Financially Speaking: Beating the S&P 500
If you are someone who has the ability to regularly beat the stock market or the S&P 500 – I’m not talking about beating the market for a quarter or even one year, but for decades – you may stop reading this article and go one to the next one because you need no one’s financial advice. Countless times over in my career, someone asked why they couldn’t beat the market. If you do an internet search about beating the market, you will surely find someone who claims they can. Here are just a few of the ones I found while doing research over Presidents Day weekend: “Beat the S&P 500 with our cutting-edge AI-powered stock selection;” “Anyone can beat the stock market, new research suggests;” “Debunking Market Myths: They say you can’t beat the Market, but you can;” and “Beat the Stock Market with these 7 tips.”
Just look back at the market over the last 2 years. In 2022, the market was down over 18%, with five months up and seven months down. For July, August, and September 2022, the market was down more than 13%. In 2023, the market rebounded and was up more than 24% with seven months up and five months down. For August, September, and October 2023, the market was down more than 11% but finished the year strong. Did you panic? Did you sell during any of the down cycles?
Warren Buffett once said: “The short-term direction of stock prices is close to random. It all comes down to human psychology and the relationship between markets and volatility. Time in the market beats market timing every time.” During the up times of the market, many believe they are risk takers and may be all-in. Once the markets correct and start to fall, many panic, and they may lock in losses. It is very difficult for them to stay fully invested. As Mr. Buffett said, it is the human psyche.
When we design portfolios for our clients, we base our investment recommendations on their risk tolerance. Basically, how much risk are they willing to take to meet their goals? The idea here is to make sure when market corrections happen, that they will not panic but will remain fully invested. A conservative investor may have 20-25% of their portfolio invested in stocks. There is no way they will outperform the S&P 500. A moderate risk taker may have about 60% in equities, and they too will not outperform the market over time but should outperform the conservative risk taker. The good news is that when the markets go down, their portfolios will not be down as much.
During the great recession of 2008, the majority of Americans were worried and many likely panicked. You may remember, 2008 was excruciating for investors, with the S&P 500 falling more than 38%. On Sept. 15, 2008, investors were shocked that Lehman Brothers, which was founded in 1850, ceased operations. It was a dark period, and no one was feeling very confident about their investments. Maybe the following tale hits home for you.
We had clients, Buffy and Jody (not their real names), with us for more than 15 years. Jody called and said they needed to meet with me immediately. With the market volatility, Buffy was panicking, and Jody couldn’t calm her. They came into my office that afternoon, and I reviewed the market and their portfolio. Buffy couldn’t believe how much their portfolio was down. She said to me, “I’m not a risk taker, how can our portfolio be down that much?” I reviewed my notes with them from all our previous meetings. From Day 1, they were hybrid (capital preservation – moderate) risk takers. On a scale of 1 to 10, Jody was an 8 and Buffy was a 4. Buffy looked at me and said, “That was then, but today I’m conservative.” Each time we met over the years, we reviewed their risk tolerance along with their portfolio. When the markets were up, Buffy was quite happy. My advice was to stay put and do nothing. I reminded Buffy how bleak the dot-com bubble was and how their portfolio survived that.
If you invest according to your risk comfort zone, market volatility should not make you crazy. I have found that most couples are opposites when it came to investment risk. Generally, one is a risk taker while the other is not, regardless of age or gender.
Patience is one key to successful investing. You should review your portfolio annually, if not more often, to make sure your portfolio remains balanced based on your risk tolerance. This means you may have to sell some stocks and add the proceeds to your bonds.
If you want to beat the market, you have to be fully invested and remain so. Maybe you should just purchase a low-cost S&P 500 ETF (exchange-traded funds) or mutual fund and keep them for decades. Now I’m not suggesting you should cash in your current portfolio today and purchase the S&P, but if you are judging your portfolio against it, then maybe? On Feb. 9, 2024, the S&P 500 hit a record high of 5026.61. Were you fully invested?
Think when the market was down over the following time periods. Did you remain calm?
COVID crash – the market was down 33% over a short time from Feb. 21, 2020 to the close of the market on March 23, 2020. Remember how you felt as our governors closed the majority of businesses? Although the markets recovered quickly, our economy did not. Did you panic?
The Great Recession crash – minus 54.8% from Dec. 26, 2007, when the S&P 500 closed at 1497.66 to 676.53 when the S&P 500 closed on March 9, 2009. I believe that most of the world was panicking as they watched their 401(k)s and individual investments fall like a rock. Did you panic?
Again, it takes patience and time in the market. Even if you have nerves of steel and remained 100% invested in the S&P 500, you would not have beaten the market, but you would have been close. This is because even the most inexpensive S&P 500 ETFs or Funds have fees called expense ratios.
As we get ready for warmer weather, perhaps you should do a little spring cleaning in your portfolio. Adjust it to make sure that whatever happens to the market in the future, you will not panic. One thing is for certain: The market will correct again, but no one knows when. Remember we have a presidential election this fall, how scary is that? Will the election results cause another market correction? Who knows?
This summer I would suggest reading “The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness,” by Morgan Housel. It may offer you the insight on how you perceive and manage your finances. Now that you have more clarity on your finances, head to the beach with your book, chair, and favorite beverage, and don’t forget the sunscreen.
Fred Dunbar, CLU®, ChFC®, RFC®, AIF®, is the former President of Planning Directions, Inc., a registered investment adviser, and Common Cents Planning, Inc.. Securities are offered through Commonwealth Financial Network®, member FINRA/SIPC. Fred may be contacted at 800-647-0762, by e-mail at freddunbar@commoncentsplanning.com or by mail at 239 Baltimore Pike, Glen Mills, PA, 19342.
This commentary is meant for general informational purposes only and is not intended to be a substitute for professional financial, tax or legal advice. Investing involves risks including the potential loss of principal. Past performance is no guarantee of future results.
This is a case study and is for illustrative purposes only. Actual performance and results will vary. This case study does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted. This case study does not represent actual clients but a hypothetical composite of various client experiences and issues. Any resemblance to actual people or situations is purely coincidental.
