Time flies when you are having fun. Twenty years ago, the stock market was in the midst of a historic run, with the S&P 500 index generating an annualized return of 28.5 percent over the five-year period ending in 1999.
Intel, Microsoft, Cisco, and Dell were just a few of the large-cap companies producing returns far beyond that 28.5 percent. It was the dot.com stocks that were creating all the excitement, however, led by a company called Amazon.com, which returned 966 percent for calendar year 1998. If your portfolio didn’t include some of these names, you probably felt like you were missing out.
That also was the year I started knocking on the doors of publishing companies across the nation, looking for someone, anyone, to publish my little book, The Coffeehouse Investor.
In the midst of a red-hot stock market, another investing fad was starting to capture the attention of the financial world as well, and I wanted to be a part of it. Led by the discipleship of Vanguard founder Jack Bogle, investors were slowly introduced to a new method of stock ownership, and the wisdom of buying Amazon.com, not as an individual stock, but as one company included in a broad market index fund.
Twenty years later, Amazon.com still is generating dazzling returns as an individual stock. By the way, I didn’t own it then and I don’t own it now – as an individual company stock, at least. But, it is included in my portfolio of market-tracking index funds, and that is good enough for me.
Is it good enough for you? In an investing world where settling for “average” means missing out on the next Microsoft, Amazon.com, or any cryptocurrency or pork belly future, for that matter, we need to remind ourselves that it is easy to look back over the past 20 years and identify the top-performing securities. However, accurately identifying the top performers over the next two decades is just a little bit harder.
Turning away from the financial media’s obsession with the next hot thing can benefit you in many ways, especially in an overall investing climate of reduced returns that only magnifies the top-performing securities. At some point, you need to leave “well enough” alone.
When you accept that your common stock portfolio will do no better or worse than the broad indices tracked, you are putting the pursuit of performance in its place. You are getting your “fair share of market returns,” as quoted by Mr. Bogle himself.
This fair share concept is important because it is all too easy to want more than what we have, as in better returns from our investments, even though the market might be generating double-digit returns, year after year.
The fair share concept is even more important in bear markets when the stock market generates a negative return year after year, as it did from 2000–02, losing 35 percent of its value, while the financial press continues to whisper in your ear, “You can do better than that.”
Build a portfolio of market-tracking index funds; stash away this column; and, in the next bull or bear market, re-read it and remind yourself that getting “your fair share” is good enough for you.
Bill Schultheis is the author of The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get on with Your Life and The New Coffeehouse Investor, the third edition of his popular 1998 release. Schultheis is a regular on NPR, and lectures and leads seminars. He is a partner and fee-based financial adviser with Soundmark Wealth Management in Kirkland.