The Secret Strategy that Outperforms 84% of the Time: Index Investing

Dear Reader,

What was it about the headline that appealed to you?

The opportunity to find out about an industry secret and/or the inside running on a proven formula for longer-term investment success?

Well, you won’t be disappointed.

What I’m about to reveal to you today is the culmination of 34 years’ experience in this business.

This winning investment formula has been tested, backtested and re-tested on an annual basis. The results are always the same…an 84% outperformance rate.

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I know, it sounds too good to be true. However, please be assured, it is the real deal.

Confession time. I am a lousy stock picker. The only reason I’ve made more than I’ve lost on buying and selling individual shares is courtesy of a 15-bagger (15 times return on my original investment) from one stock. And if I’m brutally honest, that was more a case of being in the right place at the right time.

With such a mediocre track record, it was evident I needed a far more reliable strategy to preserve and create wealth.

Thankfully, I found it.

This system — which I will reveal to you shortly — outperforms and outlasts the vast majority of professional investors…the ones who charge an obscene amount in management fees.

OK, enough of the build-up. Time for the big reveal.


Invest in…index funds

Given the fanfare and hype, I reckon right about now you’re feeling like you’ve been hit with a wet lettuce. ‘That’s it? Index funds are your grand plan? You’re full of it Gowdie.’

Yep. Heard it all before.

Why is there this feeling of disappointment? That’s easy. Because index funds are dead boring. There’s no adrenalin shot. It’s plod, plod and plod some more.

There is nothing remotely sexy about investing in an index ETF (Exchange Traded Fund).

No one goes to a BBQ and boasts ‘I’m invested in an index fund’. Eyes roll. Ho hum.

Whereas a bit of product name-dropping carries some serious kudos with your assembled peers…bought some crypto the other day, got into this tech IPO or took out a call option on Tesla.

Ooh. Aah. Aren’t you the clever one! Possibly. But, on the law of longer-term averages, probably not.

Many years ago, I was that young bull…looking for the inside path to rapid wealth creation.

These days I’m an older bull. Investing patiently. Conserving my energy and resource.

I’ve had a front-row seat in this business for over 30 years. And not even the best and brightest in the stock-picking game can consistently back winners.

It’s a statement of fact that’s been proven time and time again by numerous research reports.

The ‘S&P Global SPIVA 2019 Australian Scorecard Report’ shows only 2.2% of professionally managed funds remain in the top quartile of performance over a five-year period.

To put it another way…97.8% of fund managers cannot consistently deliver shoot-the-lights-out performance.

Port Phillip Publishing

Source: S&P Global

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Why is that?

Markets are constantly changing. Central banks intervene or they don’t. Interest rates can go up, down or sideways. Some years, growth stocks are all the rage and other years, deep-value stocks capture investor attention.

Trying to second guess what next year’s winning theme will be is not easy. Hence the high drop-out rate from the top-tier of the performance tables.

This is why backward-looking investors (the ones who chase last year’s winner/s) invariably end up disappointed.

Trying to identify next year’s winner and the one after that, comes with a 98% failure rate.

Index investing is a no-brainer

Why would you bother?

And even if you broaden the search criteria to identifying a fund that consistently outperforms the ASX 200 Index, I wish you the very best of luck.

The failure rate — depending on the time frame — is anywhere between 80% and 93%.

Port Phillip Publishing

Source: S&P Global

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Again…why would you bother?

And for those who do bother and persist in their search, the fund you selected has a 50/50 chance of surviving over a 15-year timeframe.

Port Phillip Publishing

Source: S&P Global

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Whereas the ASX 200 Index will still be there. Chugging away. Pumping out returns that over 80% of highly paid professionals cannot consistently match.

And if you’re still not persuaded, here’s something else to consider…a factor most investors are not mentally prepared for.

Over a 10-year time horizon, around 17% of funds WILL outperform the index.

Which means there’s a one in six chance of picking a winner…but it comes with a very important proviso.

You have to stick with the fund through thick and thin. Easier said than done.

The Brandes Institute released a research paper titled ‘Death, Taxes and Short-Term Underperformance’.

The title deliberately included ‘short term underperformance’ alongside life’s other certainties.

The research focused on tracking the best-performing funds in various asset classes (global shares, US shares, emerging market shares and international fixed interest).

What the research identified is…‘all the top performers dropped into the bottom deciles over rolling one and three year periods during those ten years. In many instances these included periods of falling over 30 or 40% behind…

The underperformance can be for a variety of reasons:

  • The market cycle did not suit their investment style.
  • They could have been buying deeply discounted assets that took the market some time to realise the true value in the stock.
  • Managers can become a victim of their own success — more money flows in when they are running hot, and it can be difficult to invest these additional dollars in quality undervalued stocks.

The important point to note is that even the very best of the best will have periods when they fail to deliver on investor expectation.

If a fund you were invested in fell behind the market by 30 or 40%, would you stick with it?

From my experience, a three-year period of underperformance would be more than enough for the majority of investors to call it quits…they would not stay the distance to achieve the outperformance.

The American Enterprise Institute summed up the merits of index investing very succinctly…

For many investors, the ability to invest in low-cost, passive, unmanaged index funds and outperform 92% of high-fee, highly paid, professional active fund managers seems like a no-brainer, especially considering it requires no research or time trying to find the active managers who beat the market in the past and might do so in the future.

Index investing is a no-brainer. Unfortunately, investors have to learn the hard way how to do things the easy way.

For those who need the adrenalin rush of finding that next 10- or 15-bagger, my suggestion is to invest the core of your wealth in index funds and play with a percentage — be it 10, 15 or 20% — in the market.

The index-investing strategy that outperforms 84% of the time will, over the long term, be the secret to your financial success.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion