We have often told investors that there is no shame in a simple portfolio – advice that is easier given than followed when it comes right down to it. Among many retail investors, there is a sense that only owning a few securities makes for a portfolio that is too simple, or one that lacks some sort of complexity. But that stigma is one that is based in little fact, as a simplified portfolio often outperforms a more complex and active one [for more ETF news and analysis subscribe to our .
To be perfectly frank, the average investor is relatively ineffective when it comes to generating stable and solid returns. A recent study from JP Morgan cited that the average return for retail investors over the last two decades has fallen to 2.3%; inflation averaged 2.5% over that same stretch, which means that the average investor was actually losing money each year (as far as purchasing power is concerned).
Over that same stretch, the S&P 500 and its three major ETFs (SPY, IVV, VOO) have averaged a return of 8.2%. Stretch out that time period and the S&P 500's average annual return is even higher, coming in around 9%. A 9% return each year is something that most portfolios can only dream of. After all, at that rate your money is doubled approximately every eight years [see also Closer Look At S&P 500 ETF Options].
Despite the staggering difference in these two returns, investors continue to fall prey to their emotions and chase after markets, with little discipline and many times an overly complicated set of holdings. Remember, just because an investment is available to you, does not mean it is appropriate for your objectives. This rings most true with leveraged ETFs; they are designed for complex traders and should almost never be used as a part of a long-term strategy.
Though it would obviously be a diversification no-no had you held just SPY for the last 20 years, your money would have more than quadrupled and your return would have been significantly higher than the average investor. This is demonstrated in the table below:
| S&P 500 | Average Investor | |
|---|---|---|
| Starting Value | $100,000 | $100,000 |
| Ending Value | $483,665 | $157,585 |
The numbers speak for themselves. While many investors put in time and dedicated research to their holdings, the majority end up shooting themselves in the foot when all is said and done.
We are certainly not suggesting that investors should own just the S&P 500 fund, but the numbers do not lie. You can have a relatively diverse and powerful portfolio with just a handful of ETFs. It is always a healthy exercise to re-examine your investments and see where you can trim some fat and improve your position for the long term. You may find a number of positions that you do not “need” or ones that can be captured using a broad ETF. We have a set of model ETF portfolios for investors of all disciplines and interests to help you get started.
Remember, simplicity is not a bad thing and as far as the numbers show, it just may be the key to improving your portfolio.
Follow me on Twitter @JaredCummans.
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Disclosure: No positions at time of writing.
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