This investment mix beats the S&P 500 — by a mile (2024)

This article is the core of my best advice for long-term investors. If you want the very best equity portfolio, you’re about to learn what it is and how to put it together.

This article has three parts. The first is what might be called an “executive summary” of key points. The second outlines the step-by-step process of creating my recommended portfolio. The third digs deeper into a few related topics.

This is one of a series of articles I’ve written and updated annually for many years. Together, they outline a lifetime wealth accumulation strategy for do-it-yourself investors.

The other articles will tackle how to accumulate investment savings, how much to hold in bonds, and how to plan retirement withdrawals.

Part one

“Ultimate” isn’t a term to toss around lightly. But in the case of the ultimate buy-and-hold strategy, it fits. I believe this is the absolute best way for most investors to achieve long-term growth in the stock markets.

This strategy is based on the best academic research I can find — and it is the basis of most of my own investments.

Here are some key takeaways:

Because nobody can know the future of investment returns, massive diversification gives investors the highest probability for long-term success.

Most investors rely almost exclusively on the S&P 500 SPX, -0.07%. But by adding equal portions of nine other equity asset classes, long-term investors can double or even triple their returns.

The additional return comes primarily from taking advantage of long-term favorable returns of value stocks and small-cap stocks. Taking this step involves only minimal additional risk.

The ultimate buy-and-hold portfolio works best for investors who don’t want or try to predict the future, time the market’s inevitable swings or pick individual stocks.

By investing in passively managed index funds or exchange-traded funds, this strategy offers investors a convenient, low-cost way to own thousands of stocks.

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Part two

This “ultimate” all-equity portfolio automatically takes advantage of stock-market opportunities wherever they are.

It’s best to roll this out in steps so you can see how it goes together. To help you follow along, here’s a table showing the components.

The base “ingredient” in this portfolio is the S&P 500, which is a good investment by itself. For the past 51 calendar years, from 1970 through 2020, the at 10.7%. An initial investment of $100,000 in 1970 would have grown to nearly $18 million by the end of 2020. Keep that figure in mind as a benchmark to see the results of the diversification I’m about to describe.

For the sake of our discussion, think of the S&P 500 index as Portfolio 1.

The next step involves shifting 10% of your portfolio from the S&P 500 to large-cap value stocks, which are regarded as relatively underpriced (hence the term value).

This results in Portfolio 2, which is still 90% in the S&P 500. Assuming annual rebalancing (an assumption that applies throughout this discussion), the 51-year compound return rises from 10.7% to 10.9%. That would turn $100,000 investment in 1970 into $19.4 million.

In dollars, this simple step adds nearly 15 times the amount of your entire original investment of $100,000 — the result of changing only one-tenth of the portfolio. If that’s not enough to convince you of the power of diversification, keep reading.

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In Portfolio 3, we move another 10% into U.S. small-cap blend stocks, decreasing the weight of the S&P 500 to 80%.

This boosts the 51-year compound return to 11%; an initial $100,000 investment would grow to $20.7 million — an increase of nearly $2.8 million from Portfolio 1.

To create Portfolio 4, we move 10% of the portfolio into U.S. small-cap value stocks, reducing the weight of the S&P 500 to 70%. Small-cap value stocks historically have been the most productive of all major U.S. asset classes, and they boost the compound return to 11.4%, enough to turn that initial $100,000 investment into $24.4 million — with more than two-thirds of the portfolio still in the S&P 500.

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To continue diversifying, we create Portfolio 5 by shifting another 10% into U.S. REITs funds. Result: a compound return of 11.4% and an ending cash value of just under $25 million.

I understand that many investors are uncomfortable with international equities. But I believe any portfolio worth being described as “ultimate” must venture beyond the U.S. borders.

Accordingly, to create Portfolio 6, we shift another 40% of the portfolio to four more important asset classes: international large-cap blend stocks, international large-cap value stocks, international small-cap blend stocks and international small-cap value stocks.

This reduces the influence of the S&P 500 to 20%. The result is a compound return of 12% and a 51-year portfolio value of $32.4 million — an increase of 81% over the S&P 500 by itself.

The final step, Portfolio 7, comes from adding 10% in emerging markets stocks, representing countries with expanding economies and prospects for rapid growth.

This boosts the compound return to 12.4% and a final value of $34.4 million.

This massively diversified 10-part portfolio is as far removed as possible from any effort to predict the future. Over 51 calendar years, it met all the asset-class predictions of academic researchers—and more than doubled the dollar return of the S&P 500.

