What should I invest my money in? (a question I often receive)
Almost without exception and in virtually all market conditions, The Roadside Scholar recommends the Cheap & Strong portfolio for those interested in long-term profits.
Cheap & Strong is a stock ownership plan that combines two time-tested, market-beating strategies -- value and momentum in one portfolio. The strategy is based on the historical profit outperformance of cheaper than average stocks (value stocks in wall Street lingo) AND glamour stocks whose prices have been rising rapidly (strong price momentum to Wall Streeters). Both strategies have bested the performance of the S&P 500 over long time periods.
The psychology of investors creates the opportunity.
Cheap stocks are despised, unloved stocks that have recently disappointed investors (think airline or cruise ship companies in a COVID world). Investors believe performance will never improve and drive down the stock price below real value.
Momentum stocks are the exact opposite – stocks that Wall Street adores (think Tesla or Zoom). People just can’t get enough Tesla or Zoom stock – they are Wall Street darlings. While the situation does not last forever, taking advantage of this uncritical love in the short-term has been a winning approach.
The Cheap & Strong portfolio benefits from these typical investor behaviors.
Buying cheap and buying strong has proven to be a winning strategy. If Cheap & Strong delivers profits in the future comparable to past performance, the investor would exceed the 10% profit of the S&P 500 by about 2.5% per year (12.5% annual average).
An extra 2.5% a year translates into huge additional dollars. Investing at a 10% profit for 30 years grows $10,000 into $174,500. Investing at a 12.5% profit level for the same time period nearly DOUBLES the investor’s money: the same $10,000 becomes $342,400.
Execute: Put your cash into 2 diversified stock bundles in equal parts:
50% in one that follows a deep value strategy (I favor the Invesco S&P 500 Pure Value
ETF (ticker: RPV) or the Invesco S&P Midcap 400 Pure Value ETF (ticker: RFV))
50% in one that executes the price momentum strategy (For the momentum half, I like
the iShares MSCI USA Momentum Factor ETF (ticker: MTUM).)
Each bundle’s investment strategy is sound, management costs are low and track records are excellent. Importantly, each is diversified, owning more than 100 stocks at all times (a total of over 200), and rebalances periodically. Due to the ETF structure, the tax characteristics are favorable to investors.
It is important to note that Cheap & Strong does not work all the time. The investor must be patient and not panic during periods of underperformance.
Roadside Scholar Tip: Try a systematic cheap and strong investment approach for your stock market investments. Be patient and don’t panic, over time, you will not be disappointed.
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