20 years ago I learned that a portfolio that had 20% international stocks and 80% S&P could not only beat the S&P but had the best pension performance for county workers. Note that it is not diversified into bonds and doesn’t worry about any other investment criteria like risk adjusted returns. What it did have was volatility in the international holding.

Volatility is the key to outperforming the S&P. Why is it not stock selection? The Stars buy and hold strategy holds SPY and TQQQ. Both of these hold roughly the same stocks on a cap weighted basis. The difference is the volatility of TQQQ. Its volatility on average is 4. In a rising market TQQQ acts like 4 SPY. Coming off a major correction low TQQQ acts like 20 – 30 SPY because you have 4 times as many shares after rebalancing and the volatility explodes to 5 – 8 because everyone wants to own the best stocks.

How do I know volatility is the key to beating the S&P? The Stars strategy outperforms the S&P by a factor of 17 for the best version over the past 27 years. Diversification and risk adjusted returns are the reason the financial services industry can’t beat the S&P. You can’t own investments that underperform the S&P for any reason. That just makes it more difficult to outperform the S&P.

The financial services industry needs to learn this so that they can offer better investment options.