I do what I do because tens of millions of Americans are missing out on the biggest wealth building opportunity of their lives. Seventy five percent of Americans do not end up with enough money to retire at age 65. And the twenty five percent that do retire with enough money could have had millions more if they had managed their 401K investments properly. We are talking about a missed opportunity of tens of trillions of dollars in total. Do you see why I get so worked up about this issue?
THE CAUSES
There are many reasons why people are missing out. Most of them are attitudinal in nature.
We have already talked about the love/hate relationship that people have with their 401K accounts. This mainly stems from the frustration they have with their investment performance and the massive fear that people have about losing lots of money in bear market collapses. All of this is completely understandable. We provide real solutions to these issues in our program.
IT IS THE MESSAGE NOT THE MEDIUM
Today I want to talk about another big factor that is behind the poor results of 401k investors – the fact that people are totally unaware of the massive wealth building opportunity that they have with their 401k. This mainly stems from the messages that have been communicated about 401K investing.
Just about all financial advisors are cautious about the expectations they set for their clients.
THE REGULATORY ENVIRONMENT
Most of this is driven by the regulatory framework in the investment business. Financial professionals can get in big trouble if they lose lots of money in their clients’ accounts. The industry and the government have had to put in lots of regulations to try to prevent fraud and bad behavior. As usual, there have been some unintended consequences from the rules and regulations.
Did you know that financial advisors cannot advertise their investment performance results? Interesting, right? Competitive forces in most industries lead to the best performing companies gaining market share by advertising their better products and services. This is not allowed in the investment business mainly to avoid people fabricating their results.
So, financial advisors get penalized for losing people money and they can’t talk about making people lots of money. They are left to compete on safety and reputation. The advertising messages are, therefore, all about safety and reliability – not about results. It is not their fault. It is the way the industry is regulated.
A CAUTIOUS BREED
Financial professionals are also very cautious by nature. Most advisors use projected annual investment returns of around 6% per year for their clients’ retirement planning. A trained monkey can earn 6% per year with their investments. Just putting all your money in an S&P 500 index fund will earn 9% per year in the long-term. The caution is understandable, but it keeps people from seeing the real possibilities. Setting the bar very low allows the advisor’s performance to look better but it is bad for results when you manage to that low bar.
The messages they send to their clients are all about caution and the protection of their assets. Strangely, they are not very good at this. They don’t have any effective solutions to stock market crashes. Their “Buy & Hold & Suffer” strategy never feels very safe during bear market collapses, does it?
These cautious messages only add to the fear that most investors have. Everyone is starting from a place of fear. They are never told to think about the multi-million-dollar opportunity.
THE FREEDOM TO PUBLISH
This is why I am not a registered financial advisor. I am classified as a publisher. The regulations allow publishers to talk about the opportunity. I still am required to post all the industry standard disclosures on my website and in my marketing materials. But I have more freedom to talk about the massive opportunity available to all investors.
My Beyond Buy & Hold solution is all about taking on less risk because I have a real solution to those dreaded bear market collapses. My solution allows people to capture the high long-term gains of the stock market while avoiding the pain that comes with investing in the stock market. I like to think of it as having an insurance policy attached to your stock market investments. It is insurance against bear market collapses.
The industry says that people need to take on higher levels of risk to achieve higher rates of return. I disagree vehemently with that myth.
My point today is that people would do much better in their 401k accounts if they were excited about the opportunity compared to the current state of being fearful about their investments. People would engage differently with their 401k with a more positive attitude. Most people don’t even want to think about their 401k because it scares them. Attitude matters in everything in life, and it is incredibly important in investing.
I am on a mission to spread this word and to ensure that people achieve the kind of wealth that they deserve.
Seize the day with your 401k!
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
SUMMARY:
Major Market Index funds are the best option for all investors.
Most people stop at the S&P 500 and search no further.
The Nasdaq and the Nasdaq-100 produce better results than the S&P 500, but very few people know this.
Combining Nasdaq index funds with the Beyond Buy & Hold system produces incredible results.
We already discussed the reasons why you shouldn’t own individual stocks or even mutual funds for that matter. NO stock pickers can beat the returns of the S&P 500 over long periods of time – ten years or more. Large cap US index funds (like the S&P) are the way to go. They beat small cap and mid cap funds over the long run. They beat international funds. They beat commodities. They beat bonds. Index fund owners don’t need to do any research. They don’t need to track industry trends. Investing in index funds is very simple and simpler is better than complex when it comes to investing. But which large cap index fund or funds should you own?
