Stock market returns so far this century have been lackluster, at least as measured by the performance of the Standard & Poor’s 500 Index — often referred to as “the market.”
Worse, many investors expect returns in the coming years to fall behind those of the “golden years” of the late 20th century.
If that’s the bad news, there’s still plenty of good news.
For starters, expectations are mostly hot air. Not even the highest-paid gurus and economists know the future. We aren’t stuck with their gloomy predictions — but we also can’t rely on their optimism.
I’ll show you two effective ways to get — and stay — ahead of the S&P 500 over the long run:
- Diversify properly
- Adopt productive habits and attitudes
Let’s clear away some discouraging news.
From 1975 through 1999, the S&P 500 compounded at an impressive 17.2%. From 2000 through 2015, it returned only 4.1%.
After a painful decade from 2000–2009, when returns averaged –0.9%, the index rebounded at about 13% from 2010–2015. Encouraging — until returns slowed again.
If these numbers contain a crystal ball, it’s not one I can read. You can slice past performance any way you want and still not know the future.
So what can you do?
First: Diversify. One simple approach is to divide an equity portfolio into four asset classes:
- U.S. large-cap blend (S&P 500)
- U.S. large-cap value
- U.S. small-cap blend
- U.S. small-cap value
During the so-called golden years (1975–1999), when the S&P 500 returned 17.2%, this four-part portfolio returned about 19.8%.
Over 25 years, that difference is enormous. A $10,000 investment would have grown to $528,677 in the S&P 500 — or $914,998 using the diversified approach.
From 2000 through 2015, the S&P 500 returned only 4.1%, while the diversified portfolio returned about 8.4%.
On $10,000, that’s the difference between $19,020 and $37,435.
Here’s how the S&P 500 compares with the four-part diversified portfolio over several historical periods:
Over and over again, the benefits of diversification have been documented. In every period, one asset class will lead. Sometimes that leader is the S&P 500. But over the long run, there is no substitute for diversification done right.
The second key to success is what you bring to the party.
Investment results don’t just happen. Your habits and attitudes matter — a lot.
The best investors cultivate lifelong habits of saving and thrift. Thrift helps control costs and living expenses, reducing the need to chase unrealistic returns.
Three additional habits successful investors share:
- They set measurable goals
- They create written plans
- They monitor progress regularly
Attitudes matter just as much. Successful investors tend to share four:
- Trust in the future, even when outcomes are uncertain
- Resilience, the ability to recover from setbacks
- Perspective, seeing beyond today’s headlines
- Patience, knowing time is an ally
Impatience is dangerous. It often leads investors to do dumb things.
My final ingredient is luck. You can’t control it, but you can improve your odds by being prepared when opportunity appears.
The bottom line: Diversify your portfolio, and cultivate productive habits and attitudes.
I can’t promise this will make you rich. But I can promise it will put you ahead of the game.
For more insights, listen to my podcast, “Why Not Put All Your Money in Small-Cap Value?”
Richard Buck contributed to this article.