This ‘Do Nothing Portfolio' Can Beat the S&P 500

A hypothetical stock portfolio has taken hands-off investing to a whole new level.

Jeffrey Ptak, a chartered financial analyst (CFA) for Morningstar, recently devised a passive investment portfolio that’s based on the composition of the S&P 500. But instead of replacing stocks with new companies as they’re delisted from the index, Ptak’s 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% during the 30-year period of March 1993 to March 2023. Here’s how it works, as well as some important lessons you can 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 hypothetical: “Imagine you bought a basket of stocks 10 years ago and then you didn’t trade them, not even to rebalance,” he wrote on Morningstar.com. “You just let ’em sit. How would you have done?”

To find out, Ptak compiled the S&P 500’s holdings as of March 31, 2013, and then calculated each stock’s monthly returns going back 10 years. Over 100 of those holdings were no longer in the index 10 years later, many of which were acquired by other companies, according to Ptak. What was left at the end of the 10 years was a portfolio of surviving stocks and cash that had built up over the years following company acquisitions.

The Do Nothing Portfolio would have generated a 12.2% annual return during those 10 years – practically identical to the S&P 500’s return during that time. That caught Ptak’s attention, considering 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 10-year periods – March 31, 1993 to March 31, 2003, and March 31, 2003 to March 31, 2013. The portfolio beat the index by nearly one percentage point during the first 10-year stretch and nearly matched it in the second, all while offering better risk-adjusted returns.

In total, the Do Nothing Portfolio would have outperformed the index over the full 30-year period and been less volatile. For example, Ptak found that $10,000 invested in the Do Nothing Portfolio at the end of March 1993 would have grown to $172,278 within 30 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 delisted over that 30-year stretch, the Do Nothing Portfolio would have also been more heavily concentrated in winning stocks like Apple.

“What looks to have made the difference is the way the portfolio let its winners run and refrained from entering new positions,” Ptak wrote. “Because the Do Nothing Portfolio doesn’t have to immediately make room for new index additions, such as 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, like mutual funds, lack 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 scrap your investment plan altogether in favor of this novel strategy, but there are several lessons Ptak says can be learned from the experiment.

Let winners run. Ptak acknowledges this won’t suit all investors, especially those who are uncomfortable with concentrated portfolios, but a large part of the Do Nothing Portfolio’s success can be attributed to the dominance of its top 10 holdings, especially Apple.

You don’t need to be fully invested all of the time. Instead of rushing to replace delisted stocks with newcomers, the Do Nothing Portfolio lets cash build slowly over the years. As Ptak notes, “the fewer decisions we have to make, the better.” The cash acts as a ballast for a portfolio that is more concentrated in its top stocks than the S&P 500 would be otherwise.

Don’t try to intuit your way to portfolio growth. “The responsible voice in our head tells us that a strategy of doing nothing can’t possibly work,” Ptak concluded. “Yet, markets repeatedly upend our expectations, which we often form by attempting to decode recent events and their future implications.” Instead, opt for “patience and humility” over “action and good intentions,” he says.

Bottom Line

Morninstar’s Jeffrey Ptak recently conducted an interesting experiment, in which he explored how an investor would fare if they bought a basket of stocks and then refrained from any further buying or selling. Ptack found that this hypothetical Do Nothing Portfolio would have performed quite well during recent 10-year periods and outperformed the S&P 500 between March 1993 and March 2023. By slowly amassing cash, not replacing delisted stocks and letting winners run, the Do Nothing Portfolio would have been a winning strategy.

Investing Tips

While the Do Nothing Portfolio doesn’t need to be rebalanced, 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 doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost 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.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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