Updated: Oct 29
No one beats the S&P 500 Index funds in the long term
SUMMARY:
We are all suckers for stock tips. People are always trying to tell you about the next Amazon or the next Apple. You must get in early on the next “hot” industries or companies, right?
We are all led to believe that the experts are so good that they can pick the winners of the future. Well, what does the data say? How many of the so-called experts outperform in the long run? Would you invest differently if the statistics said that the answer is none of them?
Stock Picking Gurus
Most investors are familiar with the famous investing legends like Warren Buffett and Peter Lynch. There are many more that appear on CNBC or the best seller lists. In the online world, we all hear about the incredible returns that some investing superstars posted last year or last month or last week. Some of these people achieve rock-star status. They fit perfectly into our celebrity culture. The media loves to promote these investing geniuses. Millions of people follow their trades to duplicate their results. They must have incredible gifts, or they must just work harder than the millions of other investors out there. But when we look at investing results over a long period of time, what does the data say?
How Should We Evaluate Investing Performance
What data should we look at when we want to look at investing performance? What timeline should we use? Should we focus on the last 12 months? Should we focus on the last 5 years, the last 10 years, the last 20 years? Unfortunately, the media focuses too much attention on short-term investing results and that leads to investing mistakes for many people. The isolated examples of 500% returns for some stock for the last six months gets a lot of attention because it generates a lot of views. The options traders promote their extraordinary winning trades for the last week. But investing in the stock market is and should be a long-term thing.
If you are in your early working years (your 20’s or 30’s), you won’t be accessing your 401K investments for another 40 years or more. Even if you are 65 and have recently retired, you still have an investing timeline of 25 years or so. Any money you will need to access in the short-term (then next five years) should not be invested in the stock market. So, the shortest timeline we should be looking at for investing performance is five years, but the most important timeline for investing performance is 20 years or more. Monthly or quarterly or annual investment returns can be interesting, but they should not be what we focus on when evaluating investment performance.
What Does the Data Say?
There have been many published studies that look at the performance of stock pickers over a five-year timeframe. The results have consistently shown that only 8% of stock pickers (mutual funds) outperform the S&P 500 index funds over a five-year time horizon. So, in other words, 92% of these highly paid investment gurus do worse than simply investing in a passive index fund. But, as I mentioned previously, five years is not significant for investing performance. Earlier this year, I ran a report of the top performing mutual funds over the last ten years. Out of the 9,000 mutual funds in the marketplace, I only found ten that performed better than the S&P 500 and they only beat the S&P 500 by about 2 percentage points. So, only 0.1% of mutual funds (the stock pickers) beat the passive index funds over a ten-year period. This happened to also be one of the best ten-year time periods for investing results in stock market history. I then looked at the returns of these same ten high performing mutual funds in the crash of 2008. These top performing funds lost an average of 40% in 2008. So, they performed very well in a long bull market, but they lost a lot of money in the previous bear market. I mentioned Peter Lynch of the Fidelity Magellan fund earlier. The Magellan fund was the top performing mutual fund in the 1980’s when Peter Lynch ran the fund. But after he retired, the performance of the Magellan fund has been below average. The data is very clear. NO stock pickers outperform the market as defined by the S&P 500 over the long term; periods of 10, or 15 or 20 years or more.
Individual stock pickers and day traders and options traders don’t compare their results to the S&P 500 over long time periods. Just like gamblers, you always hear about their winners, and you don’t often hear about their losses. They think that the big winner must more than offset the losers. If you are a stock picker or a day trader, make sure you evaluate your results against the main benchmark (the S&P 500) in all time periods, not just the times you got lucky.
Chasing Investment Returns
A focus on short-term investing results leads to one of the biggest investment mistakes that many people make, chasing investment returns. Chasing investment returns happens when an investor sees a report of the highest performing stocks or mutual funds of the past six months or past year, and they then shift their money from their current stock investment into that high performing fund. They are then disappointed in the performance of that new fund in the following six months or year. This happens because the short-term results that the fund achieved are not sustainable in the long run. Investors who make big bets on individual stocks or stock sectors can get lucky and win big in the short-term, but those results don’t last. No one is clever enough to pick the hottest stocks or hottest sectors for every market cycle over long periods of time.
