- Investing in the stock market always involves risk, but you can mitigate it by diversifying.
- Exchange-traded funds are diversified like mutual funds but are bought and sold like stocks.
- Three millionaires told Insider the rely on ETFs to continue building their wealth over time.
It can be hard to simply save your way to wealth, but investing in the stock market can be a smart option to grow your net worth over time. However, the stock market can be volatile and comes with risk, especially if you are invested in individual stocks or are trying to time the market.
We asked three millionaires about how they invest to keep their wealth steadily growing over time, and they all said they invest in exchange-traded funds (ETFs) as a lower-risk way to get in on the growth of certain industries or the market as a whole.
These funds often contain a variety of securities, including company stocks, commodities, and bonds. Most ETFs are managed by firms that can pick which securities to include based on the ETF’s objective. It can either track an index, be grouped together by certain industries, or include securities across multiple industries.
“ETFs give the busy consumer an opportunity to leverage the expertise of professional portfolio managers. They give the public access to some of those ‘hot’ industries that most people expect will be successful,” said Jason Howell, financial planner at Jason Howell Company, via email. “Trying to pick the individual companies within those industries is often more like gambling on a group of thoroughbred horses — they all look good.”
ETFs offer solid returns without much effort
Millionaire Michael Quan has a portfolio that includes three investment types: individual stocks, ETFs, and mutual funds. He started off as a more active investor and would pick individual stocks that he thought had good growth potential. Eventually, though, he migrated most of his investments into ETFs to diversify his portfolio. He has some mutual funds, but limits them because they are more expensive to hold. He currently has a net worth of about $2.6 million, with over $600,000 invested in ETFs, according to records viewed by Insider.
“I spent a fair amount of time originally being an active investor, meaning that I was choosing my own basket of [stocks] and it performed OK,” Quan told Insider. “I also had a side fund that was just tracking an ETF that was the total stock market index. And so what I noticed over time, or over the course of probably about 10 to 12 years, was that all of my active stock investing didn’t necessarily outperform the ETF. So when I realized that, I was like, well, I’d much rather just get into the ETF because it’s very passive. I don’t have to do much and I’ll still get very similar returns. I’d rather focus other areas, like real estate investing.”
ETFs take some of the guesswork out of investing
At 30, Sharon Tseung has already reached a million-dollar net worth by investing her income to build long-term wealth. She currently has about $360,000 in her brokerage account, with the majority invested in ETFs, according to records viewed by Insider.
She enjoys investing in tech-based companies but doesn’t want to take the time and effort to try to pick and choose which ones might have the greatest potential. Instead, she seeks out ETFs that include all the companies she wants to invest in.
“Many people think that investing is too challenging or requires a lot of money to start, but in reality, investing doesn’t have to be ‘sexy’ or intricate,” Tseung told Insider. “Long-term investing can be quite simple. Around 75% of my stock portfolio is in ETFs, and the rest is in stocks with a long-term outlook. Every year, I just put most of my income into the same investments, like QQQ.”
With ETFs, you can plan for the long-term
Adrian Brambila, 32, has a net worth of about $4 million. He’s spent the last 11 years focused on building passive streams of income and long-term wealth. Brambila enjoys keeping a minimalist lifestyle and saving 90% of his income. This allows him to invest most of his earnings into his brokerage accounts and real estate.
His investment portfolio holds about $972,000 between brokerage accounts and retirement funds. About 80% of that is sitting in ETFs, with a majority in a mix of Vanguard ETFs.
“Because I’m long-term focused on them, I know that the prices may fluctuate day-to-day, but I’m more interested in what they look like 30 years from now. And, based on the history of these types of funds, 30 years from now, that’s a pretty safe investment,” Brambila said.
They’re not without risks, and some ETFs are riskier than others
Although ETFs are a solid option, they don’t all have the same risk level. Some ETFs are only focused on a single industry, which isn’t as diversified and has higher risks.
“I could give you an ETF that owns the entire US market, but I could also give you an ETF that owns the energy sector, which is not necessarily safe,” said Asad Gourani, financial planner at AG Wealth Management.
Gourani recommends considering your personal goals as well as your risk tolerance and risk capacity when building your portfolio. This will help you decide the ratio of securities and other assets to include. He encourages seeking out investments from all asset classes, including real estate or real estate investment trusts (REITs), and global ETFs.
ETFs can be bought and sold through most regular brokerage accounts. If you need a little more guidance, you can also use a robo-advisor, which is a digital platform that can set up a diversified portfolio based on your goals and risk tolerance. Platforms like Betterment, Wealthsimple, or Wealthfront are all trusted options. But there are a variety of other platforms to fit your specific needs.