Nearly five years ago, I gave a seminar at Singapore American School, on indexed investing.
The lesson was simple, existing of the following:
- Most stock market mutual funds (which advisors typically buy for clients) lose to the overall stock market over time.
- Nobody can pick which stock market funds will outperform the stock market in the future
- 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.
- 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.
The account mentioned above is further updated here.
From September 11, 2006 to February 17th, 2011 the initially invested $200,000 has gained $53,340.76 without added money.
- Portfolio Value: $253,340.76
- Gain / Loss: +$53,340.76 (26.67%)