For centuries, the United States stock market has been the best place to invest your money compared to just about every other investment. The U.S. stock market has produced more millionaires and more billionaires than any other asset class.
The table below shows the average annual returns of the S&P 500 and the Nasdaq over various time periods.
Over long time periods, the S&P 500 produces annual returns of somewhere between 9% and 11% including dividends.
The Nasdaq tends to outperform the S&P 500 by about 1% to 2% per year over time. The returns for the Nasdaq-100 are even higher. But the Nasdaq tends to be more volatile than the S&P 500. It tends to drop by a higher percentage in bear markets, but it also tends to increase more in bull markets.
LOTS OF STOCK MARKET INVESTMENT OPTIONS
There are, however, thousands of choices when it comes to the stock market. Because of this, it can be confusing when people talk about the stock market or stock investments. To reap the benefits of stock market investing, you can invest in individual stocks, mutual funds, index funds, international stocks, growth stocks, value stocks and more.
Having all these options makes the investing process more confusing for most people.
You’ll hear lots of reasons why you should be investing in many or all of the different types of stock investments listed above. But you should ignore this noise. The truth is that the S&P 500 and the Nasdaq beat all the other options in the long run.
No mutual funds (individual stock pickers) can beat the S&P 500 over long time periods (10 years or more). International stocks can’t match the returns of the S&P 500 in the long term. The S&P and the Nasdaq are considered large-cap stock indices, and large-cap stocks beat mid-cap and small-cap stocks. Value stocks and growth stocks might have strong performance during particular time periods, but nobody can accurately predict when that will be.
There is a dark side to the stock market, however.
Individual stocks can lose their value and stay down. Some stocks can and do go to zero if the company goes out of business, but the aggregate markets as represented by the S&P 500 and the Nasdaq don’t go out of business or go to zero.
The stock market crash of 1929 was legendary. Investors were wiped out in a short period of time as the stock market dropped by 50% in a matter of weeks. Over two and a half years, from late 1929 to mid-1932, the stock market lost almost 90% of its value.
While we haven’t seen anything like the 1929 crash since then, there have been plenty of difficult and painful bear markets. The 2022 bear market saw declines of 25% to 35%. In the painful market crashes of 2000 and 2008. The S&P 500 dropped by 48% from 2000 to 2002 and fell by 56% between 2007 and 2009. The Nasdaq declined even more than the S&P 500. Watching our 401(k) accounts get cut in half was an awful experience.
When you invest in the stock market through an index fund representing the S&P 500, you can be extremely confident that the value of that investment will grow significantly in the long term. You can be much more confident in the increasing value of your stock market investment than you can be in the performance of bonds or commodities or real estate in the long term. And you can be much more confident in the performance of the S&P 500 than you can be any specific individual stock’s performance.
Why is that necessarily true? How can we be so sure of the gains from the stock market in the future? What do stocks have going for them compared to the other asset classes?
Our entire political and socio-economic system is designed for companies in the stock market to succeed. Let’s look at the incentives that help to propel the stock market higher over time:
All 500 companies in the S&P index have tremendous incentives to grow. The management, board members, shareholders, and employees all have huge incentives in place for those companies to be successful.
Local, state, and national governments are incentivized for those companies to grow. Tax revenues and job opportunities benefit all government entities.
The general population wants good-paying jobs in their communities.
Investment capital flows to growing and successful companies.
The incentives that drive the stock market are not in place for bonds, commodities, or real estate. Most people would prefer that the price of commodities and real estate remain constant or even go down. Consumers and governments don’t like price increases. Look no further than the inflation challenges we face right now. Most people would prefer that interest rates on bonds were lower rather than higher. Higher rates limit borrowing, which inhibits economic growth. There are people who benefit when prices increase, but they’re in the minority.
The other factor to consider is innovation. It’s innovation and productivity that drive the increase in company value and, therefore, the stock market. We have a highly innovative and productive economy, and I see no reason for that to slow down in the future. One could even argue that innovation is accelerating rather than slowing down.
The only factor I see that could get in the way of the 8% to 9% continued annual growth of the stock market would be a collapse of our political system. Given the events of recent years, one can’t totally rule that out. But even in the most extreme political upheaval, the same incentives for market growth should still be in place. There is way too much money at stake. Major political disruption would likely have a massive short-term effect on the stock market. But I firmly believe that after a period of time, the stock market will continue growing.
The stock market is a tremendous way to grow wealth. But investing in the stock market is even better with our Beyond Buy & Hold system. Our Beyond Buy & Hold system protects investors from major short-term collapses regardless of the reason. You can get the best of both worlds. You can get excellent long-term growth from stocks and protection against losses. You need a better approach than simply “riding it out” during stock market meltdowns.
Who wouldn't want annual returns of 10% to 14% per year AND protection against losses during bear market crashes?
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
You can save yourself a lot of money and aggravation if you can avoid some of the most common investing mistakes. Let’s review some of the biggest ones that many people make.
