Imagine what the world looked like in the year 1800…
John Adams held office as the second president of a young United States of America.
Electricity, the telephone, air travel and antibiotics had all yet to be invented.
And the average life expectancy hovered between 30 and 40 years.
A trio of Dutch researchers at investment group Robeco recently examined data that went that far back in history to assess the success of various investment strategies.
Their conclusions shook the very foundations of today’s Nobel Prize-winning theories of modern finance.
As it turns out, they identified a handful of investment strategies that have beaten the market consistently over the past 200 years.
Revisiting the Efficient Market Hypothesis
Today’s gospel of modern finance preaches that investors cannot beat the market over time.
That’s because market prices reflect all the known information about a stock or other asset.
Any new informational edge is instantly arbitraged away by a swarm of profit-seeking investors.
So don’t waste your time trying to pick an active fund manager who claims to be able to beat the market.
Instead, just listen to the late John Bogle – founder of The Vanguard Group – and buy an S&P 500 index fund.
Now, I’ve already written about why I believe the efficient market hypothesis is bunk…
And why you can do better than investing in a traditional index fund.
I firmly believe that while beating the market isn’t easy, certain investment strategies have proven their mettle over time.
And understanding how you can invest in these strategies using exchange-traded funds (ETFs) could be the key to your financial future.
Six Ways to Beat the Market
Truth be told, reading the Dutch group’s report is like stirring concrete with your eyelashes…
So let me spare you the pain of reading it by summarizing its conclusions.
After examining more than two centuries of international market data from multiple historical sources…
The report concluded that six popular strategies consistently outperformed over time.
Although these factors didn’t beat the market each and every year, they remained consistent in both good and bad times.
And contrary to what today’s finance professors tell you…
Thanks to the quirks of human behavior, these factors have demonstrated remarkable staying power.
With that, here are the six factors that have stood the test of time.
1. Trend Following
“Buy what’s going up… and sell what’s going down.” This commonsense approach was consistently the best-performing factor across all markets.
A close cousin of trend following, momentum focuses on investing in assets that perform well relative to others.
Cheap stocks outperform expensive stocks over time. This is the basis of value investing as developed by Benjamin Graham in Security Analysis.
Certain asset classes perform differently at different times of the year. Notably, you can make most of your money in the stock market between November and May.
5. High Yield
Investing in higher-yielding assets makes you more money than investing in lower-yielding assets.
6. Low-Risk Assets
Investing in low-risk assets delivers the highest returns over time. This finding directly contradicts the idea that high risk equals high returns. In a portfolio of investments, defensive stocks beat out speculative lottery tickets.
What Are the Takeaways?
So what does all this highfalutin research mean for you and your portfolio?
1. Think beyond just investing in conventional index funds. History shows that the factors outlined above beat the market over time. And even a 1% or 2% annual outperformance can make a huge difference in the long run.
2. Invest in trend-following and momentum strategies. Much of Wall Street dismisses trend following and momentum investing as crass and simplistic. Yet these two strategies have generated the best returns over time.
3. Don’t give up on a lagging strategy. Strategies go in and out of favor. So don’t abandon value investing despite its poor showing since 2008. It will be back.
But the most important takeaway is one that the Dutch study fails to mention…
You hear about the importance of diversifying across asset classes like stocks, bonds and commodities.
But it is at least as important to diversify your investments across a wide range of investment strategies as well.
And the simplest way to do this is to invest in the ETFs that track these strategies.