Some of my favorite index funds include VTI and its admiral fund, VFIAX, as well as VOO, VGT, and its admiral fund, VITAX.
Chart from Google
The benefit to choosing an admiral fund over the standard index fund is that the admiral fund typically offers an even lower expense ratio than the standard fund meaning it costs you less money over time to hold.
A potential drawback to holding an admiral fund is that you need a larger amount of cash to start.
For example, to invest in VFIAX, the admiral fund for VTI, you need to commit $3K or have an employer-sponsored retirement account (401K, ROTH 401k, etc.) to be able to invest.
It's a bit like shopping at Costco; you're buying in bulk so you pay a little less.
Once you buy an admiral fund, you can convert them to standard funds (like changing VFIAX to VTI) but not the other way around.
If you have a large sum of cash to invest, it's usually better to use an admiral fund for a lower expense ratio.
Here are the top 5 index funds as of September 2021 according to Bankrate.com:
Fidelity ZERO Large Cap Index (FNILX)
Vanguard S&P 500 ETF (VOO)
SPDR S&P 500 ETF Trust (SPY)
iShare Core S&P 500 ETF (IVV)
Schwab S&P 500 Index Fund (SWPPX)
These tend to change over time and the best index fund, historically, may not have the same returns in the future. That said, past performance is typically a good indicator of future returns.
Mutual funds!
Some index funds are referred to as mutual funds. Mutual funds are often opened-end meaning that an investor purchases the fund using a minimum amount directly from the issuer (an institution like Charles Schwab).
Mutual funds often have a page where you can read about the person or people who manage the fund, their history & historical performance, and investing philosophy.
Both mutual funds and ETFs are pooled collections of assets that generally hold stocks, bonds, and other securities.
Index mutual funds enjoy the benefits of diversification, tax efficiency, and low costs while ETFs are more likely to be passively managed and they often track a particular market index.
There are also types of mutual funds that trade on the stock market like ETFs. These are called closed-end mutual funds. Many mutual funds are passively managed but some are actively managed by a professional money manager.
Read more about mutual funds on Vanguard's website here.
ETFs!
ETFs are also traded the same way that shares of a stock for an individual company, like Apple, may be traded (in whole or fractional shares) and their price is determined by market forces.
I mostly put money into VTI, VOO, and QQQM. This is because of low fees, good historical performance over time, as well as the fact that it tracks how the stock market does overall.
If America does well, I do well, and I’m willing to bet on Americans. Since the inception of VTI, annual returns have averaged 6.5-7.5% (Fidelity) meaning that if you invest $30,000 and then $1,000/mo for the next 30 years, you’ll end up with about $1.4MM.
Chart from Calculator.net
Since that beats the vast majority of financial professionals maintaining/setting up U.S. Equity funds, I’m pretty happy with it:
Table from Aei.org
Spoiler alert, the % of financial professionals that outperform the market over 30 years is even lower at <2%. That said, there are some complex situations that may require hiring someone like a financial advisor, accountant, and/or lawyer can offer a greater return on your investment than... investments?
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