How to outperform the S&P-500 Index

All countries with a developed stock market have their stock indices.

For example:

• U.S. stock indices: S&P-500, Russell-2000, Nasdaq and others.
• Japanese stock indices: Nikkei.
• British stock indices: FTSE.

There are mega indices that that unite the largest companies from:

• developed countries,
• developing countries,
• developed and developing countries together.

As one gains experience, index investing strategies can become more complex. An investor can add new countries and indices to his portfolio.

It is better to start with the most popular index, which is the S&P 500. This index includes 500 of the largest U.S. companies. The index is regularly reconsidered and the worst companies are replaced by the best ones.

The S&P 500 Index is an elite hedge fund whose committee analyzes all U.S. companies and selects the best ones. When investing in the S&P 500 index, a beginner investor benefits from the experience of an investment committee that compiles the index. The U.S. economy is the strongest economy in the world and investing in it can bring the best results.

ETF can be used for index investing.

ETF is an exchange-traded fund launched by large investment companies. There is a small fee to manage this exchange-traded fund, but it makes it easier to buy 500 companies at a time. Also, index investing in ETF requires less money than buying a large number of shares on your own.

Passive index investing means that you invest regularly but not often. Investing a large amount of money once will not be very effective. The market has different periods: growth, decline and a flat.

Let’s have a look at the futures chart for the S&P 500 index over the past few years.

You can see on the chart that:

• from 1998 to 2013 the market was flat;
• from 2013 to 2022 there was an uptrend.

No one can say for sure what the next phase of the market will be. If you invest only once, you risk trading in a flat market, which means that you might wait more than 10 years to get some tangible results.

Therefore, the optimal passive index investing is regular investing. For example, you invest equal amounts of money once a month or a quarter. Then you can get the effect of price averaging. Some buys will be at the highs of the charts, and some will be at the lows. Thus, the average price will be more favorable. It is important to stay determined, save money and invest regularly.

Crisis, panic and fear are the best periods for the right investments because there is a possibility to buy assets that have become cheaper at the lowest prices. When everyone sells because they are scared, the conscious investor should buy. Regular investing provides such an opportunity.

Invest every month despite the news or panic among your friends.

Over the past 20 years, the average annual return that index investing can provide has been about 7% per annum.

It may seem little at first sight. How can you increase this interest rate without spending a lot of time?

You can use the volume analysis in the ATAS trading platform.

Let’s have a look at the analysis of ES futures trading volumes on the S&P-500 index on the Chicago Futures Exchange:

The chart shows a daily timeframe with the TPO and Profile indicator and a volume analysis period = 1 month.

The level of the maximum volume is marked with the label “Maximum level” (point 1). This price level is the most interesting for major traders.

If the price falls down after the volume inflow, then the downward movement is likely to continue. If the volume pushes the price up, then the upward movement is likely to continue.

Point 2 indicates the end of the month, the price is significantly higher than the maximum volume level. You can start buying right away in the month that comes after point 2.

This approach helps to invest because you enter the market only after the end of the correction or in an uptrend. If the market becomes bearish, then this approach will allow you to avoid buying.

Entry points will appear at the end of a downward movement. The maximum volume level shows that major players were especially active at this point. The price reaction, which was upward in this case, showed that major traders were buying and they pushed the price up. Therefore, the upward movement is likely to continue.

Let’s have a look at another example:

Point 3 indicates the end of the month, the price is below the maximum monthly volume (point 2). In this situation, it is better to avoid buying because a downward movement is likely to begin. However, you can buy a double volume next month if there is a signal to buy.

Such a simple approach based on the ATAS analytical platform will increase the average annual profit by 2-4% and get 10% per annum. We will describe in detail the historical testing of this approach in one of the following articles. 

The idea of this approach is simple:

• you should buy when the market is growing,
• you should wait when the market is falling.

The analysis should be done once a month, at the beginning of a new month. This approach helps to avoid a bear market. Even if you buy at the highs during a bull market, it will still bring you profit because the position is held for years.

Let’s calculate the difference between the rate of return of 7% and 10% per annum.

For example, an investor invests an initial amount of $10,000, then he adds $500 every month and reinvests profits once a year. It goes on for 30 years in a row:

• with an average annual return on investment of 7%, the result will be → $643,000.
• with an average annual return on investment of 10%, the result will be → $1,161,000.

You can get twice as much results using volume analysis. If you systematically do index investing, then it is quite possible to become a dollar millionaire.

Of course, it may take 30 years, but if you start doing it at the age of 30, you can achieve this result by the age of 60. Having this amount in the account, you can receive 10% of annual income, i.e. about $160,000 per year, which is a decent pension already.