If you plan to invest every month, you don’t have to worry about having a big lump sum right away.
Over time, your balance will grow, which means the compounding effects will also be greater.
Investing in a well-diversified exchange-traded fund can be a low-risk way to grow your portfolio.
10 stocks we like better than Vanguard Total Stock Market ETF ›
Money can be a big barrier to getting started with investing. If you don’t have enough saved, you may feel discouraged from even starting. But because investing is a long-term process that can take years and even decades, investing gradually over time can still lead to significant returns.
If you can afford to invest on a monthly basis, it is something you should strongly consider doing. Below, I’ll show you how an investment of about $440 a month can grow to be worth $1 million after 30 years.
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If you are investing regularly every month, the last thing you probably want to do is make the process complicated. The good news is that rather than sifting through stock news and following multiple companies, you can have just one or more exchange-traded funds (ETFs) to put your money into each month.
the Vanguard Total Stock Market Index ETF (NYSEMKT: VTI) is an excellent choice for this purpose, as it has minimal fees and wide diversification. At 0.03%, its expense ratio is among the lowest. In exchange for this, you get exposure to not just hundreds but thousands of stocks. This can be ideal for investors who want to minimize risk. The largest holding in the fund today is Nvidiawhich amounts to 7% of its total portfolio.
Although the fund is diversified, its performance remains comparable to that of S&P 500. Over the past decade, the ETF has generated a total return (including dividends) of 260%, which is a bit less than the 279% returns you would have earned by simply tracking the S&P 500. On a $10,000 investment, that’s a difference of about $2,000. You sacrifice some income in exchange for security, and that’s typically what you expect. However, in the long run, reducing risk is crucial, especially if you don’t want to constantly monitor the stock market.
If you’re investing $440 per month in the Vanguard Total Stock Market Index ETF or others that give you good exposure to the overall market, you could be in a position to benefit from strong compound growth over the years. Historically, the S&P 500 has averaged an annual return of around 10%. No doubt there will be bad years along the way, but this is what the index has averaged over decades.
Given how closely this Vanguard fund tracks the index, it may not be unreasonable to expect it to continue to perform in line with that long-term average in the future. Returns are never a guarantee, but if your investment ends up with an average return of 10% per year, here’s how that $440 per month investment will grow over time.
A year
10% Growth
5
$34,356
10
$90,883
15
$183,887
20
$336,907
25
$588,672
30
$1,002,903
Table and calculations by the author.
Compounding can take time, and in the first ten years you still won’t be up to a six-figure balance. However, from years 25 to 30, the balance grows by more than $400,000. This is the big payoff from the long term investment. Once your balance becomes substantial, the earnings start to become huge. Even though the percentage change may remain the same, the dollar amount will be significantly more substantial.
Investing a certain amount of money each month in an ETF, such as the Vanguard Total Stock Market ETF, can be a big step in the long run. Even if you can’t invest $440 a month, it might be a good idea to start with something each month to build that balance over time.
If you wait until the time is right and you have a large lump sum, you may miss out on potential gains along the way. In addition, investing every month can help you establish a regular habit, which can also reduce the temptation to try to time the market or obsess over its performance.
The bottom line is that if you stay the course and continue to invest regularly (ideally at least a few hundred dollars a month), you are likely to build a significant balance over the long term.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.
1 Top Vanguard Fund That Can Turn $440 a Month into $1 Million in 30 Years was originally published by The Motley Fool
