It's All About Your Strategy and Your Process
Most of us are doomed from the start regarding investing and managing money. We develop unusual attitudes towards money from a very young age. We receive lots of conflicting messages about money and investing. These mixed messages create unhealthy and inappropriate investing mindsets. If we fail to straighten out this confusion, we are not able to develop healthy approaches and strategies for managing our money. With the proper mindset, investing is more successful and more enjoyable.
Here is a sampling of the variety of messages we all receive about money and investing:
“Your Uncle Joe bought Amazon for $5 a share in the late 90’s and made a fortune. He bought his vacation home with the profits.”
“Our grandfather lost everything in the stock market crash of 1929. The family barely survived the Great Depression.”
“Audrey makes a lot of money in the stock market. She is investing heavily in lithium battery stocks right now.”
“My friend lost $200,000 this year when Tesla’s stock tanked. He won’t be able to retire now until he is 70.”
“Sally is making $5,000 per week by day trading. She took an online course, and it changed her life.”
“I’m just not lucky in the stock market.”
You could substitute your own similar stories. Whether the investing stories we hear are true or not, they end up shaping the way we approach investing. And we may not even be aware of it because many of our investing beliefs get lodged in our subconscious minds. These stories and the emotions surrounding them often lead to the following investing mistakes:
Approaching stock market investing as a “get-rich-quick” scheme.
Focusing on short-term results vs. long-term results.
Listening to stock tips.
Using emotions and not data in your investing decisions.
Chasing “hot” funds or stocks.
Celebrating your winners and ignoring your losers.
Believing in luck and thinking of investing as gambling.
Taking on too much risk.
If you want to be a better investor, you need to start by addressing your beliefs and your mindset about investing. How many of the items listed above apply to you? Are you an emotional or a disciplined investor? Do you have realistic expectations from the stock market? Take some time this week and examine your inner beliefs about investing. Examine your mindset and your expectations from investing. If you can find some mistaken investing beliefs, work on challenging them.
The best investors are not gamblers. The best investors use knowledge and data to their advantage. The best investors are disciplined and not emotional. The best investors have a solid strategy, and they stick with it. The best investors don’t chase fads and trends. Here are some ways that good investors approach investing:
They view investing as a “get-rich-slow” process. They take the long view, and focus on 10-year, 20-year, and 30-year+ returns.
They are patient and they don’t overreact to short-term surprises in the market.
They take luck out of the equation and use long-term trends and probabilities to their advantage.
They know that they will make roughly 10% per year by simply investing in indexes that track the S&P 500 and the Nasdaq. They understand that compounding returns at this rate leads to incredible asset growth.
They don’t pay attention to stock tips from any source.
They don’t get thrown off when they hear of someone making a killing on a particular stock.
They don’t pay attention the what the experts are forecasting for the market or the economy because they know they are wrong most of the time.
Your results will be better if you emulate the best investors. Your attitude will be better. Your life will be better.
“Buy & Hold” investing is disciplined in this way. Our Beyond Buy & Hold system is an improvement over traditional Buy & Hold investing but it is built upon the same solid foundation of this long-term disciplined approach. Our Beyond Buy & Hold system starts with the Buy & Hold foundation that produces 10% annual returns by simply investing in S&P and Nasdaq index funds and improves upon that solid foundation. Our system takes the best of Buy & Hold investing and eliminates the worst parts of Buy & Hold investing.
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.
The Best Index Fund that Nobody Knows About
SUMMARY:
Major Market Index funds are the best option for all investors.
Most people stop at the S&P 500 and search no further.
The Nasdaq and the Nasdaq-100 produce better results than the S&P 500, but very few people know this.
Combining Nasdaq index funds with the Beyond Buy & Hold system produces incredible results.
We already discussed the reasons why you shouldn’t own individual stocks or even mutual funds for that matter. NO stock pickers can beat the returns of the S&P 500 over long periods of time – ten years or more. Large cap US index funds (like the S&P) are the way to go. They beat small cap and mid cap funds over the long run. They beat international funds. They beat commodities. They beat bonds. Index fund owners don’t need to do any research. They don’t need to track industry trends. Investing in index funds is very simple and simpler is better than complex when it comes to investing. But which large cap index fund or funds should you own?
