Retail Investors Badly Trailing the S&P 500

[NW-Bound]

Quite a few of my tech stocks went bankrupt in the dot com, but not all of them. And that's why I only lost 1/2 of my money counting from the top, instead of down to 25c on the dollar like the NASDAQ. The S&P lost 1/2. I roughly matched the S&P, despite owning tech stocks. Whew!

Several of the old names survived, of course. Recently, I shared that if you put $10K into Cisco and Hormel in March 2000, at this point you will have $11,221 with Cisco, and $146,714 with Hormel.

Yes, Hormel, the guy that makes Spam. And the above numbers are before inflation. After inflation, it's $6,312 for Cisco, and $82,534 for Hormel. Cisco could not keep up with inflation, even with reinvested dividends.

Oh, and I remember Cisco CEO then, John Chambers, was treated like a hero by the media. And the CEO of Nokia back then too (I forgot the name). They did not do anything wrong, nor spouted off anything stupid. They were just there at the right time, and in the right business.

 

[NW-Bound]

Individual investors keep hearing diversify from the experts. SP500 did some stupid things last year - the largest 8 companies accounted for 28% of the drop last year. Some smart investors sold some of SP500 funds last year and bought some dividend/value funds - which did far better than SP500. This year, SP500 has done better than dividend/value funds. Investor are backing SP500 fund with tech sector driving growth. Once the recession kicks in later this year, I think you’ll see the situation reverse and it will look like 2022 again.

Well, it's always interesting to see how things unfold. It makes life exciting.

 

[Markola]

Retail Investors Badly Trailing the S&P 500

Here’s one way the S&P 500 was beaten, in hindsight, that is. https://money.com/make-money-stock-market-do-nothing/

 

[OldShooter]

Here’s one way the S&P 500 was beaten, in hindsight, that is. https://money.com/make-money-stock-market-do-nothing/

No news there. The data have shown this for a half-century or more. Really the only surprise is how effectively the financial industry has been in keeping retail investors from understanding.

Warren Buffet: "Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell." ... "Lethargy, bordering on sloth should remain the cornerstone of an investment style."

 

[NW-Bound]

Here’s one way the S&P 500 was beaten, in hindsight, that is. https://money.com/make-money-stock-market-do-nothing/

Here's an excerpt of the above article (I added the highlights):

Luckily, Ptak’s “Do Nothing Portfolio” — which was based on all of the S&P’s holdings as of the end of March 2013 — reveals an easier way to beat the market.

The basket generated a 12.2% return over the 10-year period between 2013 and 2023 — nearly exactly the same as the performance of the entire S&P 500 index over the same time. It was also less volatile. That’s especially surprising, Ptak wrote in a blog post, because his portfolio wasn’t rebalanced or adjusted as the S&P 500 changed. In the index itself, on the other hand, stocks were added and removed.

So, he did not beat the S&P by much. Still this proves that all the tweaking of the S&P 500 constituents by the selection committee did not achieve a whole lot, at least in the decade of 2013-2023.

Ptak was able to replicate his results over two more 10-year periods. He determined that “the Do Nothing Portfolio would have acquitted itself very well over the full 30-year period, earning a slightly higher return than the S&P 500 with less volatility,” he wrote.

The above implied that holding the S&P composition as it was in 1993 for the entire 30-year period of 1993-2023 beats the evolving S&P by a little bit.

This, I found amazing, because many present companies did not exist back in 1993. No Google (going public in 2004), no Amazon (publicly traded in 1997), no Facebook (publicly traded 2012), no T-Mobile (2002), let alone Tesla (2010).

So, why stop at 1993? What if we go way back to 1900 and own shares of horse whip and carriage makers, bypassing even Ford (1903)?

Interesting!!!

 

[OldShooter]

... this proves that all the tweaking of the S&P 500 constituents by the selection committee did not achieve a whole lot, at least in the decade of 2013-2023. ...

Certainly consistency was their objective and apparently they achieved it. I would call that "achieving a lot."

... The above implied that holding the S&P composition as it was in 1993 for the entire 30-year period of 1993-2023 beats the evolving S&P by a little bit.

This, I found amazing, because many present companies did not exist back in 1993. No Google (going public in 2004), no Amazon (publicly traded in 1997), no Facebook (publicly traded 2012), no T-Mobile (2002), let alone Tesla (2010).

