 Good day, fellow investors. I recently analyzed 150 years of SAP 500 returns to answer Peter's questions about what should we expect now from investing in index funds, what's the best strategy and how to approach such an investment. Peter asked can he reach 10% yearly returns? That's all he wants. 10% is all he wants. So let's immediately dig into the content and we'll be discussing whether we can expect 10% from the current situation from the current SAP 500 level. I'm going to dig into 10, 20 and 40 year returns in relation to valuations and then you can see what is the distribution of historical returns and also what you can expect from investing in the SAP 500. Further, based on the historical data that we analyzed, we're going to develop a strategy that you will see whether you can use or not and whether it fits your investment requirements. Investing in index funds is not about the index fund. It is actually about the investor, whether he has the three key concepts that are required to successfully invest in index funds. Index funds can be amazing investments, can be bad investments. It is all up to the investor and you have to know exactly what to do at the right time and that's what you're going to see in this video based on historical data where I used Professor Schiller database to do all the analysis. Now where does this 10% from index fund investing return yearly return come from? Well the SAP 500 is up three times in ten years. When you add the dividend it's 14% per year so that is a remarkable double-digit investment and it's logically that people expect 10% from investing in index funds as everybody did it over the last 10 years. Further, if we look over the last 45-48 years then the returns are even better given the long period. The SAP 500 is up 40 times in 48 years 8% return plus dividend yield of 3% on average that's an 11% return over almost four decades. Amazing return. Now what is investing in index funds? When you invest in an index fund in this case the SAP 500 that I use as an example you invest in the best companies out there the 500 largest companies in the United States traded in the United States of America that represent 80% of the market's equity. Those are all great businesses Microsoft, Apple, Amazon, Facebook, Berkshire, Google, JP Morgan, J&J, Visa so great businesses really good businesses that are likely to be there and continue delivering growing in the future so there is nothing really wrong wrong with index funds from this perspective. And American businesses have been delivering over the past 100 years and given their global reach it's likely that they will continue to deliver over the next 100 years. We have to see whether the current level of index funds is something good for you or not for your investment goals and your strategy. For that we are going to look at fundamentals and earnings. If we look at SAP 500 earnings history the current price to earnings ratio is 24 when I divide the SAP 500 points with the respective earnings also measured in points. The earnings yield is 4.1%. Now if I look at the SAP 500 earnings yield and I go back to 1982 well the earnings yield was much much higher and it was 14% consequently is logical that long-term returns, returns over the last 48 years were in the double digits and were close to 11% per year because the earnings of the businesses you invested in 1982 is what delivered your returns and if we go to Charlie Munger over the long term it's hard for a stock to earn a much better return that the business which underlies it earns. So this is Charlie Munger and therefore we have to focus on the current earnings of the SAP 500 to see what is the expected return. The price earnings ratio is 24, earnings yield is 4.1% from the current businesses therefore if you add 2% growth economic growth business growth over time that is a yield expected yield from a current investment in the SAP 500 of 6%. Now to go on to the historical analysis I have analyzed 10, 20 and 30 year yearly rolling returns since 1871 and divided that into quintiles so 20% chance for the worst best etc return and if we look at 10 year returns there is a 20% chance for a yearly return between minus 6% and 0.01 so 20% chance you will lose a lot of money or break even in 10 years if we look at the best situation there is a 40% chance that you get returns from 5.55% per year to 15.91% per year which is the best 10 year returns in history. I've did the same for the 20 year returns you can pause the video if you want to go in detail so that I don't spend much time on it here in the video also for the 40 year return so you can again pause it but the conclusion is pretty simple these are the 20 worst 10 20 and 40 year yearly returns you can see how the longer the investing period the more skewed to the positive your returns are so yes over the long term businesses and stocks deliver positive returns but there can be a situation 20% chance that you earn a meager 1.67% return however if we look at 20% best returns those are in the double digits for 10 and 20 year returns and then 9.65% for the best 30 year long-term return all in all when I put this all in a chart you can see how okay 10 year returns are the most volatile returns however as you invest for the longer and longer period those returns the distribution of returns smoothens out and ends up historically to what has been historically the return of 4.71% from investing in the stock market over 30 years that's the average 40 year return so 4.71 is in line with the average earning yield over time of 6.75% when you deduct the dividend you get to 4.71% when you add the average dividend of 4.3% you get to an 8-9% return which is what stocks delivered in history so current we have a 6% earnings yield so that is what stocks will probably deliver over time in the future however as Charlie Munger said it's all related to the earnings an index fund or a stock will deliver earnings closely correlated to what the businesses do so you will have 500 businesses in the SAP 500 and your returns will be closely correlated to what the businesses do and when you put that into a long-term perspective again over the next 10 years anything can happen 20 years a little bit less and then 30 years it's likely that you will get the average return so you have you need to have a long-term mindset when it comes to investing what's very interesting is that when we look at valuations the lower the valuation is it is very significant for the next 10 years because when the price earnings ratio was between 