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 beating_the_S&P500.jpgI have not only beat the S&P 500 the last five years, I’ve clobbered the S&P 500. The S&P 500 has returned about 14% annually since 2003.

While working on some posts about my investments for The Dough Roller, I set about calculating my returns for the past five years. I even had to order some old brokerage statements to get information back that far. The result? I clock in at just over 20%. Now I could pretend that I’m a brilliant stock picker, but I only invest in mutual funds. So I could pretend I’m a brilliant mutual fund picker, but that would be just plain silly. Instead, here’s how I did it and why you should (and should not) be impressed.

If I got anything right it was picking a moderately aggressive asset allocation and implementing it with low cost index and actively managed mutual funds. I will be describing my investments in detail over the next week or so. If you take time to read The Dough Roller, I believe you have a right to know exactly where I put my money.

So I’ll be telling my investment story over the next few weeks. But for today, it’s enough to know that I put a significant amount of my investments in international stocks (including emerging markets), REITs and small company funds. Over the past five years, this allocation has outperformed the S&P 500 for several reasons:

  1. International stocks, particularly emerging markets, have done extremely well. Most of my emerging market investments are in Vanguard’s Emerging Market Stock Index (VEIEX), which has returned about 38% a year over the last five years. If you look at the history of emerging markets, however, you’ll note that they can lose money about as fast as they can make it. If you invest in emerging markets, fasten your seat belt. Of course, for me they accounted for about 15% of my portfolio (10% today), so the volatility of emerging markets to my entire portfolio was muted.
  2. The falling dollar has helped many non-dollar denominated assets for US investors. If you ever wondered how the falling dollar affects foreign investments, it’s really quite simple. Imagine for a moment that one dollar is worth one EURO. A US investor exchanges $100 for 100EURO and invests the money in a stock. Assume a year later the price of the stock hasn’t changed, but now it takes $2 to buy a EURO. Now that 100EURO stock is worth $200. The change hasn’t been that dramatic, but the falling dollar has accounted for a significant portion of the increase in value of my international stocks. Of course, what the currency market giveth, it can easily taketh away.
  3. REITs have returned a princely sum (until this year, anyway). This year my REIT fund, Vanguard REIT Index (VGSIX) is down about 11%. But in the previous four years it was up each year in double digits, and exceeded 30% in three of those years. As part of rebalancing my investment portfolio, I sold some of this fund early in the year, so the decline hasn’t hurt me as much as it could have.
  4. I invested in value oriented mutual funds, which did well during four of the last five yeras. My main investment hear is Dodge and Cox Stock Fund (DODGX). Although it has lagged the S&P 500 in 2007, it outperformed the market during the previous four years. Value won’t always beat growth, but it has recently.

So why should you NOT be impressed?

At least two reason. First, returns by themselves don’t factor in the risk we take to attain those returns. You can calculate risk-based returns, but without doing the math, it’s clear that my portfolio is riskier than the S&P 500. Second, my portfolio won’t always beat the S&P 500. It has recently, but I guarantee I won’t be earning in excess of 20% year in and year out.

So why should you be impressed?

Hopefully for the exact same reason you should be impressed with your own investments. I stick to a reasonable asset allocation plan. I don’t buy into a rising market or sell into a falling one. And I implement my investment plan with low cost mutual funds.

I’d like to tell you that I have some deep dark magical secret to sell you. Maybe I should peddle a newsletter that costs $300 a year. The fact is, you should run from any “pay me money and I’ll tell you how to beat the market” scams. Investing doesn’t have to be complicated. There are some more heady aspects of investing that I study and even write about here (asset location, strategic asset allocation, after-tax asset allocation, risk measures, etc.), but these are not necessary to be a successful investor. Pick a reasonable asset allocation, buy low cost funds, invest early, and invest often.

Author Bio

Total Articles: 1080
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments

hank says:

I’m impressed. 🙂 It really isn’t rocket science to cook something like that up, but the “advisors” of the world have found a way to make a living getting people into the mindset that “it is faaaaaaar too difficult to do it on your own. You need someone who has mastered the waters”. Hell, nobody has “mastered” the waters, but they ARE salesmen I guess… Good post…

It is certainly a good idea to minimize fees (and taxes) but it’s really no easier to choose an a money manager (or mutual fund) than it is to pick stocks that will outperform your benchmark. Money managers who are past winners are no more likely to repeat than stocks are. Pop a cork, enjoy those first four years, and be glad number five was not a real stinker.

Of course people who pay loads or buy funs with expense rations much bigger than 0.5% are just giving money away.

DR says:

J. Michael, I agree. My goal is to keep total portfolio expenses to .5%. Bill Miller of Legg Mason fame had beat the S&P for 10 years running. I owned LMVTX for a number of years. This year he’s about 10% behind. To your point, managers can beat the market for a time, but not forever.

Excellent post! I love to read articles where someone has successfully beat the S&P. Thanks for sharing it. I plan to include your article in my weekly carnival review this Friday.

Best Wishes,


I am partially impressed. Your excellent return is the result of some lucks (emerging market, falling dollar and REIT) and some very wise choices (value oriented funds and Vanguard). I managed to beat the S&P 500 as well, with disciplined small cap value investing.

Nice article. Well it’s good to beat the S&P 500 in a rising market, but what about during the years the S&P was falling?

I haved published a free newsletter since 2000 with Model Portfolios. Thus far, since I began, I have published 29 quarterly Stock
Model Portfolios. At the close of 2007, 26 out of the 29 have outperformed the S&P 500. These results were achieved during both bear and bull markets. The average outperformance 1 year after publication was +4.03%. Better still, 5 years after publication, the Portfolios continued their outperformance, averaging +5.18% better than the 500 Index per year. (Eg. After 5 years, Portfolios have gained a total of more than 25% more than the gains in the S&P 500.)

Obviously, I can’t guarantee this outperformance will continue but it is encouraging since I base my Portfolio selection on a variety of research factors.

Details are available at my website, Mutual Fund Research Newsletter, which contains many articles on my strategies for investing. I recently added a blog for dealing with current issues that investors are concerned about.

archivenic says:

Excellent post! I love to read articles where someone has successfully beat the S&P. Thanks for sharing it. I plan to include your article in my weekly carnival review this Friday.