Investing Advice

Secrets of Stock Market Investing

This chapter is probably the bookís most important part. If I had put this information in the beginning so that you didnít have to read through all those other chapters, I could have saved you a lot of time. But you needed a foundation of investing smarts to understand and appreciate what I am going to reveal to you right now. A mid-cap index mutual fund is the ticket to your investing success. Itís really that simple.

Were you paying attention? Just in case, Iím going to say it again. A mid-cap index mutual fund is the ticket to your investing success.

Why doesnít everyone in the investing business know this? Beats the heck outta me. Iíve spoke with many, many investing pros and financial advisors about mid-cap index funds. Not one, not a single one, even knew that the S&P Mid-cap 400 has out-performed the S&P 500 (mostly large-cap companies) these past 5 years by a significant amount.

You may hear many times that if a mutual fund can beat the S&P 500, then this is a successful fund with superior management. The S&P 500 has beat over 81% of all actively managed funds over the past 5 years. And only one fund, the Legg Mason Value Trust, has beat the S&P 500 each and every year for the past 11 years.

But no one, not a single fund, beats the S&P 400 every year.

  • Last year, 2001, was a disappointing year for the mid-cap 400, earning only 1.3%. But the S&P 500 lost 12%.

  • Over the last 5 years, with that terrible 2000-2001 period, the S&P 500 has still returned a respectable average annual return of 10%. But the mid-cap 400 has yielded an average return of 18.6% over these same 5 years.

  • The mid-capís average annual return for 1981-2001 was a whopping 16.9%!

So Ö Iím going to say this again:

A mid-cap index mutual fund is the ticket to your investing success.

These middle size companies are not too big, not too small, and mostly growing and gaining market share.

Itís not that this is a guarded secret. Itís just the collective ignorance of that crowd of experts. See for yourself:
 

  May 1999        May 2002  
DOW  10466.93 9474.2 -9.5%
S&P 500 1281.41  1007.3 -21.4%
NASDAQ Composite   2419.15 1504.7 -37.8%
NASDAQ 100  2089.71 1109.6 -46.9%
NYSE Composite 622.26 540.3 -13.2%
Russell 2000 Small-cap       438.72 459.1 + 4.6%
S&P 400 Mid-cap   395.93 495.5       + 25.2%

So where do you want your money invested?

Mid-cap companies often share the positive features of larger companies: established products and services, solid management, and long-term operating histories.

The mid-cap company's long term growth potential is generally greater than a small company. Many medium sized companies are still small enough to quickly take advantage of new opportunities in the marketplace. Since these companies are stable and well beyond their startup phase, they generally have the resources to finance future growth.

And as we talked about earlier, investing in ďbigĒ name-brand companies isnít the best way to grow your money; too many of these giant companiesí businesses have peaked and they are now just fighting off the competition.

Writing for the May 5, 2002 www.washingtonpost.com, James Glassman called mid-caps ďthe Goldilocks stocks. Theyíre not too big, not too small, not too hot, not too cold. Theyíre just right.Ē He pointed out that $10,000 invested in the S&P 500 at the start of 1999 lost money, but $10,000 invested in the S&P 400 mid-cap index grew to $15,653.

Other The Investing Secrets Topics:

  1. Secrets of Stock Market Investing
  2. Which mid-cap index fund is the best one?

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