This article is by staff writer William Cowie.

If you are serious about your financial future, you’ve got to be serious about investing. Enough has been said about that, so I won’t belabor the point. But here’s a financial maxim that can’t be said enough…

Financial success comes from doggedly investing over a long period of time and finding ways to:

  • minimize risk so as not to lose what you have
  • maximize earnings so as to add as much as possible to what you have

When you read about the rock stars of investing such as Warren Buffett, Peter Lynch and others, you read about the billions they make because of the brilliant insights they have. If you compare yourself to them, it is easy to become disheartened and discouraged. “What chance do I have against those superstars, with their armies of analysts and billions of dollars to buy entire companies at whim? How can I possibly compete against people who move entire markets with a mere whisper?”

Then you read about people who lose money on what they thought were good investments, as well as Wall Street cheaters who trade on insider information or buy high-speed computers to trade ahead of “the little guy,” leaving ordinary folks no chance at all.

Let’s just say there aren’t too many people who think getting great returns from investing is a breeze. What makes it worse is that, even when you do all the right things and dodge the bullets, the progress seems so painfully slow that you might figure you’d be more successful trying to move a glacier.

The facts do little to convince otherwise. If you contribute $100 per month and achieve the average market rate of return of 8 percent per year, this is what you’ll end up with:

You can see after 10 whole years (at the red dotted line), the bulk of your retirement fund consists of what you put in yourself. At 8 percent per year, there’s not a lot in the line of earnings that gets added. In hard numbers, your contributions add up to $12,000, and the return adds another $6,300. Whoop-de-do. Ten years … that’s a long time. Where were you in 2004? That long.

It’s not until 15 years that the earnings start to exceed your contributions, and only after 20 years do you start cooking with gas, as the earnings become the major contributor to your retirement fund. At the end of 20 years, your contributions will add up to $24,000, but the cumulative earnings will have added around $35,000.

These numbers come from the mere contribution of $100 a month. You can use that as a multiplier for any contribution you think you can make accordingly. (For example, with a contribution of $400 per month, simply multiply the numbers in the previous two paragraphs by four.)

The 8 percent earnings number is a rough approximation of the average return of a stock index fund, net of the (small) fees such index funds typically charge. By now, you all know that the stock market, on which those funds are based, doesn’t move up in a smooth line. In times like these, its return is much higher than 8 percent; but then, of course, there are the down times when the market drops. Over the long run, though, 8 to 9 percent seems to be the average number to use.

Time, in other words, is the pixie dust that brings magic to your contributions.

There are two morals to this story:

1. If you are younger than 40, you have the luxury of simply putting your money in a stock index fund and knowing you have a good chance of having something you can rely on when the time comes that you want to be financially independent (fancy word for “retire”). In other words, you can achieve your earnings with relatively low risk … if you are actually putting money away each month. If you’re not, start now.

If you are putting away money diligently, you can stop reading this post, because you’re good. (Of course, if you want to do even better, feel free to continue reading.)

2. However, if you’re older and you didn’t do the smart thing and start early, you don’t have the luxury of a passive approach to investing anymore. There isn’t enough time for the pixie dust of time to fatten up your retirement fund as you need. You need to roll up your sleeves and get to work. That’s the bad news.

But there is good news.

Let me say at the outset that what follows will stir up controversy. All I ask is that you hear me out before pelting me with rotten tomatoes and other missiles of assorted ripeness.

As older readers might remember, I was over 50 when I woke up to the fact that I needed to get my butt in gear and do some catch-up investing. I did a lot of reading and research and a lot of experimenting. Here’s the nutshell version of what I discovered.

The benchmark

John Bogle revolutionized the mutual fund investing world with his Vanguard S&P 500 stock index funds in the mid ’90s when he demonstrated that any stock index fund will outperform 85 percent of all actively managed mutual funds (the things which populate most 401(k) plan menus) over any period of time. His predictions have proven true in the almost 20 years since then — so much so that a stock index fund usually is regarded as the best investment option available today.

But … think about that a little. The golden standard of high performance is … an average??? What’s up with that? I’m not a rocket scientist, but simple math told me that an average usually means roughly half perform under that number, but there’s another half out there performing better than that number.

