Want to grow your portfolio to $1 million? Here’s how much you should invest in the stock market

A $1 million goal is a great goal for your investment portfolio. If you reach this amount by the time you retire, you’ll have plenty of options by your side. For example, you can withdraw money slowly for daily use. Plus, you can invest some of it back into dividend stocks, which generate a steady stream of cash to supplement any retirement income you might have.

However, it is important to know how much you should invest and have realistic expectations. Ideally, you will start investing as early as possible. But if you can’t, you can make up for that lost time by saving more and investing more money in the years to come.

How much do you need to invest in the stock market to reach $1 million by retirement?

There are three variables to consider when investing in stocks: your average annual return, how much you invest, and the number of years you have left to invest. If you assume that you will have an average return of 10%, which is S&P 500long-term average, then you can decide on the other variables. Assuming your retirement age is 65, here’s how much you should invest based on a 10% annual return.

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By compounding your earnings over time, a relatively modest investment of $13,719 at age 20 can grow to $1 million because you have 45 years of compounding left. A 10% return over 45 years would mean your investment would grow to almost 73 times its original size. But if you invest at age 50 and only have 15 years left to invest, then that same 10% annual return will only grow your investment to roughly 4.2 times its value.

Your returns may look better if you achieve a higher average growth rate, or worse if you end up averaging less than 10%. But if you expect an extremely high growth rate and that you will consistently beat the market for decades, that can set the bar a bit high and lead to disappointment later.

A few ETFs for long-term investors to consider

Instead of trying to beat the S&P 500, you might consider just trying mirror it. The SPDR S&P 500 ETF Trust (SPY 0.43%) is an exchange-traded fund (ETF) that tracks the S&P 500 index. The benefit of this is that the fund takes all the guesswork out of investing. You don’t need to invest in any other stocks because the ETF will give you exposure to various industries and all major stocks. This includes An apple, Microsoftand Amazon, which are the top three stocks in the index. You can simply invest each month in the fund, knowing that your overall risk is limited.

If you want to try a more aggressive strategy, Vanguard Growth Index Fund (VUG 0.48%) may be more attractive. The fund focuses on growth stocks, which can often offer investors better returns. The passively managed fund provides investors with exposure to the highest growth stocks. The top three stocks in the fund are the same as SPY, but the percentage is different – Apple, Microsoft and Amazon account for 32% of VUG’s holdings versus just 18% in the broader ETF. VUG is also more technological, with more of 53% of the fund allocated to technology stocks, while for SPY the percentage was only 29%.

Over the past 10 years, VUG is up 230%, while SPY is up 154%. But when we look at just the last three years, it is SPY that has the higher return (25% vs. 21%). Ultimately, it depends on your growth outlook for the stock and whether you want a more diversified approach or are comfortable with a heavy technology investment. However, both funds can provide you with great long-term returns while providing you with excellent diversification.

ETFs can make investing a lot easier

If you’ve set aside money to invest in the stock market, you’ll want to use that amount to generate steady returns while ensuring that the risk of loss is minimized. And that’s where ETFs can help. Instead of spreading savings of $100,000 or more across 10+ stocks and then having to track them all, you can put that money into a diversified fund and keep your money safe.

If you are confident in your stock picking abilities, then buying stocks would be a better option. But for investors who lack experience tracking individual stocks, choosing an ETF can make the process much easier.

John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Microsoft and Vanguard Index Funds – Vanguard Growth ETF. The Motley Fool has a disclosure policy.

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