A hypothetical stock portfolio has taken hands-off investing to a whole new level.
Jeffrey Ptak, a chartered financial analyst (CFA) for Morningstar, recently designed a passive investment portfolio based on the composition of the S&P 500. But instead of replacing stocks with new companies as they are dropped from the index, Ptaks strategy takes an alternative approach: it does nothing.
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This laissez-faire approach to investing produced some compelling hypothetical returns: The portfolio would have beaten the S&P 500 by 5.6% over the 30-year period from March 1993 to March 2023. Here’s how it works, plus some key lessons that you can learn to take from it.
About the Do Nothing portfolio
How the ‘Do Nothing Portfolio’ can beat the S&P 500
Appropriately, Ptak has dubbed this super-passive approach the “Do Nothing Portfolio.” The strategy started with a simple hypothesis: “Imagine that you bought a basket of stocks ten years ago and then didn’t trade them, even to rebalance,” he wrote on Morningstar.com. ‘You just leave them alone. How would you have done it?”
To find out, Ptak collected the stocks of the S&P 500 as of March 31, 2013, and then calculated each stock’s monthly returns going back ten years. More than 100 of these companies were no longer in the index a decade later, many of which were acquired by other companies, Ptak said. What was left at the end of the decade was a portfolio of leftover stocks and cash built up over the years after corporate acquisitions.
The Do Nothing Portfolio would have generated an annual return of 12.2% over those ten years – virtually identical to the return of the S&P 500 over that period. That caught Ptak’s attention, as 5.5% of the Do Nothing Portfolio’s assets were cash. By comparison, the S&P 500 was fully invested. The Do Nothing Portfolio was also less volatile during that period and produced better risk-adjusted returns than the index, Ptak wrote.
Ptak took his experiment several steps further and tested the Do Nothing Portfolio in two other non-overlapping ten-year periods: March 31, 1993 to March 31, 2003 and March 31, 2003 to March 31, 2013. The portfolio beat the index. fell by almost one percentage point over the first ten-year period and almost equaled it in the second period, while still offering better risk-adjusted returns.
Overall, the Do Nothing Portfolio would have outperformed the index and been less volatile over the entire 30-year period. For example, Ptak found that the $10,000 invested in the Do Nothing Portfolio at the end of March 1993 would have grown to $172,278 within thirty years, while the same investment in the S&P 500 would have been worth $163,186.
How could this hands-off approach produce such impressive returns compared to the S&P 500? Ptack surmised that the Do Nothing Portfolio’s cash position — which would have grown over the years — would have helped an investor weather the stock sell-offs of 2000 and 2008. Since stocks were not replaced when they were taken private during that thirty-year period, the Do Nothing Portfolio would also have been more heavily concentrated on winning stocks like Apple.
“What seems to have made the difference is the way the portfolio let its winners run and refrained from taking new positions,” Ptak wrote. “Because the Do Nothing Portfolio doesn’t have to immediately make room for new index additions, like Tesla (TSLA) and Meta Platforms (META), or replace names that have left the portfolio (through delisting), it gives stocks like Apple the ability to run further than they otherwise could. This can be a competitive advantage as larger institutions, such as investment funds, do not have the same ability to concentrate to this extent.”
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Lessons from the do nothing portfolio
How the ‘Do Nothing Portfolio’ can beat the S&P 500
You may not abandon your investment plan entirely in favor of this new strategy, but there are several lessons Ptak believes can be learned from the experiment.
Let winners run. Ptak acknowledges that this won’t suit all investors, especially those uncomfortable with concentrated portfolios, but much of the Do Nothing Portfolio’s success can be attributed to the dominance of the top 10 holdings, especially Apple.
You don’t always have to be fully invested. Rather than rushing to replace delisted stocks with newcomers, the Do Nothing Portfolio lets cash slowly build up over the years. As Ptak notes, “the fewer decisions we have to make, the better.” The cash acts as ballast for a portfolio that is more concentrated in the top stocks than the S&P 500 would otherwise be.
Don’t try to intuitively find your way to portfolio growth. “The responsible voice in our heads tells us that a strategy of doing nothing cannot possibly work,” Ptak concluded. “Yet markets repeatedly raise our expectations, which we often form by trying to decipher recent events and their future implications.” Instead, choose “patience and humility” over “action and good intentions,” he says.
In short
Jeffrey Ptak of Morninstar recently conducted an interesting experiment in which he investigated how an investor would fare if he bought a basket of shares and then refrained from further buying or selling. Ptack found that this hypothetical Do Nothing Portfolio would have performed quite well over the past decade, outperforming the S&P 500 between March 1993 and March 2023. By accumulating money slowly, not replacing delisted stocks, and letting the winners run , the Do Nothing Portfolio would have been a winning strategy.
Although the Do Nothing Portfolio does not require rebalancing, your investment strategy may benefit from periodic rebalancing. SmartAsset’s asset allocation calculator can help you determine how much of your portfolio should be in stocks, bonds, and cash, based on your risk tolerance.
A financial advisor can help you select investments and provide ongoing portfolio management for a fee. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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