From 50% to 215% With Two Questions

outperforming stock market

The Obvious is Hidden

One of the hardest things is to see what’s in front of you.

Seeing the obvious

You want great kids? Don’t hit them. You say you don’t hit them… then only yell at them if they are in mortal danger. You want a great marriage? Then make eye contact when you talk. You want time? Then stop saying yes to everything, including to your boss and spouse. You want better investment returns? Then follow the price.

Why?

Because in the last 300 years (read: forever). I’ve never heard once about price getting restated. But I do hear about GDP numbers and employment numbers and earnings numbers and sales numbers and just about every other numbers getting restated. But not price. Not once.

It’s obvious isn’t? But not until it’s pointed out. Price doesn’t get restated. Ever.

Let’s Dig in.

A longtime client of mine was listening as I was talking to his friend Jonathan. The first thing I said to Jonathan was, “buy and hold” is one of the best investment strategies. My longtime client (who has become a friend) couldn’t believe the heresy coming out of my mouth.

Buy and Hold Works 78% Of The Time

You see, you’ve probably heard me rail against buy and hold (and for good reason). But if you think about it, buy and hold, in many ways is an amazing strategy. The follower of this strategy doesn’t have to do anything. They just buy and then one day in the distant future, there’s a lot more money to take out.

They don’t have to pay anyone. They don’t have to read newsletters. They don’t have to do research. They don’t have to trade. They just set up an auto deposit once (ten minutes worth of work) and then their entire “grow my money” strategy is completely done for life. It’s brilliant.

There’s just one problem.

[optin-monster-shortcode id=”i72q7lv1bxf4vi8trgun”]

stock market collapse is like a landslide

What about the other 22% of the time when buy and hold is not working?

Though short on the time scale, it can be long on the destruction scale.  In that 22% of time when “Buy and Hold” isn’t working, the market can be cut by 40%, 50%, 60% or more in one fourth of the time. What took 18 years to build can be halved in quarters.

And depending on what market the buy and hold investor is in, the losses could have even been deeper and longer. The NASDAQ lost 80% in the Dot Com crash and took 17 years to get back to breakeven.  

Start At The Front Of The Line

The reason I was talking to Jonathan first about buy and hold is because this is where you start. This is where the conversation starts. Why? Because stocks, namely the S&P500, in this example, is the best long-term wealth growth machine on the planet. Period.

So start with the best growth machine and then look for its biggest flaw. And when you do, you find a powerfully simple question.

Let me explain.

Over any 7-year rolling period from 2000 through the end of 2016 (the second worst 17-year period in US stock market history) a buy and hold investor would have still seen growth. If they would have “just” bought and held AND reinvested their dividends then they would have been on the red line in the price chart below.

The buy and hold investor’s fictitious starting amount of $10k would have grown to $21k over that 17-year period. Not bad. Most “pick of the month” people did much worse. You can see in the smoothed-out price chart below how this one-step investment strategy performed. 

I know this is not a fair chart because looking back and smoothing out those 50% falls makes history seem clean. And its not.

buy and hold SP500 2000 to 2017

 

The buy and hold person would have grown their money over any 7-year rolling period in that 17-year time by 51.2%. Not bad for the second worst 17-year stock market in US history. That’s the data you are seeing in the single bar chart below.

Buy the index AND reinvest your dividends and you’re done.

This is where you start.

buy and hold sp500 2000 to 2017

If Your Investment Advisor Didn’t Get You Out in ‘00 or ‘08 Then You Don’t Need Him To Grow Your Money.

You may want a financial planner that you can ask questions to for an hourly rate. But you don’t need an investment adviser if they didn’t change their long-only approach in ‘00 or ‘08. So if you have a long-only big box adviser, which is very likely if they kept telling you to “hold the course” in 2000, 2001, 2002, 2008 then they are not providing that much value.

Now, if they stopped you from taking your money out of the market in Feb/March of 2009 (the very bottom of the 58% fall in the S&P500) then they provided some value but not much because they put you in that situation. 

IF you never even thought of getting out at the bottom of “00 or “08/”09 then you don’t need them. And you can keep the 2-3% of fees, commissions, expenses and performance gap for yourself that the long-only big box adviser would cost.

