You don’t have to be a stock market genius to outperform most pros.
You might think it’s impossible to outperform the average Wall Street professional with just one investment. Fund managers are highly educated and familiar with market data. They are rewarded handsomely for making smart investments.
But the truth is, most of them may not be worth the money. With the right steps, individual investors can outperform the majority of active large-cap mutual fund managers over the long term. You don’t need a PhD or an MBA, and you don’t need to follow the daily happenings of the stock market. All you have to do is buy a single investment and hold it forever.
That’s because 88% of active large-cap fund managers underperform. S&P500 According to S&P Global’s latest SPIVA (S&P Indices Versus Active) scorecard for the past 15 years ending December 31, 2023. So if you buy a simple S&P 500 index fund like this: Vanguard S&P 500 ETF (VOO -0.23%)Over the long term, your investments may outperform the average active mutual fund.
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Why is it so difficult for fund managers to outperform the S&P 500?
It’s safe to assume that the average fund manager is hard-working and well-trained. However, there are at least two major factors working against active fund managers.
First, institutional investors account for approximately 80% of all trading in the U.S. stock market. This is much higher than a few years ago, when retail investors dominated the market. This means professional investors will primarily be trading stocks with another equally knowledgeable manager, making it much more difficult to gain an edge and outperform the benchmark index. Masu.
But the more fundamental issue is that fund managers do not simply need to outperform their benchmark index. It must outperform the index by a sufficient margin to justify the fees it charges. And this makes it less likely that any particular large-cap fund manager will be able to significantly outperform his S&P 500 index fund.
After accounting for fees, only 40% of large-cap fund managers outperformed the S&P 500 in 2023, according to the SPIVA Scorecard. So if his probability of outperforming in a single year drops to 40-60, you can see how his probability of consistently outperforming the index over the long term drops.
What Warren Buffett recommends over other single investments
Warren Buffett is one of the smartest investors around, and I can’t think of a better investment than the S&P 500 index fund. He recommends it over his own company and berkshire hathaway.
In a letter to shareholders in 2016, Buffett said that looking for good investment advice has cost investors a total of $100 billion over the past 10 years compared to investing in simple index funds. He shared a rough calculation of how much it cost.
Even Berkshire Hathaway has two small positions in the S&P 500 index fund.Vanguard S&P 500 ETF SPDR S&P 500 ETF Trust (NYSEMKT:Spy) In Berkshire’s quarterly disclosure. Both are excellent choices for index investors, offering low expense ratios and low tracking error (a measure of how well an ETF price tracks the underlying index). There are many other solid index funds you can buy, but any of the above are good choices as a starting point.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns a position in and recommends the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