Emotional Investing
One of the most common mistakes in investing is to use emotions and not discipline when making investment decisions. Fear and greed are the main culprits here.
Fear causes people to sell at the bottom and greed causes people to buy at the top which the exact opposite of how to make money investing.
Logic and reason should be at the heart of all of your investment decisions.
When making a big investment decision, take a deep breath and examine your motivations. Be honest with yourself and take a measure of the role of emotions in your decision.
Chasing performance
Many people are prone to chasing the hottest stock or the hot fund. Just because a stock or a fund has had a good run recently it doesn’t mean the trend has to continue.
The most important thing about any investment is where it is going in the future, not where it has been in the past.
Stock funds that have just posted incredible results probably made a big bet on a stock or two and it paid off. Quite often their future performance reverts back to below average performance.
Gambling
Investing and gambling are two different things. Gambling relies on luck. Good investing relies on discipline and solid strategy.
Gambling in the financial markets takes many forms. Making a big bet on one hot stock is a form of gambling. You could win big, or you could lose big. Acting on stock tips is another form of gambling.
If you are exposing your assets to a big risk of loss, you are gambling.
Predicting the Near-Term Future
All investing requires some optimism about the future. I am extremely confident that the large cap US stock index funds will grow by 9% to 10% per year over the long term. This belief allows me to invest aggressively in those funds.
But I have no better idea than anyone else how the financial markets will perform in the next three months or six months. Lots of people make predictions about these things, but they are wrong most of the time. The short term moves of the financial markets are too hard to predict. There are just too many variables.
If you shift a lot of money into bank stocks, for example, because you think the financial sector is going to do very well over the next year, you are gambling. You might have a solid argument and good data to back up your beliefs but getting the exact timing right is almost impossible.
Using the Wrong Time Horizon
People should be measuring their investment performance over long periods of time – 10 years, 20 years, 30 years or more. As I just mentioned, anything can happen in the irrational financial market in 3-month, 6-month or 12-month time periods.
When you pay too much attention to short-term results, you are likely to change strategies too frequently. It can be another form of chasing performance and you are probably going to make changes that hurt your investment results.
Build an investment strategy that is positioned to win in the long-term and stick with it.
Investing is a long-term game and it requires discipline.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Updated: Feb 20
Yesterday, we discussed the urgent need for a way to protect your life savings from getting crushed in stock market collapses.
The investment services industry has nothing to help you with this challenge.
Trying some half-baked approach on your own will only lead to disaster. There are literally millions of those sad stories.
We all want Growth and Safety. We have been told we can’t have both – that you can either have an investment strategy built for Growth or one built for Safety. I simply couldn’t accept this. I thought we could use the markets irrational movements to our advantage.
I spent the better part of a decade using my “Mad Scientist” data skills working on a solution to this problem. It wasn’t easy. If it were, everyone would be doing it.
I toiled and toiled away at this thing until I had something that I could prove would work. I love this kind of challenge. It isn’t perfect, but it is better than anything I have seen or tried before. And perfect was not the goal, just better.
The hardest part was building in a mechanism to recognize when the computer model is wrong. This is what is missing form every other model that attempts to shift out of the stock market to avoid bear markets. The market can be fickle, so the computer models get “faked out” on occasion. To make this work, we needed a system that minimized the impact of these false alarms.
The systems used by the professional investors are based on rolling averages and they are not very accurate, and they are too slow to react when they are wrong.
I must admit that there were months of sleepless nights trying to figure out this challenge. I enjoy reading Ryan Holiday’s books and in THE OBSTACLE IS THE WAY he talks about how obstacles always break apart under relentless pressure. This powerful investing system is proof of that.
Yesterday, I mentioned that I would show you how the system performed in the 2022 and 2023 bear market. In the chart below, I compare the value of a portfolio using the Market Signals system to one using a Target Date fund (the Fidelity 2050 fund). The blue line is the Market Signals account, and the Target Date fund is the orange line.
Notice how the Target Date fund was down about 25% in October of 2022 while the Market Signals portfolio only dropped by 10% at its low point. The Market Signals account was back to even by early 2023 while the Target Date portfolio was still down 20% in August of 2023. The Market Signals account had grown by 10% by August of 2023.
The Market Signals account generated returns of roughly 30% higher than the Target Date portfolio over this time period.
The orange line in the graph is the "safe strategy" that was recommended to you by the professional advisors. How safe does it feel now?
And here is the hidden little secret about our Market Signals system. You will get higher returns and much more growth in your portfolio. When you lose less money when the stock market declines, you make more. It is simple math.
You need this kind of protection for your retirement account. You can get it by signing up for a Market Signals subscription. Click here to learn more and to sign up today.
And Market Signals comes with a 100% Satisfaction Guarantee. Because I am so confident that this system will improve your investing results and protect your savings, you can cancel at any time for any reason. No questions. No hassle.
Click here to sign up now.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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