So, why stop at 1993? What if we go way back to 1900 and own shares of horse whip and carriage makers, bypassing even Ford (1903)?

You're overthinking this. There are many long term total market return charts going to pre-1929 and even to 1900. I think they all look pretty much the same -- slow, steady progress upwards. There are also many studies that show holding the market portfolio is the only reliable winning strategy. The S&P is close to the market portfolio, 80% on a market cap basis IIRC, and the rest of the market is highly correlated to the S&P, so it is a pretty good surrogate and the results pertain. The whole point of holding the market portfolio is to diversify away individual stock risk.

 

[NW-Bound]

.... You're overthinking this. There are many long term total market return charts going to pre-1929 and even to 1900...

Yes, total market return. This means you add newborn companies to your portfolio as they start to trade publicly.

However, that's not what Ptak, the author of the study was talking about. It was written that he looked at a 30-year return of holding the constituent companies of the S&P 500 as existed back in 1993. I take that to mean not adding any of the new companies whose inception happened after 1993.

Or perhaps I misread the article?

 

[OldShooter]

... Or perhaps I misread the article?

Probably not. I was making a more general point. My guess is that any portfolio that diversifies away individual stock risk and diversifies away sector risk will be a close enough approximation to the market portfolio to deliver similar results. No reason to buy a total market index except that it is an idiot simple way to achieve the goal.

When looking at these portfolios, a few tenths of a percent return one way or another will probably have more to do with the period sampled that with the portfolio itself.

 

[NW-Bound]

Probably not. I was making a more general point. My guess is that any portfolio that diversifies away individual stock risk and diversifies away sector risk will be a close enough approximation to the market portfolio to deliver similar results. No reason to buy a total market index except that it is an idiot simple way to achieve the goal.

When looking at these portfolios, a few tenths of a percent return one way or another will probably have more to do with the period sampled that with the portfolio itself.

I totally agree that nothing beats diversification as a tool to reduce risk.

I still find it very interesting that one could get anywhere close to return of the S&P, or the total market for that matter, even if one totally avoided the new companies that came into existence in the last 30 years, such as Google, FaceBook, Amazon, etc...

Of course, back in 1993 we already had Microsoft, Apple, Home Depot, Walmart, etc..., and these have grown quite nicely over 30 years. But on the other hand, I think 30 years ago many companies such as Alcoa, US Steel, as well as coal mining companies were a lot larger. Exxon Mobil plus other oil companies were a larger portion of the stock market than they are now. How could holding these companies and not buying the new technology companies keep your portfolio up against the total market?

I would like to see a bit more details on this man's study.

 

[NW-Bound]

There's another article on the recent study by Ptak, first shared by Markola in an earlier post.

To recap, Ptak found out that buying the constituents of the S&P 500 as the index existed in 2013, then not following the S&P 500 addition/deletion for the next 10 years beat the S&P slightly. And then, doing the same thing starting way back in 1993 also beat the S&P.

The Yahoo article has some further details that are interesting. For example, between 2013 and 2023, 100 of the original 500 companies in the S&P 500 were either kicked out, or taken over. Wow, I did not know the S&P 500 has such a high turnover rate.

When the constituent companies were taken over and bought out for cash, Ptak left the cash in the portfolio and did not reinvest it. Despite holding 5.5% in cash at the end of the period, the "Do Nothing Portfolio" still beats the dynamic S&P which is always fully invested.

For the full 30-year period of 1993-2023, the "Do Nothing Portfolio" grew from $10,000 to $172,278, against the $163,186 by the dynamic S&P.

The article did not say how many of the original 500 companies were still in the "Do Nothing Portfolio" in the end of 30 years, nor how much cash the portfolio now holds. If the S&P 500 lost 100 out of 500 companies in 10 years, how many got dropped out in 30 years?

Ptak observed that the cash actually helped with lowering the volatility of the portfolio, while not hurting performance. The portfolio, because it is not constantly seeking new companies like the S&P 500 does, ends up having a larger concentration of the successful surviving companies (Apple and Microsoft?), and that helps.

