In this episode of the Personal Finance Podcast, we’re gonna give you the complete guide to investing in ETFs.
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In this episode of the Personal Finance Podcast, we’re gonna give you the complete guide to investing in ETFs.
In this episode of the Personal Finance Podcast, we're gonna give you the complete guide to investing in ETFs.
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On this episode of the Personal Finance Podcast, we're gonna give you the complete guide to investing in ETFs.
What's up everybody, and welcome to the Person Finance Podcast. I'm your host Andrew, founder of Master money.co. And today on the Personal Finance Podcast we're gonna be talking about the complete guide to investing in ETFs. If you guys have any questions, make sure you hit us up on Instagram or TikTok at Master Money Co.
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They truly mean the world to me Now. Today I'm gonna give you the complete guide to investing in ETFs. Now, if you're a beginner to investing in ETFs, this is gonna be absolutely perfect for you because as a beginner investing in ETFs, this is going to be your complete guide. I'm gonna give you everything that you need to know.
Within this guide, if you have already started to invest in ETFs. I'm also gonna give you some additional pretty cool tools that you can utilize to do research and that you can use to go throughout your ETF investing journey to make sure that you have the portfolio construction that you want. So we are gonna be going through some of the basics, and then we are gonna do some advanced analysis stuff as well inside of this episode.
So this is the complete guide. It's gonna have everything that you need to know. In addition, I'm gonna be giving. The index funding ETF cheat sheet, which is my favorite index funds and ETFs on a cheat sheet. You can get that. You can download it in the show notes. And if you have never bought an ETF before, we have just released a free webinar, a free training.
It's 45 minutes long. It's gonna take you through this entire process so that you can buy your first etf. By the end of that training, you'll be able to buy your first etf. I'll share my screen with you. You can go through the entire process, and I'm gonna show you my favorite brokerage as well, which we'll talk about today in today's episode.
So if you want to grab those two freebies, the index fund and ETF cheat. And the free training, the webinar that takes you through this entire process, you are down below in the show notes. Now that webinar link is one that we don't have listed anywhere on our website. We've never listed it anywhere on social, we've never listed it anywhere in our newsletter yet.
This is the first time you're gonna be able to see that. So when you see this webinar, this is a first time link. Go through the process. Learn how to buy your first index on an ETF via following along with. And it'll show you exactly how you can go through that process. Now, today we are going to lay this entire thing out.
Now what are we gonna cover Today? I'm gonna lay out how to invest in ETFs, but I'm also gonna talk about what is an etf, how to start investing in ETFs. I'm gonna talk about which accounts you may want to open to invest in ETFs. I'm gonna talk about how to become an automatic ETF millionaire. In addition, I'm gonna talk about how much is.
How much money do you have to have invested in ETFs in order to be able to retire? Then we're gonna talk about how to construct an ETF portfolio. We're gonna talk about how to research ETFs, and I'm also gonna give you those multiple freebies that we just talked about. So going through those freebies.
I'm gonna also give you links to other websites on how to do intense research when it comes to investing in ETFs. This is not your normal ETF guide, so I want you guys to get excited and get ready, cuz if this is something you're into, let's get into it. All right, so the first question that's gonna come up is what is an etf?
And if ETF just stands for exchange traded fund in all an ETF is, is the basket of securities that typically mirrors a trade or an exchange? What do I mean by that? So say for example, you want to invest in the s. And P 500. So you're gonna look for an ETF that mirrors and follows the s and p 500. This is the same thing as how index funds work, where they mirror an index, and some of my favorite ETFs always mirror an index.
Those are some of my favorite ones that I like to invest in, whether they mirror a bond index, they mirror the s and p 500, maybe the NASDAQ 100. They mirror the entire stock market, international markets, all those different pieces are what you are looking for when you're investing in ETFs. Now, there are also ETFs out there that will mirror different sectors, whether it's technology, whether it's real estate, and REITs, whether it's dividend stocks.
There's a bunch of different types of ETFs that you can invest in. Now, the difference between index funds and ETFs is subtle, but there are differences there that you need to know. The main one is that index funds trade like a mutual. Meaning that mutual funds, you have to wait till the trading day ends before you can get in and out of a mutual fund.
So they are less liquid than our ETFs where ETFs trade like a stock. And that is the beautiful thing about ETFs is because they trade like a stock, they are much more liquid. Meaning if you need to get your cash out of that ETF for any which reason, which I don't recommend, cuz you don't want to interrupt compound CEP necessarily.
But if you do need to get out of that etf, you can get liquid. Quickly. Say for example, you have a six month emergency fund and you want to put another additional three months of emergency fund inside of an ETF because you already have that six months funded, so you're okay taking that risk for the additional three months.
If you're trying to build out that emergency fund to a longer time horizon, then that would be a great instance where you'd want that liquidity inside of an etf. Now the second difference with ETFs is typically they have lower price entry points, meaning that you can buy an ETF for much cheaper than you can an index fund.
A lot of index funds, especially the really good. Cost between 3000 to $10,000 to get into. And now a lot of new index funds are reducing that, and they're gonna make zero minimums. Like Fidelity has a couple with their zero fee, zero minimum index funds, like F zero, O X for example. But most index funds, especially the ones with a long-term standing like Vanguard, have minimums to invest in them.
And if you wanna invest in the. Admiral shares of Vanguard, which have lower expense ratios, then you have to have three to $10,000 to get into some of those funds, and for the longest time it was $10,000 ETFs. You don't have that problem with ETFs. You can get in for 1, 2, 300 bucks because they trade like a stock.
They have lower price entry points to get into those ETFs. Another great reason for beginners to get in there because you can start with any amount of money pretty. Invest those into ETFs. As long as you have a couple hundred bucks, you are starting off investing in ETFs. So they fluctuate up and down like stocks do day in and day out.
Whereas index funds trade like mutual funds. In addition, ETFs actually have slightly better tax advantages based on a bunch of different factors, some of which is the turnover ratio, which we'll talk about coming up here in a second. But they have slightly better taxation a. Which is awesome. And a lot of times ETFs have lower expense ratios, meaning the amount of money that you're paying in fees on those funds.
ETFs are typically maybe a basis point lower than our index funds. Meaning if an index fund is 0.04, sometimes the ETF is 0.03, so they're slightly less expensive. Not a huge deal when it comes to the grand scheme of things, but at the same time, this is something that can matter, where you can compare the ETF to the index fund to see which one you like more.
And ETFs, I just like for. I like it for beginners because it's an easier way to invest your dollars. I think it's an easier way to grow your wealth over time. And for me, a lot of my strategy is I have my core holdings in the index funds, but I also have, for example, core holdings in my core brokerage account in the ETFs, because I wanna have that flexibility.
In fact, a large portion of my investment portfolio is in et. Because index funds and ETFs are very comparable. They're gonna have very comparable returns in the long run. But I'd just like to have that additional flexibility. You know me when I talk about personal finance, I want you to have flexibility when it comes to your money.
Now, why are ETFs so powerful? This is the first question that you may be having as you're thinking through this process. You can see that mirror and index, but why are they so powerful? The first reason is obviously they mirror. And that reason is very powerful because you don't have somebody making decisions on what they're investing in.
