The Invest5 Story

The Invest5 Story

by Joel Greenblatt

A Lesson in Compounding

So, a few years ago, I was asked to teach a weekly class on investing to a group of ninth graders from Harlem. I eagerly said yes and immediately began to have second thoughts. For over two decades, I’d been teaching a course on investing at an Ivy League business school. After teaching for so long, I knew what I was doing (more or less). Making things even easier, the MBA’s knew what they were doing too, with an average age of 27 and three or four years of work experience before getting to me. Teaching a bunch of ninth graders was going to be tougher.

With no money to invest and still years away from a good paying job, most teenagers don’t care about investing. I wanted them to. I’m pretty sure they just wanted to go to lunch. Undaunted, the first day of class I handed out loose-leaf binders with two charts on the front cover.

One chart had a column of numbers labeled "Investor A" at the top. In this first chart, Investor A invests $2000 each year into a retirement account starting at age 26. This same investor continues to make annual contributions to his retirement account until age 65 achieving a return of 10 percent per year on his investments. That works out to 40 annual contributions of $2000.

In the next column, "Investor B" begins at an earlier age. Investor B starts investing $2000 each year at age 19 and also achieves a 10 percent annual return on his investments. But Investor B only contributes $2000 each year for 7 years and stops contributing at age 26 (just when Investor A is getting started). That’s only 7 annual contributions of $2000.

At age 65, who ends up earning more money? Investor A or Investor B? The surprise is that Investor B, the one who made just 7 annual contributions when he was young and then never contributed again after age 26, ends up earning more—$930,641 to be exact. Investor A, who diligently made contributions each year for over 40 years, ends up earning less—$893,704. Not bad for Investor A, but not my point.

The point is this: When it comes to saving, investing and the power of compounding, starting earlier is better——a lot better. But most people don’t. And that’s a problem.

The Idea Behind Invest5

Maybe the solution lies in getting back to the simplicity of ninth grade. It’s pretty clear that investing early in a disciplined manner is the key to taking advantage of the magic of compounding. But for the most part, as a society, we are blowing it. For those who haven’t yet had the chance to start investing and for those just beginning to work, maybe this means we need a game plan that adds both discipline and a helping hand to investors who should be starting on a long-term investing strategy as soon as possible.

That’s where the idea behind Invest5 came from. Invest5 was designed to provide a simple, one-step solution that combines a disciplined plan with a strategy that–hopefully– investors should be able to stick with over the long term.

Discipline

First, discipline. With Invest5, you choose an investment amount of as little as $5 a day. Once a week, the amount chosen will be automatically (and safely*) transferred from your bank and invested in the Gotham Enhanced S&P 500 Index Fund (of course, the money invested remains yours). This automatic process, which does not require a new investment decision each day, week, month or even year should help make it easier for investors to continue investing regardless of which way the market moves.

Think about how important just making that one initial investment decision actually is. If the market goes down, many investors get nervous and either sell the investments they already own or stop investing until the situation becomes “clearer”. Based on history and logic, these actions make little sense. Over the long term, the market has tended to rise as the economy grows. The truth is that stocks represent ownership shares of businesses. Stocks are not just pieces of paper that bounce up and down. As the price of a business goes down, a share of its stock may actually become more of a bargain.

Warren Buffett has often said that young investors should be rooting for the market to go down. If you are a buyer of stocks over the long term, “who wouldn’t rather buy at a lower price than a higher price? People are really strange on that. They should want the stock market to go down–they should want to buy at a lower price.” Nevertheless, without the discipline of an automatic investing program, it’s hard for most people to continue buying when stocks go down. In most cases, they tend to do the opposite, even though as prices fall, the same amount of money invested can buy even more shares.

A disciplined, automated and pre-planned investment program (the starting point for Invest5) provides a solution.

The Investment Strategy

But next, we need a thoughtful investment strategy–one that most people can stick with over the long term. The best performing mutual fund from 2000 to 2010 actually earned 18% more per year than the market (as represented by the returns of the S&P 500 index during that same period)1. That’s huge outperformance. It’s just that almost no investors stuck with that best performing fund long enough to capture those good returns.

Because the fund was so volatile, with its returns zigging and zagging wildly differently than the market, most investors bailed out after the fund lost money or underperformed the market. For the most part, they were no longer invested in the fund to capture the good returns when the fund next outperformed or the market rebounded. (In fact, by making all the wrong moves, the average investor (on a dollar weighted basis) in this best performing fund actually turned the fund’s 18 percent annual market outperformance into an annual underperformance of 11%!)