Now, if almost all managed mutual funds (85 percent is close enough to all for the purposes of this discussion) fall below the benchmark of high performance (which, again, is only the average) then simple math says there has to be a plethora of investing opportunities which outperform that average. Given how many trillions are invested by actively managed mutual funds, there must be an equal number of trillions of dollars outperforming the average.

I dedicated my learning efforts to the proving of that proposition (and, of course, to benefiting from it).


Given how late I started, I knew the average return of 8 percent wasn’t going to cut it for me. However, I’m an arch-conservative at heart, so I didn’t have the stomach to take inordinate risks. That meant things like penny stocks, options, futures, and day trading were non-starters for me. I don’t even like selling short. So I set out to see if there were any traditional ways in which to consistently earn more than that golden standard that is but an average.

There is. Actually, there are (as in, there are multiple ways to earn more than the S&P 500 average).

To be sure, none of them offer you the luxury of getting on with your life without spending a minute thinking about your retirement. In life, you get nothing for nothing, and all of these alternatives take a little work (not much, but not nothing, either). The way I explained it to myself is, “Hey, you spent enough time in your younger days being irresponsible. Now you have two choices: retire in poverty and work till you die, or spend some time and money to become at least reasonably good at investing. Neither is as nice as the option you could have had if you started investing early, but at least with some work you may be able to catch up. So, pick your poison.”

I grew up exceptionally poor, and the prospect of dying anything remotely approaching poor terrified me, so I chose the second option and I went to work learning all I could about investing.

That’s when I discovered, much to my amazement and relief, that there are simple, repeatable ways to beat even Mr. Bogle’s vaunted stock index average.

Two strategies emerge

You have two fairly safe strategies to beat the S&P 500 average over the long term:

1. Buy Berkshire stock. Berkshire has outperformed the market for as long as most of us have been alive. Critics will claim you shouldn’t put all your eggs in one basket, but they overlook that Berkshire is not a single basket. It’s more diversified than any two or three managed mutual funds out there combined: They own literally hundreds of companies in just about every business arena you can think of: Dairy Queen, railroads, mobile homes, insurance, and goodness knows how many other markets and industries. You can’t get more diversified than that, not even in a mutual fund. They’re almost as diverse as the S&P … but twice as profitable.

Buying Berkshire is an especially good option if you invest outside of a tax-advantaged retirement fund (IRA, 401(k), etc.) because they never declare dividends, so the profits accumulate tax free for you just the same.

I own no Berkies, and I have no affiliation with them, so I gain no benefit by recommending them. Let me be clear: This is not a simple stock recommendation — I never do those. This is a unique situation simply because the company has grown so big and diverse, it has practically become a mutual fund, and one that outperforms any standard you care to measure against it. You can’t argue with facts: Anybody who bought this stock outperformed the S&P.

2. Buy a proven model stock portfolio. There are many out there. I happen to follow several from AAII (the American Association of Stock Investors) and Motley Fool. Here’s a chart of one of the AAII model portfolios:

Image: AAII

The red line is what you get when you buy a stock index fund. Not bad, but …

I personally subscribe to AAII, which offers multiple portfolios, like the one above, for $29 per year. That’s as close to a no-brainer as it comes in my humble opinion. I also subscribe to Motley Fool’s Stock Advisor portfolio. It starts with $50 for the first year, but then goes up to around $300 a year. Model portfolios all cost money, but I’ve made that back tens of times over. (Again, no affiliation: I pay full retail and get nothing for recommending them. In fact, I’m not recommending them; I’m only saying those two worked for me, and there are plenty of others.)

Whichever strategy you choose, do not make the mistake of simply buying a stock or a portfolio. You’re too late for a passive approach. You have to roll up your sleeves and take charge of your investments; you have to know what you are doing and why.

Fortunately for you, it isn’t that hard. It just takes the commitment to do it, and then the diligence to stick with the commitment. There are plenty of free resources out there.

Critics, as I said, may take potshots at my approach. All I can say is that it has worked for me: the value of our investments more than quadrupled in less than five years once we got serious. Because we started late, our fund is still not in the millions of dollars, but it was enough to allow us to retire when we wanted to retire. Is the approach perfect? No. But it beats dying poor, which was my only criterion.

Catching up when you start late can’t be done passively. But it can be done without undue risk. I think that’s very good news. What do you think?

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