I know this sounds too good to be true, but here’s a secret that the advisors, stockbrokers and agents don’t want us to know. And they don’t want us to know it precisely because they make a living earning huge fees and commissions hidden within the financial products that they convince us to buy.
Financial advisors purposefully make things more complicated than they need to be, in order to stoke our insecurities about the world of investing. That complexity is profitable – for them. The result is that we’ve been left clinging to these ‘experts’ out of fear of the roller coaster of stock picking. What they don’t want us to know is that stock picking is a fallacy designed by them to make us pay their high fees and commissions.
Instead, the simple truth is that a strategy of investing in market-tracking products over the long-run is the only investment strategy that you need. It’s the single most efficient way to make money from the stock market and to grow your wealth.
Record highs are the norm, not the exception
Stock markets around the world have been hitting record all-time highs again and again over the past few months. Each time this has happened it’s made a big splash in the headlines. But when you look into it, record highs have actually been occurring repeatedly ever since stock markets were first introduced.
For example, between 1950 and 2019 there were over a thousand days in which the S&P 500 closed at a record all-time high (the S&P 500 is an index which tracks the US stock market). To put it another way: Across this 70-year period, the decade with the highest number of record highs had as many as 308 highs (happened in the 90s) and the decade with the lowest number of record highs still recorded 9 new all-time highs (happened in the 00s). On average, the S&P 500 has broken an all-time high 162 times every decade, or 13 times every year... or at least once every month. Breaking records is the norm, not the exception. In fact, it’s actually the other way round - it would be exceptional if we had a period of time without breaking any new records.
Stock market growth ultimately reflects economic growth
So how is it that stock markets can keep on breaking new records year after year? Well, there’s a straightforward link between economic growth and stock market growth, and given that, on average, economies have been growing each year, then it also makes sense that stock markets have been growing in parallel too.
The link between the two factors is remarkably simple: Both stock market growth and economic growth essentially reflect the same thing - individual business growth, for all businesses in a given market, all added up together. Why is this the case? Well, when a company sells more and more of a valuable good or service, then their profits typically increase. And when a company’s profits increase, these profits are owned by their shareholders and so this is typically reflected in a higher market valuation in the stock market.
At the same time, economic growth for a market is measured by adding up all of the value for all the goods and services for all of the companies in that market. Given that this is essentially a very similar measure as business profitability, then when these companies make more profit this also drives up higher economic growth. And so, at their core, economic growth and stock market growth reflect the same fundamental concept - the aggregate position of total business growth.
The ongoing and relentless march of growth
Apart from during the occasional time of a non-COVID(or COVID) related recession, economic growth has been marching on relentlessly, year after year. And so in light of this, combined with the direct link between economic growth and stock market growth, it therefore also makes sense for stock markets to have been hitting record highs year after year as well.
And so because of this, stock markets around the world have been notching up impressive long-term growth rates across the years. For example, since 1950 the S&P 500 has grown at an average annual rate of 7.7%. Similarly, since 1987 Hong Kong’s Hang Seng Index has delivered an annual growth rate of 7.4%. And all of this is… perfectly normal.
Ignoring your financial advisor
Despite these incredible long-term returns, however, stock markets are typically very volatile in the short-term. Looking at the S&P 500, for example, despite its overall upward trend the proportion of days that it has gone up is 53% and the proportion of days that it has gone down is 47%. As a result, no one has been able to accurately predict these short-term market movements consistently. SPIVA, which is a widely-referenced research piece that is published by the S&P DJI, analyses the performance of fund managers each year. They find that 90% of all active fund managers fail to beat the long-term market return.
As such, every time you hear a financial ‘expert’ advising you to invest in a particular stock, the only thing that you should do is take it as a signal to run a mile... Paying an advisor for a portfolio that only invests in a few stocks for the short-term is unlikely to create sustainable returns for you over the long-term. It will, however, guarantee that you pay their fees and commissions.
Instead, for a successful portfolio all you need to do is to invest in assets with exposure to the overall long-term market return. If you do this, you’ll have an investment portfolio with assets that have consistently generated long-term returns of about 7% per annum.
So how do you invest in assets with exposure to the overall long-term market return?
We know, with a huge amount of certainty, that the highest actual all-time high will be in the future, not the past, and that once we’ve hit this next all-time high there’ll be another one again after that, and then again after that too. The longer you’re invested in the market, the greater your total investment return will likely be.
And so the million dollar question: How do you actually invest in assets with exposure to this overall long-term market return? You could buy a broad basket of individual shares directly yourself. However, this requires a lot of work and it would likely be too costly and too time consuming for you to ever execute.
Fortunately there’s another option, which is using Exchange Traded Funds (ETFs). ETFs were first created about 30 years ago, and they automatically buy a basket of different shares for you. Each ETF is a single fund that tracks a specific index, and they automatically buy all of the shares included in that index for you. This means that you can buy an entire basket of shares all in one go. ETFs are the most efficient way for you to buy and track a market, and you can buy them directly without the need of a financial advisor or their high fees and commissions.
Therefore, the only strategy that you need to predict and win big from the next stock market high is to invest in market-tracking ETFs. And if you haven’t done so already, the best time to invest in them is right now.