How much larger are the gains produced by the most successful investors?

What do the most successful investors do differently from the masses? Oddly enough, most people simply do not ask. (They also probably do not ask “exactly how much more successful are those investors?”)

By most successful, I mean the largest long-term profits. We can measure that as a multiple of typical gains. Let’s look at typical gains compared to a simple alternative.

sample results

Above is an actual example of 33 years of trading results for two methods. On the left is the final balance that would result from a starting balance of $10,000 placed in to a mutual fund modeled on stock prices of the top 500 companies in the US (which would include different companies over a period of several decades, but a mutual fund investor or 401k investor would not need to pay attention to that detail).

The nominal gains are almost $212,000 (beyond the initial $10,000 invested). That is a very common method.  The percentage gained is 2,120%. Sounds pretty good, right? How open are you to even better results than that?

On the right above are the results of a method that is only slightly less simple. The same $10,000 managed with just a bit more care (only a few transactions per decade) produced actual gains of over $427,000, a gain of 4,270%. In other words, the gains on the right ($427k) are over twice as large as the gains on the left ($212k). Now, are you interested yet in learning exactly how easy it has been to produce results that are at least twice as good as average?

Click one of these two options:   >>>THESE LINKS ARE NOT ACTIVE YET<<<

> How easy is it to produce results that are far above average?

> Why are the 2,120% gains not as good as you might presume?

Of course, you might think that the “typical” results are pretty good. In 33 years, the value of the balance multiplied by over 20 times. Pretty successful, right?

spx 2
One problem with that presumption is that the gains were not constant across the 33 years. The charts above and below show that almost all of the gains were in the first half of the 33 years. Compare those two time periods and then we will review how inflation and taxes have further reduced the success of that method.

spx 3

For comparison, note that the method that gained 4,270% did so well largely by exiting the stock market prior to ALL of the biggest declines of the last 33 years. By occasionally using select mutual funds and the safest bonds, that strategy even produced gains while most stock market investors were losing money year after year. The total number of transactions were just a few per decade. Sounds pretty easy, right? It has been.

(Further, the investment advisor whose results are shown above actually had much better results than what are shown above. I am showing those results here because that is the simplest and safest strategy of that advisor. It is very easy to do AT LEAST that well.)

How about taxes? While there could also be significant taxes on the amount of dollar increase, there are ways to avoid capital gains taxes and income taxes. Though most investors only delay taxes (like through IRAs and 401Ks), it is a simple thing to use tax-exempt investment shelters. However, most people do not know much about tax-exempt shelters (but do know about inflation). So, let’s ignore the tax issue for now and just focus on the unavoidable issue of inflation.

sample results 5
The black areas above show the actual purchasing power of the original investment (adjusted for inflation). In terms of purchasing power, the method on the left produced more than a 500% increase (but almost all in the first half of the 33 years). The method on the right produced over a 1000% increase, plus it was much more consistent (far safer) than the much more common method.

Again, the results on the left are for a method which would be recommended by most any mainstream financial advisors. Those people are usually just commission-earning salespeople who have a large financial incentive to give advice that is good for the companies that hire them, (but may be not all that great for naive consumers, especially in the last 15 years).

One issue ignored by many advisors (salespeople) is tax-exempt gains. In the chart below, we see that, after taxes (in red below), many investors would only make about a 400% increase in purchasing power from the common method.

That 400% increase is a long way from the gains of 2,120% that many investors might think they have gotten. Inflation results in “false profits” that produce tax liability but no increase in purchasing power. Even with interest income on some bonds, there can be income tax liability. When thinking about multiple decades, we see that inflation can create inflated investment gains that, through taxes, will create a massive transfer of wealth from investors to governments. (The same thing applies to real estate, etc…)

sample results 4
If not using tax-exempt sheltering, the method on the right would produce an after-tax increase in purchasing power of about 800%. By using tax-exempt sheltering, the gain in purchasing power would be over 1000%.

> To let us know that you want to know more about investment shelters that are tax-exempt in the US, click here.
One simple point is that most “average” investors are unaware of what results are realistic to expect from using the most common long-term investment strategies. They may be totally unaware of the many cases of long-term negative results, like the last 26 years of decline in the entire stock market of Japan:

n225

The most popular strategies are not the most successful strategies. In fact, they are often not successful at all (at least not unless you are the salesperson piling up commissions from selling those methods to some naive mainstream investors).

Using the most common investing methods during periods of weak markets will consistently produce huge losses that can take several decades to recover. In contrast, the most successful investment methods are either designed to work in absolutely all market conditions or adjust along with changes in market conditions.

net2x

In the next presentation, one issue that we will explore is the fact that investment markets serve to transfer wealth. Who receives the bulk of the wealth being transferred (and how do they do it)?

Of course, governments benefit enormously from the fees on every trade and the taxes on taxable gains. But that is probably not as relevant to you as making sure that you are one of the “smart money” investors who are receiving the bulk of the wealth that most investors are complacently pouring in to investment markets. All you have to do is let us better position you to receive much more of that flow of wealth.

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To hear that presentation now, click here: https://jrfibonacci.wordpress.com/2015/06/25/benefiting-from-the-constant-transfer-of-wealth/

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To receive an email with a link to that presentation, click here.

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One Response to “How much larger are the gains produced by the most successful investors?”

  1. Simple insights regarding investment markets, IRAs, and more | power of language blog: partnering with reality by JR Fibonacci Says:

    […] J R Fibonacci Hunn two related articles I published last week: https://jrfibonacci.wordpress.com/…/how-much-larger…/ […]

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