It’s a common misconception that to build wealth in the stock market over the long term, you need to invest in a portfolio of individual stocks.
While it’s certainly possible to achieve superior returns with individual stocks, it isn’t a requirement for building wealth. In fact, you might be surprised at how much growth potential a portfolio of simple ETFs can have, especially if you invest in them through a Roth IRA, which can set you up for a retirement full of tax-free income. Here are three to consider.
1. Don’t underestimate the power of this “boring” investment
Legendary investor Warren Buffett has said, “It is not necessary to do extraordinary things to get extraordinary results.” He was referring to investing in low-cost index funds — specifically those that simply track the S&P 500, which Buffett considers to be an excellent “bet on American business.”
Since 1965, the S&P 500 has produced annualized total returns of about 10%. Although it can fluctuate significantly from year to year, it has historically been a great investment for people who measure their returns in decades.
One in particular that could be a good choice is the Vanguard S&P 500 ETF (VOO 0.30%), which has a rock-bottom 0.03% expense ratio. This means that for every $1,000 you have in this fund, your annual investment expenses will be just $0.30.
2. Real estate could be a big opportunity in 2024 and beyond
The real estate sector has underperformed the overall stock market recently, and it isn’t hard to see why. Real estate investment trusts (REITs) are highly sensitive to interest rate movements. Rising rates not only make it more expensive for real estate owners to borrow money, but as income-focused stocks, their yields typically rise and fall along with risk-free Treasury yields, and rising yields have an inverse relationship with stock prices.
However, with rates widely expected to fall in 2024 and 2025, it could be a great time to add the Vanguard Real Estate ETF (VNQ -0.69%) to your portfolio. This ETF tracks a weighted index of real estate stocks and has historically been a great generator of both growth and income. In fact, over the past 50 years, equity REITs have actually outperformed the S&P 500, averaging an 11.1% annualized total return from 1972 through 2021.
3. Could this ETF rally by 50% or more this year?
There has been a major disconnect between the performance of small-cap and large-cap stocks for several years. In fact, the relative price-to-book value of small caps to large caps hasn’t been lower in 25 years. And the last time we saw this type of valuation gap, small caps outperformed for the next 12 years.
Fundstrat analyst Tom Lee recently said that the Russell 2000 small-cap benchmark index could rise by more than 50% in 2024, especially if interest rates start to fall. The Vanguard Russell 2000 ETF (VTWO -0.36%) is an excellent way to invest in small caps as a whole without having to pick any individual stocks.
You might be surprised at the return potential of these ETFs
These ETFs might not sound exciting, especially compared to some of the high-growth technology stocks you could buy right now. But you might be surprised at the compound return potential over the long run.
As an example, let’s say that you open a Roth IRA in 2024 and contribute the maximum amount allowed for this year, which is $7,000, and spread it among these three ETFs. Even if they simply match the stock market’s historical performance over time, this could grow into more than $122,000 in 30 years. Now imagine if you maxed out your IRA every year from now on and invested in more low-cost ETFs.