*superior returns cannot be guaranteed or expected

Why should I buy the S&P 500?

First of all, for those that think playing in the stock market is a giant gamble:

The S&P 500 has a 80.4% win rate.

Wow!

You can’t be serious right?

Imagine you’re at Las Vegas. And you flip a coin 100 times, where you win if it lands on heads.

And it lands on heads 80 times.

This statistic will probably shift around as time goes on, but it should stay around 70-80%. (Source)

Out of 46 years (1970 to 2016) – and you can probably chalk up 2017 as a winning year – only 9 have been losses.

This 80% number includes the 2% dividend – if you strip dividends out, SPX’s win rate is 76%, with only 11 losing years (still impressive!).

From the great “Oracle of Omaha” Warren Buffett (Source):

In addition to this outstanding win rate, invest early. 

When people tell you to “start saving early/young”, they actually mean “invest when you’re young.”

Why, you ask?

Common logic states that the $100 you have today, is definitely worth more than the same $100 in 10 years.

However, over time, that amount compounds the longer you hold onto the S&P 500.

Take a look at this table below:

All you need to do is invest $5,500 into the S&P 500, every year from ages 22-29.

And the best part is you don’t have to invest any more after that.

Why?

The logic is that after age 29, the 10% return* you expect to receive will be greater than the $5,500 maximum allowable amount you can put into an IRA.

For example, the total market value at age 29, $68,000, multiplied by 10%, is $6,800. ($6,800>$5,500)

This is why Brother B will never catch up to you if you invest early.

*I need to footnote this 10% expected return. In the last 38 years (1978-2016), the S&P 500 has annualized a 10-10.5% return. That is a fact. It includes dividends reinvested.

Now this statement, while true in the past, may not be true going forward. We don’t know if SPX will continue to yield 2% in the next n number of years. We could see a cycle where your last few years before withdrawing money from your 401k/IRA (age 55-59) is a recession type scenario (think of the devastation to someone’s retirement account if they retired in 1929. Or 2008).

There is a chance that you might not achieve that 10% annualized return, or even a 7% annualized return.

Therefore, I will further elaborate (in a future post), on why we should not ultimately stop investing at age 29 (as the picture above suggests), and actually slowly moving additional capital into bonds, especially if the S&P has been rapidly accelerating to the upside. 

Therefore, the next logical question is…

How do I buy shares of the S&P 500?

Well first, it is an index, so you cannot straight up buy an index. You have to buy a thing called an ETF (exchange traded fund), which is basically an equity-like mutual fund.

The most popular one is the “SPDR S&P 500 ETF Trust” [Ticker: SPY].

Inquire your broker, or if you don’t have an account yet, open an account at Etrade, Fidelity, TD Ameritrade, Robin Hood.

You can buy this in your retirement accounts too (401k, IRAs).

And the most important question of all…

When do I buy the S&P 500?

Many (such as Warren Buffett) will tell you that you cannot time the market, which is true to an extent.

The best risk-free way is to simply drop money into the S&P 500 annually, and to NOT sell, even through a recession.

The “holding on” part is the most important takeaway of all this.

For individual stocks, as business models change and industries become disrupted, many will go to $0.

However, since the S&P 500 is an index that chooses only the largest & best 500 companies, bad under-performing companies are constantly being kicked out of the index.

That is why, the S&P 500 will never go to $0.*

*Of course, this is assuming the US government stays afloat and does not defunct.

There may be prolonged periods of where the S&P 500 declines, but rest assured, it will not crash to $0 a share, like some companies would (JCPenny, Enron, and other “blue-chips” from way back in the day come to mind).

Now, since you’re already here in this article, you already know more than the general American population.

Most people don’t know to invest in the S&P 500 until many, many days later (Brother B).

From this point on, I will be talking about trying to outperform the S&P 500.

Achieving the market returns (7-10% pre-inflation adjusted returns) is already really good.

However, I will be trying to time to market to achieve greater than market returns.

I may fail over the test of time, but this is something I am extremely interested in doing.

Short term investors might be interested in what I am doing here, but if you are a long term investor: 

Just sit in the S&P 500. Do not trade around.

Proposed Strategy #1. Buy S&P 500 at the 1st of every month.

Take whatever you want to invest.

Divide it by 12.

Invest 1/12th at the 1st of every month. Without emotion. This is how you will outperform in the long run. Never sell, like a robot.

Proposed Strategy #2. Buy S&P 500 at the 1st of every year.

Lump sum it all on Jan 1 of every year. You will obviously feel extremely happy if the market goes up for the rest of year, and very sad if the market goes down for the rest of the year.

However, this is an even lazier strategy so that you dont even have to buy shares every month. And very likely, per the above, still come out very wealthy at the age of 65.