Long-Term Investing At Its Best

I have found that there are a great deal of investors who follow outdated advice that is preventing them from achieving the returns they could have achieved, while putting themselves at unnecessary risk and risking losing a lot of money.

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Some things that we know now are dead wrong were believed, and prescribed by medical experts sixty years ago:

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• In an advertisement for cigarettes, doctors can be seen saying, "Smoking is good for you.". This is despite the fact that they are encouraging the cause of the most cancers, heart attacks, and strokes nationwide.

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• We know now how much protein we need for a healthy body, so why should we consume more of it?” Nope. More protein can cause kidney damage.

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• Historically, it has been understood that people need lots of rest. Now, today, we understand that active lifestyles enable people to live longer and better; ironically, it can be harmful to get too much rest.

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• In 1960, when I began investing, most people "knew" that in order to be successful in the investment business, one only had to own 10 to 20 shares of good companies that you would keep for the rest of your life.

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By the 1990s, many people thought that the 500 companies in the S&P 500 SPX, +0.15% was all they would ever need when it came to investing. As time passed, although, investment experts "wised up" and started recommending owning the 500 companies in the index.

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However, just as medical professionals have many more tools at their disposal, we investors have a tremendous amount of tools at our disposal as well. Using these tools, we are able to achieve a higher level of long-term return and lessen the odds of suffering loss.

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Diversification is probably the only free lunch available on Wall Street, according to academic researchers who are almost all in agreement. Their study identifies nine asset classes that have proven over the long-term to be excellent diversifiers. When these nine asset classes are combined with the S&P 500, a composite index of growth and value stocks, they create a solid diversifier.

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There are nine stocks in this category: large-cap value stocks, small-cap blend stocks, small-cap value stocks, real-estate investment trusts, large-cap value stocks, small-cap value stocks, small-cap blend stocks, small-cap value stocks, international large-cap blend stocks, international large-cap value stocks, international small-cap blend stocks, and emerging markets stocks.

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The ultimate objective of buying and holding assets for nearly 30 years is to take an equal percentage of each of these asset classes and personally own each of them, as part of what I have referred to as the Ultimate Buy and Hold Strategy. I have no idea which of these asset classes will perform better than others in any given period.

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Our foundation's website contains two tables, the first of which shows the contribution that each of these building blocks has had to the long-term performance of the S&P 500, over the previous 53 calendar years, and the second of which illustrates how this portfolio is constructed, step by step, using these three building blocks. 

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Here are a few of the things you will find on it that you might be interested in.

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The numbers are very large due to the fact that we are talking about 53 years. However, do not take them too seriously because they are not adjusted to take into account inflation, and, as important, there is no guarantee that things will go as they should in the future.

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I have been amazed at how quickly $18.9 million can be grown from an initial investment of $100,000 at the beginning of 1970. That's quite remarkable, and it's a good basis for comparison; an initial investment of $100,000 has grown to $18.9 million by the end of 2022.

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For example, if a portfolio had been constructed to include equal parts of that index plus the nine asset classes I listed above, and had been rebalanced annually, then that portfolio would have grown to $41.8 million in just six years.

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We have identified the best exchange-traded funds that offer the best returns on investment over the long-term. And it is easy to access these funds through exchange-traded funds that have been deemed to be the best.

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I have come up with this 10-fund solution to the problem of looking into the future. By doing this, you are not required to select managers, sectors, or companies. You are not required to figure out when to enter and exit the market.

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Nonetheless, it does require a hands-off approach and a lot of patience, as it cannot work if you interfere with it too much. If you get in the way too much, it won't work.

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Taking a risk is easy when you see people make money in the past, and that's why we should avoid looking at past returns because we know how things turned out. As humans we have to live in the present, not knowing how things will turn out in the future.

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There is a considerable difference between the compound returns that have been calculated over the years by the Merriman Financial Education Foundation from those of the past decade.

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As an investor starting out in 1970, one could think it was perfectly understandable if, after ten years, you decided to go all in with the global portfolio after ten years of investing.

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There were many investors who knew that the S&P 500 represented the pinnacle of the investment world in the 1990s, but that was something of the past by 2000.

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There were then two bear markets in the US stock market from 2000 through 2009, which left the S&P 500 with a decade in which it lost money. Those who retire in 1999 or 2000 and rely solely on that index have had to deal with an extremely painful first decade of the new century during the financial crisis.

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This is a topic that deserves its own discussion, but I think that is why I always encourage people to invest more than they think they will need in order to be prepared for retirement.

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A high level of diversification has proved to be a very effective tool over the long run over the last few decades, as shown in the final line of the table.

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It is not a good thing that 10 asset classes can be owned and managed by a single investor, but that is the reality most investors face.

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It's good news that Chris Pedersen, the director of research at our foundation, has developed a series of portfolios that are much easier to manage and perform far better than the S&P 500 index over time. Among them are a series of robust portfolios that provide high returns over the long run.