THE S&P 500
Index funds which track the S&P 500 index should be at the top of your list. The S&P 500 is the benchmark index that all equity fund managers and investment professionals use to measure their results. You should too. This index represents the 500 biggest and best companies in the world. Specifically, the S&P 500 contains the largest 500 companies that trade on US stock exchanges. This index is highly diversified across companies and industries. These companies’ performance reflects what is going on in the US and global economies. Over long periods of time, the S&P 500 has returned between 7% and 8% per year before dividends. Currently, the S&P 500 has a dividend payout rate of 1.8% per year. So simply owning an S&P 500 index fund will return you around 9% to 10% per year with dividends reinvested. You will not be able to beat that return by investing in your own stock picks or by investing in the stock picks of highly paid money managers via mutual funds. As far as investing in equities goes, the S&P 500 is very safe because of its diversified holdings and because of the size and strength of these companies. The value of all the S&P 500 companies represents about 70% of the value of the entire stock market. It is not immune from bear market crashes, but it will always rebound from bear market crashes and eventually reach higher price levels. For many investors, they should simple stop right here and invest only in the S&P 500.
The ticker symbols of the top index funds that track the S&P 500 are VOO, IVV and SPY. VOO and IVV have lower fees than SPY. Not all these ticker symbols are available on every brokerage platform, but at least one of them is traded on all the major trading platforms – Schwab, Fidelity, TD Ameritrade, etc.
THE NASDAQ
Investors who are looking for higher returns from a large cap index fund will want to consider investing in the Nasdaq. The two biggest stock exchanges in the US are the New York Stock Exchange and the Nasdaq. Companies that meet their financial requirements can trade their stock on either exchange. The Nasdaq composite index contains the stocks of the roughly 2,500 companies that trade on the Nasdaq exchange. While most people think of the Nasdaq as a large cap index, 30% of the Nasdaq is made up of mid cap and small cap companies. The Nasdaq is mostly large cap but not purely large cap. The main difference between the Nasdaq and the S&P 500 is that the Nasdaq contains a higher percentage of technology companies. Just over 50% of the companies that trade on the Nasdaq are technology companies. Tech companies only make up 28% of the S&P 500. Because the Nasdaq contains more exposure to smaller companies and technology companies, you get more growth in the Nasdaq vs. the S&P 500. But you also get more volatility. The Nasdaq beats the S&P 500 by about 2% per year over the long term. You can expect the Nasdaq index to grow by 9% to 10% per year compared to 7% to 8% for the S&P 500. The S&P 500 pays out dividends at a slightly higher rate, however. The current dividend ratio for the S&P is 1.5% compared to 0.8% for the Nasdaq. Including dividends, you can expect to earn about 1.5% more per year in the Nasdaq versus the S&P 500. That may not sound like much, but earning and additional 1.5% per year would generate 50% more total dollars over 30 years.
The chart below compares the performance of the S&P 500 to the Nasdaq Composite between 1986 and 2022. An investment in the Nasdaq would have generated about twice the amount of money at the end of 2022 versus the same investment in the S&P 500. But the gains were not consistent. The Nasdaq surged ahead in the late 1990’s during the dot-com bubble, but the Nasdaq gave back all those gains in the early 2000’s. From 2009 through the end of 2021, the Nasdaq significantly outperformed the S&P 500.
The greater volatility in the Nasdaq means that price peaks are higher and price valleys are lower when compared to the S&P 500. The Nasdaq tends to drop more in bear markets and tends to climb higher in bull markets. In years where the S&P 500 is declining in value, the S&P index drops by an average of 12% per year. In those same years when the S&P is declining by 12% per year, the Nasdaq is declining by 18% per year. In years where the S&P 500 is increasing in value, the S&P index grows by an average of 17% per year. In those same years when the S&P is increasing by 17% per year, the Nasdaq is gaining 24% per year. Since the S&P only loses money 27% of the time and increases in value 73% of the time, the math works in the Nasdaq’s favor. When it lags (27% of the time), it falls short by 6% per year. When it beats the S&P (73% of the time), it wins by 7% per year. The volatility results in peaks that are 7% higher and valleys that are 6% lower. Since most people are uncomfortable with the volatility of the S&P 500 (bear markets), they tend to stay away from the Nasdaq because it is even more volatile. The extra 2% per year in additional returns is not worth the added volatility for them. In the long run, though, long-term Nasdaq investors will end up with more money vs. S&P 500 investors.
