How Investing In These Funds Could Be the Secret To Building Wealth
Investing in exchange-traded funds (ETFs) could be one of the smartest moves you make to build lasting wealth. ETFs offer a unique combination of benefits, from tax advantages to lower fees, making them particularly appealing to investors looking to maximize long-term growth.
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To understand the uniqueness of these funds, Gil Baumgarten, CEO of Segment Wealth Management, explained how they came about and how you can use them to build wealth.
“The mutual fund was invented in 1929, where people could co-mingle their money and hire a professional money manager with very small amounts.” ETFs, introduced in 1993, took this concept further by listing mutual fund-like investments as stocks, creating significant tax benefits for investors.
Baumgarten highlighted one major advantage of ETFs over mutual funds. “There’s some partitioning in the mechanics that creates tax advantages for ETF investors that mutual funds don’t possess.” Essentially, ETFs help investors defer capital gains taxes, boosting compound interest growth potential.
“It increases the likelihood you’ll get a step up in basis at the first death of the first spouse,” he explained, making gains potentially tax-free if handled correctly.
While mutual funds often charge extra fees for frequent trading, Baumgarten noted that ETFs generally avoid this. “Lower fees in an indexed portion of an ETF would be a better long-term investment for most people,” he said.
He warned against trying to beat the market through frequent trading or targeting niche sectors like cannabis or healthcare ETFs, however. “That is a fool’s game. You’re much better off owning a broad-market ETF with exposure across all market sectors.”
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For those new to investing, Baumgarten recommended starting simply. “You just have to know what to ask for. Walk into a Charles Schwab or Fidelity office, open an account, deposit a thousand dollars and say, ‘Give me $500 worth of VOO and $500 worth of VTI,’” referring to Vanguard’s S&P 500 (VOO) and Total Stock Market Index (VTI) ETFs.
These funds offer broad market exposure at minimal costs, providing a “pure form of participation.”
If you’re not sure how much money to put toward ETFs, Baumgarten is unequivocal, “Everything you can possibly afford.” He argued that the common advice to save 10% to 15% of one’s income is just not enough for anyone aiming for true wealth.
Reflecting on his own experience, Baumgarten shared, “When I got married, my wife and I decided we would live on one income and save 100% of the other income.”
Baumgarten himself personally holds millions of dollars in these funds alongside his clients’ portfolios.
Baumgarten cautioned investors against obsessively checking their portfolios, as frequent monitoring might lead to misguided attempts at timing the market. “They have no idea what they’re doing and will ultimately blow themselves up,” Baumgarten warned, advocating for patience and steady accumulation.
Instead, he emphasized the historical reliability of long-term investing. “The stock market goes up in 81% of all time periods over 12 months.” Although returns fluctuate annually — sometimes drastically as they have lately — the average long-term return remains around 9%, primarily tax-free if investors avoid selling.
“Capital gains taxes are forgiven at the death of either owner,” he added, making ETFs “a perfect legacy kind of vehicle.”
ETFs are not only great for wealth accumulation but they can also provide significant liquidity if you need access to funds. For example, “They can be used for loans,” Baumgarten explained, suggesting investors borrow against their ETF holdings for short-term needs, avoiding tax consequences of selling shares outright.
ETFs represent more than just an investment strategy — they’re a cornerstone of smart financial planning that can truly help you build wealth over time.
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