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This ETF Could Help Grow Your Retirement Account

The Motley Fool logo The Motley Fool 6/22/2020 Chuck Saletta
a sign on the side of a building: This ETF Could Help Grow Your Retirement Account © Provided by The Motley Fool This ETF Could Help Grow Your Retirement Account

Over long periods, the vast majority of professional money managers tend to underperform a relevant market benchmark after including their costs. That makes investing to build your retirement account balance fairly straightforward. Instead of having to search high and low for a manager who might beat the market, you'll very likely be better off simply finding a low-cost ETF that tracks a benchmark you like and investing in it.

If you're not sure what benchmark to use, one straightforward path is to take Warren Buffett's advice to "never bet against America" and simply follow one that tracks the overall U.S. market. A superb ETF that tracks the total US Stock Market  is the Vanguard Total US ETF (NYSEMKT: VTI). This ETF could help grow your retirement account by letting you bet on American companies without having to pick the winners from the losers or spend a lot of money to get broad U.S. market exposure.

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Buy the market for very low friction costs

The Vanguard Total US ETF carries a minuscule expense ratio of 0.03%, which means virtually all the money you invest in that ETF goes to work and stays working for you. In addition, it recently traded hands a mere $0.01 per unit below the net asset value it represents. That close tracking between price and underlying value means that investors have a good chance of getting a fair deal whether they're buying or they're selling, helping with overall liquidity.

Even in today's era of generally free brokerage commissions, it'd likely be impossible for an ordinary investor to duplicate that ETFs holdings for as low a cost as the fund itself can manage. The bid/ask spreads alone would make it tough to keep costs down. Add to that the headache of having to make thousands of transactions every time you wanted to invest new money or take money out, and duplicating the portfolio on your own simply isn't worth it.

Instead, with one simple transaction every paycheck, you can invest in a very broad swath of the U.S. market, keep your costs in check, and likely beat most professional money managers. What's not to love?

Appropriate for long term growth, not current cash flow

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As much as the Vanguard Total US ETF has going for it, it's important to note that it's most appropriate for money you're looking to let grow over time. It's not a great choice for money you need to spend in the near term -- within the next five years or less. This is because even though it's diversified among the stocks it owns, it still is ultimately a stock-based investment. As this year's COVID-19 driven crash reminds us, the stock market doesn't always go up, and when it drops, it can drop fast.

Instead, the portion of your money that you expect you'll need to spend within the next few years belongs in cash, CDs, or duration-matched Treasuries or investment grade bonds. In today's low interest rate era, you won't get much return on the money you have invested in those, but you'll have a higher likelihood that you'll get the cash flows you're promised when you expect them. For money you're spending in the near term, that's a much higher priority than maximizing your potential rate of return.

Note, though, that even current retirees may very well have decades ahead of them. They'll need money with the potential to grow over time to have a chance of covering those longer-term costs and keeping up with inflation and taxes. As a result, there's still a place in many retirees' portfolios for stock-based investments like the Vanguard Total Market EFT to offer that potential for long term growth.

Get started now

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Picking the right type of investment to buy is only part of the challenge when it comes to building your retirement account. Another -- and arguably larger -- aspect of the challenge is to keep on investing new money throughout your career to add to the pot of cash compounding on your behalf. Based on historic rates of return, it takes just $600 a month -- around $20 a day -- invested in stock type investments like the Vanguard Total Market ETF over a 30-year period to potentially turn you into a millionaire. 

There are, of course, no real guarantees in investing except this one: $0 invested at any rate of return will always wind up being worth $0 when all is said and done. That said, over time, the difference between $0 and $1 million can be as simple as $600 a month, which makes getting started now one of the most important things you can do in your quest to build wealth.

Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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