Are you looking to turn a little bit of money now into a respectable nest egg for retirement? That's most investors' ultimate goal. The question is, given all the different ways you can invest your money, what's the best way of doing so to reach whatever target you may have in mind?
Here's a rundown of five different ways you could turn a stash of $100,000 into $1 million worth of retirement savings. The big distinguishing factors in each of these scenarios to consider are the amount of time you'll need to make it happen, and the amount of volatility you'll need to prepare for in the meantime.
1. Own the biggest technology growth stocks for 19 years
Veteran investors likely realize that one sector's stocks have dominated the market for over a couple of decades now. That's tech stocks, which by their very nature are also (usually) growth stocks. Their underlying companies are behind some of the world's most important sociocultural inventions, like the internet, mobile phones, personal computers, and now, artificial intelligence (AI).
The specific companies leading this ongoing evolution are, of course, forever changing. At one point IBM was a technology titan, while just two years after Nvidia's founding in 1993 it was very nearly bankrupt. Amazon didn't exist until 1994, and its ongoing existence remained in doubt until the early 2000s. HP (formerly known as Hewlett-Packard) was the centerpiece of the PC industry's earliest days. Now it's a nearly forgotten name.
There's a way to navigate these comings and goings. That is, rather than trying to pick individual winners, step into a fund that's consistently well exposed to large technology stocks, or that holds the names that will eventually become these market-leading tickers.
A mutual fund or exchange-traded fund built to mirror the performance of the S&P 500 Growth index -- something like the iShares S&P 500 Growth ETF (IVW 1.18%) -- would do the trick. If you'd prefer something with a bit more pop, the Invesco QQQ Trust (QQQ 1.08%), which is meant to mirror the Nasdaq-100 index, boasts even stronger returns. Assuming it can maintain its average annualized return of 13.3% for the foreseeable future, a $100,000 investment in it now should be worth a little more than $1 million within 19 years.
Just brace for extreme volatility in the meantime. After all, the bigger these stocks' gains, the bigger the pullbacks when they run into turbulence. The Invesco QQQ Trust fell more than 35% from peak to trough in 2020 when the COVID-19 pandemic first took hold, for perspective.
2. Own value stocks for 26 years
Too much volatility for your taste? There's a palatable alternative. While value stocks certainly aren't immune to market volatility, they do tend to hold up better to headwinds. You may be more comfortable with something like the iShares S&P 500 Value ETF (IVE 0.90%), which mirrors the S&P 500 Value index and is about 10% less volatile than the S&P 500.
You won't do quite as well with this holding as you will with something more aggressive like the aforementioned Invesco QQQ Trust (even after factoring in any dividends such funds or value stocks might pay). Since this point in 1994, the S&P 500 Value Total Return index -- which mathematically reinvests any dividends the index pays in more share of the index itself -- has only averaged an annualized return of 9.4%. That's not bad. It's even on par with the S&P 500's (^GSPC 1.15%) typical yearly gain of 10%.
Even so, at that rate of return, it would take you nearly 26 years to grow $100,000 into $1 million.
3. Own high-dividend-paying stocks for 29 years
If you instead choose to lean heavily on dividends to drive a sizable chunk of your growth, it could take you 29 years to grow a six-figure sum into a seven-figure stash. That's based on the S&P 500 High-Dividend index's total average annual return of 8.4%, which includes the benefit of the dividends it pays in the meantime. As the name suggests, the index aims to hold the S&P 500's highest-yielding 80 names at any given time.
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There's an interesting footnote to add here, however. The high-yield-minded methodology behind the S&P 500 High-Dividend index may actually be flawed in a way that ultimately undermines its long-term total net return. An analysis by mutual fund company Hartford indicates that shares of S&P 500 companies with a history of growing dividend payments they can actually afford to pay -- even if their yields aren't sky-high -- ultimately outperform most other S&P 500 stocks.
The average annual total return since 1973 for these particular tickers? Between 9% and 10%, with below-average volatility. Hartford's number-crunchers conclude that organizations willing and able to properly handle this aspect of their cash flow also do most other things well.
The point is, perhaps worrying a little less about sky-high yields and instead just looking for high-quality dividend payers could shorten the 29-year timeframe this dividend-minded approach requires.
4. Own a diversified portfolio of bonds for 48 years
You don't have to grow your nest egg using stocks at all if you don't want to. You could do it with bonds as well. It's just going to take you considerably longer to reach your goal. The average interest rate on a portfolio of short-term T-bills, investment-grade corporate bonds, and 10-year Treasuries going all the way back to 1928 is 5%. Assuming you reinvest these interest payments in an equally diverse portfolio of bonds, you could grow $100,000 into $1 million in 48 years.
That's probably not going to work for most people, even if it makes for a much less volatile portfolio. That's not just because most investors don't have 48 years to wait. That average interest rate isn't nearly as consistent as you might expect. It's been roughly half of its current rate since 2008, and was nearly twice its current average in the late 1970s and early 1980s, when inflation was rampant and the Federal Reserve was desperately trying to tamp prices down with steep base interest rates.
The last thing any future bond-minded retiree wants to be forced to do is retire in a period of prolonged weak interest rates, which is clearly possible.
5. Employ a combination of all of the above for about 25 years
It's perhaps the fifth option that makes the most sense for all investors looking to turn a little money now into a million-dollar retirement nest egg later. That is, use all four of these approaches, allocating a piece of your portfolio to each kind of holding.
Yes, doing so means you're hedging your bet. That's the point. You're not just hedging, though. You're also improving the consistency and stability of your portfolio's total value, making it easier to stick with your allocation when certain stocks start to struggle. That's a big (unspoken) part of the battle ... not flinching when things get tough. Being confident enough to remain invested means you're already positioned properly for when the recovery takes shape. And it always eventually takes shape.
Bottom line? It may be an antiquated premise, but diversification remains a must-do if you're serious about achieving real long-term growth from your investments.
