Must-Know Investment Tips for 2021 — and the Decade That Lies Ahead
The stock market is a mischievous little devil. Every New Year, plenty of experts try to identify the top stocks to buy and stake their reputations on how they will perform over the following 12 months. But most short-term predictors end up looking silly, and those that bet correctly once usually fail when they bet again.
CXO Advisory tracked 6,584 expert forecasts between 2005 and 2012. These forecasters guessed the market’s direction just 46.9% of the time, meaning coin flippers would have beaten them. Perhaps that’s why Steve Forbes said, “You make more money selling advice than following it. It’s one of the things we count on in the magazine business — along with the short memory of our readers.”
Nonetheless, many investors continue to speculate every year. But such casino-like behaviour will cost them plenty over time, as ‘the house’ almost always wins. That house being, in investment speak, a diversified portfolio of low-cost index funds. Sure, that sounds boring, as you probably want to beat most index fund investors. It’s a tall order, but it’s not impossible–if you’re willing to sidestep the crowds.
Can You Beat Most Index Fund Investors…with Index Funds?
I’ll share a winning strategy that will take less than one hour a year. You won’t have to follow the stock market, and this method will thump the returns of most professional investors after fees. It might even beat most index fund investors.
Let’s start with index funds that focus on value stocks, the ugly ducklings of the investment world. Value stocks are cheap, relative to cash-flow, book value and business earnings. In other words, they’re beaten-down stocks that nobody really wants, and their names certainly don’t get whispered around the water cooler at work. But they’re one of the best ways to invest your money (ask Warren Buffett).
Over time, value stocks beat high-growth stocks. That might sound like a contradiction, as growth stocks are stocks with fast-growing corporate earnings. They include darlings such as Apple, Amazon, Alphabet (Google), Netflix and Tesla. But over long-term periods, ugly duckling value stocks deliver swan-like performances, typically putting growth stocks to shame.
Why Value Stocks Prove to Be Long-Term Champs
According to portfoliovisualizer.com, large U.S. growth stocks averaged a compound annual return of 9.93% between January 1972 and November 2018. That would have turned a $10,000 investment into $841,620.
But large U.S. value stocks gave growth stocks a beating over that same time period, averaging a compound annual return of 11.24%. With value stocks that $10,000 investment morphed into $1,470,281.
When comparing medium-sized and small-sized stocks over the past 46 years, value stocks won again. Mid-sized growth stocks averaged a compound annual return of 10.11%; mid-sized value stocks averaged a compound annual return of 12.95%.
The gap is even wider when comparing smaller stocks. Between January 1972 and November 2018, small-cap growth stocks averaged 9.81%; small-cap value stocks averaged a compound annual return of 14.03%.
Value stocks don’t beat growth stocks every year. Nor do they win every decade. But as you can see in the table below, even with a few lost battles along the way they ultimately win the war and still represent some of the best stocks to buy today.