Do You Want To Avoid Those Nasty Falls While Keeping The Best Parts of Passive Investing (aka: buy and hold)?

Then start by asking yourself what is the biggest flaw (cultural weakness) to the buy and hold approach. I’ll tell you what I found. The biggest flaw of buy and hold is that it only works when the market is in a bull market. Sounds obvious I know.

But what about those non-bull markets (aka: when the market falls)? Those periods of time when the Ocean (read: market) has 100 foot waves and gale force winds, what about then? Start asking one question, “Is it best to be IN or OUT of the stock market?

If investors asked this one question (and knew how to get the answer) then that buy and hold  51.2% rolling 7-year return increases to 175%. AND the follower of this one question didn’t have to be out of the market that many times. But the times they did, mattered.

This is pretty amazing.

So an investor during the same time period with the same world leaders, with the same interest rates can change his/her returns and grow that fictitious $10,000 to (almost) $30k instead of $21k. You can visually see the difference in the price chart below. The blue line represents asking one question compared to the red line (no questions).

What’s great about this question is that most of the time the answer to IN/OUT…? Is “Be IN.” In fact, 78% of the time the answer to the question is “be in.”

beating the sp500 with one question

 

And as you can see in the image below, simply by taking the third choice you didn’t know you had… A choice that is part passive with dividends reinvested AND asking one question to eliminate the cultural weakness of “buy and hold” the investor gets a completely different outcome.

beating the sp500 with one question

Just One More Question: If IN the Stock Market, then where?

What I discovered when I researched what really worked best in growing money I noticed that geographic location mattered. That a well diversified portfolio would noticeably underperform a portfolio that knew and understood which geographic location on the planet was gathering the most new money.

The four locations on the planet are: U.S. domestic, international developed,  international emerging and your own home country?

If you kept the best of buy and hold. AND then added question one (Is it best to be IN/OUT?) thus eliminating the cultural weakness of buy and hold. AND then added one more and final question (If IN, then where?) THEN an investor’s 51.2% 7-year rolling average would change to a 215% 7-year rolling average.

Again, this is the same 17-year period in politics, wars, inflations, news-breaks and technology. All the investor did was add two questions to his approach. Just two.

Look at the image below and notice, how different that top dark blue line grows money compared to the red line (buy and hold) and the light blue line (asking one question).

As you might be able to read, that fictitious $10k grows to $91k by simply asking two questions.

  1. Is it best to be IN or OUT?
  2. And if IN, then where?

That’s more than 4x more than just the buy and hold approach. Which I haven’t even mentioned, the buy and hold approach beats 99% of all investors over any 7-year rolling period. Read that sentence again.

I don’t know if you’ve noticed but every study that compares passive investing (read: index returns) to active investors never includes the growth of the S&P500 with dividends included. Why? The “dividends reinvested” performance is called its total return.

None of the research I discovered ever uses the total return index. Interesting.

from 51% to 215% with just two questions

Now, I’m not claiming you would have followed the two question approach if you knew about it. I’m not claiming you have would put all of your money in US Domestic or International Emerging or International Developed or anything.

I’m not claiming anything of that.  

Go With “Simply Powerful”

What I am doing is pointing out to investors that if they simply look for the powerfully simple approach that is simply powerful, then they have [not only] more than a fighting chance to get control back over their money.

They’ll have a heck of a lot of time on their hands. Time that can be used for connecting with people they love (the number one influencer of longevity).

You can see in the image below the difference in 7-year rolling returns how asking no questions (red bar), or asking one question (light blue bar) or even asking two questions (dark blue) can change people’s investment returns.

from 50% to 215% with just two questions

Do What Matters Most

Here’s the takeaway.

It’s not whether you will or won’t ask those questions. Or did you get in on the right day, at the right hour, at the right price? That is not the point of any of this.

The point?

Investors are not even asking the right questions. The most important question: Is it best to be IN/OUT of the stock market?And then if you want to go all Phd on investing. You could ask one follow up question, “And if IN then where?”

In Your Corner,

RCPeck-Dig Signature.JPG     
RC Peck, CFP

 

Comments

Leave A Response