Win by being lazy at the stock market

The reality is that the stock market has also offered a path for ordinary people to build wealth. PHOTO: REUTERS

(NYTIMES) - Many parts of the GameStop story - the wild swings over the past couple of weeks in shares of the video game retailer and a few dozen other out-of-favour stocks - are not exactly new.

Long before Reddit, the Yahoo message boards of the late 1990s democratised the expression of strong opinions about stocks.

Short squeezes and market cornering were manoeuvres well before Randolph and Mortimer Duke - the fictional securities-fraud-committing villains of the 1983 comedy Trading Places - were greedy little boys.

What has been weird to watch, if you've spent your life plodding away at building a retirement fund, reading books about personal finance, and weighing fee structures and tax implications of various investment vehicles, is the mix of righteous anger and gleeful anarchism driving it all.

Many of the traders driving the GameStop mania in recent days want to strike it rich and bring down what they view as a corrupt, rigged system along the way.

Yes, there is abundant greed and venality on Wall Street.

But the reality is that the stock market has also offered a path for ordinary people to build wealth - and more so in the last generation than ever before.

You haven't needed to burn down the system. All you've had to do is take the laziest, simplest approach to stock investing imaginable and have a little patience.

Ever since Vanguard introduced its S&P 500 index fund 45 years ago, ordinary investors have been able to invest in broad stock indexes in a tax-efficient manner, with extremely low fees.

Any schlub on the street can put money to work harvesting a small share of the earnings of hundreds of leading companies, led by some of the sharpest corporate executives on earth and their millions of employees.

You haven't had to do much of anything. Your returns would have been strong even if you had terrible timing.

Suppose you received a US$10,000 windfall in March 2000, the peak of the bubble and a moment at which we can all agree stocks were overpriced.

Yet, even with such unfortunate timing, if you invested that money in a low-fee S&P 500 index fund and reinvested dividends for the past 20 years, your US$10,000 would have turned into nearly US$28,000 (S$37,000) by the end of this past month - a 5 per cent annual return when adjusted for inflation.

And that was the single worst month in decades to begin investing. On average, if you were to select a month between 1990 and 2019 to begin investing, your annualised return through last month would have been 9.8 per cent after inflation. Simply for having the patience to sit on your hands.

(Those returns would have been reduced by a few hundredths of a percentage point by mutual fund fees, and more by taxes if the money was not in a tax-advantaged account.)

It gets better. Most people don't receive and invest a single windfall, but rather chip in savings gradually.

So suppose you had begun saving US$100 a month at the start of the year 2000 - again, near the peak of a bubble - and had continued doing so ever since, increasing your savings along with inflation, putting the money into an S&P 500 index fund and reinvesting dividends.

Over the past 21 years, you would have contributed about US$32,500, yet your portfolio at the end of last month would be worth more than US$103,000.

You achieved a 10.5 per cent annualised rate of return, because while some of your savings was invested at market peaks, your slow-but-steady approach ensured you were also buying shares during periods when the market was depressed, as in 2002 and 2009.

If the market is rigged, it is rigged in a way that allows people to achieve a substantial return on their money by watching television, playing golf or taking a nap, rather than by spending their hours scouring message boards or developing elaborate theories of how to enact revenge on perfidious hedge funds or learning what the gamma of an option is.

There are no guarantees in life. Some people who are aggressively trading meme stocks will presumably walk away with significant profits. Index funds won't generate the kind of overnight payoffs that buyers of GameStop options are evidently looking for.

And the decades ahead may offer lower returns to stock investors than the decades just past. But the extraordinary payoffs of being a passive stock market investor are not something to overlook. When you are offered a free lunch - a reasonable expectation of good returns with zero effort and only moderate risk - it makes sense to eat it.

Join ST's Telegram channel and get the latest breaking news delivered to you.