If you’re not a professional investor you might find it difficult keep up with breaking news that would effect the stocks in your portfolio. Reading and interpreting financial statements, conference calls, economic indicators, is a lot of work. Successful investing is complicated and time consuming, but does it have to be?
Do you have what it takes
Even if you’re a pro, it can become a life consuming obsession to outperform the market. Peter Lynch, (one of the most notable portfolio managers ever), was known to work 24 hours a day seven days a week. He talked to company executives, investment managers, industry experts, and analysts around the clock. He would even work while with his family at the dinner table.
In his book, Beating the Street, he describes how he would purposely use the less traveled backroom stairs to avoid running into anyone he knew, so he wouldn’t waste time talking with co-workers. He even mentions that during a ski vacation, he would make calls to his office to put in buy and sell orders after every trip down the mountain.
Because of this his obsession Peter Lynch earned an average annual return of 29% over 13 years. So do you think you have what it takes to achieve these types of results? If you’re like most, you probably don’t have the drive and determination to invest well.
Decisions, decisions
So what is a would be investor to do? Brave the wild world of the markets and build your skills against the fury of aggressive traders, mammoth market movers, lightning fast computer-algorithmic trading systems, and the more informed institutional investors? Or maybe you can align your cash with an accomplished mutual fund manager. Unfortunately with their turnover and fee’s, most underperform the market.
May I suggest a simpler solution? As another famed investor John “Jack” Bogle, (the founder of Vanguard), has been preaching for years, look towards an index. An index auto
You don’t have to constantly buy and sell, so you avoid capital gains taxes and other fees. Also it’s an easy way to own some of your favorite companies that make up that index. This is a passive strategy, you simply buy and enjoy your free time, while your money compounds away.
Average isn’t so bad
The most common index, the SPDR S&P 500 ETF Trust (NYSEMKT:SPY), has over the past 20 years, returned 275% for investors, that’s an average of around 14% per year. If you invested $10,000, 20 years ago, you’d have $132,459 today. That’s a pretty astounding return when you consider the effort involved.
By buying the S&P 500 you will own a portfolio flush with some of the markets best treasures. Its top holdings include great companies like Exxon Mobil Corporation (NYSE:XOM), Apple Inc. (NASDAQ:AAP), Microsoft Corporation (NASDAQ:MSFT), Johnson & Johnson (NYSE:JNJ), and Berkshire Hathaway Inc. (NYSE:BRK.A).
A step further
If you do choose to invest in an index, you’re most likely investing for the long-term, so why not add some proven theory to the mix. It has long been established that a well diversified small-cap portfolio will outpace a large-cap portfolio over time. The iShares Russell 2000 Index (ETF) (NYSEMKT:IWM), is an ETF that tracks an index that has returned 324% over the past 20 years. This works out to be a 16.2% per year average, turning an initial $10,000 investment into $201,429.
Some of its top holdings are CoStar Group, athenahealth, CommVault Systems, and FirstMerit. This ETF has an average daily volume of around 38 million shares and has about $26 billion in assets. It has also returned about 24% year to date.
If you had invested $10,000 in an index which follows the tech-heavy Nasdaq Composite 20 years ago, you might be sitting on a beach right now. Over that time the Nasdaq has enjoyed a 761.82% return, a 30% per year average. This is a record which would make any portfolio manager turn green with envy. It would also have turned you into a millionaire.
Here, you’ll find heavy hitters like Cisco, Intel, and Amazon.com. Indeed, the Nasdaq is filled with some of the best businesses of our age.
If you can’t beat it, join it
While there’s no shame in trying to beat the market, why bother? When it comes to your wealth and an even more valuable resource, (your time), why not play it safe. There’s no need to slave over spreadsheets and watch the talking heads on TV, in an attempt to earn a few more percentage points. Instead, buy an index, relax, and enjoy your time. Your family will probably be glad you did.
The article Why This Could Be the Best Investment of Your Life originally appeared on Fool.com and is written by Ken Conte.
Ken Conte has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Ken is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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