Because as we know, humans don't have a crystal ball, do they? I don't have a crystal ball. Do you have a crystal ball? This is the reason why we talk about passive investing so much because you cannot predict what's going to happen in the future. And a lot of people are going to say that they can, and they'll go in and they'll start to day trade.
They'll have 15 screens across their desktop and it looks really cool. And you think they're an amazing. But reality is 99% of those investors, especially when they're amateur investors, do not beat the market, meaning the s and p 500. Now, let's talk about professional investors. People who do this day in, day out have entire teams that help them invest.
How many of those investors can beat the s and p 500? If you've been listening to this podcast a long time, you know the number. 90% of professional investors cannot beat the s and p 500 and guess. The ones that do, they are not the same year in and year out, meaning they cannot beat the s and p 500 for multiple years.
This is a powerful number to understand because once you realize this, you realize, why am I trying to beat the market? Because nobody can. Instead I can become the market and the ETFs allow you to do that by investing in index funds that mirror the index of the total stock market or the NASDAQ 100, depending on what you're looking for.
In addition, ETFs have very low. Reducing your costs when it comes to your investment portfolio is the number one thing that you need to be doing. If you're paying an advisor 2%, that advisor better be bringing it when it comes to your investment returns. Otherwise, they are taking six to seven figures over the course of your investing career.
Just rate 2%. Fee. It's amazing how much money you are spending. If you haven't heard our episode, we talk about the major impact of fees. Make sure you check out that episode because it will really open your eyes if you've never thought about this. Even though 1% fee can absolutely destroy your wealth building ability.
In addition, we talked about this, they have lower costs to get into, so it's great for beginners. If you have a couple hundred bucks, you can start investing in ETFs. And you can build any type of portfolio with ETFs, and we'll get into this in a second, but you can build a three fund portfolio. You can build a Warren Buffet portfolio.
You can build a six fund portfolio if you want to, all with ETFs, because most index funds have comparable ETFs that go along with them. And if they don't, we can find one that will work well for the same exact type of portfolio that you are looking for. Now, how do you invest in ETFs? Do you need a brokerage account to invest in ETFs?
Now, the short answer is yes, you're going to need a brokerage account to invest in et. But more importantly is the type of brokerage account that you choose, or the type of account that you choose. And there's two buckets that I want you to think about here. Tax advantage accounts and non-tax advantage accounts.
What does that mean if you've never heard of that before? So first, let's talk about tax advantage accounts. If you've ever listened to the episode, talking about the Stairway to Wealth, or if you've listened to this podcast for a long time, You know all about tax advantage accounts. These are things like your I R A Non-tax advantage accounts are things like your traditional brokerage account.
Now you're trying to figure out which one should I invest in first? Here is my order. This is what I absolutely love to invest in. First, get your 401K match. Now, a lot of times 401ks will not have ETFs in them, so you gotta make sure that at least get that 401K match before you do any of this stuff. We are looking at the Roth ira.
Now the Roth IRA is for a very big reason, one of my favorite accounts outside of the Roth 401k cause you can get more money into that Roth 401k if you like the investment options than your Roth 401k. But the Roth IRA means that you are putting money in that you already paid tax on from your paycheck.
Your money grows tax free. Very, very powerful. And you could pull the money out tax free. How powerful is that tax free growth? If you put $500 per month into a Roth IRA and you wait 30 years, you're gonna have a million dollars inside that Roth. I. $800,000 inside of that Roth IRA is from your growth, meaning $800,000 is tax free.
This is powerful because taxes will absolutely bring your wealth building ability down if you don't take advantage of them. So Roth IRA one, IRA two. So IRA and 401k are very comparable. The way that this works is you're putting money in and you get a tax deduction on that money. When you put it into a Roth ira, your money grows and then you can pull the money out.
But when you pull the money out at age 59 and. When that money comes out, then you're paying taxes on that money, so you're paying taxes on the future value of that money. Now, if you are a high earner, you can't contribute to a Roth ira, guess what? You're gonna do? A backdoor Roth ira, meaning that you put money into your Roth ira, then you convert that money to a Roth ira, and that's how high earners can get that money in it.
If you don't know that strategy, make sure you listen to our episode where we talk through that. Now we also have a second bucket, which is the non-tax advantage account, which is your traditional brokerage account. Now I have a traditional brokerage. I contribute it to it every single month, and in fact, past my six month emergency fund, my traditional brokerage account is my cash on hand that I am utilizing as my backup emergency fund.
I've told you that I like to have a lot of cash on hand. Well, I'm actually investing a large portion of that in my traditional brokerage account as a backup emergency fund to my emergency fund. This is how you become financially bulletproof over time, but my taxable account is something I'm definitely contributing to as well.
Flexibility, taxable accounts allow you to have a ton of flexibility. If you heard the episode, we talked to Jeremy from Personal Finance Club. We went through the six ways to access your retirement accounts early, but he lays out the argument in that episode that really the taxable account just gives you the most flexibility.
And it's true. You have a ton of flexibility. So having that traditional brokerage account is an amazing way to do this. Now, where are you gonna open? Where are you gonna open this brokerage account? There's so many different options out there. How do you figure out which one is the best for you? In my opinion, there are four that I actually like, and I've tried all of them.
Trust me, my accountant hates me because I have to send in all of these tax forms from all these different brokerage accounts because I try all of them to see which ones are the best ones, here are my four favorites for et. Number one is in one finance. And the reason why I love in one finance is threefold.
They have an amazing dashboard as number one, meaning they are more modern than some of these other options. Number two is that you can actually auto rebalance your portfolio. Now with one button click. What does that mean? That means if you wanna have a portfolio with 70% stocks and 30% bonds, and that portfolio gets outta whack, where all of a sudden it's 62% stocks and it.
38% bonds, then guess what? Most people have to go in there. They have to do all this math. They have to figure out how to rebalance their portfolio. Within one finance, you can push a button and auto rebalance. Your portfolio used to only be able to do this with robo-advisors. Now, M one Finance can do it with just a one button click.
And the third reason why I love M one Finance is their pie system. It makes it super easy to fill out a portfolio and maintain that portfolio and set it up to become an automatic millionaire. We're gonna talk about that in a second, how you can become an automatic ETF millionaire, but they have automation tools that are way better than everybody else, and so I love the automation tools that M one Finance has for ETFs.
Now, M one Finance does not have index funds. So they only have ETFs. They do not have index funds. So if you're really gung-ho on index funds for some reason instead of ETFs, then that would not be the best option for you. These other options would be amazing. My number two favorite for ETFs is Vanguard, because I like Vanguard ETFs the most.
I like investing in Vanguard ETFs the most. I think they have the best ETFs out there for, in my opinion, and so Vanguard, it would be my second. Number three, fidelity and number four, Charles Schwab. Now Charles Schwab is the only one I've never used, but I've looked deeply into Charles Schwab and at Charles Schwab.
They have some great funds there as well. They have seemingly your best interest at heart when it comes to investing, where a lot of other brokerages don't shout out Robinhood, but there's a lot of other brokerages out there that do not have your best interest at heart. This is a major thing that you gotta think through when you're choosing your brokerage.
