Wednesday, October 01, 2008

How to be a millionaire

Trading common stocks can be a harrowing affair. The other option to grow your wealth is to look at Exchange Traded Funds (ETFs). The best ETFs in my opinion are those that track broad based indices like the S&P500. The S&P500 tracks the top 500 large cap companies in the U.S and is generally used to indicate the state of the U.S equity market. If you look at historical returns, the S&P500 has delivered between 8 to 12 % gains annually. Compound this over a period of 20 to 30 years and you've got pretty substantial returns.

The ETF that tracks this is the SPDRS TRUST SERIES 1 (Stock Ticker: SPY) and the investing formula is dollar cost averaging. Because this ETF tracks the entire U.S market, it is essentially neutral and by buying into this ETF at consistent points every year with a fixed amount of cash, you can ride out the ups and the downs. When the market is up, you buy less units. When its down, you buy more. The point is to consistently accumulated units year after year and the earlier you start, the better.

Using the historical market returns of the S&P500 (taking a safe compounding rate of 5%, an initial amount of US$10,000 with a yearly investment growth of 10% (i.e. the same time next year, I will use US$11,000 to purchase more units and US$12,100 the following year), I can look to accumulate US$1,043,003 in 21 years.

The only concern is that your investment is in U.S dollars so there are also foreign exchange risks to consider. There's a local equivalent, the Strait Times Index (STI) and you can look to purchase the STI ETF (Stock ticker: ES3.SI) with the same strategy above.

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