Picking Stocks is Gambling
It is impossible to predict the direction of the entire stock market in the short-term. In the long-term, the stock market will go up, but there is no way to know how the market might move this week, this month or even this year. There are just too many variables and factors to predict. Everyone has a prediction, but nobody is right all the time. The variables and factors involved with individual stocks is even greater. You could pick a great company in a great industry, but when the market drops it typically takes every stock with it. And even if the market goes up, the stock could get hurt by industry issues, regulatory issues, company performance issues, competition, etc., etc., etc. The stock market in total has never gone to zero, but individual stocks can and do go to zero. Companies go out of business all the time.
But, just like the stock pickers mentioned above, you could get lucky. You could pick the right industry and the right company at the right time, and you could win, and you could win big. This can be very exciting. This can be fun, and it is okay to experiment with money that you can afford to lose. But don’t invest more than 5% of your portfolio in individual stocks at any time. Just be aware that the individual stock segment of your portfolio will underperform your investments in market index funds over the long-term.
Picking Stocks is Hard Work
In addition to being an unsuccessful strategy, it is hard work. Picking stocks involves a lot of research and a lot of monitoring, weekly at a minimum and often daily. If you want to day trade or trade in options, you need to be glued to your computer screen all day. If all this work resulted in superior results and you enjoy this work, then I would say go for it. But it is a lot of work for lower returns compared to buying an index fund. Buying an S&P index fund or a Nasdaq index fund on the other hand is easy. There is very little research involved and much less news to stay up on. And for very little effort, you get better results. The S&P 500 produced annual returns of 15.1% before dividends for the ten years between 2015 and 2024. If you reinvested the dividends, your returns would have been closer to 17% per year. If you invested $100,000 in an S&P index fund at the beginning of 2012 and simply held it for ten years, your money would have grown to over $400,000 at the end of the ten years.
But What About Bear Market Crashes?
Bear market crashes affect individual stocks, but they also impact index funds. Bear market crashes happen about once every seven years on average. And the S&P 500 drops by an average of 37% in these crashes. Until now, you had no choice but to “Buy & Hold” or to simply wait it out. We created the Beyond Buy & Hold system to deal with these bear market crashes. We have created a powerful way to “trade” these inevitable bear markets so that you don’t see your investments drop by 40% or more and, in fact, you can now make trading profits during the bear market cycles. We are so excited to share this investing breakthrough with individual investors. You can now get the best of all worlds. You can avoid the difficulty and the hard work of picking individual stocks or even mutual funds by simply investing in stock market index funds like the S&P 500 or the Nasdaq. And you can use our system to “trade” those same index funds during bear markets (see 2022) to avoid most of the losses and to profit when the bear market rebounds. And because you “own the market” with an index fund, you will get big annual returns in bull markets (roughly 15% per year before dividends). Follow along with our newsletters and we will show you how it’s done. We will walk you through it step by step and you can trade right along with us.
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.
The Solutions are Worse than the Problem
SUMMARY:
Did you ever question the solutions that the financial professionals provide? Are the solutions to the risk of bear markets truly improving your investment results? What if the solutions are lowering your long-term investment returns and not really helping you avoid the pain of bear markets? Is asset allocation a good thing? Are bonds helping or hurting your portfolio?
EVERYONE HATES TO LOSE MONEY
No one likes to see their investments drop by 30% or 40% or 50% in bear market crashes like the one we are living through in 2022. In fact, the pain associated with losing money is greater than the pleasure of seeing your investment portfolio increase in value. So, the investment professionals have designed lots of different strategies to minimize the pain and damage of bear markets in stocks. Diversification and asset allocation are said to be good methods to avoid risk in your portfolio. Fixed income securities or bonds are less risky according to the investment professionals and are recommended for most portfolios. They also tell us to put some of our portfolio in international equity markets or commodities because they don’t necessarily “correlate” with the US equity markets. And because we are so afraid of losing money, we are eager to follow their advice.
THE BENEFITS OF BUY & HOLD
Buy & Hold is a form of disciplined investing, as opposed to emotional investing, and that is a good thing. Fear, if not held in check by discipline, causes people to buy into the equity markets at the top (fear of missing out) and sell at the bottom (fear of getting wiped out). This is the worst mistake that many stock market investors make. So, Buy & Hold is an improvement over the worst possible investing strategy, but should we settle for “better than the worst”? And based on the popularity of Buy & Hold investing and the other strategies that we “must” follow if we pursue Buy & Hold, what are the real costs of Buy & Hold investing? We encourage you to ask those questions.
