Fictitious stock portfolios have taken hands-off investing to a whole new level.
Morningstar Chartered Financial Analyst (CFA) Jeffrey Ptak recently devised a passive investment portfolio based on the composition of the S&P 500. Another approach: do nothing.
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This laissez-faire approach to investing has produced some compelling hypothetical returns. Over the 30-year period from March 1993 to his March 2023, the portfolio would have outperformed the S&P 500 by 5.6%. then take.
About portfolios that do nothing
Aptly, Ptak calls this ultra-passive approach “Do Nothing Portfolio.” This strategy started with a simple hypothesis. “Imagine buying a basket of stocks 10 years ago and then not trading them, not even to rebalance,” he wrote for Morningstar.com. “You just made them sit. What am I supposed to do?”
To find out, Ptak compiled the S&P 500 holdings as of March 31, 2013 and calculated the monthly returns for each stock going back 10 years. Ptak said more than 100 of those holdings were no longer included in the index after 10 years, many of which were acquired by other companies. What remained at the end of the decade was a surviving stock and cash portfolio that had been amassed over the years following company acquisitions.
A do-nothing portfolio would have produced an annualized return of 12.2% over the decade. This is virtually identical to his S&P 500 return during that time. Given that 5.5% of Do Nothing Portfolio’s assets are cash, this caught Ptak’s attention. In comparison, the S&P 500 was fully invested. The do-nothing portfolio also produced better risk-adjusted returns than the index, with less volatility over the period, writes Ptak.
Ptak took his experiment a step further by doing nothing in two non-overlapping decades, 31 March 1993 to 31 March 2003 and 31 March 2003 to 31 March 2013. I tested my portfolio. The portfolio outperformed the index. Up nearly a percentage point in his first decade and nearly matching in the second stretch, all with better risk-adjusted returns.
Overall, the Do Nothing Portfolio would have outperformed the index over the entire 30-year period with low volatility. For example, Ptak found that $10,000 invested in the Do Nothing Portfolio at the end of March 1993 grew to $172,278 within his 30 years, and the same investment in the S&P 500 was worth $163,186. .
How could this non-interfering approach generate such excellent returns relative to the S&P 500? , speculated that it would help investors survive the stock sales of 2000 and 2008. A do-nothing portfolio would have been more focused on acquiring stocks like Apple.
“What appears to have made a difference is the way the portfolio has run winners and refrained from entering new positions,” writes Ptak. META), or to replace names that have been removed from the portfolio (due to delisting), thus offering stocks like Apple’s Mutual. This could be a competitive advantage as large institutions like the fund do not have the ability to focus to this degree.”
Lessons from a portfolio that does nothing
While it may not be possible to completely scrap investment plans in favor of this novel strategy, there are some lessons Ptak can learn from the experiment.
Let the winner run. Ptak admits that this isn’t for every investor, especially those who are uncomfortable with concentrated portfolios, but much of Do Nothing Portfolio’s success lies in its top 10 holdings, especially It may be due to Apple’s dominance.
You don’t have to invest completely all the time. Instead of rushing to replace delisted stocks with new stocks, Do Nothing Portfolio allows you to slowly accumulate cash over the years. As Ptak points out, “the fewer decisions you have to make, the better the outcome.” Cash acts as ballast for portfolios that are concentrated in stocks higher than the S&P 500.
Don’t try to intuit the path to portfolio growth. “The responsible voices in our heads tell us that the strategy of doing nothing probably won’t work,” concluded Ptak. “But markets repeatedly subvert our expectations that are formed by trying to decipher recent events and their implications for the future.” “please choose.
Morninstar’s Jeffrey Ptak recently conducted an interesting experiment. He explored what would happen if an investor bought a basket of stocks and refrained from buying or selling any more. Ptack finds that this hypothetical do-nothing portfolio has performed very well over his recent decade, with him outperforming the S&P 500 from March 1993 to March 2023. Did. It has become a winning strategy.
Portfolios that do nothing need not be rebalanced, but investment strategies may benefit from regular rebalancing. SmartAsset’s Asset Allocation Calculator helps you determine how much of your portfolio should be in stocks, bonds, and cash based on your risk tolerance.
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How This “Do Nothing Portfolio” Beats the S&P 500: How to Sit and Get Rich was originally posted on the SmartAsset blog.