For most Canadians, the idea of a million-dollar retirement fund feels distant or even unattainable. However, you can build a $1 million portfolio by keeping it simple and investing in low-cost passive index funds.
This approach eliminates the risk of holding individual stocks that might fail over time. In fact, just a handful of companies account for most of the stock market returns, making holding individual stocks even riskier. Instead, passive investing allows you to harness the power of global economic growth and compound interest over time.
Whether you prioritize maximizing your Tax-Free Savings Account (TFSA) or building your Registered Retirement Savings Plan (RRSP), the approach remains the same.
In this article, I have identified two simple index funds that Canadian investors with a long-term investment horizon can buy and hold right now.
Diversified index funds are products that have the ability to turn modest monthly contributions into a seven-figure portfolio over time. Compared to active funds, passive exchange-traded funds (ETFs) are cheaper, with lower expense ratios and management fees.
The majority of asset managers on Wall Street fail to beat the underlying index, which has increased the assets under management for passively managed funds over the last 20 years.
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Two TSX index funds to buy right now
The first fund to consider is iShares Core Equity ETF Portfolio (TSX:XEQT), a globally diversified equity portfolio holding thousands of stocks across multiple countries and sectors.
Canadian investors often suffer from home bias and may have a significant exposure to domestic companies dominated by blue-chip banks and energy companies.
However, they miss out on international tech giants, healthcare innovators, and consumer brands driving global growth. XEQT is a diversified ETF that provides you with exposure to some of the largest companies in the world.
The second fund is Vanguard S&P 500 Index Fund (TSX:VFV), which tracks the S&P 500 index. The U.S. economy has historically driven global growth, and this fund provides concentrated exposure to the massive technology companies that dominate the global economy.
The fund is also unhedged, meaning you benefit if the Canadian dollar weakens against the U.S. dollar over time, a trend that has played out repeatedly across decades.
How to build a $1 million portfolio
Investing $500 each month for 35 years, given an average annual return of 8%, will help you accumulate $1 million. If you increase the monthly contribution to $1,000, the time horizon falls to 26 years, while a $2,000 investment will help you achieve your $1 million goal in 18 years.
The remarkable part is how that $1 million gets built. In the $500 monthly scenario, you contribute $210,000 of your own money over 35 years. The remaining $790,000 comes entirely from market growth and compound interest. Nearly 80% of your wealth comes from the market doing its work, not from your paycheck.
The vehicle you choose matters as much as the strategy itself, so aim to prioritize your TFSA. A million-dollar portfolio is impressive, but a tax-free million-dollar portfolio is life-changing.
If you build this wealth in an RRSP, the government effectively owns a portion of it. When you withdraw funds from the RRSP in retirement, it gets taxed as income, and you could lose $300,000 or more to taxes depending on your bracket.
Max out your TFSA first, and aim to hit the annual contribution limit of approximately $7,000, which breaks down to roughly $583 per month. Once your TFSA limit is reached, direct any excess funds into your RRSP to reduce your current taxable income.
The hardest part of this entire strategy is doing nothing. So, automate your monthly contributions, stop checking stock prices daily, and let the power of compounding work its magic.
