Common Sense Investing Reaps a $46,800 profit so far

Nearly five years ago, I gave a seminar at Singapore American School, on indexed investing.

 The lesson was simple, existing of the following:

  1. Most stock market mutual funds (which advisors typically buy for clients) lose to the overall stock market over time.
  2. Nobody can pick which stock market funds will outperform the stock market in the future
  3. The mutual funds that have historically outperformed the stock market, generally lose to the market eventually—so buying them based on their track records in a loser’s game.  Studies show that buying history’s best performing mutual funds is a sure way to lose to the stock market going forward.
  4. Low cost index funds are more tax efficient to own, and they provide investors with the highest statistical chance of success.

These four statements above are academically irrefutable.

I created an account that we would track, on September 11th, 2006.  It consisted of splitting money into thirds:

  • 33% in a bond market index
  • 33% in a U.S. stock market index
  • 33% in an International stock market index

Since that time, we have had the biggest stock market crash since the great depression (2008/2009).  But if we invested $200,000 on September 11th, 2006, would our account be higher today than it was then—without adding a penny to it?

The answer is “Yes”.

That ultra simple account would have a profit, today, of $46,811.00

The model account was for a 30-35 year old investor.  An older investor would have done even better because they would have had a higher bond allocation (the rule of thumb is that—for people without pensions—their bond allocation should equal their age).  Considering the type of market we’ve had over the past five years, a person with a higher bond allocation would have done even better, because bonds (when including their interest) outperformed stocks over the past five years.

If you don’t have an indexed account, the odds are roughly 80% that you have underperformed this one.

After taxes, over the next 20 years, the odds of outperforming an account like this will diminish with each passing year.  No academic study refutes that.  Every academic study supports that.

Only a salesperson will argue with it.

 






Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

You may also like...

8 Responses

  1. I love the final statement in bold.

    Do you know if any of the teachers you gave the seminar to followed the advice?

    More importantly, do you know if they held tight through the recession (if they did invest) or did they jump ship?

    Not only indexing but also patience is the power of your model account.

  2. @Myke@In Search of Salt

    Thanks Myke,

    Actually, I was really impressed by how many teachers made the switch to indexes back in 2006, when I gave this presentation. I know of at least a dozen who did it, and after each of my seminars, I would say 30%-50% of the attendees have made immediate switches into indexes. I have had some of the same people continue to attend the seminars over the years, and many of them have made switches after the third or fourth seminar. As for "holding tight" during the downturn, most of them did. That said, I can think of one sad example of a woman bailing on her investments at exactly the wrong time (February 2009) but most of them held their ground, and some of them were even greedy when others were fearful, taking advantage of cheap stock market levels to rebalance.

  3. Jean says:

    @Myke@In Search of Salt

    I am one of the teachers who was at that first (or one of the first) seminars that Andrew gave. While it all made sense and opened my eyes, I was, unfortunately, slow to respond at the start. It cost me my opportunity to get into Vanguard index funds at a time that the company was responding to restrictions placed on US taxpayers living overseas. The long and short of it was that I could not open an account once I was ready to, since I had an overseas mailing address (now considered too risky to allow us, teachers and others, to invest money back into the US – what??!!!). Anyway, I continued paying into my investment accounts, but it was with the wrong emotions and intention behind it, once I was aware just how much I was "losing" to loads and management fees. Then came the crash, and I lost about 35% in one of those investment accounts. I still stuck with the idea of pursuing an account of index funds, and, eventually, I followed up on Andrew's suggestion of looking into Assetbuilder, Inc. (which was to be my saving grace). I was able to set up a highly diversified balanced portfolio of DFA funds (yeah!!!), and I've since transferred all my mutual funds into it – as well as have been aggressively contributing to it to make up for the earlier losses. I'm back on track and still young enough, thankfully, to know the process and principles will be on my side. I will say that it was great to see how well my colleagues/friends who had chosen to index back in 2006 have done through all the economic recession. No salesperson can argue with that.

  4. You're motivating me Jean! Thank you!

  5. @Andrew

    That is great news (other than the one unfortunate lady). I suppose having a string of seminars is very helpful – not only to learn more before making a decision, but also to be able to hear thoughts and advice during difficult times.

    I've given some seminars here as well… though with a very low rate of … well, anything. The teachers here tend to be more apathetic toward investing. They really seem to appreciate what I talk about, but all talk about starting a savings plan once they get back to their home countries (That could be one of the big differences between our situations… I get the impression that most people you work with consider their teaching in Singapore to be part of their journey of teaching. Here, people view it as something to do before figuring out what they want to do).

    The good news is that none of my friends are being laced by loads (you'll remember I got my one friend out of Investors Group, and into TD e-series funds). Other than him, however, most people here are not invested at all.

  6. @Jean

    Thanks for sharing your story and experience. I really appreciate it.

    It sounds as if you have time on your side, so there should be no need to worry. Just listen to Andrew and keep your emotions in check.

    I've never fully understood why the US (and Canada too, probably) has such restrictions on funds. As a Canadian I can't buy American funds, but at least Vanguard has the ETF option as well. I have my permanent address listed as my parents' house, so I haven't run into problems with investing in Canada.

    I haven't read much about DFA, but I listen to a podcast by Paul Merriman, and he is always touting their benefits. I think he has something to do with their creation, but I am not terribly sure. He has an enjoyable podcast, none-the-less.

    Take care, Jean.

  7. @Myke@In Search of Salt

    Cheers Myke,

    When I put a few of them together, I'll run them past you to see what you think. I'd love to get some advice!

  8. Jean says:

    @Myke@In Search of Salt

    Fortunately, I had those experiences relatively early on, as well as a couple of others. However, I'm pleased to be where I want to be now.

    If you read Andrew's current post, he does mention DFA within the explanation of Assetbuilder, Inc. You can also have a look, if interested, at their direct website, http://www.dfaus.com/ It has other videos and historical info.

    Like you, I don't get the restriction on funds, either, especially for those of us who are direct neighbors or citizens of the country!!!

    Cheers, mate!

Leave a Reply