Individual investors love looking at the trading moves of legends in the industry, like Warren Buffett, Bill Ackman, Stanley Druckenmiller, or Cathie Wood. These professionals are in their positions for a reason. And maybe it's best to follow what they do for your own portfolio.
While there are certainly some fund managers out there who deserve a ton of credit for putting up impressive track records, the truth is that the vast majority of them actually lose to the S&P 500. This is a troubling statistic.
But all hope isn't lost for the individual investor. If you want to beat these so-called experts, here's one ridiculously easy way of doing so.
Keep it simple
If most fund managers lose to the market over a long time horizon, then it makes sense that owning an exchange-traded fund that tracks the performance of the S&P 500, like the Vanguard S&P 500 ETF (VOO 1.05%), is a no-brainer method of outperforming the experts. In the past decade, this ETF has produced a total return of 237%, turning a $10,000 initial cash outlay into almost $34,000 today.
That's certainly a respectable gain that could've been achieved by doing absolutely nothing. It didn't require someone to pore over financial statements or stock reports or to obtain a fancy MBA.
Besides being very low maintenance, perhaps even more notable is the fact that buying and holding the Vanguard S&P 500 ETF is cheap. The expense ratio of 0.03% means that for every $10,000 invested, only $3 goes toward the fee each year. Compare that to professional money managers who can charge substantially more than that for what's usually poor performance.
Investing in the stock market is a unique playing field where the pros can severely underperform the average person out there, as well as the overall market. It could be due to overconfidence and trading too often, following the herd and owning what everyone else does, or simply over-diversifying and not focusing on the best ideas. There could be many reasons for the disappointing results.
At the end of the day, the simplest option is typically the best, particularly when dealing with your hard-earned savings and investments. In my opinion, that choice is the Vanguard S&P 500 ETF.
NYSEMKT: VOO
Key Data Points
Behavior matters
Knowing what investment vehicle to put money into is only half the battle. Now that investors understand that they can do much better than the experts by simply buying and holding the Vanguard S&P 500 ETF, another critical factor to think about is behavior.
I don't think anyone believes that professional fund managers aren't smart. These are well-educated people who know how markets work and how to analyze companies and stocks. But even they, too, must deal with their own biases and emotions.
Here's where the individual investor can try to gain an edge. There's no need to try and time the market, even though it sounds like a smart idea to trade in and out of stocks to avoid the down days and capture the up days. The best course of action is to adopt a dollar-cost average strategy, regularly adding savings into the ETF on a monthly or quarterly basis. Staying focused over the longer term, such as 10 years or more, is key, while also recognizing that volatility is inevitable.
Next time you turn on the financial news and watch so-called experts sitting around a table discussing the market and their stock picks, you can rest assured knowing that your portfolio is likely to perform better than theirs over the long term. And all thanks go to the Vanguard S&P 500 ETF.
