Today, we share the final article in Dan Wiener’s series on ways investors can build their wealth — not by relying on any individual stock to make them a millionaire, but simply by choosing the right mutual fund investments.
The InvestorPlace Digest is dedicated to helping make you a wiser, wealthier investor. To that end, Dan’s knowledge and expertise, earned from more than 30 years of experience in the mutual fund marketplace, provides unique insights you won’t find elsewhere.
Today’s insight references a momentum approach which Dan calls the “hot hands” method. It’s an easy way to beat the market and boost your long-term returns.
I hope you enjoyed this series. We look forward to bringing you more of Dan’s insights in the future.
The Easiest Way to Get Good Returns on Your Money
By Dan Wiener
Today I’ll be demonstrating the simplest way I know to get good returns.
And then we’ll talk about how to make even BETTER returns.
Yes, you’ll easily beat the market over time. Although, to be frank, that’s not as difficult as some would have you believe …
… and it’s also not why we invest.
We just want to make the most of every dollar we earned. Whether it was from a raise at work that we stashed away — when we could think of dozens of ways to spend it. Or that old “clunker” we drove for years, to skip the car payment. Or even the proceeds from a teenage summer job … which I was able to match — and invest — for my own kids.
All so we can enjoy that money, down the road.
So, the stakes are high. And there’s one simple action you can take:
Figure out which investments performed best, over the last year. Buy them now. Hold for the next year. Rinse and repeat.
(See, told you it was simple. And it can be very effective, as we’ll see in a moment.)
This is the philosophy known as “momentum investing.” But really, the idea is something we can all agree on:
Investing success doesn’t just disappear with the turn of the calendar.
Good performers tend to stay good … if for no other reason than the rest of the world catching on (and rushing in).
I call this the “Hot Hands” method.
I recommend doing it with stocks. I recommend being diversified. And — if you want the best bang for your buck — I recommend doing so with equity funds from “the king of low-cost”: Vanguard.
Here’s how it’s performed over time:
I mention this not to prove the momentum investors right …
Or to disprove the index enthusiasts — who’d have you believe that there’s NO WAY you (or anyone else) will beat the market in the end, so you may as well just buy the S&P or the Total Stock Market.
This, by the way, is the prevailing attitude at my favorite fund family, The Vanguard Group. (At least, it is in their marketing.) Yet just by taking this incredibly simple, almost mindless approach — buying last year’s best fund, year after year — you’d have gotten almost triple the returns on your money:
Following a “Hot Hands” strategy at Vanguard from the end of 1981, when you’d have put your money into their Windsor fund, through the end of 2018, you’d have made a +13,610% return … versus +4,580% with the Total Stock Market Index fund.
Those are whopping numbers — but that’s what you get when you invest, reinvest, and compound your gains. This is the real, proven, and consistent way that fortunes are made.
What I also want you to notice is which funds won out.
It’s understandable to see certain ones coming on and off the list, as their flavor of investing goes in and out of style. (International stocks being the clearest example.)
But mainly that big, +13,610% return owes to great years for great managers. So great, in fact, that they more than make up for the years when “Hot Hands” lags the market.
Hardly any of the winners are index funds. Most of them are higher-quality, actively managed funds. Just like the ones that made my own list of Vanguard’s 17 Most Powerful Funds.
Now, again — when you look at how the sausage got made — you see that “Hot Hands” had some rough times, in individual years.
Nothing works every time. And “Hot Hands” is an aggressive strategy.
If growth is your objective, and you’ve got a reasonably long-time horizon … then “Hot Hands” is for you.
By all means, devote a portion of your portfolio to this simple, elegant way of stacking up superior returns over time.
If you’re willing to invest more broadly — you can beat the market AND enjoy a smoother ride.
You just need a few more of Vanguard’s highest-quality funds.
There are a few I’ve got in mind here as making a great “Conservative Growth” portfolio, as I’ve termed it at The Independent Adviser.
There’s the powerful growth fund most Vanguard investors miss.
There are great income funds, too, from Vanguard’s top managers.
There’s even a couple of ETFs.
You can read more in my special report on Vanguard’s 17 Most Powerful Funds … which you can access for free at this link.
Dan Wiener, Editor
The Independent Adviser for Vanguard Investors