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Do you want to be rich?
That’s a question I often ask my readers.
And like clockwork, the answer is always “of course!”
This response isn’t surprising. But what is are the habits many investors employ that are counter to this goal…
…especially one I see many people currently falling into.
The Market Isn't Designed to Make Sense
Nobody thought the first half of the year would turn out like this.
That includes me. But while my forecast going into the year included one last dump before a new bull market began, I was still very well positioned to ride the tech rally higher.
You may be asking, “But Robert – if you thought the market would fall another 15%, why would you still be holding stocks?”
Because I know to follow one of the oldest rules in the book.
Keep Time on Your Side
I had one of our Patreon members send me this message last week:
This investor is falling into the classic trap of timing the market.
This is when investors attempt to predict the short-term movements in the market by buying at the lowest point and selling at the highest point.
Buy low, sell high – it’s just that easy, right?
Well, unless you’re one of the greatest traders in the world, it’s not so easy.
Simple in Theory, Complex in Practice
Investors trying to time the market often rely on a variety of indicators to tell when to make buy or sell decisions.
But no matter the “secret sauce” an investor is using, timing the market accurately and consistently is extremely challenging.
To effectively time the market, you need to accurately understand and forecast global economic conditions, geopolitical events, investor sentiment, and a bevy of unforeseen events.
And you need to did it consistently! That’s why even professional fund managers struggle to consistently time the market.
The “Smart” Money Isn’t Very Smart…
You may think that most hedge funds - or investment vehicles where investors pool their money to be managed by professional investors - beat the market.
Afterall, hedge fund managers have nearly unlimited resources, manpower, and capital. Surely at least most beat the market, right?
It’s actually the opposite.
For instance, a study conducted by S&P Dow Jones Indices found that over a 15-year period ending in December 2020, around 85% of U.S. large-cap fund hedge fund managers underperformed the S&P 500 index.
Now again, these hedge fund managers have far more experience, resources, and manpower than individual investors.
Yet, even with all these advantages, many still cannot even outperform the S&P 500!
And it’s even worse for individual investors.
…But Neither is the “Dumb” Money
Hedge funds and institutional investors with more capital, better resources, and superior manpower still chronically underperform the market.
Does that mean individual investors fair any better? Not so fast.
The Dalbar Study, which spanned several decades, showed that individual investors fared even worse than institutional investors.
According to their 2020 report, over a 20-year period (2000-2019), the average individual investor earned an annualized return of around 5.2%, significantly below the S&P 500's average annualized return of approximately 6.1%.
What Should You Do?
We now know that both professionals and individuals individuals chronically underperform the market.
But we also know that you need to invest if you want to retire.
So what should you do? Well, you need to simplify things. This includes keeping a large percentage of your portfolio in index funds like the SPDR S&P 500 ETF (SPY).
This is a simple ETF that tracks the performance of the S&P 500. And there are a few reasons for this.
Keep it Simple, Stupid
I know some of you are nervous after last year’s bear market. And while bear markets can shake even the most hardened stock market veteran, it’s important to remember that bear markets are rare.
A study by NYU Stern School of Business showed that from 1926 to 2022, the U.S. stock market had positive annual returns in approximately 76% of the years, indicating a general upward trajectory.
That means every year US stocks have a down year, stocks rise for three years.
Going one step further, bear markets are historically much shorter than bull markets.
The average bull market lasts 991 days compared to 289 for bear markets. That means bull markets last nearly three-times longer than bear markets.
And whether it’s the Great Depression, World War II, 9/11, or COVID-19, the S&P 500 has always recovered to make new all-time highs. This is a core reason why I hold a large percentage of my portfolio in S&P 500 ETFs.
And really, you should to.
Bringing it All Back Home
People like to make investing more complex than it needs to be.
And this is by design; the finance community wants to make investing seem difficult so they can sell you expensive and - usually - unnecessary financial products.
But in reality, the way you “win” at investing is to buy and hold shares in quality companies or index funds and hold those shares for many years, not by timing the market or using a fancy hedge fund manager.
And that’s exactly what I plan to keep doing.
Stay safe out there,
Robert