5 and 10 the average return over the next 10 years was close to 10% it again averages out to in this case 6% close to the 4.74 and 5% on less than 10 data points in history so we don't know what will happen in the future but long-term returns smoothen out so valuations don't really matter when you are investing for the really really long-term in index funds over the short short term those really matter then when you look at investing okay what's the best strategy we have seen that long-term stocks will deliver because you're investing in the businesses not in the stock market that goes up and down so what are the free key components you need to have when it comes to investing in index funds and what's the best investment strategy if you wish to invest in index funds you need to have a long-term attitude as we have seen long term you will get the business returns secondly you have to patiently and diligently constantly invest month per month so that you don't even have to worry about crashes which we'll discuss in a second and thirdly you must not be greedy and you have to align what you have with what are your financial goals if you can do those three steps that's the best index fund investment strategy that there exists and it will deliver over time let me explain more in detail the long term it's very simple long term the businesses will give you your returns you reinvest your dividends and you will get a good return in probably in this case from the current level six percent but if there is a crash you will do even more and when it comes to long-term investing the stock market might do nothing for the next 15 years and many see that as a very bad thing we are used to stocks going up up and up but 15 years of flat or stocks down might be even better when it comes to your long-term returns this is something you have to learn to live with over the last what 120 40 years there were 76 years where the stock market was below the previous level or didn't grow at all so you have to expect that more than 50 percent of the time you're invested your index funds will not be delivering any kind of positive returns there might be a crash and it might take a lot of time to recover but if you are like most people a crash is something wonderful this is a complex table you can again pause the video if you want to dig deeper but what it tells you the first table on the top is a scenario where you invest a hundred thousand you add six thousand per year and the sap 500 goes up six percent plus the current dividend you end up in 10 years with 305 000 the middle table shows that next year there is a crash of 50 percent you keep investing and the sap 500 goes up six percent per year the first table shows okay you there is a crash and then the sap 500 goes to the same level as in the first scenario you end up with more money thanks to the crash 350 000 compared to 305 000 and that's also the moral of the story you have to patiently and have discipline to invest during crashes because those are the moments that will give you the highest possible returns you patiently accumulate during a crash and then you have to see when the market rewards you and the market is always volatile so at some point it will give you a great reward at some point it will disappoint you but when it has given you the reward then you have to wait a certain time spent it can be five 10 20 years for that then you have to decide what am i going to do with my money i know so many that didn't sell in 2000 even if they have reached all their financial goals because they wanted to add a meter to the their yacht another spare bedroom in their holiday home so let's stick to stocks those can only go up then when those fell then they sold everything they had just to keep what they need so they risk what they need to get something but they don't need that's greedy and you must not be greedy which is the third and key factor when it comes to investing at some point in your life the stock market will give you an opportunity to cash out to put your financial goals first and to really get to them when the stock market gives that situation to you you can cash out you have to make the right decision don't be greedy don't bet on stocks don't risk your pension whatever if you need the money in the next five 10 years because we have seen the distributions historical distributions those are very very volatile and then the worst thing that people usually do is to sell in panic 2002 2008 2009 so many investors have sold because they didn't have the right mindset and now the fourth question to answer the question of the video are index funds the best investment that's for you to answer they might be the best investment for you we can discuss index fund bubbles this and that but you have to see okay this is what history tells us this is the current situation is this the best investment for me can I set it on autopilot and forget about it if you don't want to bother with individual stocks then index funds might be the way for you if you want to develop your mindset learn about a few great businesses then you might do both you might invest in the businesses you understand and keep a certain percentage of your money in index funds so you have both ways of doing that I am not invested in index funds because I do stock market research for a living so I really research businesses I own businesses I like to own individual businesses and that is something that has been working very well for me over the past 20 years and that's something I will continue to do and you have to see whether investing in individual stocks is for you owning individual businesses or you just wish to forget about it vanguard index fund put it on automatic add to that each month and over the very long term the market will go up and down but it will give you the time when it's up when you will see okay what am I going to do in relation to your financial goals it's about your financial life nothing else else if you like this focus on the mindset and historical approach to investing please subscribe and click that notification bell so that you get notified when there is another well-researched video coming out that might add value to your investing life lower your risk or at least explain what might happen so that you can make better financial decisions which is the mission of this channel looking forward to your comments let me know whether you prefer individual businesses or you like this idea of index funds forget about it investment style I'll see you in the next video