THE S&P 500
Index funds which track the S&P 500 index should be at the top of your list. The S&P 500 is the benchmark index that all equity fund managers and investment professionals use to measure their results. You should too. This index represents the 500 biggest and best companies in the world. Specifically, the S&P 500 contains the largest 500 companies that trade on US stock exchanges. This index is highly diversified across companies and industries. The performance of the companies in the S&P 500 reflects what is going on in the US and global economies. Over long periods of time, the S&P 500 has returned between 7% and 8% per year before dividends. Currently, the S&P 500 has a dividend payout rate of 1.8% per year. So simply owning an S&P 500 index fund will return you around 9% to 10% per year with dividends reinvested. You will not be able to beat that return by investing in your own stock picks or by investing in the stock picks of highly paid money managers via mutual funds. As far as investing in equities goes, the S&P 500 is very safe because of its diversified holdings and because of the size and strength of these companies. The value of all the S&P 500 companies represents about 70% of the value of the entire stock market. It is not immune from bear market crashes, but it will always rebound from bear market crashes and eventually reach higher price levels. For many investors, they should simple stop right here and invest only in the S&P 500.
The ticker symbols of the top index funds that track the S&P 500 are VOO, IVV and SPY. VOO and IVV have lower fees than SPY. Not all these ticker symbols are available on every brokerage platform, but at least one of them is traded on all the major trading platforms – Schwab, Fidelity, TD Ameritrade, etc.
THE NASDAQ
Investors who are looking for higher returns from a large cap index fund will want to consider investing in the Nasdaq. The two biggest stock exchanges in the US are the New York Stock Exchange and the Nasdaq. Companies that meet their financial requirements can trade their stock on either exchange. The Nasdaq composite index contains the stocks of the roughly 2,500 companies that trade on the Nasdaq exchange. While most people think of the Nasdaq as a large cap index, 30% of the Nasdaq is made up of mid cap and small cap companies. The Nasdaq is mostly large cap but not purely large cap. The main difference between the Nasdaq and the S&P 500 is that the Nasdaq contains a higher percentage of technology companies. Just over 50% of the companies that trade on the Nasdaq are technology companies. Tech companies only make up 28% of the S&P 500. Because the Nasdaq contains more exposure to smaller companies and technology companies, you get more growth in the Nasdaq vs. the S&P 500. But you also get more volatility. The Nasdaq beats the S&P 500 by about 2% per year over the long term. You can expect the Nasdaq index to grow by 9% to 10% per year compared to 7% to 8% for the S&P 500. The S&P 500 pays out dividends at a slightly higher rate, however. The current dividend ratio for the S&P is 1.5% compared to 0.8% for the Nasdaq. Including dividends, you can expect to earn about 1.5% more per year in the Nasdaq versus the S&P 500. That may not sound like much, but earning and additional 1.5% per year would generate 50% more total dollars over 30 years.
The chart below compares the performance of the S&P 500 to the Nasdaq Composite between 1986 and 2022. An investment in the Nasdaq would have generated about twice the amount of money at the end of 2022 versus the same investment in the S&P 500. But the gains were not consistent. The Nasdaq surged ahead in the late 1990’s during the dot-com bubble, but the Nasdaq gave back all those gains in the early 2000’s. From 2009 through the end of 2021, the Nasdaq significantly outperformed the S&P 500.
The greater volatility in the Nasdaq means that price peaks are higher and price valleys are lower when compared to the S&P 500. The Nasdaq tends to drop more in bear markets and tends to climb higher in bull markets. In years where the S&P 500 is declining in value, the S&P index drops by an average of 12% per year. In those same years when the S&P is declining by 12% per year, the Nasdaq is declining by 18% per year. In years where the S&P 500 is increasing in value, the S&P index grows by an average of 17% per year. In those same years when the S&P is increasing by 17% per year, the Nasdaq is gaining 24% per year. The volatility results in peaks that are 7% higher and valleys that are 6% lower. Since most people are uncomfortable with the volatility of the S&P 500 (bear markets), they tend to stay away from the Nasdaq because it is even more volatile. The extra 2% per year in additional returns is not worth the added volatility for them. In the long run, though, long-term Nasdaq investors will end up with more money vs. S&P 500 investors.
THE NASDAQ-100
The Nasdaq 100 has a similar profile to the Nasdaq Composite. It represents only the biggest 100 companies that trade on the Nasdaq. The Nasdaq-100 contains an even higher percentage of technology companies than the Nasdaq Composite and it does not contain any financial companies. The returns for the Nasdaq-100 are even higher than the Nasdaq composite and it is not any more volatile than the Nasdaq composite on the downside. While the Nasdaq composite beats the S&P 500 by about 2% per year, the Nasdaq-100 beats the S&P 500 by about 4% to 5% per year. That overperformance is very significant. Earning an additional 4.5% per year compared to the S&P 500 would generate 240% more total dollars over 30 years. In years where the S&P 500 is declining in value, the S&P index drops by an average of 12% per year. In those same years when the S&P is declining by 12% per year, the Nasdaq-100 is declining by 17% per year. In years where the S&P 500 is increasing in value, the S&P index grows by an average of 17% per year. In those same years when the S&P is increasing by 17% per year, the Nasdaq-100 is gaining 29% per year. When it lags (27% of the time), it falls short by 5% per year. When it beats the S&P (73% of the time), it wins by 12% per year. The volatility results in peaks that are 12% higher and valleys that are 5% lower. As with the Nasdaq, people tend to avoid the Nasdaq-100 due to the added volatility. But for long-term investors, people miss out on a lot of investment gains by staying away from the Nasdaq-100.