So in One Finance, Vanguard, fidelity, Charles Schwa, I like all four of them. You can not go wrong with any of them, but in one finance, which I will link up down below our link to in one finance, that is an affiliate link, so it will help support the show if you use that link to set up your M one finance account.
And if you do, let me know and I can send you over some of my pies that I utilize when I invest inside of my M one Finance account. If you wanna learn how to step by step by your first investment inside of in one finance, our investing webinar is gonna walk you through those step-by-step. So we have a webinar, free webinar, click the link down below in the show notes, and you'll be able to utilize that webinar and learn how to buy your first investment step by step.
So this is one thing I want you to learn how to do. If you've never invested in index funds and ETFs, I want you to be able to do that. Now let's get into how to do research on ETFs and what are the best ETFs. All right, so we're gonna try to figure out what the best ETFs are and how to do your research on ETFs.
Now, obviously as I talk through these ETFs, this is not me recommending these, I'm telling you what my favorite ones are, but in addition, I'm gonna give you step by step here on how to do some research and some advanced strategies that you can do to do research as well. So there are 1,774 ETFs just in the US alone, and the entire world is getting close to 3000 ETFs.
What does that mean? That means your head is going to be spinning. Try to choose the best etf. If you're brand new. So what we need to do is we need to narrow down our options. We can look at a couple of buckets here. We can look at if we wanna have aggressive growth. Meaning if you are younger in your investing journey, you wanna have more growth heavy ETFs, instead of investing in a bunch of bonds because you want your money to grow and you have a longer time horizon to be able to do that.
As you approach retirements, you may want to take on some extra bond exposure if you wanna reduce that volatility and that ride through ups and downs in the stock market traditionally. Historically, bonds have become less volatile than stocks are. So you want to think of these two things. Am I gonna be more aggressive and or am I getting closer to retirement?
And do I want to tone it down a little bit? So you have these two buckets here, and what's gonna happen is even if you are not close to retirement age and you just don't like the bumpy ride of stocks, then maybe your risk tolerance is lower than someone else's. You gotta figure out what your risk tolerance is before you start investing your dollars.
Meaning how do you react when the market goes down? Do you completely panic and freak. Well, you shouldn't because it's a very normal event. But if you do need to train your brain to learn how to handle those market downturns, especially if you have a long time horizon, cuz it's so imperative, your asset allocation, meaning the types of stocks and bonds that you select, have a million dollar impact on your portfolio.
A million dollar impact. And so you gotta make sure you understand what the right asset allocation is, which is why we talk about that so much in Index Fund Pro as well, which is our premium course, 99 bucks to learn how to invest in index funds and ETFs. Index Fund Pro actually walks you through how to select your asset allocation and figure out your risk profile.
Now, as we are starting to think through our two buckets, aggressive, non-aggressive as we approach retire. We're gonna start to do some research here. Now, the first place I'm gonna give you to do some research is the ETF database. Now in the ETF database, I'm gonna link it up down below in the show notes.
You can search for ETFs by category, which is really cool. So they have some of the top ETFs that you can select from, and you can look and see what are the most traded ETFs, or you can look at category maybe. Large cap stocks, for example, so you're looking for like an s and p 500 etf. One of my favorites out there is called V O O and V O O is Vanguard's s and p 500 etf.
One of the best ETFs out there. If somebody was asking me, what are your two favorite ETFs would be V O O, VT I, those are my two favorite. They have a lot of overlap, which we'll talk about here in a second, but those are my two favorite ETFs that are out. To look at Now, as you look through the ET TF database, you're gonna see that there's gonna be a bunch of options for you out there.
This is how you start to do your research. You can look at the real estate sector, technology, communications, all of these different things. Then what you wanna do is as you get into that E T F database, you find some that you like. Then you want to go to their ET TF profile. What does that mean? That means you're going to the.
Looking through their profile to see exactly what this ETF is, what it consists of by reading the summary, reading some of the metrics, which I'll tell you which metrics to look for in a second and understanding what you're doing. And then in a third option is you can go to morningstar.com and morningstar.com is one of the best places to research funds and ETFs so that you can see which ones are the best ones out there.
And they give a rating on Morningstar as well that it's going to allow you to say, Hey, this is an A rated fund. This is a fund with a low expense ratio. It's a fund with a low turnover. And it's one that I'm really interested in because it's exactly the sector that I'm looking to invest in. So that is how you can look through by using those three tools, the ETF database, the ETF profile of whichever company actually hosts that etf, and then go to morningstar.com.
Now, what should you look for when you're doing this? Number one is a summary of what the ETF actually is, making sure that you're reading through that. Understanding exactly what this ETF is investing in so that you know going forward that this is what you're looking for. Because sometimes ETFs may look like they're investing in one thing, and maybe it's something that you actually don't realize that you're investing in.
Number two is the expense ratio. Now, we have talked about this a number of times, but your expenses will absolutely destroy your wealth building ability if you do not control expenses. What is a good expense? Anything below 0.3% when it comes to ETFs is typically okay because you can have a robo-advisor for 0.25%, but really I want it to be below 0.2%, and for most, if you're investing in something like an s and p 500, in next one, it needs to be under 0.1.
Percent because for example, Vanguard's v o o has an expense ratio of 0.03%. So you gotta make sure that you keep those expenses and those fees low. The next one is the turnover ratio. Most people don't talk about the turnover ratio. The turnover ratio is how often. Stocks and bonds are being sold inside of that ETF or inside of that index fund.
The lower the number, the less you are gonna have to pay in taxes when it comes to that fund. You want that turnover ratio to be as low as you possibly can. Under 50% is definite because mutual funds trade above 50%, meaning you're gonna pay more taxes there. But keeping it below 15% is a major one that you definitely want.
When it comes to doing this, then you wanna look at the returns or the performance of the fund. So look at the returns over time, see how long the time horizon is, and you can also see how old the fund is by doing this, but look at those returns over time. So say for example, you're looking at a s and p 500 etf, it's got a 9% rate of return over the last 25 years.
That's a good sign that that is a solid e TF that is mirroring something like the index where it's going to allow you to get to that point. Now, what I want you to do is if you're comparing it to an index, say for example you're looking at the NASDAQ 100, take the E TF look at their returns over time and then look at the NASDAQ returns at that same timeframe to make sure that they're at least close enough so that they're actually mirroring that nasdaq.
Etf Age is the next one. If you don't want an ETF that's only two years old because it doesn't have a track record, maybe there's some comparable ETFs that have a longer track record with a higher return rate. Then top holdings, you wanna look at the top 10 25 holdings to make sure they are comparable to that actual index.
So say for example, you're looking at an s and p 500 etf, you wanna make sure the top 10 holdings are things like Apple, Microsoft, Amazon, Nvidia, all those companies that are the top 10 inside the s and p five. Because this matters. It matters heavily because the top 10 holdings are typically close to 25% of something in an index fund.
