“If I only had a crystal ball.” Every investor has probably made this wish from time to time.
We would all like a way to avoid the emotional pain and anxiety that are sure to come when our portfolios lose value due to inevitable market downturns.
Surely a perfect investment would spare us that pain. Suppose a mutual fund manager with a crystal ball knew which 10% of the 500 largest U. S. stocks would earn the highest returns for each upcoming five-year period. Investing only in those stocks should ensure gain with no pain.
According to an article by Bob Veres, editor of Inside Information, someone has looked back over more than 80 years to track such a hypothetical perfect fund.
Alpha Architect, a research company, divided the 500 largest U.S. stocks into deciles and imagined a fund investing in only the 10% known to have the highest returns for the next five years. Beginning January 1, 1927, the hypothetical portfolio was adjusted every five years.
If you could have purchased it then and held it to the end of 2009, you would have earned just under 29% a year.
Lots of gain, no pain at all, right?