Outperform 92% of Professional Fund Managers with This Simple Strategy

Investing in the stock market can be a daunting task, especially when faced with the challenge of outperforming professional fund managers who have years of experience and access to vast resources. However, a simple investment strategy can help you beat nearly 92% of these professionals over the long run. This strategy involves investing in an S&P 500 index fund, such as the Vanguard S&P 500 ETF (VOO 0.96%).



The reason this strategy works is due to the high failure rate of actively managed funds. According to the SPIVA (S&P Indices Versus Active) Scorecard, only 8.2% of large-cap domestic mutual funds outperformed the S&P 500 over the past 20 years. Even when looking at a shorter three-year period, about 80% failed to beat the benchmark. This high failure rate can be attributed to several factors, including market efficiency, transaction costs, fees, fund size, performance chasing, and survivorship bias.

One of the main reasons actively managed funds struggle to outperform is their higher fees. The average expense ratio for actively managed large-cap funds is around 0.65%, while the expense ratio for the Vanguard S&P 500 ETF is only 0.03%. This lower expense ratio means that index funds passively track the performance of the market, with minimal fees deducted from investors' returns. Over a 15-year period, the difference in fees can significantly reduce the overall returns of actively managed funds. For example, if an investor has $10,000 invested in an actively managed fund with a 0.65% expense ratio, they would pay $650 in fees over 15 years. In contrast, an investor in the Vanguard S&P 500 ETF would pay only $45 in fees over the same period. This $605 difference in fees can have a significant impact on the overall return of the investment.

Additionally, the lower expense ratio of index funds allows them to more closely track the performance of the market. This is because the fees deducted from the fund's assets are lower, resulting in a smaller tracking error. The Vanguard S&P 500 ETF, for example, has a very low tracking error, which means that its value closely follows the value of the S&P 500 index. This allows investors to benefit from the long-term growth of the market, without the drag of high fees.

In conclusion, a simple investment strategy of buying an S&P 500 index fund can help you outperform nearly 92% of professional fund managers over the long run. This strategy works due to the high failure rate of actively managed funds, which can be attributed to factors such as market efficiency, transaction costs, fees, fund size, performance chasing, and survivorship bias. By investing in an index fund with a low expense ratio and minimal tracking error, you can benefit from the long-term growth of the market while minimizing the impact of fees.