Please Don’t Buy That S&P 500 Index Fund

  • SumoMe

Well thank goodness that whole “election thing” is over with.  I do not discuss politics here but based on my own in-depth pre and post election analysis I have discerned that there is  almost exactly a 50% chance that I did not like your candidate and that you did not like mine (come to think of it I didn’t really like my candidate either). But enough about all that.  Let’s get back to the markets.

See also Crude Oil Plunges (and What to do When Things Go Right)

It always bums me out a little when I talk to someone who is holding or is considering buying and holding an S&P500 index fund.  I call this a “drifting with the tide strategy.”  If the market is drifting higher that’s great. But when the market is drifting lower your only choice is to “sit and take it.”  Sorry, but not my cup of tea.

If you have read any of my work you know I have no problem with employing “timing” techniques to avoid the huge plunges that occur from time to time.  But I recognize that market timing is not everyone else’s cup of tea. So if you are hankering to buy-and-hold the S&P 500 Index please consider any or all of the 3 (actually 4) alternatives described next.

3 (actually 4) Alternatives to Buying and Holding the S&P 500 Index

*S&P 500 Equal Weighted Index (can be traded using ticker RSP)

*S&P 500 Pure Value Index (can be traded using ticker RPV)

*S&P 500 Low Volatility Index (can be traded using ticker SPLV)

Figure 1 displays the growth of $1,000 invested in each of the indexes listed above versus the S&P 500 Index itself since July1995 (the earliest month of data for S&P 500 Pure Value Index).1Figure 1 – S&P 500 versus 3 alternatives; growth of $1,000 (7/95 to present)

*The most obvious thing to note is that all 3 indexes outperformed the S&P 500 Index by 44%, 56% and 45% respectively.

Other items that need to be considered:

*All 3 alternative indexes underperformed the S&P 500 index during the late 1990’s

*All 3 alternative index experienced significant drawdowns in 2008

*One other excellent alternative to picking and choosing among these 3 is simply to hold all 3 alternative indexes and to rebalance once a year. Figure 2 displays the results of this approach versus buying and holding the S&P 500 Index.2Figure 2 – Growth of $1,000 in S&P 500 Index versus a combination of 3 alternatives (with a rebalance at the end of each year)

Figure 3 displays the year-by-year results for the S&P 500 Index versus 3 alternatives and a combination of those 3 alternatives.

Year SPX Combine EqualWt PureVal LoVol
1996 23.0 17.9 20.8 22.1 11.5
1997 33.4 31.3 27.8 35.3 30.8
1998 28.6 10.5 14.1 8.5 8.8
1999 21.0 0.4 10.3 (3.5) (5.7)
2000 (9.1) 15.9 (1.7) 17.1 36.1
2001 (11.9) 4.9 5.3 13.6 (3.2)
2002 (22.1) (14.4) (13.8) (22.1) (6.6)
2003 28.7 35.1 47.6 47.5 13.2
2004 10.9 20.3 12.1 20.3 29.6
2005 4.9 7.9 11.1 8.1 4.4
2006 15.8 18.5 15.6 14.2 26.4
2007 5.5 (0.5) 3.9 (4.9) (0.4)
2008 (37.0) (36.3) (40.9) (46.2) (22.3)
2009 26.5 40.2 54.5 89.6 (3.4)
2010 15.1 19.4 16.9 11.2 33.3
2011 2.1 4.6 (2.1) (3.7) 20.9
2012 16.0 17.8 23.2 32.5 0.5
2013 32.4 36.0 36.4 39.0 32.0
2014 13.7 14.9 14.3 3.4 29.2
2015 1.4 (2.0) (1.9) (6.3) 2.0
2016 7.8 9.8 10.8 16.8 2.8
Total % Gain +495% +822% +755% +826% +772%
Average 9.9 12.1 12.7 13.8 11.9
Std Dev 18.7 18.0 20.9 28.0 16.9
Ave/StdDev 0.53 0.67 0.61 0.49 0.70
MaxDD (50.9) (54.7) (53.3) (62.3) (48.2)

Figure 3 – Year-by-Year results

Summary

The “Combine” strategy gained +822% from the end of June 1995 through the end of September 2016 versus +495% for the S&P 500 Index.

In sum, if you have decided to buy-and-hold a stock index fund or ETF as a part of your portfolio, the results discussed above strongly suggest considering alternatives to a straight S&P 500 index fund.

Jay Kaeppel

One thought on “Please Don’t Buy That S&P 500 Index Fund

  1. Hi Jay
    Thanks for all your work,can you run this and leave out the Pure Value, it looks the most volatile? and have you thought about putting together an actual calender with your top seasonal trends marked on it ?
    Thanks Dave

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