This investment mix affects the S&P 500 – about a mile

This is one of a series of articles I have written and updated every year for several years. Together, they devise a lifelong wealth accumulation strategy for do-it-yourself investors.

The other articles cover how you can accumulate investment savings, how much to keep in bonds, and how to plan a retirement withdrawal.

Part one

“Last” is not a term for throwing around lightly. But in terms of the latter buying and holding strategy, it responds. I believe this is the best way for most investors to get long-term growth in the stock markets.

This strategy is based on the best academic research I can find – and underpins most of my own investments.

Here are some of the main takeaways:

Since no one can know the future of investment returns, large diversification gives investors the highest probability for long-term success.

Most investors rely heavily on the S&P 500 SPX,
-2.71%.
But by adding equal shares of nine other equity asset classes, long-term investors can double or even triple the yield.

The additional yield comes mainly from taking advantage of the long-term favorable yield of value stock and small-cap stock. Taking this step poses very little additional risk.

The eventual buy and hold package will work best for investors who do not want or are trying to predict future, period of volatile market movements or selectivity. individual stock.

By investing in passively managed index currencies or trading currencies, this strategy offers investors a convenient, low-cost way to own thousands of stocks.

Read: Will Social Security still be there if I wait to apply?

Part two

This “ultimate” equity package automatically takes advantage of stock market opportunities wherever they are.

It’s best to implement this in steps so you can see how it goes together. To help you keep going, here is a chart showing the parts.

The main ingredient in this package is the S&P 500, which is a good investment in its own right. For the past 51 calendar years, from 1970 to 2020, the S&P 500 grew by 10.7%. An initial investment of $ 100,000 in 1970 would have grown to nearly $ 18 million by the end of 2020. Keep that figure in mind as a benchmark to explain the results of the multiplication I expect.

For the sake of our discussion, think of the S&P 500 index as Package 1.

The next step involves moving 10% of your portfolio from the S&P 500 to large cap value stocks, which are seen as relatively basic (hence the term value).

This will result Package 2, which is still 90% in the S&P 500. Assuming an annual rebalancing (assumption that is relevant through this debate), the complex 51-year yield rises from 10.7% to 10.9%. That turned a $ 100,000 investment in 1970 to $ 19.4 million.

In dollars, this simple step adds nearly 15 times your total initial investment of $ 100,000 – a result of converting just one-tenth of the package. If that’s not enough to convince you of the power of multiplication, keep reading.

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In Pack 3, we move another 10% into U.S. small-cap mix stocks, reducing the weight of the S&P 500 to 80%.

This strengthens the complex 51-year yield to 11%; initial investment of $ 100,000 grew to $ 20.7 million – an increase of nearly $ 2.8 million from Package 1.

To create Package 4, we move 10% of the package to small U.S. cap value stocks, reducing the weight of the S&P 500 to 70%. Historically, small-cap value stocks have been the most productive of major U.S. asset classes, and they push the complex yield to 11.4%, enough to turn that initial $ 100,000 investment to $ 24.4 million – with more than two-thirds of the package still in the S&P 500.

Read: Is COVID-19 a foretaste of what retirement will look like?

To continue multiplying, we create Package 5 by transferring another 10% to US REIT funds. Yield: a complex yield of 11.4% and a closing cash value of just under $ 25 million.

I understand that many investors are uncomfortable with international identities. But I believe that any portfolio worthy of being defined as “final” must cross U.S. borders.

Accordingly, created Pack 6, we move a further 40% of the portfolio to four more important asset classes: large-cap international mix stock, large-cap international value stock, small-cap international mix stock and high-cap value stock between -national small-cap.

This reduces the impact of the S&P 500 to 20%. This result is a complex yield of 12% and a 51-year package value of $ 32.4 million – an 81% increase over the S&P 500 alone.

The last step, Package 7, coming from investing 10% in emerging market stocks, representing countries with growing economies and prospects for rapid growth.

This strengthens complex output to 12.4% and a final value of $ 34.4 million.

This heavily multiplied 10-part package is removed from any attempt to predict the future. Over 51 calendar years, it met all asset class predictions of academic researchers – and more than doubled the yield of S&P $ 500.

Here are my specific recommendations:

Property class	Recommended ETF (ticker)
Standard & Poor’s 500 Index	AVUS
US cap value	RPV
US small-cap mix	IJR
US small-cap value	AVUV
US property investment trusts	VNQ
Great international mix	AVDE
Cap international value	EFV
International small-cap mix	FNDC
International small-cap value	AVDV
Emerging markets	AVEM

Unfortunately, this package has an important drawback: It needs to own and rebalance 10 parts. Few investors have the time or inclination to do so.

Fortunately, we have designed an alternative with four funds that is much easier to implement.

From 1970, this “lite” version of the end-to-end buying and holding strategy would have yielded almost the same complex yield, dollar yield and conventional debt with the 10-asset package I explained. above.

In a future article, I will bring out this new version.

Part three

It will not surprise you to find out that there is much more to be said about this package.

In 2020, we rebalanced results from the 1970s to reveal new data that we did not have in previous years. We also changed our views on the investment costs that investors would have incurred in the 1970s. We believe our rebates will perform better than investors expect in the 21st century.

But even after all these numbers, the results have not changed substantially, and my beliefs or recommendations have not changed.

This updated data is as good as I can make it out to be.

To learn more about these changes as well as some other reasons why I think this pack is so great, I hope you take it into my latest podcast.

Richard Buck contributed to this article.

Paul Merriman and Richard Buck are the authors of We’re Talking Millions! 12 Simple ways to retire.