So you gotta make sure that you understand what those top 10 holdings are. And then you wanna look at dividends and distributions because what you really wanna be doing is taking those dividends, reinvesting those dividends, and we'll talk about that here. In one second. Now, as you're choosing your ETFs, one question you may be having is, do these ETFs have the same different companies inside of them?
Is there a lot of what is called fund overlap? Now, I want you to remember this term because fund overlap is an important thing to understand. When most people invest in ETFs, they want to invest in ETFs for that diversification. But if you're buying two ETFs with the same exact companies inside of them, you have major fund overlap and it's just redundant.
Now, is there anything wrong with that? Not if it's in the same asset allocation that you're looking for. For example, if you want 70% stocks and 30% bonds, and you have 70% stocks with two ETFs that have major fund overlap, Then it's whatever, but at the same time, it's just overcomplicates your portfolio when it's not necessary.
So there is a tool that you can use called the Fund Overlap Tool, and I'm gonna link it up down below with the exact link so that you can look at this, meaning that you can take two index funds and ETFs. Use that fund overlap tool and be able to see how much do these funds overlap. I would keep it below 50% overlap if you possibly can.
Now I'm gonna do one that a lot of people talk about now is v o o verse v t i. This is a question that I get all the time. So we're gonna do a fund overlap live here on the podcast. That's going to show you. How much do these two funds actually overlap each other? Because should I own both of them?
Should I own one of them? There's nothing wrong with owing both of them, that's for sure. But at the same time, you are gonna have major fund overlap. Let's see how much these two funds actually overlap. So I just did this live on the podcast. So V O O has 99.4% of the same holdings as V T I, and it comes in by weight as well, meaning.
You are basically investing in the same fund. If you buy v o o and v t I. Now V t I is vanguard's total stock Market Index Fund. V O O is Vanguard's s and p 500 index. But because the large companies in indexes hold such a heavy weight, the large companies are gonna be the same pretty much in both. So you gotta understand how much overlap is there and is it just redundant for me to invest in these ETFs if there's overlap.
So use that overlapping tool. It's a very cool tool that you can use to see. Do I have way too much fun, overlap? And is this okay for what I'm looking to do? Now, you heard me talk about dividends, and you may be wondering, well, how much dividends am I gonna collect? When are my dividends gonna come in? All these different things.
Now, if you've heard me talk about dividends before, maybe you follow me on social media. You've seen that I collect thousands of dollars in dividends quarterly from my index funds and ETFs. Now, what I do with those dividends, because I'm in my growth phase, is I take those dividends and I automat.
Reinvest the dividends. You have options with dividends. If you're trying to live on your portfolio, you can take those dividends and live down on them, or you can put them back and reinvest them. So that compounding machine will really start to snowball and to grow. Most people want to reinvest their dividends or should reinvest their dividends, especially if you want that portfolio to grow over time.
There's a button on in one Finance and Fidelity, Vanguard and Schwab where you can just automatically reinvest your dividends every time so that you don't have to collect those dividends and they don't sit in. This is how the snowball grows, so make sure that you click that button. It should be on your checklist as you're listening to this episode, to reinvest your dividends.
If you've never thought about that before, make sure that that is checked. A lot of times, a lot of companies will automatically do it, but make sure it is checked off so that your dividends are getting reinvested and all they do is your dividends come in. It's a portion of the company's profits. They share them with you.
You usually get them quarterly, and when those quarterly dividends. All of a sudden it's gonna automatically reinvest it and buy more shares without etf. It's the coolest process allows you to compound over time. And the amazing thing is with dividends, this is going to really start to compound where over time your ETF is gonna be buying multiple shares of ETFs every single quarter, where you don't even have to lift a finger.
And this is how you allow your money to work for you instead of you working for your money. Now, how can you become an automatic ETF millionaire? We're gonna jump in next. Alright, so how can you become an automatic ETF millionaire? This is a very powerful thing that I want you to learn how to invest in ETFs and how you can just automate this process, meaning you set this up once, you check it once a year, and that's really all you have to do.
Automation is the key in one of the most powerful things when it comes to investing your dollars. We're working on a course to show you how to automate your entire financial. So that you can spend way less time worrying about money and instead worrying about growing your income or doing whatever else, spending more time with your family or whatever else you wanna do.
So here's how to become an automatic ETF millionaire. Number one is you're gonna choose the ETFs you want to invest in. In one. Finance is the easiest way to do this because you can create pies auto to invest into. Those pies. So if you want to invest in M one Finance, make sure you check out our link down below.
It helps support the show. Number two, set up automatic transfers from your checking account to the pie that you are interested in investing in. So M one Finance has a system in there showing you how to auto transfer over. So all you do is you set it up, go to auto transfers, set up the amount that you wanna invest in, and we'll talk about the amount here in a.
And then you transfer it over. Number three, you wait. This is a very simple system. 1, 2, 3. And what's gonna happen is as you wait, you're gonna watch your money compound. So let's see how fast your money can grow based on a rate of return, depending on what your pie is gonna return over time. So say for example, that you invest $500 per month.
$500 per month is one where a lot of people will start because it allows them to compound their money over time. So if you invest $500 per month, how long would it take you to become a. Well, if you had an 8% rate of return, it would take you 34.16 years to become a millionaire. If you got a 10% rate of return, it would take you 29.6 years to become a millionaire.
So you're automatically investing and you're waiting. Roth ira, say you maxed out your Roth IRA every single year at the time recording this to max out your Roth IRA in 2023. It's $541 and 66 cents, meaning $6,500 a year divided by 12 is $541 and 66. So if you did that at an 8% rate of return, it would take you 33 years before you became a millionaire.
But if you got a 10% rate of return, you could become a millionaire sooner in 28.9 years before you became a millionaire with $541 and 66 cents now $1,000 a month. If you invested $1,000 per month, it would take you 23. At a 10% rate of return, and it would take you 26 years at an 8% rate of return to become a millionaire.
And then let's look at, if you max up your 401k or your Roth 401k, which is $22,500. If you're over the age of 50, it's even more than that. You could put additional $7,500 into those accounts. But if you're under the age of 50, it would be $1,875 per month to max out that 401k. It would take you 19.34 years at an 8% rate of return, and it would take you 17.40 years at a 10% rate of return.
So you can see the extreme power of maxing out that four ohk, cause you'll be a millionaire within less than two decades. So making sure that you have that in place is going to be the way that you can become an automatic millionaire. Now, how do you construct your portfolio with these z? We're gonna talk about the three common ones that we talked about here.
So the simple path to wealth portfolio, which is investing in a total stock market index fund, typically it's VTS ax. The comparable to that, and you'll see this on the index fund and et tf cheat sheet, is V t I. So yes, you can do it there. Can you do the Warren Buffet portfolio, meaning that this is gonna be 90% in an s and p 500 index fund, which would be the equivalent to V O O, and then 10% in bond index fund, which would be something like B N D at Vanguard.
So yes, you can do that as well. When you look in that index fund and et TF cheat sheet, you'll see the comparable funds on that cheat sheet. What about the three fund portfolio? There's a bunch of different ways to do a three fund portfolio, and we've done a YouTube video on this as well, where you can see the ETFs to craft this three fund portfolio will link up down.
