"Formula X" trounces S&P 500

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(MoneyWatch) If I were to tell you that it's possible to beat the S&P 500 index with near certainty over long periods of time, would that pique your interest? Well, you can, with a simple formula that works. Sounds a bit like the beginning of an infomercial, right?  But I'm not going to throw on a blue polo shirt and yell at you through the television. I'm just going to describe a formula that I've been using for a couple of decades and show you how well it has performed for me. 

The S&P 500 index has gone a whole lot of nowhere since this recent century began. This fact has been pointed out by many pundits, including Mad Money's Jim Cramer. Yet my "formula X" is up 42 percent, trouncing the index. And you don't have to take my word for it either. Instead, take a look at my results that, unlike Cramer, I'm absolutely willing to have audited by anyone.


My formula X selects only U.S. based stocks and certainly isn't immune to bear markets, but notice how I lost a tad less than the index through 2002. During the next five years, however, my stock picking formula really shined as I outpaced the index by over 20 percent. Sure, the financial collapse hit hard, yet I stayed above the index in catastrophic times as well. The recovery has me a full 13 percent above the all-time high of the S&P, and I'm now 42% ahead of the S&P 500 index.

Though a 42 percent return admittedly isn't stellar over 13 years, formula X also bested inflation, surviving the dot com and real estate bubbles - two of the largest bubbles in history.

Not only has formula X worked through every bull, every bear, and every bubble the market has thrown at investors over the last 20 years, I feel confident it will continue to work over periods of a few years or longer. By that, I mean it will beat the S&P 500 index, no matter what stocks return going forward. I realize this is a strong claim but I stand by it.

Here's the simple formula

My stock selecting formula is simple; I selected virtually every U.S. based publicly held stock: I bought the Vanguard Total Stock Index Fund (VTSMX) and just let the dividends reinvest. That is the simple secret of how my US stock portfolio stomped the S&P 500 index.

See, many in my financial services industry love to use this S&P 500 index as the benchmark for U.S. stocks because it's a low bogie and easy to beat. But the index carves out dividends and doesn't include the mid-sized and small companies. In other words, the total return of the total US stock market is very likely to continue to beat the S&P 500 index since that's only part of the return of part of the US stock market.

I'm not even sure that Cramer actually beats the easy bogie of the S&P 500 index, and there is ample evidence most professional investors also fall short. My advice is to deploy formula X by buying a low cost-broad total index fund. Do the same for international stocks as well.

Many good broad low-cost index funds exist now from providers such as Fidelity, iShares, Schwab, Vanguard, and others. Once you buy them, let dividends reinvest. And when you get that irresistible urge to either buy more or sell, let it pass.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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