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April 18, 2023 at 04:31 PM
What You Need to Know
- Buying and holding 500 stocks returned a bit more than the S&P 500, with less volatility, a Morningstar researcher found.
- Extra cash may have been a buffer against market downturns for the portfolio.
- The portfolio didn't have to replace holdings and could give its winners more room to run.
Buying a basket of stocks and letting it sit untouched for 30 years can generate better returns than the S&P 500 index, according to a top Morningstar researcher.
Jeffrey Ptak, chief ratings officer for Morningstar Research Services, first conducted a 10-year experiment starting March 31, 2013, in which he gathered the S&P 500′s holdings and then pulled each stock’s monthly returns over the next decade.
Using those 120 monthly returns for each holding, he compounded its value as if an investor had simply left the “Do Nothing Portfolio” alone and reinvested any dividends — adjusting each stock’s value by monthly total return for all 120 months.
Ptak calculated the portfolio’s total return for each month to form the return stream over 120 months, he wrote Monday on Morningstar. By decade’s end, more than 100 stocks in the portfolio had disappeared, mostly through acquisitions, so the portfolio comprised the remaining holdings and cash.
Holding Its Own
“The Do Nothing Portfolio held its own. It generated a 12.2% annual return over the 10 years ended March 31, 2023, finishing in a virtual dead heat with the actual S&P 500,” he wrote.
“This is a decent achievement when you consider that while the S&P 500 is a passive benchmark, it isn’t a set-it-and-forget-it index. The S&P index committee chooses which stocks to add to the index and which to jettison, actions that the Do Nothing Portfolio eschews.”
Because the Do Nothing Portfolio was less volatile, its risk-adjusted returns surpassed those of the actual S&P 500, he added. In fact, its 0.84 Sharpe ratio — an investment performance measure that adjusts for risk — “would have beaten that of nearly every actively managed large-blend fund over this 10-year span,” he said.
This showing was surprising in part because the Do Nothing Portfolio carried more cash than the index, finishing the decade with about 5.5% in “dry powder,” while the S&P 500 was nearly fully invested throughout, Ptak wrote. “Cash would have dragged on returns as markets rose, but the Do Nothing Portfolio’s holdings were more than equal to the task,” he said.
Ptak expanded his experiment by conducting the same exercise for the two previous decades. For the 10 years ended March 31, 2013, the Do Nothing Portfolio nearly matched the S&P 500 return, with results again looking a bit better on a risk-adjusted basis, he said, as lower volatility led to a better Sharpe ratio for the hypothetical portfolio.