THE NASDAQ-100
The Nasdaq 100 has a similar profile to the Nasdaq Composite. It represents only the biggest 100 companies that trade on the Nasdaq. The Nasdaq-100 contains an even higher percentage of technology companies than the Nasdaq Composite and it does not contain any financial companies. The returns for the Nasdaq-100 are even higher than the Nasdaq composite and it is not any more volatile than the Nasdaq composite on the downside. While the Nasdaq composite beats the S&P 500 by about 2% per year, the Nasdaq-100 beats the S&P 500 by about 4% to 5% per year. That overperformance is very significant. Earning an additional 4.5% per year compared to the S&P 500 would generate 240% more total dollars over 30 years. In years where the S&P 500 is declining in value, the S&P index drops by an average of 12% per year. In those same years when the S&P is declining by 12% per year, the Nasdaq-100 is declining by 17% per year. In years where the S&P 500 is increasing in value, the S&P index grows by an average of 17% per year. In those same years when the S&P is increasing by 17% per year, the Nasdaq-100 is gaining 29% per year. Since the S&P only loses money 27% of the time and increases in value 73% of the time, the math works in the Nasdaq 100’s favor. When it lags (27% of the time), it falls short by 5% per year. When it beats the S&P (73% of the time), it wins by 12% per year. The volatility results in peaks that are 12% higher and valleys that are 5% lower. As with the Nasdaq, people tend to avoid the Nasdaq-100 due to the added volatility. But for long-term investors, people miss out on a lot of investment gains by staying away from the Nasdaq-100.
In the next chart, we add in the Nasdaq-100 to the comparison. The Nasdaq-100 stayed ahead of both indices in the 2000’s and had explosive growth after 2009. Surprisingly, most investors are not aware of the strong performance of the Nasdaq-100 index. Savvy investors are well aware of the advantages of investing in the Nasdaq-100.
There are not as many options for Nasdaq index funds. We use the ticker symbol ONEQ for the Nasdaq composite and the ticker symbol QQQ for the Nasdaq-100.
The following chart compares the value of a $10,000 starting investment at the beginning of 1986 in the S&P 500, the Nasdaq Composite, and the Nasdaq-100. You can see how significantly the Nasdaq and the Nasdaq-100 outperform the S&P 500. The Nasdaq-100 investment produced $845,000 compared to $182,000 for the S&P 500 – almost five times more money or an extra $663,000. Amazing!
| S&P 500 | Nasdaq | Nasdaq-100 |
Beginning Investment | $10,000 | $10,000 | $10,000 |
Ending Investment | $182,000 | $319,000 | $845,000 |
THE NASDAQ AND BEYOND BUY & HOLD
Since our Beyond Buy & Hold avoids most of the pain associated with bear market collapses, we are very comfortable owning Nasdaq index funds. The larger declines in bear markets for the Nasdaq when compared to the S&P 500 creates better opportunities for our system to profit by trading the Nasdaq in those bear markets. Since we go “all in” during bull market cycles, we get to reap the rewards of the higher returns of the Nasdaq and the Nasdaq 100.
Avoid the Nasdaq at your own peril. Combining the Nasdaq-100 with the Beyond Buy & Hold investing system can create incredible results for your portfolio.
Be well,
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.
But You Can Profit from the Volatility
SUMMARY:
The Rational Stock Market theory states that the market always looks forward and that future economic results are already priced into the market. It is all based on data.
But the economy never grows by 50% and it never shrinks by 50% in short periods of time. So why does the stock market exhibit wild swings of this magnitude?
It is human emotion and human behavior that moves markets in periods of excessive volatility.
