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You don’t have to be a stock market genius to outperform most pros.
You might not think it’s possible to outperform the average Wall Street professional with just one investment. Fund managers are well educated and steeped in market data. They are paid a lot of money to make smart investments.
But the truth is, most of them may not be worth the money. With the right steps, individual investors can outperform most active large cap mutual fund managers over the long term. You don’t need a doctorate or an MBA, and you certainly don’t need to follow the daily grind of the stock market. You only need to buy one investment and hold it forever.
That’s because 88% of active large cap fund managers have underperformed S&P 500 index over the past 15 years to December 31, 2023, according to S&P Global’s latest SPIVA (S&P Indices Versus Active) scorecard. So if you buy a simple S&P 500 index fund like the Vanguard S&P 500 ETF (FLIGHT -0.23%)your investment will likely outperform the average active mutual fund over the long term.
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Why is it so hard for fund managers to outperform the S&P 500?
It’s a good bet that the typical fund manager is active and well trained. But there are at least two major factors working against active fund managers.
The first is that institutional investors account for about 80% of all trading in the US stock market – much higher than it was years ago when retail investors dominated the market. That means that a professional investor is mostly trading shares with another manager who is also very knowledgeable, making it much more difficult to gain an advantage and outperform the benchmark index.
The more fundamental problem, however, is that fund managers don’t just need to outperform their benchmark index. They need to beat the index by a significant margin to justify the fees they charge. And that significantly reduces the likelihood that any given large-cap fund manager will be able to outperform the S&P 500 index fund.
The SPIVA scorecard found that only 40% of large-cap fund managers outperformed the S&P 500 in 2023 after you factor in fees. So if the chance of outperforming drops to 40-60 for one year, you can see how the chance of consistently beating the index over the long term could go way down.
What Warren Buffett recommends over any other single investment
Warren Buffett is one of the smartest investors around, and he can’t think of a better investment than the S&P 500 index fund. He recommends it even above his own company, Berkshire Hathaway.
In his 2016 letter to shareholders, Buffett shared a rough calculation that seeking advanced investment advice had cost investors a combined $100 billion over the previous decade compared to investing in a simple index fund.
Even Berkshire Hathaway holds two small positions in S&P 500 index funds. You’ll find shares of the Vanguard S&P 500 ETF and the SPDR Trust S&P 500 ETF (NYSE: SPY) in Berkshire’s quarterly statements. Both are great options for index investors, offering low expense ratios and low tracking errors (a measure of how closely the price of an ETF follows the underlying index). There are plenty of other solid index funds you could buy, but either of the above is a great option as a starting point.
Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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The job Want to Outperform 88% of Professional Fund Managers? Buy This 1 Investment And Hold It Forever. – The Motley Fool appeared first on Canadian News Media.
