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“SOME PEOPLE automatically sell the ‘winners’—stocks that go up—and hold on to their ‘losers’—stocks that go down—which is about as sensible as pulling out the flowers and watering the weeds,” argued Peter Lynch in his 1989 book One Up on Wall Street.
My father worked for Sears for 30 years, delivering washers, freezers and other appliances. Sears rewarded employees with stock, even delivery men like my dad. Over time, through splits and spin-offs, he acquired shares of Allstate, Discover, Dean Witter and Morgan Stanley. These shares supported my parents through their retirement and became my inheritance.
My father passed away in 2008, leaving me and my siblings shares in everything that was Sears. This was my first exposure to stocks and the financial markets. At age 53, I was oblivious to investment matters. My life was working for a nonprofit youth organization. Stocks and investing simply weren’t part of my world.
Spurred on by the fear of having almost nothing for retirement, I started studying investing. As part of this learning process, I often talked to others to see what they knew. Most were just as ignorant. Sadly, five of my colleagues—who had also inherited some wealth—had the misfortune of meeting and trusting unscrupulous financial advisors. These slick advisors kindly proceeded to help my friends lose their inheritance.
Based on these sad stories, I was determined to avoid a similar fate. I embarked on a journey to study and learn about investing, declaring to myself, “I might lose, but I won’t let anyone steal from me.”
Initially, my hubris exceeded my knowledge. I read about value investing. It seemed like a good idea and, with the best of intentions, I bought some undervalued companies. What could possibly go wrong? That’s when I learned the hard way about catching falling knives.
“No problem,” I thought, “how much lower can the price go? It must be at its bottom.” Oh my, I found out. Ouch.
But as for my inherited Sears shares, could there be a more stable company? I read some place that someone said that their favorite holding period is forever.
Established in 1893, Sears grew, becoming a household name across generations. Its expansive catalog offered everything from cutlery to complete home kits. In 1997, reaching its pinnacle, Sears held the 15th position in the S&P 500.
In 2018, just 21 years later, Sears declared bankruptcy. During the company’s years of decline, the S&P 500 thrived. Between 1997 and 2018, the S&P 500-index climbed from around 970 to 2500, an impressive increase of roughly 160%, excluding dividends.
At the start of that 21-year stretch, Amazon entered the S&P 500 in 300th place. By 2018, it was in fourth place. Among the top 10 companies in 2000, only one of them—Microsoft—is still there in 2024.
Looking into the shiniest crystal ball, we can’t know what the top 10 companies will be two decades from now, but don’t worry. The good news: We can buy the top companies of the future if we buy an S&P 500-index fund today.
Why is it that, during the years that Sears inched its way to bankruptcy, the S&P 500 marched to a 160% gain? Many would say diversification. But maybe we should add another factor.
The S&P 500 index is in a continual process of rebalancing based on market capitalization. As one company fades, another emerges. The index automatically lightens up on its losers, while automatically investing more in the winners. It automatically performs the function that too many of us don’t have the nerve to do on our own—and that’s to pull the weeds and water the flowers.
William Housley lives in Parker, Colorado, and has worked with Youth for Christ for more than 47 years. There, he serves as a trustee on the 403(b) committee. In their work with Youth for Christ, Bill and his wife Gretchen, a registered nurse, have ministered to youth in California, Germany, Vermont and Colorado. Today, Bill continues to contribute to the organization as “legacy staff.” He and his wife love spending time with their three grandsons.
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Bill, I agree with your recommendation to invest in an S&P 500 index fund.
Personally, I would favor a total US stock market index fund with greater exposure to small and mid-cap companies. Such a fund offers more diversification and greater odds of owning a future winner that, today, may be too small to be included in the S&P 500.
Jane Bryant Quinn in her book How to Make Your Money Last advised Mrs. Buffet to replace the S&P 500 index fund recommended in her husband’s will with U.S. and international total market index funds. She hinted that such a move could make Mrs. Buffet smarter than Warren.
Hi Philip, I did not intend the story to be a recommendation. If it came across as such I apologize. It was simply an observation that I thought most of us do not consider regarding on how the SP automatically self-balances.
William:
An additional thought…since you inherited stocks from your dad, you may have been emotionally attached to them. That is always a different consideration.
When my step dad passed, my sisters and I inherited his Vanguard Funds. Over his last 7-10 years of life, 83-93, he encouraged me to manage the funds with the focus on the inheritance, since I was a licensed CFP and quite capable of doing so. I refused to do so, however, because as I told him, until he is gone, they are his funds to provide for his life and his health.
