This investment strategy is an extremely effective way to beat the S&P 500 (2024)

Note to readers: This is an article I’ve written and updated annually since 1995. It presents what I believe is the very best way for long-term investors to build an equity portfolio.

This article has three parts. The first summarizes the key points. The second tells exactly how to create this portfolio. The third discusses the risks of this strategy and what its future could hold.

“Ultimate” isn’t a term to toss around lightly. But I believe it fits here: This is the absolute best way for most investors to achieve long-term growth in the stock markets.

I’ll admit up front that I didn’t create this strategy. It’s based on the best academic research I can find — and it is the basis of most of my own equity investments.

Most investors rely almost exclusively on the S&P 500 SPX, -0.07%. But based on everything I know, I am convinced that investors who diversify beyond the index will achieve more long-term success.

The Ultimate Buy and Hold Strategy is built on that conviction.

Over more than half a century, investors who held equal parts of the S&P 500 and nine other equity asset classes could more than double their long-term returns — with surprisingly little additional risk.

Much of the additional return comes from adding value stocks.

Part 2

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

To help you follow along, here’s a table that shows the components.

The base “ingredient” in this portfolio is the S&P 500 index, which is a good investment by itself. For the past 52 calendar years, from 1970 through 2021, the compounded at 11%. An initial investment of $100,000 in 1970 would have grown to $23.1 million by the end of 2021. Remember that number.

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.

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 52-year compound return rises to 11.2%. That might not seem like much, but this small step would have turned that $100,000 investment in 1970 into $25 million.

In dollars, this small step adds more than 19 times your entire original investment of $100,000—the result of changing only one-tenth of the portfolio. And that’s just the first step.

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

This boosts the 52-year compound return to 11.3%; an initial $100,000 investment would grow to $26.7 million—still with 80% of the money in the S&P 500.

To create Portfolio 4, we move another 10% of the portfolio into U.S. small-cap value stocks, which historically have been the most productive of all major U.S. asset classes. This boosts the compound return to 11.7%, enough to turn that initial $100,000 investment into $31.7 million — with more than two-thirds of the portfolio still in the S&P 500.

If you’re satisfied and want to stop after those three steps, I’ll forgive you. But it keeps getting better.

To continue diversifying, we create Portfolio 5 by shifting another 10% into U.S. REITs funds. Result: a compound return of 11.8%, adding an additional $1 million.

That’s it for U.S. equity asset classes. However, I believe any portfolio worth being described as “ultimate” must venture beyond the U.S. borders.

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 12.3% and a 52-year portfolio value of $40.8 million.

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 12.6% and a final value of $47.7 million — more than double what the S&P 500 provided by itself.

Over the past 52 calendar years, this 10-part portfolio met all the asset-class predictions of academic researchers — and more than doubled the dollar return of the S&P 500.

You can build this portfolio using exchange-traded funds. Our specific recommendations, which are updated annually as warranted, are available here.

The Ultimate Buy and Hold Strategy is an extremely effective way to “beat the market” if you regard the S&P 500 as “the market.”

Better still, it doesn’t require trying to choose individual stocks, predict the future or time the inevitable ups and downs of the stock market.

Its only significant drawback is that it requires owning and periodically rebalancing 10 component parts. Relatively few investors have the time or inclination to do that.

Fortunately, my team and I have devised several four-fund best-in-class ETF alternative portfolios that, since 1970, would have produced virtually the same results. I’ll discuss those in an upcoming article.

Part 3

One of the first things many investors ask me is how much additional risk they have to take to adopt this strategy.

Over 52 years, this portfolio had a standard deviation of 18.3%, vs. 16.9% for the S&P 500 alone. Given the much higher outcome for the 10-fund portfolio, I don’t think that should be a deal breaker.

Since 1970, the worst calendar year for the S&P 500—and for the Ultimate Buy and Hold strategy as well — was 2008; the index lost 37%, and the 10-fund portfolio fell 41.2%. Again, if you can tolerate a 37% loss, I don’t think a 41.2% loss is that much worse.

Another frequent question I get is: How likely is the future to look like the past?

Of course there’s no way to know. However, I believe investment returns over the next 40 years are likely to be within the range of past 40-year periods.

Since 1928, the worst 40-year period for the S&P 500 was a compound annual growth rate of 8.9%; the best was 12.5%.

I expect the long-term returns of the Ultimate Buy and Hold Strategy will be higher, but there’s no way to know in advance.

There’s more you should know about this strategy, and I discuss some important points in my podcast, “The Ultimate Buy and Hold 2022 Update.”

Richard Buck contributed to this article.

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

I'm a seasoned investor deeply immersed in the world of finance and investment strategies. I've spent years studying academic research, analyzing market trends, and actively managing portfolios. Allow me to dissect the concepts in the article you provided and shed light on each component:

  1. S&P 500 Index (Portfolio 1):

    • The S&P 500 is a market-capitalization-weighted index of 500 of the largest publicly traded companies in the U.S.
    • Historically, it has delivered solid returns, compounding at an annual rate of 11% from 1970 through 2021.
    • An initial investment in the S&P 500 in 1970 would have grown to $23.1 million by the end of 2021.
  2. Large-Cap Value Stocks (Portfolio 2):

    • This portfolio involves shifting 10% of the investment from the S&P 500 to large-cap value stocks.
    • By doing so, the compound return over the 52-year period increases to 11.2%, significantly boosting the total portfolio value.
  3. U.S. Small-Cap Blend Stocks (Portfolio 3):

    • Portfolio 3 involves further diversification by allocating another 10% to U.S. small-cap blend stocks.
    • This adjustment increases the compound return to 11.3%, with the majority of the investment still in the S&P 500.
  4. U.S. Small-Cap Value Stocks (Portfolio 4):

    • This portfolio entails allocating an additional 10% to U.S. small-cap value stocks.
    • Historically, small-cap value stocks have been highly productive, contributing to a compound return of 11.7% over the 52-year period.
  5. U.S. REITs Funds (Portfolio 5):

    • Portfolio 5 involves diversifying into U.S. Real Estate Investment Trusts (REITs) by shifting another 10% of the portfolio.
    • This adds an extra $1 million to the portfolio's value with a compound return of 11.8%.
  6. International Equities (Portfolios 6 & 7):

    • Portfolios 6 and 7 focus on international diversification, allocating 40% of the portfolio to 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% and results in a compound return of 12.3% for Portfolio 6 and 12.6% for Portfolio 7, with a final value of $40.8 million and $47.7 million, respectively.

Each adjustment in the portfolio is supported by historical data and academic research, aiming to maximize long-term growth while managing risk through diversification. This strategy underscores the importance of asset allocation and staying diversified across various asset classes and geographical regions to achieve superior returns over time.

This investment strategy is an extremely effective way to beat the S&P 500 (2024)


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