The Rational Stock Market theory states that the experts have already incorporated all the relevant information into stock market prices. If there is going to be a recession next year, they are already including that impact in their market values. If inflation is going up and down, they have that covered. If the global economy is slowing down, that too is reflected in the current prices for stocks. If the market makers are really that good, why does the stock market move up or down by 5% on a given day when an economic report comes out only to be followed by a drop of 4% the following day? If corporate profits grow by an average of 8% per year, why does the market drop by 40% in a matter of months only to reverse course upwards by 50% or more over the following years? All you have to do is look at charts of stock prices to see that emotions and the herd mentality move the market in the short term, not reason. For centuries, the stock market has been the best place to invest your money compared to just about every other investment. But it can be painful to invest in the stock market. The stock market is not rational. Investing in the stock market can be maddening but the volatility of the irrational market presents a big opportunity to make higher returns.
In the chart below, we compare the actual performance of the S&P 500 for the period between 1995 and 2021 to what a “rational” market would look like. For the rational market, we smoothed out the chart by using the average annual return of 8% that the S&P produced over this time. The orange line represents a market that produces steady returns. The blue line is the actual stock market performance. Over the long term, the S&P consistently produces average annual returns between 7% and 8% excluding dividends. This period was no different. When the blue line is significantly above the orange line, the market is irrationally bullish. When the blue line is significantly below the orange line, the market is irrationally bearish. This illustrates perfectly how people are constantly over-reacting to news and events. Corporate profits grow by 8.7% per year over time which is consistent with the growth of the stock market over long periods of time. So, in the long term, the stock market is rational. But in the short term, the market is anything but rational.
Look at how overvalued the market was in the late 1990’s and early 2000’s. A rational market would have valued the S&P 500 at $709 in March of 2000, but the irrational investors valued the S&P at more than double that amount - $1,499 at that time. This was during the height of the dot-com bubble when everyone was saying things were “different” this time. The collapse of the housing and mortgage markets in 2008 sent the S&P well below a rational valuation. A rational market at the beginning of February 2009 would have valued the S&P 500 at $1,437 yet rampant fear created an actual value of the S&P that was half that level - $739. We moved from a market that was overvalued by 2-times in 2000 to a market that was undervalued by half in 2009. Even though the market experienced strong gains between 2009 and 2021, the blue line stayed below the orange line until the end of 2020. A chart like this one gives you an indication of whether investors are overvaluing or undervaluing the market.
So, we are left with this awful Catch 22. We have the stock market that is a great place to invest (annual returns of 9% to 10% with dividends reinvested) and we have the stock market that can drop by 50% or 60% in a matter of months and stay in negative territory for six years or more. If the market were truly rational with market values closely following the orange line in the previous chart, using a Buy & Hold investing strategy would be just about all one could do. Investing would be easy and painless. But because the market is irrational, a Buy & Hold strategy is painful.
Buy & Hold is certainly better than what many people often do, which is to sell stocks after they decline significantly and buy more when stocks are riding high. Fear causes people to sell at the bottom and greed causes people to buy at the top. So, for the average investor, sticking to a disciplined approach like Buy & Hold helps people avoid some big investing mistakes. So, clearly Buy & Hold is better than the worst investing approaches. But why should we settle for a strategy that is “better than the worst”? Is it possible there is a better way to invest in the stock market during those awful Bear markets when stocks drop by 40% or more?
There is a better way. We don’t think it makes sense to watch your investments get cut in half during one of these downturns that happen every six to seven years and then wait four or five years for your investments to get back to even. The wild swings in stock values shown in the previous chart present an opportunity to make more money in the stock market. It is emotional human behavior that creates these wild swings, and that irrational human behavior is something that is very predictable. We figured out a way to exploit the volatility. You can reap the rewards when the market appreciates excessively, and you can sidestep the irrational bear market collapses. In a truly rational market that steadily climbs by 8%, you could only make 8% per year. Because the market is not rational, you can make much more than 8% per year. We created Beyond Buy & Hold to show you how.
Be well,
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.
%20(1).png)
