Are You An Investor Or A Speculator?
Several years ago, a couple of chaps with, perhaps, far too much time on their hands conducted an experiment. They analyzed the investment returns of more than 56,000 U.S. brokerage accounts over a six-year period. They wanted to figure out what kind of investors earned the best results.
If you’re intimidated by just the thought of investing, I don’t blame you. Daily business news networks report how stocks are performing, as if they’re calling a play-by-play on a fast hockey game. Economists discuss projected unemployment levels or the short-term prospects for individual stocks like Boeing, Amazon, Apple and Exxon Mobil. It’s easy to get the impression that making money in the markets requires a nimble hand…the ability to buy or sell whenever the markets or an individual stock sways left or right.
But that isn’t investing. It’s speculating. Investors buy and hold. Speculators trade (sometimes every hour) based on price movements. There’s no shortage of marketing charlatans online offering secrets to trading riches. You might see one on youtube, sitting in a Ferrari, claiming he turned $1000 into $10 million. And for just $9.99 a month, he’ll show you how it’s done.
Warren Buffett is the world’s greatest investor. He doesn’t trade. He has owned most of his stocks for several decades and he doesn’t care how his investments perform over short periods of time. In fact, he says, “When I buy a stock, I don’t care if they close the stock market tomorrow for a couple of years.” That might cause an aneurism for a trader. But real investors make much more money than traders.
The University of California’s Brad M. Barber and Terrance Odean, from Berkeley conducted the world’s broadest study on traders. They published their findings in the Journal of Finance in an article titled, “Trading is Hazardous to Your Wealth.” After examining 66,465 brokerage accounts over a six-year period, they concluded that the more an investor trades, the less money they make. Transaction costs, overconfidence, poor market timing and (perhaps) following too many fools on business television ensured that rapid traders underperformed the market by about 7 percent per year.
Many of us have read stories about retired janitors or librarians who left multi-million dollar fortunes to their favorite library or church. But I’ve never seen a story about an octogenarian who lived by the sword, successfully trading his or her way to wealth over several years. Instead, they’re more like Ronald Read who amassed $8 million on a janitor’s salary by being frugal and owning the same stocks for decades.
Real investing requires patience, not an eye on the economy and a trigger-happy finger. In fact, by building a globally diversified portfolio of stock and bond market ETFs, you will destroy the returns of most active traders. Your investments will see good and bad years. But if you are patient, you should record a profit every five years.
To maximize profits, we shouldn’t think about this week, this month or this year. Those are short-term distractions. Instead, we should remain diversified and think, long term. You might consider putting 60 percent of your money in global stock market index, such as Vanguard’s FTSE All-World UCITS ETF (VWRA). This provides exposure to about 3,900 stocks in 50 different countries. Nobody trades the shares within that fund. In other words, it becomes the ultimate buy and hold investment.
You could then put the remaining 40 percent of your proceeds into a global bond market index, such as the iShares Global Inflation-Linked Government Bond ETF (IGIL).
If possible, add money every month…yes, every month (see endnote). Don’t try to time the market. Don’t mess around. Don’t think like a trader. Think like an investor and you’ll make more money.
You won’t, of course, see a profit every year. But that’s not the point. Over rolling five-year periods, you should see returns. We have seen some horrific market crashes over the past 34 years. U.S. stocks dropped about 20 percent in a single day in 1987. Globally, stocks cratered about 47 percent from 2000 to 2002. They plummeted about 50 percent from 2008 to a low point in 2009. And they recently fell about 35 percent from February 19th to March 23rd, 2020.
But despite those drops, investors with 60 percent in global stocks and 40 percent in global bonds would have done just fine. I measured 31 rolling 5-year periods from 1986 to April 30, 2020 (the final period was 4 years, 4 months). In each case, the globally diversified portfolio would have earned a profit.
Here’s how I defined “rolling five-year periods.” I measured the time periods from 1986-1990; 1987-1991; 1988-1992; 1989-1993…and so on, until January 2016 to April 30, 2020.
From January 1986 to April 30, 2020, the globally diversified portfolio would have averaged a compound annual return of 8.22 percent per year. That would have turned a single $10,000 investment into $150,709, measured in USD.
The worst five-year period was from January 2004 to December 31, 2008. Over this measured period, the globally diversified portfolio would have gained a compound annual return of 2.20 percent. That would have turned a $10,000 investment into $11,152.
The best five-year period was from January 1995 to December 31, 1999. The same portfolio would have gained a compound annual return of 14.94 percent. That would have turned a $10,000 investment into $20,064.
Nobody can predict how markets will perform. Nobody. That’s why it’s best to own a globally diversified portfolio of stocks and bonds. Ignore the media.
Ignore forecasts. If you have the emotional strength to do so, you’ll give almost every active trader a long-term beating.
Growth of $10,000
60% Global Stocks, 40% Global Bonds
January 1986-April 30, 2020
January 1986 – April 30, 2020
Rolling Five-Year Returns For 60% Global Stocks, 40% Global Bonds
5 Year Periods
5-Year Compound Annual Growth
Respective Growth of $10,000 Over 5 Year Periods
2016 to 4/30/2020
* Note: these returns tracked the respective global stock and bond market indices. ETFs that track these markets would underperform the indices by small amounts (up to 0.2% per year) based on fees and tracking error
* Source: portfoliovisualizer.com
In my book, Millionaire Expat, I recommended that investors never pay more than 1% of their purchase price in commissions. For example, if an investor can only save $100 a month, paying a $25 commission to purchase would constitute 25% of the purchase value. Such investors might be better off with Internaxx’s Smart Portfolio accounts, which don’t charge purchase commissions. However, overall costs would be lower if an investor could invest at least $2,500 a month into a portfolio of ETFs. In this case, a $25 commission would represent 1% of the total proceeds, and the ETF’s expense ratio charges would cost less than the charges on Internaxx’s Smart Portfolios. Alternatively, investors who save smaller sums might choose to invest quarterly in a portfolio of ETFs, `instead of monthly, to be wary of commission costs.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas
Internaxx Bank S.A. accepts no responsibility for the content of this report and makes no warranty as to its accuracy of completeness. This report is not intended to be financial advice, or a recommendation for any investment or investment strategy. The information is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Opinions expressed are those of the author, not Internaxx Bank and Internaxx Bank accepts no liability for any loss caused by the use of this information. This report contains information produced by a third party that has been remunerated by Internaxx Bank.
Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.