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Asked about his investing success, Warren Buffett attributed it to “living in America, lucky genes and compound interest.” That may sound glib, but it highlights two great ways you can build wealth (Buffett’s genes aside): Buy shares of leading U.S. companies and keep plowing your money into the stock market.
Buying stocks might seem foolhardy now, with the U.S. market near historic highs. But even if stocks falter in the near term, they are likely to push higher over the long haul.
Granted, the path to $1 million gets easier if you have plenty of time and a pile of money to invest. With $50,000 in the kitty, it would take more than 31 years to hit the mark at a 10-percent annual return. But by investing steadily, through market ups and downs, you can accelerate the timetable. Adding $1,000 a month to the pot would push you past $1 million in 20 years. Saving $1,500 a month would get you there in a little over 17 years.
These figures assume you plow every penny of dividend income and capital gains back into the market, and they don’t factor in taxes or investment fees, both of which would trim your returns. One way to deal with those issues is to buy an exchange-traded fund that mirrors the broad market. One such fund, iShares Core S&P Total U.S. Stock Market ETF (symbol ITOT, $57), charges just 0.03 percent in annual fees, putting 99.97 percent of the market’s returns in your pocket. And because the fund distributes minimal capital gains, it’s tax-efficient, too (though you may owe taxes on dividends if you hold the ETF outside of a retirement account).
You can try to beat the market with other ETFs, actively managed mutual funds or individual stocks. Many think banks will benefit from lower corporate tax rates and a rollback of regulations. Financial Select Sector SPDR Fund (XLF, $25), a member of the Kiplinger ETF 20, holds a bundle of them.
Among mutual funds, one of our favorites is Fidelity New Millennium (FMILX). Emphasizing shares of large, growing companies, it has returned an annualized 10.8 percent over the past 20 years, beating Standard & Poor’s 500-stock index. Vanguard Health Care (VGHCX) has fared even better, gaining 13.1 percent annualized.Individual stocks pose more risks, of course, but they can be well worth it. Buffett’s holding company, Berkshire Hathaway (BRK-B, $171), has been a steady winner, edging the S&P 500 over the past 15 years with an annualized return of 9.2 percent.
Buffett, 87, will eventually depart. But the company he built should continue to thrive, riding the strength of the U.S. economy.
Daren Fonda is a senior associate editor at Kiplinger’s Personal Finance magazine. Send questions and comments to firstname.lastname@example.org.