Master money on YouTube, but the three fund portfolio is one that will allow you to best say 70% stocks and 30% bonds. And of that 70%, maybe 50% is in US stocks, 20% is international and 30% is in bonds. And you can diversify those bonds however you want. That's what a three fund portfolio looks like.
And when you have this refund portfolio in place, you can also craft it with ETFs as well, so you can craft any type of pie that you want. With these ETFs, it's very comparable. They're transferable. It's very easy to do this. Now, how much do you need to retire with ETFs? This is another major question that beginners may have.
Finding your enough number is so powerful the first time you learned how to do this. And when you learn how to do this, it's gonna be one of the best things that you do with your financial life. Here's exactly how you can do this in less than a couple minutes here. So if you wanna learn how to figure out what your enough number is, when can I stop working?
You're gonna take the amount that you wanna spend in retirement. So say for example, you wanna spend $80,000 per year in retirement. If you wanna spend $80,000 per year in retirement, you take that number and you multiply it by 25. What you're gonna find out is when you multiply that number by 25, you have 2 million.
Why is this significant? Because there's a rule called the 4% rule. It's based on a Trinity study. There's a bunch of other academic studies that had worked on the 4% rule, and some people say it's too conservative. Some people say it's too aggressive, but it's right smack in the middle of everybody's portfolio construction and draw down theories.
So with the 4% rule, here's how it works. You could draw it on 4% of your portfolio every single year and still preserve that wealth and that money throughout your retirement years. If you're closer to the age of 25 or 30 and you learn to retire really, really early, maybe you sold a company or did something along those lines, maybe you wanna venture towards three and a half percent.
If you're older and you're starting to retire maybe in your mid sixties, and maybe you want a venture to four and a half percent, but 4% is right smack in the middle allows you to draw down that portfolio. So 2 million. 4% of that every single year is $80,000. That's exactly how you do the math. Figure out how much you wanna spend in retirement.
Multiply it by 25. There's your freedom number. Super, super simple. So that's how you figure out how much is enough. Now listen, if you wanna learn more about how to invest in index funds or how to invest in ETFs, First go down, check out the free webinar that we have on How to Buy Your First etf. Make sure you check out that link.
Then grab the free cheat sheet as well where you can get the free cheat sheet and understand what the best index funds and ETFs are. And then lastly, check out our course called Index Fund Pro. And in Index Fund Pro, we take you through this entire process and show you how to craft. Your perfect portfolio for index funds and ETFs, and we show you exactly how to do that.
Go through the process, find that enough number, figure out all of these different pieces so that you can have your investment plan all in place, and it costs you 99 bucks. You can have your investment plan for life crafted through this course, and it's gonna cost you $99. So make sure you check out Index Fund Pro.
We'll link it up down below as well. It is our flagship course. There's over 30 videos there, and we're continuing to add, we just added five more a couple of weeks ago. So we are adding to Index Fund Pro constantly. And in addition, index Fund Pro members are also gonna get. Early access to anything else that we have coming out, including coaching, which is releasing very soon.
So make sure you check out Index Fund Pro as well if you're interested in investing in Index Fund and ETFs, or don't if you don't want to. So listen, I truly appreciate each and every single one of you listen to this podcast episode. All I wanna do is bring as much value to you as I possibly can. And hopefully we did that today.
If we did, make sure you share this episode with a friend. And again, don't forget to subscribe to this channel on whatever your favorite podcast player is, or on YouTube so that you can get as much value as possible in your financial life as well. Thank you guys so much for listening to this episode. We will see you on the next episode.
Transcript:
On this episode of the Personal Finance Podcast, we're going to give you the complete beginner's guide to ETF investing.
What's up every buddy, and welcome to the Personal Finance podcast. I'm your host, Andrew, founder of Master money.co. And today on the personal finance podcast, we're going to be giving you the complete ETF guide.
If you guys have any questions, make sure to hit us up on Instagram or Twitter at Master Money Co and follow us on Spotify, Apple podcast or whatever podcast player you're listening to this podcast on right now. And if you want to help out the show, leave a five star rating and review on Apple podcast or Spotify.
Now today I am incredibly excited to share this episode with you guys for a number of different reasons. One of which is if you're a brand new investor, if you have never invested in your life before, this is going to be the guide that can show you exactly step by step on how to invest in index funds and ETFs.
And we've also created a webinar for you so you can buy your first investment. And I show you step by step exactly how to do that. You're going to be able to grab that guide in the show notes down below. So make sure you check out completely free. All you have to do is sign up and then you will instantly have that webinar available to you.
I am also going to lay out exactly how to research ETFs. We're going to go through what an ETF is, how to start investing in ETFs, what accounts you may want to open when you're investing in ETFs, how to become an automatic ETF millionaire. I'm going to talk about how much is enough, so how much ETFs you have to buy before you can actually retire, why ETFs are so powerful, how to construct an ETF portfolio, and I'm going to give you so many different freebies in this episode.
So you're going to absolutely love this. And we're going to do some deep dives into how to research ETFs as well. So I am really, really excited to share this episode with you. You are going to learn a ton If you've never invested in ETFs and if you've been investing in ETFs for a long time, I've got some advanced stuff for you too. So this episode is for everybody.
So make sure you tune in, get ready, and let's get into it. All right, so the first thing we're going to talk about is what the heck is an ETF? If you've never heard of what an ETF is, let's dive into what that is. So an ETF stands for exchange traded fund, and it's a basket of stocks that trades on exchange just like a stock does.
So you could think of this as all it's doing is an ETF is looking at something like an index. So say for example, the S&P 500 is an index, which is 500 of the largest companies inside of the US stock market. And when you look at something like the S&P 500, what you want an ETF to do is to mirror the S&P 500.
Why? Because historically the S&P 500 has had fantastic returns. And if you think those returns are going to continue on into the future, then you just want to invest in something like the S and P500508 of the largest stocks inside of the US stock market. Seems like a nice hedge to me. So when you do that, you can buy something like an ETF and invest in that ETF and it mirrors the S&P 500.
If you like the NASDAQ 100, it can mirror the NASDAQ 100, but it can also so mirror a bunch of different securities as well. It can do commodities and bonds and a bunch of other things like dividend stocks or Reit's. Now one thing to note about ETFs is they're not like an index fund.
Where is index funds trade like a mutual fund. ETFs trade like a stock. So they fluctuate up and down all day long just like a stock would. And the beautiful thing about ETFs is they offer a low expense ratio. Now, fees as you may know, are detrimental to your wealth building ability.
The more fees that you have, it's absolutely going to destroy your wealth building. That may sound like something that is obvious, but at the same time most people don't understand that a 1% fee is a six figure decision or a 2% fee could be a six to seven figure decision that you make. Hiring a financial advisor that puts you into index funds or puts you into blue chip stocks for a 2% fee is something where you may be paying six to seven figures depending on how much money you are investing into that fund over the course of that time frame.
Because you are investing with those high fees, you want to keep your fees as as low as you possibly can. And ETFs allow you to do that, meaning that you can keep your fees as low as possible. And for most of them, they're somewhere like 0.04 percent, 0.03% of some of my favorite ones.
