That’s right, I have the secret trick that will double your returns. It’s not clickbait, it’s not a scam, and I’m not going to make you wait till the bottom of the article to find out what it is. Here is the secret that the entire mutual fund industry has been fighting for over forty years.
Do Nothing! Just buy and hold.
You heard me. Do nothing. Don’t sell when the market is high, don’t sell during a market crash to limit losses, don’t buy when the market is low, don’t keep a reserve of cash to use when stocks are on sale, just buy an index fund and hold it. Then hold it some more. Statistically you will come out way ahead of any other strategy. Your portfolio will perform twice as good if you just leave it alone. But why?
You can’t predict the future!
Say it with me. “I can’t predict the future!” No investor, broker, trader or guru can predict the future. This philosophy was championed by Jack Bogle who started Vanguard funds to provide low fee funds that simply tracked with the entire stock market. No fancy allocation, no quants trading every millisecond to maximize returns, just a mutual fund that buys all the stocks. His rationale was that since very few actively managed funds outperform the market over the long term, you might as well just buy the market. The follow on benefit is that since buying all the stocks in an index is dead simple, the fees for managing the fund can be quite low.
From head to heart.
I had read all the statistics. I had a working knowledge of the futility of market timing. I was a simple buy and hold investor. Until that is, I got “The Hunch”. It was late 2015 and the market was way up from the 2009 crash. The Schiller P/E ratio was showing the market was overvalued, and many of the gurus were predicting an imminent correction. What is more, I had a gut feeling that they were right. So I transferred my 401(k) holdings from stocks to bonds. All of them. Then I sat back in gleeful anticipation of that juicy sweet correction. I was going to make a killing. Sell high and buy low. That’s how it’s done boys! Ahh yeah!
If you take a look at the market value from that time period you can see what happened. The market went sideways for a bit. It teased a few small dips. Then it went up. And it went up again. And then it went up some more. All the while, I was still rooting for a correction that never happened. By the time I had finally realized the futility of what I had done I had lost a year of gains. I missed out on over 20% growth during my market timing fiasco. This type of behavior is why most investors don’t even get the same return as the funds they are invested in!
But I’m not as stupid as you!
That’s entirely true. You are stupid in your own special way. There are so many ways to mess up your portfolio performance. Take Bubba. He wants to retire some day so he starts a retirement account. He talks to his advisor and picks some mutual funds that have performed well over the last five years. Five years later he finds out that two of his mutual funds have underperformed. So what does he do? He sells those and picks a few more. He has just locked in the losses from those funds. Rinse and repeat. By trying to pick good mutual funds Bubba actually pulls his overall portfolio performance down. Then the market has a correction. It’s a big one. Down 10%. Bubba gets scared. He decides to pull out of some of his mutual funds and add more bonds. He has just locked in his losses again. The market recovers but Bubba is still a bit gun shy so he waits a bit more. Just like that he misses out on some big gains. Bubba cuts his account performance in half from what he might have had if he just bought and held instead. This is how you double your returns by doing nothing!
So Just pick the next Warren Buffett instead?
I’ll just find that one great fund manager, and then buy and hold that fund. No! No! No!, and more No! Warren Buffett himself has gone on record stating that his advice to his wife for managing her trust when he passes away is to invest in index funds with 10% bonds on the side. Well that just means he doesn’t trust her to beat the market by trading stocks right? No! It also means that he doesn’t trust any of the younger fund managers that he knows to beat the market. I don’t know about you, but to me, that is a pretty stinging indictment of the entire industry. Statistics show that he and Mr. Bogle are right. Over a 15 year period only 18% of actively managed mutual funds beat the market. By 30 years that statistic is less than 1%. Statistically speaking that is the same as zero. One fund out of a hundred will beat the market. Most likely due to dumb luck. Do you really think you will be able to pick the one fund out of a hundred that will outperform the market for the next 30 years? And if you could, the likelihood is that the higher fees they charge will eat away all of that extra performance and then some.
The easy way
So here is the solution. Buy a low fee index fund that tracks the total stock market and hold it till retirement and beyond. Continue to add to the account by buying more of the same index fund. If you need to feel the thrill of trading stuff around then allocate 10 to 25% of your portfolio to a bond fund. Once a year you can rebalance your portfolio. When stocks are down you can sell some bonds and buy some more index fund (on sale!) to get back to your chosen percentage. Isn’t that fun? When stocks are high you can rebalance by selling some of the index fund and buy bonds. Stocks way up mid year? Rebalance. Market correction? Rebalance. Rebalance anytime you want. As many times as your heart desires. Just make sure you always get back to that 10 or 20% bond allocation. This strategy will very slightly beat the market.
Here is the hard part. Do nothing else! Ever! If you don’t feel it in your gut yet then go ahead and play with a little bit of money on the side and see what happens. You might pick correctly a few times if you are lucky but eventually you will find out the same thing that I did. You can’t predict the future. And neither can anyone else.
Footnotes
Aside from personal experience, much of the information contained in this post is detailed in the excellent book “The Simple Path to Wealth” by JL Collins
