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Editor's note: Today, we're featuring an important essay from Dr. David Eifrig's new publication, Retirement Millionaire Daily. It's a free daily e-letter packed with intriguing health and wealth ideas... and tips on how to live a "millionaire lifestyle" on far, far less than you can imagine. (You can sign up by clicking here.) Read on to learn the power of the "do-nothing" strategy...
Increase Your Profits... By Doing NothingBy
Wednesday, December 9, 2015
Stock markets are unpredictable...
Analysts predicted the markets would slide the Monday following the terrorist attacks in Paris. They didn't...
The S&P 500 rose 1.5% that Monday. And the story was similar in financial markets around the world.
Or consider pharmaceutical giant Pfizer's announcement last month that it will buy Allergan – the maker of Botox – for $160 billion. This merger will make Pfizer, which is based in the U.S., the largest drugmaker in the world. The deal also allows Pfizer to move its headquarters to Ireland, saving – according to some experts – more than $1 billion in taxes.
While more than $1 billion in savings sounds positive... naturally shares of Pfizer and Allergan fell around 3% after the announcement. (Both stocks eventually recovered those losses.)
The point is... it's impossible to digest what every new headline will mean for the market's day-to-day movements.
Unfortunately, too many investors worry about every small market movement, up or down.
Today, we're telling you how to increase your portfolio's profits – no matter what's going on in the markets – with our "do-nothing" strategy.
The two main components of this strategy are:
But we're not talking about just any stocks. We mean real companies with real earnings that make up a part of the real economy. From 1928 through 2014, stocks returned an average of about 11.5% per year, according to Federal Reserve data. The 10-year Treasury bond returned just 5.3% annually in the same time period.
That might not sound like much...
But it means $100 invested in stocks in 1928 would have compounded into nearly $290,000 today. The same $100 invested in Treasury bonds would be worth less than $7,000.
Stocks consistently deliver the highest returns over long periods of time. The problem is that stocks can be risky. You never know what they'll do in the short term.
A research firm called DALBAR tracks what individual investors actually earn on their stock investments. Over the past 30 years, the average investor has earned just 3.7% a year... compared with 11.1% for a simple buy-and-hold of the S&P 500 Index.
That difference comes down to timing. The "average" investor consistently gets in and out of the market at the wrong time.
Many people used the turbulent economy and market of 2008 as an excuse to sell their portfolios, bury their heads in the sand, and stop investing in the market entirely.
Those folks missed out on the opportunity of a lifetime to secure their retirement. More than likely, they sold at the bottom... and they won't get back in until the top...
All you have to do to beat the "average" investor is to just stop trying.
Let your hard-earned money work for you... A simple, diversified, buy-and-hold strategy will earn much more than 3.7% over the long term.
Behavioral economist Richard Thaler, now known for his books Nudge and Misbehaving, wrote a defining paper on the "equity premium puzzle" in 1985...
His conclusion was that folks' ability to tolerate stock-market risk was inversely proportional to how frequently they checked in on performance. And, according to Thaler, "For someone with a twenty-year investment horizon, the psychic costs of evaluating the portfolio annually are 5.1% per year." Thaler later suggested investing heavily in stocks but avoiding all stock-market news – especially cable television.
And in a recent study, Fidelity Investments analyzed client accounts to see who had the best performance. The highest-earning group was those who actually forgot they had investment accounts at Fidelity.
Anyone who reads a newspaper or watches financial news regularly is always going to have a reason to get out of the market. Don't be one of them.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Further Reading:
Many people make terrible mistakes with their investments because they're always looking for "action." Learn more about how to "sit tight" in these two essays from Dr. David Eifrig:
"If you begin to think about investing this way, you can avoid a huge amount of worry and wasted time, and set yourself up to make extraordinary returns."
"The strategy for selling is determined by why you bought in the first place..."
Market NotesA WIN FOR THE HOMEBUILDERS Today's chart shows more good news for U.S. homebuilders...
Regular readers know that Steve Sjuggerud has been an outspoken bull on housing over the last several years. He personally has more of his net worth invested in real estate today than he does in stocks. And he says it's an ideal time to own the companies that build homes.
We can see that Steve's advice has been spot-on by looking at shares of D.R. Horton (DHI). As the nation's largest homebuilder, DHI acts as a "bellwether" for the housing sector. The company specializes in building entry-level "starter" homes and has been steadily growing... home sales are up 30% versus 2014.
As you can see from the chart below, shares have been in a serious uptrend lately. The stock is up 25% over the past six months and recently touched a new 52-week high. It's further proof that the trend in homebuilders is UP!
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