The other benefit of Buy & Hold investing is that it teaches people to think long-term for their stock market investments. Buy & Hold is a strategy for the long term. Many people mistakenly focus too much on short term results from their stock market investments. Get rich quick schemes have been around for a long time and will probably never go away. It is important for everyone to understand that money invested in the stock market should stay invested for a minimum of five years. Money that you will need access to in the shorter term should not be invested in the stock market. The stock market is the best place to invest for the long term, but the market can be very volatile in the short term.
THE TRUE COSTS OF BUY & HOLD
There many costs associated with Buy & Hold investing.
Financial and Emotional suffering during bear market crashes
No growth in the value of your stocks for anywhere from 4 to 8 years
Lower returns from your portfolio from bonds
Lower returns and higher volatility in your portfolio from international investments and other asset classes.
FINANCIAL AND EMOTIONAL SUFFERING
This cost is the easiest to comprehend. Anyone who was heavily invested in the stock market in 2000 and 2008 can distinctly remember watching their investment portfolios drop by 50% or 60% or 70%. Many are seeing a similar thing happening right now in 2022. It can be excruciating watching a $500,000 retirement nest egg drop to $250,000 in a short period of time. The emotional suffering that goes along with these scenarios can be devastating. I know I felt awful in both of those crashes.
YOUR INVESTMENTS DON'T GROW
It feels good to see your portfolio rebound from big market collapses. But it can and does take a long time – from four to eight years in some cases. And then you realize that we are all just rooting for our portfolios to get back to break-even. To achieve our long-term financial goals, we need our investments to grow and to not just stand still. The S&P 500 basically went nowhere from 2000 to 2013. Time periods like this can be devastating to your financial plans depending upon your age. If you were early in your retirement or just entering retirement during the early 2000’s, your financials plans were probably thrown into disarray. It can be very difficult to make up for this much lost time.
THE TRUE IMPACT OF BONDS
Bonds are a poor long-term investment when compared to the stock market and even though they generate a predictable return via interest payments, they can and do lose their principal value. Bonds only provided interest rates of roughly 2% in 2021 while stocks grew by 27% (S&P 500). Bond rates have risen in 2022 but that means that bond values have decreased. Bonds have lost money in 2022. So, if you had 40% of your money in bonds in 2021, you lowered your investment returns by 93% (2% vs. 27%). The 60/40 split returned about 17% compared to a portfolio of all stocks of 27%. Now, you might say 17% was a nice return and you would be right. But you could have earned 27% and that 40% invested in bonds in 2022 hasn’t provided the cushion that was promised as both stocks and bonds have crashed. During growth or bull markets (85% of the time), stocks are rising by 15% per year, so the 40% allocation to bonds is costing you dearly. Bonds are lowering your returns during these time periods by about 70% to 80%. And they are not helping you all that much in the 15% of the time when markets are crashing. You are only getting an illusion of safety, but one with a pretty high cost.
THE PROBLEM WITH ASSET ALLOCATION
The other asset classes also only drag down your returns. The S&P 500 has consistently beaten international stocks over the long term. And international equities typically fall by as much or more than the S&P 500 during Bear market crashes. For short periods of time, it is possible that international stocks or other asset classes outperform the stock market, but we should be investing for the long term and not for isolated, short periods of time. Some commodities have done well as long term investments, but they are much more volatile than the stock market, so they are not providing less risk. And commodities are very unpredictable. No one really knows why commodities go up or down over particular time periods. So, the investment community has sold you on the benefits of asset allocation and it doesn’t really work in the long term. It was a nice try to deal with the risk of Bear market crashes, but it has cost people lots of money.
Buy & Hold is better than the worst investing approaches out there. But we believe that you should not settle for “better than the worst.” Our whole reason for being is to show you that there is a better way to invest. If you stick with us, we will show you how. You will be happy you did, and your money will be happy you did.
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.
Updated: Oct 15, 2022
SUMMARY:
Did you know that outside of Bear Markets that the stock market returns about 15% per year? And did you also know that the stock market provides excellent returns about 86% of the time?
Bear market declines only represent about 14% of trading cycles on average. But bear market crashes happen about once every seven years. For this big problem (bear market crashes) that only happens occasionally, the investment world has come up with a small number of solutions that only hurt your long-term investment results.
