• February 5, 2023

This investment mix beats the S&P 500 — by a mile

This article is the core of my best advice for long term investors. If you’re looking for the best stock portfolio, you’ll learn what it is and how to put it together right away.

This article consists of three parts. The first is what is known as a “summary” of the key points. The second section describes step by step how to create my recommended portfolio. The third delves into some related topics.

This is one of a series of articles that I have been writing and updating annually for many years. Together they outline a lifelong wealth creation strategy for do-it-yourself investors.

The other articles are about how to accumulate investment savings, how much to hold in bonds, and how to plan withdrawals for retirement.

part One

“Ultimate” is not a term to throw around lightly. But in the case of the ultimate buy and hold strategy, it works. I believe this is absolutely the best way for most investors to get long term growth in the stock markets.

This strategy is built on the best academic research I can find – and is the foundation for most of my own investments.

Here are some key takeaways:

Since no one can know the future of investment returns, massive diversification offers investors the highest chance of long-term success.

Most investors rely almost entirely on the S&P 500
SPX, -1.40%.
Long-term investors can double or even triple their returns by adding equal proportions of nine other equity asset classes.

The additional return results mainly from the use of long-term favorable returns from value stocks and small-cap stocks. There is only minimal additional risk associated with this step.

The ultimate buy-and-hold portfolio is best for investors who don’t want to predict the future, who want to time the inevitable fluctuations in the market, or pick out individual stocks.

By investing in passively managed index funds or exchange traded funds, this strategy provides investors with a convenient and inexpensive way to own thousands of stocks.

Read: Will Social Security Still Be There When I Wait To Use It?

Second part

This “ultimate” all-equity portfolio automatically takes advantage of stock market opportunities wherever they are.

It is best to do this gradually so you can see how it fits together. To help you get involved Here is a table shows the components.

The base ingredient in this portfolio is the S&P 500, a good investment in itself. In the last 51 calendar years from 1970 to 2020, the S&P 500 composed at 10.7%. An initial investment of $ 100,000 in 1970 would have grown to nearly $ 18 million by the end of 2020. Think of this number as a benchmark to see the diversification results that I will describe.

For our discussion, think of the S&P 500 index as Portfolio 1.

The next step is to move 10% of your portfolio from the S&P 500 to Large Cap Value Stocksthat are considered to be relatively undervalued (hence the term value).

That leads to Portfolio 2This is still 90% in the S&P 500. Assuming annual compensation (an assumption that applies in this discussion), the 51-year compound interest yield increases from 10.7% to 10.9%. That would turn a $ 100,000 investment in 1970 into $ 19.4 million.

In US dollars, this simple step adds almost 15 times your total original investment of US $ 100,000 – the result of changing just a tenth of the portfolio. If that’s not enough to convince you of the power of diversification, read on.

Read: We want to return to an emerging city in the west where we can withdraw – where should we go?

in the Portfolio 3let’s move another 10% in US small-cap blend stocksThis reduces the weight of the S&P 500 to 80%.

This increases the 51-year return to 11%; An initial investment of $ 100,000 would grow to $ 20.7 million – an increase of nearly $ 2.8 million over Portfolio 1.

Create Portfolio 4We move 10% of the portfolio in US small cap value stocksReduction of the weight of the S&P 500 to 70%. Small cap value stocks have historically been the most productive of all major US asset classes, boosting returns to 11.4%. That’s enough to turn that initial $ 100,000 investment into $ 24.4 million – with more than two-thirds of the portfolio remaining in the S&P 500.

Read: Is COVID-19 A Preview of Retirement?

In order to diversify further, we create Portfolio 5 by shifting another 10% in US REITs Medium. The result: an average return of 11.4% and a present value of just under USD 25 million.

I understand that many investors are uncomfortable with international stocks. However, I believe that any portfolio worth calling the “ultimate” must go beyond the US.

To create accordingly Portfolio 6We are shifting another 40% of the portfolio to four other major asset classes: international large-cap blend stocks, international large-cap value Stocks, international small-cap mix Shares and international small-cap value Stocks.

This reduces the influence of the S&P 500 to 20%. The result is an average return of 12% and a 32 year portfolio value of $ 32.4 million – an 81% increase over the S&P 500 alone.

The last step, Portfolio 7, results from adding 10% in Emerging market stocksRepresenting countries with expanding economies and prospects for rapid growth.

This increases the yield to 12.4% and a terminal value of $ 34.4 million.

This massively diversified 10-part portfolio is as far removed as possible from any effort to predict the future. For over 51 calendar years, it met all of the predictions of academic researchers’ asset classes – and more than doubled the dollar return on the S&P 500.

Here are my specific recommendations:

Asset class

Recommended ETF (ticker)

Standard & Poor’s 500 Index

AVUS

US large cap value

RPV

US small-cap mix

IJR

US small cap value

AVUV

US real estate mutual funds

VNQ

International big mix

AVDE

International large-cap value

EFV

International small cap mix

FNDC

International small-cap value

AVDV

Emerging markets

TO HAVE

Unfortunately, this portfolio has one major drawback: it requires the ownership and regular realignment of 10 components. Relatively few investors have the time or the inclination to do so.

Fortunately, we developed a four-fund alternative that is much easier to implement.

Since 1970, this “lite” version of the ultimate buy-and-hold strategy would have produced virtually the same return, dollar return and standard deviation as the 10-fund portfolio described above.

I’ll be bringing out this new version in an upcoming article.

Part three

You won’t be surprised to learn that there is so much more to be said about this portfolio.

In 2020, we recalculated the 1970s results to reflect new data we didn’t have in previous years. We also changed our assumptions about the fund spending that would have been billed to investors in the 1970s. We believe our recalculations will better reflect what 21st century investors can reasonably expect.

However, even after doing all of these calculations, the returns have not changed much, and my beliefs or recommendations have not changed.

This updated data is as good as I can do.

To learn more about these changes and some of the other reasons I treasure so much about this portfolio, I hope you will prepare for them My newest podcast.

Richard Buck contributed to this article.

Paul Merriman and Richard Buck are the authors of We’re talking about millions! 12 easy ways to improve your retirement.

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Jack

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