So ETFs have extremely low cost, which is extremely powerful for you, the investor. Now here are some reasons why ETFs are so powerful. Number one is they mirror the index. So there is no guessing games as to what these funds are investing in. They are just mirroring the index. So if you're investing in the S&P 500, it is just following the S&P 500 not to wonder what securities they're adding to that.
It's going to follow exactly what the S&P 500 does. The beautiful thing about this is if a company in the S&P 500 is not doing well, it gets kicked out and a better company comes in to play. So this is something where it is self cleansing and very helpful if you are investing in something like an index.
They also beat professional investors. You've heard me talk about this stat before. If you listen to this podcast for any amount of time is that 90% of professional investors do not beat the returns of the S&P 500. And of the 10 percent that do, they are not the same year in and year out.
So professional investors with an entire team cannot beat the S&P 500. Why do we as amateur investors think that we can #3 is ETFs have low cost. We just talked about cost and many of ETFs costs are even lower than index fund. This is a very powerful thing to understand because entry level ETFs, you can evaluate these by looking at something called the expense ratio.
So one of my favorite ways to evaluate the expense ratio is you take the ETF and you put it into something like morningstar.com and you could see what is the expense ratio of this ETF and you can start to evaluate that ETF to see with some of the metrics that are in there. And we'll talk more about how to evaluate ETFs here shortly.
In addition, if you're a new investor, ETFs have lower costs to get into. So an index fund cost anywhere from 3000 to $10,000 to get into. Now, some new index funds have no minimums, but for the most part, most index funds cost anywhere from 3000 to $10,000 to get into with ET EFS, you only have to spend a couple 100 bucks to buy an ETF.
There's lower entry cost for brand new investors, especially if you don't have a lot of money to start with. And what also I love about ETFs is you can build any portfolio type you want. Say for example, you want to invest in something like a three fund portfolio where you're investing in maybe 70% stocks and 30% bonds.
You can do that with ETFs. With something like VOO and B&D, maybe you want to build a portfolio that is really, really diversified and have a bunch of different funds in there. You can do that with ETFs. There's so many different ways that you can invest with ETFs and there are thousands and thousands of them out there that really you have so many different options to be really well diversified when it comes to ETFs.
Now, one question that we get all the time is do you need a brokerage account to invest in ETFs? The quick answer is yes, you'd absolutely have to have a brokerage account to invest in ETFs. But most importantly, the thing you really want to make sure that you do right is make sure you choose the right account for your situation.
So there's a bunch of them to choose from including tax advantage and non tax advantage. So let's talk about the tax advantage accounts first. Number one is the Roth account or the Roth Iras and maybe your employer offers what is called a Roth 4O1K as well. Roth accounts are very powerful accounts because what happens with a Roth is that you contribute money that has already been taxed.
Money from your paycheck that came in has already been taxed. You put money into the Roth IRA. Your Roth can grow tax free and you can pull the money out of a Roth tax free. Now, why this is so incredibly powerful is because the growth, both of your money being tax free is the majority of your money, especially if you're maxing out your Roth IRA.
So say for example, you Max out your Roth IRA for 30 years, you're going to have $1.1 million in that account if you invest in something with a 10% rate of return. Now when you get to that 1.1 million dollars, 850,000 of that is going to be tax free growth, meaning you have $850,000 completely tax free.
And then the rest of it is going to be your contributions of the amount of money that you actually put into that account. That's why we love Roth accounts because you pay taxes now and you don't have to worry about what taxes are going to be in the future. You already paid your taxes and so that money can grow tax free and you can pull the money out tax free. This is also great for people who are dividend investors and you want to make sure that your dividends are not getting taxed too much.
Then a Roth IRA is another great option for that situation. In addition, the second tax advantage option is an IRA. So the way an IRA works is that you get a tax deduction when you contribute to an IRA or if it's a four O 1K, which operates a very similar way in your 4O1K, you're not going to pay taxes on the money.
It comes straight out of your paycheck, the money grows and then you pay taxes when you pull the money out. Well, not paying taxes upfront means that you can put more money into that account and it can grow more because you're putting more money in that account. But then you're always going to have to pay taxes at some point in time. So on the back end, you're going to pay taxes when you pull the money out.
Then you can also open a non tax advantage accounts and these are still actually powerful accounts to use. So something like a traditional brokerage account, you can go out and you can open a traditional brokerage account anywhere that you want. Now, some of my favorite ones that are out there are Vanguard, Fidelity, Charles Schwab, and M1 Finance.
Now M1 Finance is my favorite place for ETFs and there's a number of reasons why that we can go through here. But I love M1 Finance because it has a modern dashboard a it has an auto rebalance system. And this is the coolest part about M1 Finance is before you had to figure out how am I going to rebalance My Portfolio?
Meaning if you have 70% stocks and 30% bonds and you want to keep it that way, you want to keep a 70% stocks and 30% bonds inside of your asset allocation, then you're going to have to rebalance every single year because your portfolio is going to get out of whack. And when finance is a button where you just push the button, you can automatically rebalance your portfolio.
Whereas if you go everywhere else, you got to figure out, do the math and you got to sell some shares and you got to add some shares here and there. And it's a really annoying process for me at least to have to rebalance a portfolio. So I always tended to not rebalance as often as I should have. And so with that automatic rebalance system that anyone finance, I absolutely love that feature.
They do it for you. And they also have something called a pie system. So if you're building out some of these portfolios, maybe you want a three fund portfolio or A2 fund portfolio like Warren Buffett and you're building out these portfolios, they have a pie system that allows you to do that automatically without even having to invest in each individual security.
So it makes everything automatic. It's an amazing way to automate your entire investing process. And in our Investing for Beginners webinar, make sure you check that out because I take you step by step at the end of that webinar on how to buy your first investment inside of M1 Finance as well.
If you want to check out M1 Finance, we'll have them linked up down below so that you can check them out. But like I said, Vanguard, Fidelity, Charles Schwab, M1 Finance, all of those are amazing places where you can buy index funds or are all of those are amazing places where you can buy ETFs. Now let's get into what are the best ETFs and how to research ETFs.
All right, so one big question that we get all the time is what are the best ETFs? And there are 1774 ETFs on the US stock market alone according to etf.com. And it can make your brain spin trying to choose which ones are the best ones. In Index Fund Pro, we are doing full breakdowns of all my favorite index funds and ETFs that you can check out.
But you need to narrow this down. And if you're younger, a lot of people look at things that have long term growth so that they can build wealth over time and they get less aggressive as they approach retirement. That's the normal way to do this. But here is how to find the best ETFs and do your own research. And we also have an index fund, an ETF CHEAT SHEET that we will link up down below as well in the show notes so that you can check that out.
Now here's how to do the research. So my favorite place to go is #1 going to the ETF database. And this is all going to be LinkedIn, the show notes. So you can check out all these tools that we're talking about here. So when you go to the ETF database, the cool thing is you can search ETFs by category. So say, for example, you're very interested in healthcare ETFs.
You really think the future is healthcare. And within healthcare, you think there's going to be a lot of profits going to be made and you want to have a diversified ETFs in healthcare. So you can go into the ETF database and you can choose healthcare and see all the best ETFs that are in the healthcare sector. And you can deep dive into each one and see which one may be the best for you.