See: https://finance.yahoo.com/news/nothing-portfolio-beat-p-500-204224869.html?.tsrc=fin-srch

 

[ERD50]

I haven't read every word here, but I wonder if some of the under-performance could simply be due to investors taking the dividends in cash (rather than reinvest) to pay ongoing expenses (like most retired people would do)?

-ERD50

 

[Markola]

Probably not. I was making a more general point. My guess is that any portfolio that diversifies away individual stock risk and diversifies away sector risk will be a close enough approximation to the market portfolio to deliver similar results. No reason to buy a total market index except that it is an idiot simple way to achieve the goal.

That’s why I favor the broader Vanguard Total Stock Market Index with exposure to 3,900 equities vs the S&P 500 index fund. Intellectually, it seems to offer more of a diversification free lunch, though history shows expenses and returns are almost identical between the two.

 

[NW-Bound]

I haven't read every word here, but I wonder if some of the under-performance could simply be due to investors taking the dividends in cash (rather than reinvest) to pay ongoing expenses (like most retired people would do)?

-ERD50

Regarding the original article, showing that the retail investor losing -26.51% in a recent 15-month period of Nov 21 - April 23, when the S&P lost only -10.94%?

No, dividends are not that much in that short period.

It was more an indication of chasing hot stocks, which crashed a lot harder than the S&P. On the other hand, if these people bought the hot stocks way early, they might still have some gains, and even beat the S&P over the longer periods.

It's hard to tell.

PS. Some headlines on the Web say that retail investors start putting money into the stock market again. Is that a good or bad sign?

 

[NW-Bound]

That’s why I favor the broader Vanguard Total Stock Market Index with exposure to 3,900 equities vs the S&P 500 index fund. Intellectually, it seems to offer more of a diversification free lunch, though history shows expenses and returns are almost identical between the two.

Or as the study by Ptak shows (not the original article in the OP) showing, taking a snapshot of the S&P then letting the failing companies drop out over a 30-year period and not replacing them with new companies, while holding a lot of cash, beat the S&P and the total market too.

The above means not bothering with chasing the latest technology stocks, no "disruptive" stocks, no genomics, no EV stocks, no biomed, no fancy technology, actually works quite well for 30 years. That's a long time, with huge changes in the economy and the way people live.

Weird stuff can happen in the market.

All I can conclude is that it's hard to make generalizations, and there's too much randomness to know anything for certain.

 

[Markola]

Retail Investors Badly Trailing the S&P 500

^^^ I guess it’s a “let the leaders run” kind of strategy. I can’t imagine owning 500 stocks nor paying the trading fees to buy them and then to sell some when they drop out, but maybe a closed end fund could do it.

 

[NW-Bound]

^^^ I guess it’s a “let the leaders run” kind of strategy. I can’t imagine owning 500 stocks nor paying the trading fees to buy them and then to sell some when they drop out, but maybe a closed end fund could do it.

Exactly. The Ptak study is more of a theoretical interest than a practical importance.

By the way, no you would not sell anything, you only bought. And you bought once, and never again, including the new stocks that the S&P 500 selection committee adopted.

You would not sell anything, including the stocks that get dropped by the S&P 500 selection committee. You let the rejected stocks stay in your portfolio.

About the cash, he was talking about stocks that went bankrupt, got bought out or taken over, and the purchasing companies paid for the takeover with cash. Ptak then lets the cash sit, and not reinvest it into anything. So, the portfolio was 100% invested in the beginning, and ends up with a lot of cash from the buyouts. Still beat the S&P. Is that not amazing?

Again, I have not found out that out of the original 500 companies in 1993, how many would be left standing, inside or outside the S&P, at the end in 2023. But in just 10 years, from 2013 to 2023, 100 out of the original 500 already got bought out or went bankrupt.

 

[OldShooter]

... No, dividends are not that much in that short period. ...

Also, if the total return calculation is done correctly, cash flows in and out of the portfolio are accounted for.

... if these people bought the hot stocks way early, they might still have some gains, and even beat the S&P over the longer periods.

True enough but the phenomenon of individual investors underperforming is pretty much old news, well suppressed by the investment industry.

That’s why I favor the broader Vanguard Total Stock Market Index with exposure to 3,900 equities vs the S&P 500 index fund. Intellectually, it seems to offer more of a diversification free lunch, though history shows expenses and returns are almost identical between the two.

