Paul Merriman
Sound Investing For Every Stage of Life 

Ultimate Buy and Hold Equity (50% US / 50% Int’l) Portfolio Tables for 2018
Ultimate Buy and Hold Equity (70% US / 30% Int'l) Portfolio Tables for 2018
Ultimate Buy and Hold Podcast
Lessons from 2018 Ultimate Buy and Hold Strategy 2018
Market Watch Ultimate Buy and Hold Strategy Article

Lessons from 2018 Ultimate Buy and Hold Strategy 2018

Even though I’ve been describing the Ultimate Buy and Hold Strategy and following its progress for more than 20 years, I get new insights from each new set of annual returns. 

Here are some of the things that particularly strike me from the 2018 update, which tracks this portfolio for 48 years, from 1970 through the end of 2017.

ONE:  Each of the tiny incremental “baby steps” in building the portfolio described in this study turns out to have massive implications when applied over nearly half a century.

This is one reason I ask readers to take the time to follow each step and see its impact. I could of course go from the Standard & Poor's 500 Index directly to the full portfolio.

But the differences between Portfolio 7 and the Standard & Poor's 500 Index are so stunning that they would not seem credible.

I think laying it out step-by-step is also useful for people who might be terrified of straying far from the S&P 500.

You can keep the bulk of your money, if you wish, in “the market” and still get a terrific boost from taking only a few steps toward diversification.

TWO: If you think of risk as “the price you pay” for returns, this is the most spectacular bargain I know of.

From the S&P 500 to Portfolio 7, the return goes from 10.5% to 12.3% and yields a huge difference in dollars over 48 years.

Yet while the standard deviation goes from 17% to 17.4%.  That’s essentially meaningless, a difference that only a statistician would even notice.

If you take the attitude (as I do) that investors are essentially paid for the risks they take, the 48-year payoff ($26.2 million from Portfolio 7 vs. $12.2 million in the S&P 500) is astronomical for the tiny extra risk.

THREE:  Many people on Wall Street emphasize how difficult it is to beat the Standard & Poor's 500 Index.

This study shows clearly that, at least over long periods of time, only one of the other asset classes (international large-cap blend stocks) underperformed the S&P 500.

And if you took only one of the other steps in the process of building Portfolio 7, you would have beaten the S&P 500.

These results aren’t short-term anomalies. We’re talking about nearly half a century of returns, and many of the asset classes in this study have documented track records going back to the 1920s.

I hope you will remember this next time you think that the S&P 500 is tough to beat.

FOUR:  In terms of real dollars, the impact of proper diversification is undoubtedly life-changing.

It’s true that few people have $100,000 they can sock away and leave untouched for 48 years.

But many investors have horizons of at least 20 to 30 years, and 40 years is not unreasonable for money that is set aside in your 30s and 40s.

Even baby steps in returns can really get you places, as we can see in the step from Portfolio 4 (11.5%) to Portfolio 5 (11.6%). The change in compound return looks miniscule, but the change in long term dollars is more than $700,000.

If you think an increase of “only” 0.1% in return is hardly worth bothering about, ask yourself: How many people do you know who would turn down the chance to have an extra $711,000? 

FIVE: Although the additional returns from proper diversification are less certain in shorter periods, retirees who properly diversify will likely have more money to spend and more to leave to their heirs if they go beyond the Standard & Poor's 500 Index.

SIX: “Growth” investing, it would seem, may be mislabeled.

For investors who would go the extra mile, the results of moving to an all-value approach (Portfolio 8) are astounding. Compared with Portfolio 7, this all-value portfolio more than doubles the difference in dollars from the Standard & Poor's 500 Index.

I admit that I devised Portfolio 8 with the benefit of hindsight. But that’s not really different from everything else I’m reporting here.

By eliminating most growth stocks (those in blend funds), Portfolio 8 grew enormously, at 13.5%, and added $16 million to Portfolio 7, which was already a great success.

SEVEN:  Whenever I think about these long-term results I am reminded how important an all-value portfolio could be to an investor who’s, say, 25 years old.

The statistical risk of the all-value portfolio is only slightly more than that of the Standard & Poor's 500 Index. And the extra payoff is enormous: the difference between turning every $1 invested into $420 instead of only into $120.

EIGHT: There’s an alternative version of the Ultimate Buy and Hold Strategy table, one based on monthly rebalancing instead of annual rebalancing. LINK TO THIS

Comparison of results from the tables show that annual rebalancing results in higher returns.

The reason is not hard to understand if you think about it. While rebalancing keeps the components of a portfolio where they should be in relation to each other, it does require cutting off the “winning streaks” of successful asset classes.

The point of investing in a “winning” asset class is to let its success continue to build on itself for a time.

If you imagine the very extreme case of rebalancing your investments every hour that the markets are open, you can easily see this would not give success much of a chance.

There’s no magic about a 365-day period for rebalancing, but it is easy to remember. And it works.

A final word:

Every one of these lessons, of course, carries the assumption that the future will be at least somewhat like the past. And there can be no assurance of that.

Still, all the evidence available to us leads me to believe that in the future at least four relationships will continue – perhaps not always in the short term, but definitely over the long term:

First, stocks are likely to outperform bonds.

Second, small-cap stocks are likely to outperform large-cap stocks.

Third, value stocks are likely to outperform growth stocks.

Fourth, sensible diversification among asset classes will improve performance while it moderates risk.

Furthermore, I believe all four of those points will continue to be true for international investments, not just U.S. ones.