STOCK MARKET HIGHS AND LOWS
The stock market is a great place to invest your money in the long term. The stock market has produced more wealth, and more millionaires than any other asset class in history. It is highly liquid (easy to buy and sell), and it has little or no carrying costs (expenses to hold the assets). In the long term there is very little risk when investing in the broad stock market. Individual stocks can and do go to zero, but the broad stock market always goes up in the long term. The only danger associated with investing in the broad stock market are those painful and annoying Bear market crashes. They happen about every 6 to 7 years on average and these bear market declines can generate losses of 40% or 50% of your investments. The market always bounces back from these declines, but it can take up to seven years to get back to even.
| S&P 500 | |
|---|---|---|
PEAK | BOTTOM | DECLINE |
10/8/73 | 9/3/74 | -44% |
8/17/87 | 11/30/87 | -33% |
3/20/00 | 9/30/02 | -48% |
10/8/07 | 3/2/09 | -56% |
2/10/20 | 3/16/20 | -32% |
| | |
Bear markets have two components - the crash and the recovery. The declines or crashes last about 11 months on average. Some crash periods have been very short like the Covid Crash of 2020 and some take a long time like the financial collapse of 2008. The recovery leg of a Bear market lasts two or three times as long as the crash. The rebound or recovery phase can be very powerful and can produce some big gains. All our worries about stock market investing are associated with these Bear market crashes.
But if we separate out the periods when stocks are crashing in Bear markets from all other time periods, the Bear market crash only represents about 14% of stock market trading cycles. The other 86% of the time, the stock market (as measured by the S&P 500) is climbing by about 15% per year on average. On an annualized basis, stocks lose about 39% of their value in the Bear market crash cycles. So, 86% of the time, investments are growing very rapidly (15%) and only 14% of the time are stocks losing money.
THE OTHER PROBLEM WITH BEAR MARKETS: TIME
It is bad enough that bear market declines are so severe, but the other issue with bear markets is time. Bear markets are not short-term events, typically. If we look back 50 years, the average duration of a bear market is about 4.5 years. This counts the time between the previous peak and the recovery back to that peak. So, your money basically earns nothing over 4.5 years (not including dividends). On the high end, the 1970’s bear market lasted 7.5 years and the 2000 crash lasted 7.2 years. The 2020 Covid crash was quick, lasting only six months. The crash itself takes an average of 15 months from peak to bottom. The longest declines in the last 50 years happened in the 1970’s (2.5 years) and the early 2000’s (1.8 years). The shortest once again was the Covid crash of 2020 which went from peak to bottom in only about one month. The current bear market (as of this posting) is only about 9 months at this point, but it is following the pattern of the 1970’s bear market, unfortunately. So, in addition to dealing with the pain and suffering of investment losses of 40%, equity markets can go nowhere for as long as seven or eight years or more.
Date of Prev. Peak | Date of Bottom | Time to Bottom (months) | End of Bear Market | Bear Market Duration (yrs.) |
1/5/73 | 10/3/74 | 21 | 7/14/80 | 7.5 |
8/25/87 | 12/4/87 | 3 | 7/26/89 | 1.9 |
3/24/00 | 10/9/02 | 31 | 5/18/07 | 7.2 |
7/13/07 | 3/9/09 | 20 | 3/6/13 | 5.7 |
2/19/20 | 3/23/20 | 1 | 8/18/20 | 0.5 |
AVERAGE | | 15 | | 4.5 |
THE WRONG SOLUTIONS TO THE PROBLEM
But because the crashes are so severe (-39%), modern investment theory has created a variety of strategies for dealing with these inevitable crashes. We are told to put 40% of our money in bonds. We are told to diversify our investments into international equity markets and commodities. The theory is that these other asset classes will not fall as much during bear market crashes and can, therefore, cushion the blow. The only problem is that this is not always true and that these other asset classes perform much worse than the stock market 86% of the time.
THERE IS A BETTER WAY: BEYOND BUY & HOLD
The problem is that until now there has not been a proven and simple alternative to Buy & Hold or to modern asset allocation strategies. We developed the Beyond Buy & Hold strategy to deal with the shortcomings of modern investment theory. We are here to tell you that there is a much better way to invest where you can achieve the high long-term returns of the stock market and lower your risk. Imagine capturing those 15% annual gains most of the time and not having to worry about Bear market crashes. We have created a trading system that allows investors to sidestep Bear market crashes. The whole purpose of our newsletters is to educate you on this new and better way to invest in the long term. The Beyond Buy & Bold system can produce investment returns that are three times (yes, triple) what you are getting from the traditional asset allocations. We want all our subscribers to learn about and benefit from this new approach that has only been available to the big hedge funds and financial institutions.
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.
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