It’s actually simpler than you think. But definitely not an easy plan to stick to.
Keep It Simple, Stupid (KISS)
We are our own enemy when it comes to building wealth. We look for complexity when it comes to our investments. Our minds are wired to think that we gain an edge and get the best results from the most complex strategies.
I used to also think that I needed to have a sophisticated strategy for my investments to beat the market and get the best return on my money. While that maybe true most of the time, it does take a whole lot of time and effort. Time and effort that we may not be able or willing to spare.
Most of us don’t have that kind of time and capacity to dedicate to finding and monitoring the best stocks to outperform the market.As a father of two young children, I’d rather much spend my free time caring, nurturing, playing and attending to my kids. Not forgetting that I also have a full-time job.
But that doesn’t mean I should neglect my financial responsibilities to build our wealth and make the best use of our resources.
Fortunately, when it comes to investing sometimes the simplest strategy is the best. The question are we disciplined enough to stick to a simple plan without falling into the temptation of endlessly tinkering with our portfolio.
Leave the tinkering and sophisticated strategies to the hedge fund managers and full-time traders who have the luxury of spending all their working hours focused on the stock market.
The Million-Dollar Question
Back to the million-dollar question. The answer will probably underwhelm you.
Just put $1,000 into an S&P 500 ETF every month for 25 years.
Even legendary investor Warren Buffett has openly shared that he wants 90% of his wealth to be invested into index funds tracking the S&P 500 upon his death.
I find it hard to believe as well, so I back-tested this theory using Portfolio Visualizer. See the results below. If you had started doing this in January 2001, you’d already be a millionaire by now courtesy of the amazing bull run we’re in.
Of course looking at the chart of S&P 500 over that period, we can see that the massive bull run since 2009 lows have accelerated wealth accumulation over the past decade.
But even if we consider a horror scenario of the 20 years from 1991 to 2010 which includes 2 market crashes in the latter decade, you would only have been set back by another 3 years and hit the million dollar mark by end 2013.
The Magic Of Compounding
What I find interesting is that even after more than a decade, the portfolio value was only one-third of the way around $300K. Most of the gains were in the subsequent decade or so. That’s the power of compounding at work.
So if you’ve been investing diligently for a decade, you might not have great results to show for it. But you need to have patience and let compounding do it’s thing. That’s a good reminder for myself too, since I’m only a decade into my investing journey.
Beating The Market
People celebrate beating the market. You hear it in the news and on social media. But ask yourself, do you need to beat the market? How much time and effort do you need to put in to do so? Is it worth it?
These are questions no one can answer for you. But we are fortunate in that we now have a viable alternative in index funds. Now, everyone can invest and match the average market returns.
I guess nobody wants to be average, but average is actually pretty darn good. The S&P 500 has averaged ~11% over a rolling 15 year period dating back to 1972. Let’s be honest, how many of us can beat 11% CAGR consistently?
Here are some ETFs that track the S&P 500 index:
- SPDR S&P 500 ETF (ticker SPY)
- Vanguard S&P 500 ETF (ticker VOO)
- iShares Core S&P 500 ETF (ticker IVV)
If you want broader global exposure, you can also look into the Vanguard Total World Stock ETF (ticker VT).
Concluding Thoughts
I’ve recently discovered a useful portfolio tracking site Portseido, which lets you compare your portfolio performance against a benchmark like the S&P 500 index.
I have to admit, it’s a wake-up call for me that I have been underperforming the S&P 500 index quite substantially. Currently, I only have around 18% of our portfolio in index ETFs split between VT and QQQ.
In coming months, I intend to increase the weightage of index ETFs by selling off my lower conviction holdings. I’m hoping to reduce my number of holdings too so I don’t have to spend as much time tracking them, especially the individual stocks.
At the point when or if I eventually minimally match market returns, I will then consider adding other ETFs or individual stocks to try to gain some alpha.
What percentage of your portfolio is in index funds/ETFs? Do you intend to increase or decrease exposure?
Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.
Disclosure: I’m long VT and QQQ.