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There's hardly any arguing with the fact that investing in the stock market is one of the best ways to build wealth. However, it can all feel so intimidating and complex at first.
Making matters worse is that the professionals, who the average investor might turn to for guidance, have poor track records. In the past decade, an alarming 85% of U.S.-based active fund managers underperformed the broader S&P 500. Those who invest in these funds are essentially paying for unsatisfactory results.
There's reason to be hopeful, though. In fact, you, the average investor, can adopt a ridiculously simple strategy to beat these experts.
Set it and forget it
The best course of action for the average investor, if the goal is to outperform the pros, is to buy an investment vehicle that tracks the performance of the overall S&P 500 index. This benchmark consists of 500 large and profitable American businesses in all sectors of the economy.
Investors can choose from popular index funds offered by reputable firms, such as the Fidelity 500 Index Fund or the Schwab S&P 500 Index Fund. There are exchange-traded funds, too, like the Vanguard S&P 500 ETF or the iShares Core S&P 500 ETF. All of these are low-cost options.
Historically, this has been a worthwhile bet to make. The S&P 500 index has produced a total average annual return (a figure that includes dividends) of 10.3% since 1926. This means that had you invested $1,000 30 years ago, that position would be worth more than $19,000 today.
However, investors can supercharge their returns by also investing fresh cash at regular intervals, a strategy known as dollar-cost averaging (DCA). Let's say you invested $1,000 in an S&P 500 fund 30 years ago, but then you also invested $50 per month during that period of time. Today, your position would be worth a jaw-dropping $130,000. Even the great Warren Buffett supports this investment approach for most people.
Adopting a DCA approach essentially involves automating the investing process. Investors can avoid spending hours researching financial statements and competitive dynamics, and there's no need to make complex decisions about what to buy and sell. The simplicity is actually a key feature for long-term success that can help your portfolio perform better than the vast majority of professional fund managers out there.
Reasons for poor performance
It's strange to think that such an easy-to-understand and effortless strategy can do so well. I believe it's worthwhile to consider two key factors that could be leading to such disappointing results for the experts.