The most common investing strategy within the personal finance world is the buy and hold strategy. You buy and hold a broad market index such as the S&P 500 and forget about it for decades. Does it work? Heck yes it works. It’s been my primary strategy for the past five years and it will not change anytime soon.
My $160,000 pretax portfolio grew to where it is in just four and a half years not because I actively traded. It grew because I employed a passive investing strategy. Almost 100% of the portfolio is parked in the S&P 500 with no plans to change.
I’ll be the first to admit that I did get lucky starting to invest in one of the best times to invest. Ever since 2016, the S&P 500 hasn’t closed out the year with negative returns. (Knock on wood for 2020). However, the great news is that over 40 years, the average yearly returns will be about 7-10%.
When I first heard about investing, I said to myself, “7-10% is nothing!” Since then, I’ve learned and 7-10% is a ridiculously good rate that can’t be beat. In my home country, the broad index returns have been almost flat for the past 10 years. Can you imagine patiently waiting for 10 years only to have the same amount of money at the end?
I am incredibly thankful that I live in one of the most developed countries in the world. It’s the land of the opportunity and I am a firm believer in that. Currently, my yearly income is approximately $110,000, not excluding benefits. My current benefits isn’t anything to scoff at either, it’s one of the best I’ve seen.
Uncommon Investing Strategy
So by now, you’re thinking, hey what gives? The buy and hold strategy has been preached for decades and not uncommon at all. Fair point. The investing strategy that I encourage is to have two separate portfolio. One portfolio should be purely focused on wealth creation. The one you don’t mess around with and will never budget on.
The second portfolio should be one that you play with. One that you are trying to make the most returns with. What percentage of your net worth this portfolio should be is entirely dependent on your personal risk tolerance. Personally, I love taking risk with my money. If I believe there is more than a 50% chance the bet will work out, I happily go for it.
These “moon-shot” bets have to be a minority percentage of your overall net worth. Otherwise, you are taking an all-in risk where a loss means an insane amount time lost. This way, you have a non-zero chance to beat the market yet if it goes south, you will not trail far behind.
Currently, 20% of my net worth is dedicated to beating the markets. That is not a recommended amount but my personal preference and choice. After investing for over 7+ years, I am comfortable with the risk. The rule of thumb is that your moon shot bet portfolio should be no more than 25% of your total net worth.
There are definitely people who’ve sold all of their belongings and invested 100% of their net worth onto speculative investments. There are people like that article who’ve sold all of their belongings and invested everything onto bitcoin. Can it work? Sure. You have to ask yourself though, would you rather be a millionaire for sure in 10-15 years? Or would you rather try to be a millionaire in 5 years or be worth nothing?
Average Returns Are Good Enough
The risk-averse investor certainly does not have to try to beat the market. He or she can park their money in the S&P 500, Dow, or NASDAQ and sleep like a baby. There’s nothing wrong with that investing strategy. The U.S. stock market has returned 7-10% a year on average. Even though it’s a risk-based return and just the average, it is phenomenal.
Too many people try to go for the 5-10x yearly returns and chase to no end. Most of the investors who chase these unrealistic returns end up having less money by year’s end than the start. Successfully achieving these returns are not impossible but it isn’t probable. Fly too close to the sun and you will be burned.
I save between $50 – 60,000 per year, at a minimum. My expenses are the lowest possible expenses that I could make them. I know by consistently investing that much onto the S&P 500, I will be a millionaire in 10 years since I started. Especially when accompanied by a 7-10% compounded boost to my investments, if not more.
I’m almost half way there to 10 years and am fully confident I will be there in the next half. Although I do not have half a million currently, I fully understand that compound investing starts slow.
However, the second half is where the real growth and fun happens. After all, Warren Buffet made 99% of his wealth after his 50th birthday. Assuming he lives to 100, the second half is where the real growth happens!
Now, if aliens attack or asteroids strike the Earth in the next five years, I will not get there. However, I am comfortable with this remote risk.
Investing Takes Time, Be Patient
Maybe the very first year you decide to invest, the market turns sour and you end up losing money that year. I know the feeling. You’ve saved up $10,000 in a year only to have it be worth $9,000 by the year’s end. That money might’ve just went to rent, am I right?
As Jeff Bezos always stresses when making decisions related to his business, always look at the long-term. Don’t ever make short-term decisions that will affect your long-term investing strategy. That’s a surefire recipe for disaster.
What should you do when you had a short-term down year but are looking for long-term success? Stay the course. Ignore the noise and your own feelings. Your feelings are an immediate, knee-jerk, and short-term reaction to what’s going on right now. Not the best guidance for how you should make long-term decisions.
The shape of the S&P 500 this year is a fantastic and exact indicator of what you should do when you’re down. You need to stay the course and buy more! Yes, it hurts and all you can think about is how you lost 50% of your money. Not investing in a ridiculously risky and fancy tech stock but in a broad market index. It will physically hurt you where it hurts you the most.
However, those who stayed the course reaped the benefits, myself being one of them. It is one of the best money making decisions you’ll ever make.
