Outsmarting Wall Street: A Simple Approach for Everyday Investors

Investing in the stock market can be an excellent way to accumulate wealth, but it can often feel overwhelming at first.

Many investors look to professionals for help, but troubling statistics reveal that 85% of U.S.-based active fund managers have underperformed the broader S&P 500 over the past decade. Essentially, those who invest in these funds are paying for disappointing results.

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Fortunately, there is an easy strategy that average investors can use to outperform these professionals.

Set It and Forget It

For investors aiming to outperform the pros, a smart approach is to invest in an index fund that tracks the overall S&P 500 index. This index represents 500 significant and profitable American companies across various sectors.

Popular options include the Fidelity 500 Index Fund and the Schwab S&P 500 Index Fund. Investors can also consider exchange-traded funds, like the Vanguard S&P 500 ETF and the iShares Core S&P 500 ETF. All are low-cost options that can be beneficial.

Historically, investing in these funds has been a wise decision. The S&P 500 index has delivered an average annual return of 10.3% since 1926, meaning a $1,000 investment made 30 years ago would be valued at over $19,000 today.

Investors can enhance their returns further by regularly investing new money through a strategy called dollar-cost averaging (DCA). For instance, if you invested $1,000 in an S&P 500 fund 30 years ago and added $50 each month, today, your investment could be worth about $130,000. Even Warren Buffett endorses this straightforward approach for many investors.

Utilizing a DCA strategy simplifies the investment process. Investors don’t need to spend hours analyzing financial statements or debating complex buying and selling decisions. This simplicity is key for long-term success and can result in better performance than most professional fund managers.

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Understanding Expert Failures

It may seem surprising that such a simple strategy can achieve great results. To understand this, let’s examine two factors that contribute to professional investors’ poor performance.

Firstly, high fees play a significant role in reducing investor returns. For example, hedge funds typically charge a flat management fee of 2%, plus a performance fee that consumes 20% of annual profits. Over time, these fees can significantly deplete client capital.

Secondly, many fund managers over-diversify. The average mutual fund holds more than 100 different stocks. This strategy often prioritizes risk reduction over maximizing long-term returns. It seems illogical for educated professionals to allocate funds across numerous mediocre investments instead of focusing on the top 20 or 30 high-quality picks.

These insights suggest that individual investors aiming to grow their wealth should consider embracing a passive investment strategy.

Take Advantage of New Investment Opportunities

Do you feel like you missed out on buying winning stocks? Here’s why you should pay attention.

Occasionally, our expert analysts issue a “Double Down” stock recommendation for companies they believe are about to soar. If you think you’ve missed your chance to invest, now may be the best time to act. The statistics are compelling:

• Nvidia: If you invested $1,000 when we doubled down in 2009, you’d have $349,279!*
• Apple: If you invested $1,000 when we doubled down in 2008, you’d have $48,196!*
• Netflix: If you invested $1,000 when we doubled down in 2004, you’d have $490,243!*

We are currently issuing “Double Down” alerts for three remarkable companies, and such opportunities may not present themselves again anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of December 16, 2024

Neil Patel and his clients hold no positions in any stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

The views expressed here are those of the author and do not necessarily reflect those of Nasdaq, Inc.