In the next chart, we add in the Nasdaq-100 to the comparison. The Nasdaq-100 stayed ahead of both indices in the 2000’s and had explosive growth after 2009. Surprisingly, most investors are not aware of the strong performance of the Nasdaq-100 index. Savvy investors are well aware of the advantages of investing in the Nasdaq-100.
There are not as many options for Nasdaq index funds. We use the ticker symbol ONEQ for the Nasdaq composite and the ticker symbol QQQ for the Nasdaq-100.
The following chart compares the value of a $10,000 starting investment at the beginning of 1986 in the S&P 500, the Nasdaq Composite, and the Nasdaq-100. You can see how significantly the Nasdaq and the Nasdaq-100 outperform the S&P 500. The Nasdaq-100 investment produced $845,000 compared to $182,000 for the S&P 500 – almost five times more money or an extra $663,000. Amazing!
THE NASDAQ AND BEYOND BUY & HOLD
Since our Beyond Buy & Hold avoids most of the pain associated with bear market collapses, we are very comfortable owning Nasdaq index funds. The larger declines in bear markets for the Nasdaq when compared to the S&P 500 creates better opportunities for our system to profit by trading the Nasdaq in those bear markets. Since we go “all in” during bull market cycles, we get to reap the rewards of the higher returns of the Nasdaq and the Nasdaq 100.
Avoid the Nasdaq at your own peril. Combining the Nasdaq-100 with the Beyond Buy & Hold investing system can create incredible results for your portfolio.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
SUMMARY:
The stock market is still struggling to get back to the pre-crash highs of early 2022.
But we are still sitting well above the lows reached in October of 2022 and are still only 6% below the all-time highs in the S&P 500.
Small cap stocks have not rebounded as much and are still well below their all-time highs.
The major stories are still the same – interest rates, inflation, and recession concerns.
The trend in interest rates and the fact that stocks are approaching a key resistance level (all-time highs) means that we can expect a lot more volatility in the markets in the short term.
The market rally of 2023 has stalled out since the beginning of August. As of the market close on Friday September 8th, the S&P 500 is only down about 6% from its previous peak at the start of the 2022. The Nasdaq is down about 13% from its all-time high and the Russell 2000 is still down around 24%. In the graph below, you can see the nice bounce off of the October 2022 lows. Stubbornly high interest rates, global economic concerns and the market digesting the big runup since late 2022 have us in a holding pattern right now.
The Nasdaq has climbed roughly 34% from its low in October of last year while the S&P 500 has gained about 25% since then. The Russell 2000 (small and mid-cap stocks) has only gained about 9% since October. This is more evidence of why you don’t want to own small-cap and mid-cap funds. They underperform the large cap index funds over longer time periods, and they get hit just as hard if not harder in bear markets. Advisors recommend small and mid-cap stocks for diversification, but this strategy doesn’t work and doesn’t make any sense.
This bear market has been driven by inflationary pressures and its resultant impact on interest rates. While the Fed seems to be nearing the end of its rate raising cycle, the debt markets are still struggling.
A nice way to track bonds and interest rate trends is by looking at bond prices. Remember that bond prices move in the opposite direction of interest rates. When interest rates rise, bond prices go down and vice versa. And the cleanest way to track bond prices is by looking at zero coupon bonds. Since zero coupon bonds don’t pay any interest, the total return on these bonds is reflected in the price of those bonds. We use the symbol ZROZ to track bond prices.
In this first chart, you can see the deep and steady decline of bond prices since the start of the stock market decline at the beginning of 2022. The price of these bonds is now back at the low of October 2022 which represents a loss of about 50% from the peak at the end of 2021.
As I cover in my book, FIX YOUR 401K, in more detail, this is an example of why you do not want to own bonds. You receive lower long-term returns than stocks and you get very little, if any, protection of your capital. If you purchased these bonds at the end of 2021, you were receiving an interest rate of 1.9%. We are told that bonds are safer than stocks, but how safe have they been over the last 18 months? For a measly return of 1.9%, you were exposed to a 50% loss of your principal. Again, most advisors recommend bonds in your portfolio for the purpose of asset allocation and diversification, but this approach doesn’t work on any level. Shorter term bonds have not dropped as much as longer term bonds like ZROZ, but the trends are the same.
We remain in a period of volatility and instability in most financial markets. We expect this to continue in the near term. Janet Yellen recently commented that she believes a soft landing for the economy is looking more and more likely. I don’t know her track record at predicting such things and one should never rely on these forecasts for investment decisions.
The reality is that no one knows if the worst is over or not. Because of the uncertainty, it is important to follow a disciplined approach to investing. Followers of our Market Signals newsletter are positioned to benefit if the market keeps moving higher and will be able to limit losses if the market turns down from here. It is critical to have an investing strategy that wins no matter which way the market moves. No one can predict which way things will move in the short term. But we all know that in the long term, the direction of the stock market will be higher. Stay disciplined, my friends.
Happy Investing,
Phil
Disclaimers *The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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