That’s why the best investment strategy for most people is not merely one that makes sense but also one they can stick with. That was the idea behind the Gotham Enhanced S&P 500 Index Fund (GSPFX). Most investor’s follow the returns of the S&P 500 index and use its returns as a guideline to judge how the market is doing. So, the Gotham Enhanced S&P 500 Index Fund starts there. The fund buys all 500 stocks in the S&P 500 index and reweights them, but only in a limited way.

The idea is to outperform the S&P 500 index, but at the same time, attempt to limit how much the fund’s returns deviate from the S&P 500 return. How do we try to do this? If a stock within the S&P 500 appears to be cheap relative to our assessment of its value, we’ll generally buy more of it than the amount held in the S&P 500 index. If a stock appears expensive to us, we’ll buy less. It’s just that we limit how much more and how much less. In this way, we hope to outperform the S&P 500 over time but limit the variance of the fund’s returns relative to the S&P’s return. If we are successful, the fund should outperform the S&P 500 index over time and also limit the magnitude of underperformance during periods where the S&P 500 index outperforms. Hopefully, this strategy will make it easier for investors to stick with the fund over the longer term and capture superior returns if the fund outperforms.

The Final Piece

Invest5 combines the discipline of an automated investment plan with an investment strategy that should make sense for most investors over the long term. More important, the opportunity to start investing with as little as $5 a day with Invest5 should make it easier for many to get started right now. In the end, just starting is the key. As a handful of ninth graders (at least, the ones who were actually listening) can attest, the power of compounding can’t begin until you make the decision to start investing. The sooner, the better.

June 2020

The Gotham Enhanced S&P 500 Index Fund (GSPFX) is a mutual fund that buys all 500 stocks in the S&P 500 Index but reweights them, buying more of the ones we think are cheaper and less of the ones we believe are more expensive.
Morningstar Rating TM
Overall Morningstar Rating based on risk-adjusted returns among 1,229 Large Blend Equity funds as of 9/30/2020.

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1Source: Morningstar study quoted in The Wall Street Journal, December 31, 2009, "Best Stock Fund of the Decade."
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Mutual fund investing involves risks, including possible loss of principal. Annual stock returns may vary greatly from year to year; may be negative; and do not compound at a consistent rate. Automatic investing does not guarantee that your investments will make a profit nor does it protect you against losses when stock markets are declining. You should consider whether you will be willing to continue investing during a long downturn in the market, since automatic investing involves making continuous investments regardless of fluctuating price levels.

Past performance is no guarantee of future results.

The Gotham Enhanced S&P 500 Index Fund (the "Fund") began operation on December 30, 2016. It seeks long-term capital appreciation. There is no guarantee that the Fund will achieve its objective. The Fund may experience high portfolio turnover, which may increase brokerage costs.

The S&P 500 Total Return Index (the "Index") is a commonly followed equity index and is generally considered a barometer of the U.S. equity market. Returns for the Index include the reinvestment of income and do not include transaction fees, management fees or any other costs. The performance and volatility of the Fund will be different than that of the Index. The Index is unmanaged and investors cannot invest directly in the Index. Past performance of the Index is not indicative of its future performance.

The Morningstar Rating TM ("star rating") is calculated for funds with at least a three-year history. Exchange-traded and open-end mutual funds are combined into a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each fund category receive 5 stars, the next 22.5% receive 4 stars, the next 35%receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating is a weighted average of the performance figures associated with a fund's 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. In the Large Blend category, GSPFX was rated 4 stars among 1,229 funds for the 3-year period ending 9/30/2020. © 2020 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

An investor should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. The prospectus and summary prospectus contains this and other information about the Fund. To obtain a copy of the prospectus and summary prospectus, please call 888-705-0545 or visit prospectus-reports. The prospectus and summary prospectus should be read carefully before investing.

Invest5 by Gotham Funds

The Gotham Enhanced S&P 500 Index Fund is distributed by Foreside Funds Distributors LLC ("FFD"). Gotham Asset Management, LLC is the investment adviser to the Fund and is not affiliated with FFD. FFD does not open, maintain or monitor customer accounts, nor does it accept any investments or handle purchase or redemption requests. Shareholder accounts invested directly in the Fund are held at the transfer agent, BNY Mellon Investment Servicing

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