Many would agree that Warren Buffett stands out as one of the top stock pickers on the planet. Berkshire Hathaway’s long history supports this claim. Interestingly, though, Buffett often suggests that most individuals shouldn’t really mimic his stock choices. Instead, he advocates for a simpler approach: adopting a buy-and-hold strategy by starting with a single exchange-traded fund (ETF) that reflects the performance of mutual funds, specifically the S&P 500.
Buffett’s Views Backed by Data
During Berkshire Hathaway’s 2020 annual shareholder meeting, Buffett reiterated that for most people, investing in an S&P 500 index fund, like the SPDR S&P 500 ETF Trust or the Vanguard S&P 500 ETF, is the way to go. He has long championed this straightforward, passive investment strategy. In fact, his 1993 letter to shareholders highlighted how even those without in-depth financial knowledge could outperform many experts by consistently investing in index funds.
Statistics endorse Buffett’s perspective as well. According to Standard & Poor’s findings, 79% of large-cap mutual funds underperformed the S&P 500 last year alone. This isn’t just a temporary issue; over five years, 89% failed to beat the index. Looking back 15 years, nearly 90% of these funds have struggled to match the S&P 500’s performance. And it’s worth noting that funds that manage to surpass the market in one timeframe don’t typically maintain that momentum.
In many cases, beating the S&P 500 often boils down to luck rather than skill. It’s also apparent that hedge funds and actively managed ETFs face similar challenges when compared to major benchmarks.
Consider the Odds
Now, one might wonder if an ordinary investor could achieve what the so-called experts cannot. While it’s certainly possible, small investors enjoy certain advantages, like the lack of requirement to disclose trades beforehand and not having to navigate market shifts related to those trades. However, the likelihood of consistently leveraging these advantages to surpass the broader market is quite slim.
If your aim is to maximize returns without embracing excessive risk, you might do well to heed Buffett’s advice and include something like the SPDR S&P 500 ETF Trust or the Vanguard S&P 500 ETF as a core element of your investment portfolio.
