INDEX FUND EVALUATION SPREADSHEET
MARKET-BASED INVESTMENT BUY STRATEGY SPREADSHEET
MARKET-BASED INVESTMENT SELL STRATEGY SPREADSHEET
INVESTMENT RISK CATEGORIES
Important Note: When adding up what you have across your investment accounts, I recommend making the following adjustment for pre-tax type investment accounts (e.g., 401Ks and IRAs without the word “Roth” attached): reduce the total amount by 24% for a conservative overall estimate. We have to pay taxes when withdrawing from these kinds of accounts so this will help to account for that. Feel free to use a different percentage reduction depending on what tax bracket you believe you will fall into when withdrawing money from these accounts.
HIGH-RISK INVESTOR (your investment goal is 4+ times what you presently have in total across your investment accounts – after making adjustments in accordance with the note above). For example, if your investment goal is $2M and you presently have $500k or less in total across your investment accounts then you would be a high-risk investor.
MEDIUM-RISK INVESTOR (your investment goal is roughly 2-4 times what you presently have in total across your investment accounts – after making adjustments in accordance with the note above). For example, if your investment goal is $2M and you presently have $500k-$1M in total across your investment accounts then you would be a medium-risk investor.
LOW-RISK INVESTOR (your investment goal is no more than 2 times what you presently have in total across your investment accounts – after making adjustments in accordance with the note above). For example, if your investment goal is $2M and you presently have $1M or more in total across your investment accounts then you would be a low-risk investor.
UNIQUE DIFFERENCES IN STOCK MARKET INDEXES
Each of the Stock Market Indexes have unique differences. For example:
a. The S&P 500 (e.g. SPY ETF), Total Stock Market (e.g., VTI ETF), and Nasdaq 100 (e.g. QQQ ETF) indexes typically have smaller dividends and higher valuations (Price-Earnings Ratios – P/E ratios) which exceed many of the other market indexes due to a larger and higher concentration of technology/growth companies. Technology/growth companies typically have higher P/E ratios and pay little or no dividends – so if you prefer to invest in these indexes you might need to make some adjustments to account for this. The S&P 500 comprises about 80% of the entire U.S. stock market value – so it can be a useful proxy for the performance of the U.S. stock market as a whole. The Nasdaq 100 is primarily comprised of large cap growth-oriented stocks.
b. The SPY, VTI, and QQQ ETFs suffer from higher valuation and concentration risks where a select few large cap stocks tend to dominate – some investors/economists are greatly concerned about the valuation and concentration risks while others believe they are appropriate since that is where much of the earnings growth presently is.
c. The high valuation and concentration risks are not a problem for the VTV ETF (value stocks of large companies), the RSP ETF (an equal weighted version of the S&P 500 Index), the Russell 2000 Index (e.g., IWM ETF, SPSM ETF, etc.), or the Mid-Cap Stock Index (e.g., IJH ETF). However, these indexes and ETFs could underperform depending on which side of the high valuation and concentration risks debate is correct.
d. The high valuation and concentration risks are also not presently much of a problem for the International Developed Market Index (e.g., EFA ETF) – however, it probably makes sense to monitor this on a periodic basis in case that changes at some point.
e. The Russell 2000 Index (e.g., IWM ETF, SPSM ETF, etc.) tends to outperform in lower inflation economic environments, lower interest rate economic environments, and when the economy is performing well overall. This index also tends to drop the fastest and deepest in a slowing economy but rebounds sharply in the midst of the economic slowdown in anticipation of economic recovery.
f. The Mid-Cap Stock Index (e.g., IJH ETF) – Can serve as an intermediary to balance the risks between the small-cap indexes (such as the Russell 2000) and large cap indexes (such as the S&P 500, the Total Stock Market, and the Nasdaq).
g. The International Developed Market Index (e.g., EFA ETF, VXUS ETF, etc.) can be impacted by U.S. trade policy and has potential currency exchange risk as well since this index is not U.S. based. In terms of the potential currency exchange risk, a falling dollar tends to increase gains while a rising dollar tends to reduce gains. However, the currency exchange impact is not typically very substantial unless the dollar experiences big moves.
KEY HISTORICAL STOCK MARKET TRENDS
- The Odds Overwhelmingly Favor Buyers Over Long Term – Not Sellers
If you understand nothing more about the stock market, please at least pay attention to the following chart:
The key takeaway from the above chart is that the odds overwhelmingly favor buyers of the stock market over the longer-term (the odds of positive returns are 67%, 88%, 93%, and 100% over 1, 3, 5, and 10-year periods, respectively) – while the opposite is true of sellers (the odds of negative returns are 33%, 12%, 7%, and 0% over 1, 3, 5, and 10-year periods, respectively) – source: https://www.capitalgroup.com/individual/planning/investing-fundamentals/time-not-timing-is-what-matters.html#:~:text=Riding%20it%20out,Source:%20S&P%20500%20Index. So, buyers don’t have to be very precise to capitalize in terms of market timing while sellers have to be very precise.
2. Stock Market Drops Happen Regularly
The key takeaway from the above chart is that stock market drops are to be expected and happen on a regular basis: A 3-5% drop in the S&P 500 index generally happens about three times a year, a 10% drop generally happens about once every 1.5 years, and a 20%+ drop generally happens about twice every five years – these drops are measured from the most recent highs – not all-time highs – although the two sometimes coincide. So, the deeper the drop you wait for before buying, the higher the likelihood you’ll miss a significant rebound.