Yes, absolutely. We carry the "intellectual" look at diversification one step further and own the world via VTWAX. That has cost us some return as the US has outperformed, but the game is not over.

 

[M Paquette]

I had to look. Including market fluctuations, and my annual withdrawals of selected gains and dividends, I'm down 13.3% over this Nov 2021 to present interval.

Meh. M... E... H... Meh.

It's well inside my long term plans. I've seen worse. Heck, I retired in March 2008, and some of us may recall what happened over that next year. Why, I had to rebalance bonds and treasuries in Nov 2008, and stocks in Feb 2009. I haven't had to expend that massive effort since then. Just a little pruning when I do my annual withdrawals...

 

[tenant13]

I’m at pretty much the exact same level. 10k less on the 12th, 10k more today. Lol. And I do own a lot of tech stocks. Not JUST tech but substantial amount. No bonds though. I just never liked them. My absolute worst performing account is the “Intelligent Portfolio” by Schwab. It’s the last time I let anyone else make investment decisions for me. At least if I mess up I shrug it off and move on. These guys are a joke and I’m mad at myself AND them.

 

[HaveEnough]

Two words Real Estate.

Not REITs, not stock real estate, physical real estate.

We have < 1% in the "market" all in real estate, primarily notes, not rentals with toilets and tenants.

Up 24.5% since Dec 2021 to (march 23) that includes removing all living expenses but that is less than 20% of income. Highly recommend.

Have (more than) Enough

 

[Markola]

Retail Investors Badly Trailing the S&amp;P 500

^^^^^ Just curious how real estate notes appreciate? Is there a way to mark them to market or do they have price discovery of some kind? Or maybe you’re saying your rental income is up 24.5%?

 

[luckydude]

Two words Real Estate.

Not REITs, not stock real estate, physical real estate.

We have < 1% in the "market" all in real estate, primarily notes, not rentals with toilets and tenants.

Up 24.5% since Dec 2021 to (march 23) that includes removing all living expenses but that is less than 20% of income. Highly recommend.

Have (more than) Enough

^^^^^ Just curious how real estate notes appreciate? Is there a way to mark them to market or do they have price discovery of some kind? Or maybe you’re saying your rental income is up 24.5%?

I have the same question as Markola. In today's rising interest rate environment, wouldn't existing real estate notes depreciate in value? Do you buy those notes individually from brokers and hold them to maturity, or do you buy shares in an investment fund that invests in notes bought in bulk?

 

[HaveEnough]

Thanks for the questions and curiosity!

The gain is from the interest at 12% and 2 points for the origination. After the 7 month term expires, the note can be renewed at my discretion for another point. I use some leverage (HELOC) to goose the returns a little. There are some other tricks.

These are fix and flip loans, they are short term. They do not act like bonds as far as valuation. These are not public market vehicles. These are generally not resold because the "time to maturity" is limited. The security is the property. I am similar to the bank with a mortgage. I am paid when the property sells or the note expires. The success rate on these, for me is 1 loss in 10 years and over 500 loans. I do have another that may go south for my second in 10 years.


Arguably, there is no appreciation. However, if a loan extends for a year, it generates 16%. If it goes past the term, the rate updates to compound daily.

 

[luckydude]

Thanks for the questions and curiosity!

The gain is from the interest at 12% and 2 points for the origination. After the 7 month term expires, the note can be renewed at my discretion for another point. I use some leverage (HELOC) to goose the returns a little. There are some other tricks.

These are fix and flip loans, they are short term. They do not act like bonds as far as valuation. These are not public market vehicles. These are generally not resold because the "time to maturity" is limited. The security is the property. I am similar to the bank with a mortgage. I am paid when the property sells or the note expires. The success rate on these, for me is 1 loss in 10 years and over 500 loans. I do have another that may go south for my second in 10 years.


Arguably, there is no appreciation. However, if a loan extends for a year, it generates 16%. If it goes past the term, the rate updates to compound daily.

Thanks for the explanation. 1 default in 500 loans over 10 years is very impressive. It sounds like a good niche investment strategy for investors with ample liquidity.

If you don't mind sharing, do you use a lending platform to get matched and vet out loans, or do you own a business that markets and caters specifically to such loans?

 

[Montecfo]

Sounds like Have Enough is doing what we call hard money lending.