They give you a bunch of statistics on each ETF. They give you a bunch of metrics and charts. It's an amazing place to go when you're doing your initial research, especially if there are very specific ETFs that you're looking for. If you're looking for broad market ETFs, things like the S&P 500, the NASDAQ 100, all of those different types of companies, there are a lot of great options on there in the ETF database as well, where you can look at some of the top ETFs by weight.
You can look at them by how much money is actually allocated into those funds. There's a bunch of different things that you can look at when you get into that ETF database. Then you can look at the ETF profile, which the ETF database has for each ETF. So once you open up the profile to each ETF, you can see so much information.
So say, for example, you want to look at VOO, you can dive into the ETF profile, see if this is something that's worth it for you and look at the database as well. So you can go back and forth and see if this works for you. And So what I like to do is go to vanguard.com, open up their profile, then go to the ETF databases profile and kind of review the stats for each one and get an overview of what this ETF is about.
So I read through all of that stuff just so I have a full understanding of what I'm investing in before I go through that process. Then I take it and I go to morningstar.com and look at some of their ratings that they have at morningstar.com. And that's a great place to check out all the key metrics as well. And you can see how are the professionals rating this ETF, What do they think about it?
And these are three great places where you can start to do your in this research. Now, what do you need to look for? The first thing you need to look for is a summary of what the ETF is. You need to understand exactly what you're investing in, especially if you're getting into some of these niche ETFs. If that's something you're interested in, you need to look at #2 is the expense ratio. What is the expense ratio?
That is how much you're paying in fees to invest inside of this ETF. This is very important to understand because if the expense ratio is too high, it is not of in your best interest to invest inside of that ETF. Yeah, so here's one key thing to understand. If the expense ratio is above a half a percent or 50 basis points, I typically won't even look at it.
Most ETFs are below 10 basis points or below .10% expense ratio. So if it is way above that, there is no reason to invest in that ETF because typically it's probably not going to outperform something like the S&P 500 or historically it most likely has not.
So making sure that you look at these and the expense ratio and how much they're eating into your cost is going to be very important. You want to look at the turnover ratio. Now, if you've never heard anybody talk about the turnover ratio before, this is how often the fund is buying and selling stocks inside of that ETF. Why does this matter?
This matters because it can increase the amount of taxes that you have to pay come tax time if the turnover ratio is higher. So the lower the turnover ratio, the better. So you'll see stuff like VOO where it's the S&P 500. They're not going to be buying and selling a ton of different securities. Their turnover ratio is going to be less than 10%.
But if the turnover ratio is much, much higher, mutual funds have 50% or above turnover ratio a lot of times because they're buying and selling a bunch of securities, meaning you're going to have to pay more taxes during that time frame. Then you also want to look at the returns. Make sure the returns line up with the actual index. So say it, for example, you're investing in the NASDAQ 100.
You want to look at the total returns of the NASDAQ 100 during the time frame that you're looking at. Maybe you would have looked at the last 10 years. Then you can look at that ETF and see how close is this. This needs to be very close. Otherwise it's not investing exactly in the NASDAQ 100 or mirroring that NASDAQ 100.
Sure, if it's half a percent off something along those lines, it's OK, but if it's way off 1 to 2%, then you definitely want to look at something else or just look at another provider that invests in the NASDAQ 100. Then you want to look at how long has the ETF been around because some ETFs don't have a very long history and I prefer ETFs that have longer history than ETFs that do not have a long history.
That's one thing if I'm trying to decide between two of them. If one has a longer history, I'm more interested in that one because I can see the long term performance of that ETF. Then you want to look at the top holdings. So the top holdings typically are the top 10 or the top 25 holdings. If you're investing in the S&P 500, for example, they need to mirror what's in that S&P 500.
So typically the top 10 holdings in something like VOO is going to be the weight of like 25% of the entire fund. So this is very important to understand because it's 25% of your return. So looking at the top 10 holdings, it should be things like Apple, Microsoft, Amazon, Google or Alphabet, those types of companies that you understand.
So you want to look at the top 25 holdings or the top 10 holdings if you don't have access to the top 25. And then you want to look at the dividends or the distributions and see what the dividend rate is. And then reinvesting those dividends is incredibly important. So if you don't know what to do with dividends when it comes to investing in index funds and ETFs, if you're in your growth phase, if you're not going to be living off this portfolio today, then reinvesting those dividends is the best thing to allow compound interest to continue working for you.
And initially, what happens is when an ETF pays you a dividend, you're just buying more shares every time those dividends are distributed. You can just Google how to reinvest dividend at X brokerage, wherever your brokerage is and it will show you exactly how to do that. Now in the webinar that we're talking about, we show you exactly how to do that in one finance if you want to check that out during that webinar.
Now the next thing to research is fund overlap. Now fund overlap is very important. For example, if you want to invest in a number of different ETFs and index funds, you may want to see how often are these funds overlapping or how many of the same securities do they have inside of that fund.
So one common example of this is I get questioned all the time about Boo and VTi. So VOO is Vanguard's S&P 500 ETF, one of my favourites, and VTi is another one of my favourites, which is Vanguard's Total Stock Market ETF. The difference between these two is very important to understand and you can plug these into something like the fund overlap tool, so you can see how much of these stocks are actually overlapping inside of these funds when we're investing.
So let me do one for example. So let's go look at VOO and VTi for example. So when I pull this up inside of the fund overlap tool, which will be linked up down below and you can check this out, the fund overlap tool shows me that 99.4% of VO OS 510 holdings are also inside of VTi.
So this shows me that there is a massive amount of fund overlap when it comes to this. So the overlap by weight is actually 85% between these two funds. There's only a 15% differential of what the difference is between these two funds. So would it be redundant to invest in both? It could be and that decision would be up to you and how much overlap you actually want to have.
If you want to be diversified into both of those funds and you hold those as your major stock weight, there's nothing wrong with investing in both of them. You just may have very similar returns because of this fund overlap, this 85% fund overlap. So this fund overlap tool is a very cool tool that you can also use when you're doing your research into index funds and ETFs.
And it also has some additional information in there that you can check out like weight and VOO and the weight and VTi of the top ten companies. And you can dive even deeper and see which one is overweight relative to the other 1. So it's a great comparison tool to see how much the these funds are overlapping.
So that's how you research ETFs. That's how you dive deeper into ETFs, making sure you're reinvesting those dividends as well. If you're in the growth phase, that's how you go through that process. If you guys have any questions on researching ETFs, make sure you hit me up on Instagram or Twitter to check that out. Now let's dive into the step by step guide on how to become an automatic ETF millionaire.
All right, so this next thing we're going to talk about how to become an automatic ETF millionaire. And then we're going to show you if you invest X amount of dollars per month, how fast can that grow and how much wealth can you build by investing X amount of dollars per month over a long period of time? So how to become an automatic ETF millionaire?
Step one is you're going to choose the ETFs you want to invest and you're going to use our guide on how to research ETFs. You're going to choose your ETFs in your portfolio. And you can also access that index fund and ETF CHEAT SHEET with all my favourites there if you want to get your research started with that, that CHEAT SHEET. And then you're going to invest that money into M1 Finance.
