A Sound Long-Term Investment Strategy

Financial Investing is so confusing and intimidating for many people just beginning to plan for their long-term financial security into their retirement years. How much should I invest? What should I invest in? Who should I seek for advice? Listening to the multitude of investment professionals, financial advisors, and numerous financial media outlets you soon realize everyone has a different opinion. Making the right decision early in life on the best investment strategy will have a profound impact on your retirement. Your biggest financial decision you will ever make is how to safely invest your nest egg over the next 30-40 years.

So, what’s wrong with hiring a financial advisor to guide you along the way? There are pros and cons to this question. Professional financial advisors typically charge a 1%-1.5% annual fee on the principal of your investable funds. For example, to professionally manage a $500,00 portfolio will cost you $5,000 - $7,500 annually. That’s a hefty cost considering most people could manage their investments, with similar or better results on their own. Financial advisors not only provide investment advice, but can also provide tax saving strategies, help establish estate trusts, assist with long-term care, setting budget and savings goals, and a host of other financial needs. Financial advisors are best suited for individuals who simply don’t have the time or desire to manage their own financial goals and need someone to coach them along the way. Financial advisors are most beneficial to the very well off with vast amounts of wealth. With the Federal tax code constantly changing every year, financial advisors and their staff are up to date with these new laws and can recommend tax saving strategies to their high net-worth clients who can justify their annual fee. However, for the average person with less than a million dollars to invest, or someone just starting out, it’s not essential to hire a financial advisor. Often companies and some financial institutions will provide this service free on an introductory basis. It’s always a good idea to take advantage of these offers, with no obligation to become a client. It’s also a good idea to read financial publications and listen to cable financial news networks to further understand how financial markets work and are impacted by global events.

This article is designed to provide an alternative to using a financial advisor for managing a retirement portfolio. This is just one example of a potential investment strategy with proven long-term results.

There are basic tenets of investing that have proven to provide superior returns with minimal volatility over long periods of time. First, always invest in best in class. The S&P 500 is an index comprising of 505 stocks from 500 companies listed on the U.S. stock exchanges. The S&P 500 Index represents the world’s best in class companies. Due to stringent U.S. regulatory requirements, corporate governess and the rule of law these companies must adhere too, allows for a high degree of investor confidence. Mostly U.S. based, these companies have the protection of the most advanced military in the world along with a strong stable national government. These qualities along with transparency in financial reporting provide investors around the world a degree of safety that other countries can’t match. The U.S. stock market has one of the best annual returns of all global stock markets over the last 120 years as the chart below details. This is one reason why Warren Buffet avoids investing in foreign stocks.

Credit Suisse Report prepared by researchers Elroy Dimson, Paul Marsh and Mike Staunton.

Investing in companies in industry sectors that thrive under long-term demographic trends, stable consumer demand, government subsidies, and pricing power are the companies that historically produced above average investment returns.

For example, the healthcare industry is comprised of companies engaged in pharmaceuticals, medical devices, managed care, medical equipment, etc. will continue to thrive under federal and state government subsidy programs. Demographic trends are locked-in showing strong growth in the older adult population (the over 65 age group is the fastest growing population demographic in the U.S.) which will continue to drive healthcare demand unabated. Also, the industry has incredible pricing power, meaning they can raise prices on services and products without fear of losing market share.

Another example is the consumer staple industry. These are companies engaged in the production of goods and services that consumers need regardless of how the economy is performing. Consumer products include, food and beverages, personal care items and household products. Companies in this sector include: Procter & Gamble, General Mills, Coca-Cola, Costco and Walmart. Whether in an economic recession or expansion, consumer demand remains relatively constant for these goods and services.

$10,000 allocated to a portfolio of the two mutual funds below that invest solely in the healthcare and consumer staple sectors, along with the S&P 500 Index would have increased in value to ~$417,000 in 30 years. This equates to approximately a 13% annual return. Along with a stellar overall return, volatility was rather muted with only 5 negative years during this time frame. Past performance is no guarantee of future returns, but if the trends in consumer demand and demographics persist as they have historically in these two sectors, then it’s a safe bet that future investment returns in these sectors will continue.

The charts below were calculated using the website www.portfoliovisualizer. This free site enables a user to back-test hypothetical portfolios to determine the rate of return over a specific timeframe.

Charts provided by: www.portfoliovisualizer.com

  • FDFAX (Consumer Staples) 30-year annualized return 10.77%

  • VGHCX (Healthcare) 30-year annualized return 14.78%

  • VFNIX (S&P 500 Index) 30-year annualized return 11.12%

The benchmark that most mutual fund managers use to evaluate their performance is the S&P 500 Index. The S&P 500 Index is considered a passive form of investing. The concept is easy, you’re investing in an index comprising the 500 largest companies that trade on the U.S. stock exchanges representing about 80% of the total market capitalization of the stock market. You don’t need a financial planner for advice in passive investing, and the fees in these index funds are very low. As Warren Buffet once said, upon his death he would instruct the heirs of his estate to invest 90% in the S&P 500 Index and 10% in bonds. But let’s go a step further with this statement from the greatest investor of our generation.

The S&P 500 Index is comprised of eleven sectors, as discussed above Healthcare and Consumer Staples are two of these sectors. The other nine are: Utilities, Financials, Industrials, Telecom, Technology, Materials, Real Estate, Consumer Discretionary, and Energy. Though the S&P 500 has an average annual return of about 11.2% since 1990, each sector within this index has long-term returns above and below this average. For the investor, you want to invest in those sectors that had relative and consistent outperformance from those sectors that underperformed. The best performing sectors in the S&P 500 Index have been Healthcare, Consumer Staples, and Technology averaging 12%-15% annual returns. The worst performing sectors have been Utilities, Telecom and Energy with annual returns around 6%-10%.

Financial Advisors do play an important role in helping individuals with their long-term retirement planning. They are especially beneficial to high net-worth families who can take advantage of all the services a financial advisor can provide. However, for those individuals who just need a sound investment strategy without needing to pay a high annual fee to a financial advisor, then the example provided above should adequately suit your long-term retirement goals.

The author of this article is a private investor with over 35 years of investing experience. Readers should conduct their own due diligence regarding appropriate investment strategies to suit their long-term personal goals.