The Most Profitable Investment Strategy
This should be the foundation of your investing journey...
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People like to make investing more complicated than it needs to be.
I blame Hollywood for this. Everyone thinks the way you get rich in the markets is putting on “sexy” trades. This includes shorting the US housing market like Michael Burry or pumping penny stocks like Jordan Belfort.
But any professional investor worth their salt knows it’s much simpler to get rich in the stock market…
…and today, I’ll show you how to get started.
Getting Your Feet Wet
I understand why people fall into the “get-rich-quick” trap.
Retail investors are inundated with stories about people getting rich quick in the stock and crypto markets. For instance, during the last cryptocurrency bull run it seemed we only saw headlines like this…
…or even ones like this during the “meme stock” frenzy:
But these headlines all suffer from the same thing: survivorship bias.
Not Everyone Will “Survive”
Survivorship bias is when people focus only on the success stories of a particular strategy while ignoring the higher number of stories of those who don’t succeed.
For instance, many people are drawn to investing because they see or hear stories of people who got rich quickly through their savvy investment decisions.
These stories often involve extraordinary gains, such as the 25-year-old becoming a millionaire by investing in cryptocurrencies or a 20-year-old making millions trading meme stocks.
However, you likely only see the success stories… and rarely hear about how most people lose money on these strategies.
For instance, I’m sure many of you think that by following the stocks on Reddit’s WallStreetBets you can “get rich quick.” Yet between 21 January and 17 December 2021 - the height of the “meme stock” frenzy - the ten most mentioned stocks on WSB generated negative monthly returns at least 59% of the time, with an average monthly loss of 6.7%.
Some people saw this coming, including me who told Time Magazine this in July 2021:
“I tell people to stay away from meme stocks for the most part,” he says. “For me, it’s kind of like a game of hot potato. Someone’s going to be left holding the bag.”
And while I think it’s OK to speculate on high-risk strategies like crypto and meme stocks (and even wrote a book on it), you should only do so with a small percentage of your portfolio.
But if you do plan to speculative on high-risk strategies, you need to have most of your money in something safe and reliable like an S&P 500 index fund.
The Foundation of Your Portfolio
As mentioned before, my largest portfolio position - SPDR S&P 500 ETF (SPY) - hasn’t changed much in the last decade.
And there’s good reason for that. While I’ve only held this position for about 10 years (and add to it monthly), over the long-term it has recovered to make new all-time highs after:
The Great Depression
World War II
Vietnam War
9/11
Global Financial Crisis
COVID-19 Pandemic
And while it has yet to fully recover from The Great Inflation, I have a feeling it’s a matter of time until my SPDR S&P 500 ETF (SPY) – which tracks the S&P 500 – hits a new all-time high.
ETFs that track the S&P 500 are the bedrock of any investors’ portfolio, as they mimic the performance of 500 large publicly traded companies in the United States…
…and includes companies from different sectors such as technology, finance, and healthcare.
This structure gives investors diversification amongst many sectors and investing trends.
But the top reason to hold S&P 500 ETFs are the long-term gains. Over the last 90 years, the S&P 500 has delivered average annual gains of 10%…
…with the index delivering positive returns in 73% of those years.
And I don’t expect the next 90 years to be much different… and that goes for the “smart guys” as well.
The Smartest Guys in the Room?
Investing in S&P 500 index funds not only has me on the track to building wealth, but it’s done better than most hedge funds as well.
For instance, institutional investors dream of finding managers that reliably outperform the S&P 500.
There’s just one problem: they can’t.
Over the last three years, the S&P 500 has returned 8%. That’s even with 2022, which was one of the worst years for the index in a decade.
Yet, this is right in-line with the indexes long-term returns (which ranges between 8%-10% depending on your start date).
Not only do most hedge fund managers not beat the S&P 500’s long-term annual return of ~8%, as the above chart shows most cannot even beat the rate of inflation.
And this isn’t a new phenomenon; hedge funds on average have under-performed the S&P 500 nearly every year since the Global Financial Crisis in 2008:
This means that investors with all the resources, brain power, and capital in the world can’t even beat the index.
Which begs the question: why do you think you can?
Coming to Terms with the Index
My goal every year is to structure my portfolio in a way that I beat the S&P 500.
So far in 2023, I’ve done a pretty good job at that thanks to my positions in beneficiaries of the AI-investing boom (you can see my full investment portfolio here).
But if you’re a newly minted investor - or someone who doesn’t have time to watch the market every day - there is no reason to hold less than 80% of your investments in index funds that track the S&P 500.
Because even the best investors on the planet can’t beat it consistently.
So instead of fretting over how to get-rich-quick off the next meme stock or cryptocurrency, just buy an index fund.
You’ll thank me later.
Stay safe out there,
Robert