Why Blind Index Investing Could Be Costing You Thousands?!Index-based investing has been one of the most popular ways to grow a long-term portfolio for decades. Today, it has become even more accessible and favored, offering a safer foundation for investing and generally carrying lower risk compared to portfolios composed of individual stocks. For someone like me, a technical analyst, index investing isn't exactly an adrenaline rush. Under societal pressure, I decided to test a few hacks and dive deeper into it ;)
I set out to compare three of the most popular U.S. index ETFs – SPY (S&P 500), QQQ (Nasdaq 100), and IWM (Russell 2000) – and analyze how to implement a brief technical analysis into index selection could influence long-term results. Starting in 2005, I "invested" $1,000 every quarter, completing a total of 81 test purchases. Each time, I selected the index that technical analysis suggested was in the strongest position.
If done strictly and consistently, there were often situations where all three indices had just reached their all-time highs. In those moments, I had to make a choice. Technical analysis is not just about drawing lines on a chart – experience, market intuition, and behavioral patterns of the price play a big role here.
My Test and Strategy
The goal was to compare the following three U.S. index ETFs:
- SPY (S&P 500)
- QQQ (Nasdaq 100)
- IWM (Russell 2000)
Test conditions:
- Start date: 2005
- Investment period: 81 quarters
- Mandatory quarterly investment: $1,000
- Index selection: Based on technical analysis and market intuition.
Distribution of trades during the test period:
- SPY: 35 times
- QQQ: 31 times
- IWM: 15 times
The chart illustrates SPY, QQQ, and Russell with blue arrows marking purchase points.
Results of the Experiment
Performance of my strategy:
- +344% return
- Invested: $81,000
- Final value: $360,000
Comparison indices (each quarter regular purchases):
- SPY: +233% (final value: $272,000)
- QQQ: +579% (final value: $552,000)
- IWM: +128% (final value: $186,000)
My strategy outperformed SPY and IWM because I focused on selecting the ETFs in the strongest technical condition at the time. While QQQ delivered higher absolute returns, my diversified approach offered competitive returns with lower risk and more stable outcomes.
Key Takeaways
1. Diversity and Stability: Risk Mitigation and Return Optimization
The goal wasn't just maximum returns but also reducing risk and adopting a smarter approach. While QQQ had the highest returns, remember that it is heavily concentrated in the technology sector, making it riskier. Back in 2005, it wouldn't have been easy to predict that QQQ would outperform. A technical analysis strategy allows for risk diversification by choosing the strongest index at any given time, delivering significant returns while maintaining diversity and stability.
2. Thoughtful Regularity Outperforms Blind Regularity
Strict quarterly investing avoids the biggest mistake investors fear – timing the market. Regularity is crucial, but it needs to be thoughtful. The tests showed that blind purchasing could be costly: for instance, regular SPY purchases would have left $100,000 on the table, and IWM even more. My strategy allowed selecting the strongest index at each point, yielding significantly better returns.
3. Wrong Index Choice Can Be Costly
Had I chosen only IWM throughout the period, my return would have been just +128%. This clearly shows the importance of not sticking to one index but instead evaluating regularly to find the one with the greatest potential at any given time.
How to Choose the Best Index: Follow my Newsletter to Guide You
One of many of the topics of this newsletter (You will find it here, in the profile section, visiting my "website") will be sharing my monthly and quarterly top lists of indices, making regular purchases easier for you. The test proved that sticking to one index isn’t the best way forward – but which one should you choose? That’s where the monthly top list comes in.
I firmly believe this strategy and approach have significant potential to help investors make smarter and more confident decisions. That’s why I’m starting a newsletter, where one of the many topics will be sharing this list regularly:
- The technically strongest indices for investing.
- Explanations of why a particular index is technically more attractive than others.
Conclusion
My research proves that technical analysis and understanding of charts can be powerful tools for long-term index investing. Regularity, fact-based decisions, and risk diversification help achieve optimal results.
Your portfolio deserves better decisions. Don’t waste time analyzing indices yourself.
All the best,
Vaido