When he passed, we inherited his Vanguard funds, enjoyed a step up in basis, and for my sisters, these funds became the bulk of their retirement funds.
Like you, my dad worked many years for his two employers…24 years in the US Army and 16 tears as a US Capitol Police Officer. Unlike Sears, however, both of his employers are alive and well.
Again, thanks for a wonderful article.
You are right, I likely kept my inherited stocks a little too long. But, honestly it was not a lot.
This is a wonderful history lesson and also a renewal of the wisdom of John “Jack” Bogle.
Bogle is credited with making indexed products available to the common man, and since he founded Vanguard Group, he alone is probably more responsible for the wealth of everyday Americans than any other single individual in the USA.
Warren Buffet has stated, on the record, that when he dies, he has advised his wife to retain 10% of her Berkshire Hathaway Stock and put the remaining 90% of her inherited wealth into the S&P 500.
How much plainer can it be to Americans wanting to save and invest for the future? If it’s good enough for Warren Buffett, why isn’t it good enough for you?
Thank you for the comment I also have a similar plan to Mr Buffett – Cheers
I made plenty of mistakes along the way but never stopped saving and learning. Things turned out pretty well in spite of the missteps. Great article William.
My friend sent a congratulatory email on my first published article for the Humble Dollar. He said that in his 60 years of working in the financial industry that the self-balancing aspect of the SP 500 never occurred to him.
Congratulations of your first article.
It is a great article and makes one think! That’s always a good thing.
Good point. May be I should pay more attention to companies newly added to SP 500.
William, topnotch first article and very well written. Hope you continue to contribute.
Yes my first, it was so much fun I think I would like to try again. Jonathan was very helpful!
First and foremost thank you for spending your career by saying yes to your calling of working with today’s youth.
I have to admit, I’ve never chased shiney individual stocks but I spent years chasing shiney index categories. I now know that both are a bad way to invest. Stick with VTI or VT
Thank you.
What is most important is to save money, and invest it in a way that you are comfortable with.
I have always invested in individual stocks, because I want to analyze each company I invest in. I study the financials, read the conference calls, evaluate the business model and the quality of management. I have no wish to ‘beat’ the ‘index’ – I am content with a portfolio of steady companies that will neither soar nor crash, but pay a good dividend and grow their business over the years. Yes, I have made a lot of money.
Others have different a different point of view.
Of course we will never know how much your investments would have made had you gone with index funds instead.
Given the large number of investors who follow your approach, there will always be a small number whose investments make a lot of money over a long period of time simply due to chance.
Isn’t that a lot of work? Do you enjoy doing it as a hobby so to speak?
If you’re not looking to beat the index, why do all that work when you could just buy an index fund? I have to conclude it’s a hobby.
I also appreciate this point of view. You are one of the fortunate ones who have the capacity. My realization is that I do not. I admire those who can.
Indexing has Won the Game from its inception in 1975
We all a bit of gratitude to the great Jack Bogle
Only fools trade stocks
Yes, and maybe we are also susceptible to being fooled. Specially early on in our investing journey.
Nice article Bill. I realized pretty early that I’m a lousy stock picker and instead focused on the things we could control – savings rate, taxes, spending …low cost index funds make up the vast majority of our retirement funds.
Thanks to discovering John Bogle and Vanguard at the beginning of my investment journey I never invested in individual stocks. As Jack preached, “Why try to find the needle in the haystack when you can buy the entire stack?”
Thank you for your kind word of encouragement. This was my first effort
This is a great article on the conundrum of “not knowing what you don’t know”. In my opinion, reliably predicting the next big winner is either luck or simply being in the right place at the right time.
Thank you Jeff. What are the chances of either being lucky or in the right place at the right time? I have never won a door prize even when I was the only one in the room.
Just like my local NPR station. I am a continuing donor, and every fundraising period send out merch or give people trips to destinations all over the world . . . but I’ve never gotten that call.
I had a similar experience, but fortunately figured out at a relatively young age that neither I nor my broker (remember those) was that good at picking individual stocks so I switched to mutual funds. Unfortunately, I didn’t catch on to index funds until later in life. By then, I couldn’t bear to pay the significant capital gains taxes to switch everything over. However, at some point, all new money went into a low cost S & P 500 index fund. It all worked out.
Thank you for your comment. Yes, life has a way of working out if we just do the fundamentals faithfully.
Bill, you present a great illustration of the value of indexing. Thanks for an interesting article.
Thank you.