Now M1 Finance is linked up down below and you can create a pie. So when you create that pie, you're going to have that available for you. So that every time that you're investing, what you're going to do is you're going to set up automatic transfers directly to that pie. So every single time you get paid or once a month, whatever frequency you want, you're going to just automatically transfer that money over to your investment account before you can even go and spend it.
You always want to pay yourself first. The reason for that is that is how wealth builders build. Well, Warren Buffett talks about this all the time. You need to pay. Pay yourself 1st and then spend what is leftover. It's so incredibly important to do that. And the way to do that is to automate the process so that you don't have to try to rely on your own personal willpower to invest your dollar.
So setting it up automatically and M1 Finance is the best for automatic investing because you can invest in your direct pie or your direct portfolio automatically every single month. Step 3 is to wait, and Step 4 is to watch your money compound. Here's why. If you invested $500 every single month with an 8% rate of return and you want to to get to $1 million, it would take you 34.16 years to get to $1,000,000.
And if you got a 10% rate of return, it would take you 29.69 years to get to $1,000,000. So that's at $500 per month. If you had $500, that's how long it would take you to become a millionaire. Now, if you just automated this process, you can set it up automatically where you don't have to think about it again.
Just let this process be automated and then every single time you invest, it automatically goes into that account. You can worry about making more money investing in your business or building out your career so you can earn more money to fuel that fire even more. So you can get to that millionaire status even faster and grow well beyond that millionaire status.
Because obviously we know most people don't want to retire in $1,000,000. You can only draw down $40,000 a year. More about that here in a second. I'll tell you exactly where those numbers come from. Now we have your Roth IRA. So say for example, you want to Max out your Roth IRA every single year with $541.66.
So at the time where I'm recording this, you can Max out your Roth IRA with $6500 per year. And if you're over the age of 50, you can Max out with $7500 per year. So let's say we Max it out at $6500 per year. If we did that with $541.66 and we got an 8% rate of return, it would take us 33.2 years to become a millionaire.
Now, if we got a 10% rate of return, it would take us 20, 8.9 years to become a millionaire. That's maxing out your Roth IRA every single year. Now let's look at $1000. Let's say you upped the ante. You start making more money and you're investing $1000 every single month. You invest $1000 per month at a 10% rate of return.
You'd have 23 years before you become a millionaire. And if you invest $1000 per month at an 8% rate of return, it would take you 26 years to become a millionaire. And if you maxed out your 4O1K right now, that'd be $1875.00. So if you did that, it would take you 19.3 years at an 8% rate of return to become a millionaire and 17.4 years to become a millionaire at a 10% rate of return.
So these are the reasons why you want to set up and become an automatic ETF millionaire because you want to have this all set up already. It's automated. You don't even have to think about it. And you can worry about making money somewhere else so that you can earn more income, deploy it towards index funds and ETFs or earn that additional income and put it towards real estate or your business or whatever else you want to do with that money to build your generational wealth.
Now, how should you construct your portfolio? That's another big question that we get a lot when it comes to ETF investing. So one to five ETFs is all you really need. If you want to get crazy, you can, you can go beyond that, but if you're new, I would not recommend going beyond one to five ETFs. Now, there's a couple of portfolios that we talk about all the time in this podcast.
One of which is the easiest one is the Simple Path to Wealth portfolio. Now, if you've never heard of the Simple Path to Wealth portfolio, this is investing in something like VTi where there's a book called The Simple Path to Wealth that was written by JL Collins and he talks about this in that book where you buy one index fund, or in our case would be 1 ETF, which is the Vanguard Total Stock Market Index fund.
And BTI is the ETF version of that index fund. And this holds thousands and thousands of different stocks, every stock inside of the stock market. So you're well diversified when it comes to international stocks because all the US based businesses are doing international business as well.
You're also well diversified when it comes to US based stocks, obviously, because you're owning every single stock inside the stock market. But some people may argue, well that doesn't have enough bond exposure for me. I don't want to deal with all the volatility. So then you can look at something like the Warren Buffett portfolio maybe. So Warren Buffett invests his own family's money into index funds and ETFs.
This is exactly how he invests it. He puts 90% into an S&P 500 index fund and you can use the ETF to do this and he puts 10% in a bond index fund ETF. So 9010 portfolio is the Warren Buffett portfolio. Then you have a three fund portfolio and this was popularized by the Bogleheads.
But a three fund portfolio means that you have X percentage in in US based stocks, X percentage in international stocks and X percentage in bonds, whatever you are comfortable with. So thinking through which portfolio may work for you depends on your risk tolerance in a number of other different factors.
Now, how much do you have to have before you can retire? So there's something called the 4% rule, which states that you can draw it on 4% of your portfolio every single year and never run out of money. Now, if you're like in your early 30s, for example, then maybe you want to draw down 3.5% to make sure that you have enough.
Instead of 4%, you want to draw down a little bit less. And some people may even argue that the 4% rule is too conservative and you could do 4.5 to even 5%. Four percent is a happy middle there. So that's how you can figure out how much money do I actually need? So every single year, you got to think, how much am I spending in retirement? How much do I want to spend in retirement?
This is the number you really need to get nailed down. So say for example, that you want to spend $80,000 per year in retirement. So what you do is you multiply 80,000 by 25 and what that's going to get you is the exact number that you need invested in order to be able to retire.
So 80,000 * 25 is $2,000,000. So once you have $2,000,000, you don't have to work anymore. You have your money available there that you can draw down at 4% every year and that's $80,000 per year that you can draw down. So that's how you can figure out how much money you need to retire with ETFs.
And the amazing thing is you can automate this entire process with the exact process that we just discussed. Now, what are my favorite index funds and ETFs? We have them linked up down in the CHEAT SHEET. I love VOOI, love VTi. Those are some of my favorite and court ETFs that I absolutely love.
But you can check out the CHEAT SHEET and you can do some of the research that we talked through on this episode as well. So how do you learn more? So first, you can check out our free webinar that we keep talking about in this episode. The webinar is going to walk you through step by step on how to buy your first index fund or ETF. You can also check out Index Fund Pro, which is our course which teaches you exactly how to invest in index funds and ETFs, which accounts are best for you.
It walks you step by step. We hold your hand through the entire process so that you can get from point A to point Z and basically have your own investment portfolio set up and you never have to think about it again. It's a set it and forget IT system so that you are ready when it comes to investing.
And lastly, just make sure you grab that index fund and ETF CHEAT SHEET so that you can start doing your research and looking for the best index funds and ETFs for your own personal situation. Listen, I hope you guys learned a ton in this episode. If you guys have any questions, make sure you hit us up on Instagram or TikTok at Master Money Co and follow us on Spotify, Apple podcast or whatever podcast player you're listening on right now.
And if you want to help out the show, share it with a friend and leave that five star rating and review. I cannot thank you guys enough for leaving those five star ratings and reviews. They truly mean the world to me. I appreciate each and every single one of you. Listen to this episode and we will see you on the next episode.
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