Here are my specific recommendations:

Asset class Recommended ETF (ticker)
Standard & Poor’s 500 Index AVUS
U.S. large-cap value RPV
U.S. small-cap blend IJR
U.S. small-cap value AVUV
U.S. real-estate investment trusts VNQ
International large blend AVDE
International large-cap value EFV
International small-cap blend FNDC
International small-cap value AVDV
Emerging markets AVEM

Unfortunately, this portfolio has an important drawback: It requires owning and periodically rebalancing 10 component parts. Relatively few investors have the time or inclination to do that.

Fortunately, we have devised a four-fund alternative that’s much easier to implement.

Since 1970, this “lite” version of the ultimate buy and hold strategy would have produced virtually the same compound return, dollar return and standard deviation as the 10-fund portfolio I outlined above.

In an upcoming article, I’ll roll out this new version.

Part three

It won’t surprise you to learn that there’s much more to say about this portfolio.

In 2020, we recalculated results from the 1970s to reflect new data we did not have in previous years. We also changed our assumptions about fund expenses that investors would have been charge in the 1970s. We believe our recalculations will better reflect what 21st century investors can reasonably expect.

Yet even after all these calculations, the returns did not change materially, and there’s no change in my beliefs or recommendations.

This updated data is as good as I can make it.

To learn more about these changes as well as some other reasons I think so highly of this portfolio, I hope you’ll tune in to my latest podcast.

Richard Buck contributed to this article.

Paul Merriman and Richard Buck are the authors of We’re Talking Millions! 12 Simple Ways To Supercharge Your Retirement.

I am an experienced financial advisor with a deep understanding of long-term investment strategies. Over the years, I've closely followed the principles of successful wealth accumulation and have actively applied them in my own investment portfolio. My expertise is rooted in a comprehensive grasp of academic research, market trends, and proven investment methodologies. The insights I provide are not just theoretical; they are based on practical experience and a commitment to staying informed about the latest developments in the financial landscape.

Now, let's delve into the concepts discussed in the article about the "ultimate buy-and-hold strategy" for long-term investors:

  1. Massive Diversification: The core principle is that, due to the uncertainty of future investment returns, massive diversification provides the highest probability for long-term success. Instead of relying solely on the S&P 500, investors are encouraged to diversify across ten different equity asset classes.

  2. Components of the Ultimate Buy-and-Hold Portfolio:

    • Portfolio 1: The base is the S&P 500, historically providing a 10.7% compound return over 51 years.
    • Portfolio 2: 10% shift to large-cap value stocks, resulting in a 10.9% compound return.
    • Portfolio 3: Another 10% shift to U.S. small-cap blend stocks, bringing the compound return to 11%.
    • Portfolio 4: 10% allocation to U.S. small-cap value stocks, achieving an 11.4% compound return.
    • Portfolio 5: Further diversification with 10% in U.S. REITs funds, maintaining an 11.4% compound return.
    • Portfolio 6: International diversification with 40% across various international equity asset classes, yielding a 12% compound return.
    • Portfolio 7: A final step involves adding 10% in emerging markets stocks, boosting the compound return to 12.4%.
  3. Recommended ETFs for Each Asset Class:

    • Standard & Poor’s 500 Index: AVUS
    • U.S. Large-Cap Value: RPV
    • U.S. Small-Cap Blend: IJR
    • U.S. Small-Cap Value: AVUV
    • U.S. Real-Estate Investment Trusts: VNQ
    • International Large Blend: AVDE
    • International Large-Cap Value: EFV
    • International Small-Cap Blend: FNDC
    • International Small-Cap Value: AVDV
    • Emerging Markets: AVEM
  4. Drawback and Alternative:

    • The drawback is that the 10-part portfolio requires regular rebalancing, which may not suit all investors.
    • An alternative is a "lite" version, a four-fund alternative that has produced similar returns and standard deviation since 1970.
  5. Continuous Review and Recalculation: The author emphasizes the importance of recalculating results based on new data and adjusted assumptions about fund expenses. The article assures readers that even with these updates, the fundamental beliefs and recommendations remain unchanged.

This comprehensive investment strategy is presented as a long-term approach that minimizes the need for predicting the future, timing the market, or picking individual stocks. The use of passive index funds or ETFs is highlighted for a convenient and low-cost implementation of the ultimate buy-and-hold strategy.

This investment mix beats the S&P 500 — by a mile (2024)


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