Home / Investing / You will be surprised to see what investment the S&P 500 has destroyed – Investment Watch

You will be surprised to see what investment the S&P 500 has destroyed – Investment Watch

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by Simon Black

It was 1990, and the Soviet Union was on the verge of collapse. The Berlin Wall was still in the process of destruction, and East and West Germany met later in the year.


Nelson Mandela was released from prison in February, and the South African government began talks to end Apartheid shortly thereafter.

Iraqi dictator Saddam Hussein invaded Kuwait in August.

Ghost, Home aloneY Beautiful woman They were the best movies of the year. Janet Jackson & # 39; s Rhythm nation It was the best selling album.

And the S&P 500 reached a record high of 360.65 in May.

It's hard to imagine that number; The S&P 500 just closed last week at a record high of 3316, more than nine times more than its peak in 1990.

And that is an impressive growth, no doubt. Investors who have had the discipline to buy and maintain over the past three decades have been rewarded.

This is, of course, the most common investment advice distributed by money experts and best-selling financial authors. They tell people to invest in an S&P 500 index fund and basically keep it there for decades.

Experts insist that there will always be strong years and weak years, but the overall long-term history is quite good.

And this is true to some extent. But let's go back 20 years at the beginning of 2000, when the S&P 500 was about 1500.

If I had bought and maintained so far, that represents an average annual return of only 4%.

4% is better than zero … but there is almost nothing to highlight.

(This performance does not take into account dividends, taxes, fund management fees or inflation … but these effects largely offset each other).

Going back, if I had bought the S&P 500 in 1990 and had kept it for 30 years, I would have obtained a more respectable annualized yield of 7.7%.

And that sounds much better.

But it may surprise you to discover that you could have bought a bond from the US government. UU. At 30 years in 1990 with a yield of 9.2%!

Think about that: I could have avoided all the fainting of the stock market … all the crazy turns due to war, financial crises, recessions, panic, euphoria, etc. And he gained an additional 1.5% every year for the past three decades.

The point is: conventional wisdom is not always correct.

I am not trying to say that investing in an index fund is a terrible idea; It is a reasonable approach for people who are not willing to educate themselves about finances or do any work to find large investments.

But it is important at least to know what you are getting into.

Buying an S&P 500 index fund essentially means that you have 500 different investments. It is really difficult to track 5 investments. I can't imagine keeping track of 500.

And even experienced and sophisticated investors would have difficulty naming more than 50 to 100 companies in the S&P.

I guess there are a few hundred companies in the index that most people have never heard of, let alone know about business operations, financial performance, quality and integrity of management, etc.

Indexed investment is a conscious decision to know absolutely nothing about your investments, and to buy everything regardless of price or quality.

Again, this is a very easy and simple investment approach that might be appropriate for some people. But it is silly to think that this is the right (and ONLY) way in which everyone should invest.

There are always other options … and that is the fundamental spirit that underpins our worldview in Sovereign Man.

Our goal is to help people expand their options beyond the convention, and help people understand each other's risks and rewards.

I showed you a simple example earlier: the S&P 500 has dropped 7.7% since 1990, while a 30-year government bond paid 9.2%.

And since 2000, the S&P 500 has returned only 4%, while a 20-year government bond would have paid 6.9% during the same period. That is a BIG difference of almost 3%.

So, looking at these numbers, you can see that the conventional wisdom of "investing in an S&P 500 index fund" did not necessarily result in the highest annualized return.

This may not work today, of course.

The 30-year bond yields are unfortunate, only 2.3%. That barely keeps up with taxes and inflation … so you would have to be crazy to keep such a depressing rate for the next three decades.

Fortunately, those are not the only two options in the investment universe.

Conventional thinking would make us believe that we can only invest in stocks, or that we invest in bonds. And if you are a bank or hedge fund with tens of billions of dollars to manage, those are practically your only options.

But this is where small investors have a unique advantage; With a limited size, we are agile enough to participate in niche opportunities that are too small for large investors.

Small investors can invest in thriving foreign markets. Or in alternatives such as royalties that produce cash, financing of real estate between peers or private assets in difficulty.

But the best investment you can make, of course, is the investment you make in yourself. Taking the time to learn about business and finance pays huge dividends in the future.

You could learn, for example, how to start an online business in your spare time that can generate life-changing supplementary income. And that is a performance that would far exceed any indexed fund.

Again, I am not here to tell you where you should or should not invest. The key idea is that you tend to increase your chances of success when you think unconventionally and expand your universe of options.


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