Buy and hold the indexes if you want to beat average investors

There are three truisms that keep finding new confirmation and that investors should ignore at their own risk:

  1. Buy and hold the market, don’t try to beat it.
  2. Index fund investors will beat most other investors.
  3. Stodgy value stocks usually beat sexy growth stocks.

Two new real-world studies covering the since 1957 dramatically illustrate these points. In one, the Hulbert Financial Digest, a newsletter that tracks the recommendations of other investment newsletters, showed that buying an index fund would have beaten the results of over 80% of investment newsletters since 1980. The other, a study of changes in the composition of the Standard & Poor’s 500 stock index , showed that investors who stuck with the original stocks that made up the index in 1957 would have beaten the index itself, which was annually updated to include new growth stocks over the years.

Hulbert has been following the investment recommendations of newsletters since 1980. It studied the results of the model investment portfolios recommended by the newsletters and found that only one in seven of the newsletters it tracked had beaten the S&P 500 over the years. Of the original 35 newsletters in existence when Hulbert first published in 1980, just five were able to beat the benchmark index, it said. Some of the newsletters recommended investing partly in foreign stocks, so Hulbert adjusted for the differences in risk and found that even after that adjustment most newsletter portfolios failed to beat the market. It noted that its study’s results were similar to statistics funds that show only 19% of the funds in existence since 1980 had beaten the S&P index through May of this year.

Growth stock returns got a drubbing in a study of the S&P index by Professor Jeremy Siegel of the Wharton School(author of “Stocks for the Long Run”) and Jeremy Schwartz, an analyst at Wisdom Tree Investments in New York. They looked at the performance of the original 500 S&P stocks from 1957 through 2003 compared to the index, which was updated regularly as old stocks were deleted and new stocks were added. The original stocks, adjusted for companies that merged or went out of business, did better than the average, the study found. Siegel said the index was often changed to include hot new growth stocks. Often their returns were beaten by the older, stodgier stocks that were in the index originally.

“Our results question the common notion among investors that you’ve got to own growth, that you’ve got to keep updating portfolios—otherwise your returns will fall behind,” he told Wealth Manager magazine. “It’s often the case that the new firms aren’t really providing the best returns.” The best performer among the surviving original S&P stocks was Altria Co., the former Philip Morris. Despite being faced with billions of dollars of smoker’s lawsuits and a decline in tobacco use, it returned 20% per year from 1957 through 2003, or double the index return.