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You Can Outperform 88% of Professional Fund Managers by Using This Simple Investment Strategy

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You don’t have to be some finance wonk to beat Wall Street’s top pros.

Professional fund managers are in charge of investing billions of dollars for investors. They’re often highly educated, have years of investment experience, and get paid well for their skills and expertise. But the truth is most aren’t worth the fees they charge.

It doesn’t take an advanced degree or special insider knowledge to do better than the vast majority of actively-managed mutual funds. A simple strategy can beat about 88% of them. It’s a strategy Warren Buffett famously bet half a million dollars on with the expectation it could beat any hedge fund manager over 10 years.

He won the bet.

All you need to do is buy an S&P 500 index fund, such as the Vanguard S&P 500 ETF (VOO -0.39%), and you can expect better long-term returns than most active mutual funds.

Image source: Getty Images.

Why 88% of active large-cap funds can’t beat a simple index fund

S&P Global publishes its SPIVA (S&P Indices Versus Active) scorecards twice a year. The scorecard compares the performance of active mutual funds (after fees) to relevant S&P benchmark indexes over periods of one, three, five, 10, and 15 years. It found that 88% of active large-cap funds failed to beat the S&P 500 over the last 15 years as of the end of 2023. Even when you look at a shorter three-year period, about 80% failed to beat the benchmark.

There are a couple of factors that lead to such dismal results for active funds as a group.

First, it’s important to consider how the stock market works. There’s always someone on either side of a transaction; for every buyer, there’s a seller. And among large-cap stocks, the people buying and selling shares are mostly institutional investors. In other words, one fund manager is typically selling their shares to another fund manager. They can’t both be right.

Since large institutions make up most of the market, the odds of outperforming the market as an active fund manager may be only a little better than 50/50. But the second factor severely diminishes the returns passed on to investors in actively-managed funds.

Fund managers, their teams, and the institutions they work for all require compensation. That means mutual fund investors have to pay fees. The most common fee is the expense ratio, which captures a portion of the assets under management. Those fees can climb well over 1%. That means the fund manager has to outperform the market by the fee they charge clients just to break even. And that’s a lot harder than simply beating the market by a few basis points.

As a result, the percentage of actively-managed mutual funds that outperform the S&P 500 in any given year is only around 40%. And very few can consistently beat the market by enough every year to come out ahead in the long run.

Reduce your “cost of participation”

If you want to outperform the average investor, the key is reducing what Vanguard founder Jack Bogle called “the cost of participation.” Those are the costs you have to pay to invest your money.

It’s become easier and less expensive to invest over the 25-plus years since Bogle coined that term. Portfolio transaction costs are near zero with most brokerages waiving commissions on stock purchases. On average, expense ratios for mutual funds have declined considerably from the mid-90s too. Still, an investor should aim to keep costs as low as possible, and that means avoiding unnecessary fees.

Since active mutual funds cannot outperform their fees, on average, those fees should be deemed unnecessary. You can buy the Vanguard S&P 500 ETF and practically match the market return for a fee of just 0.03%, or $3 for every $10,000 you invest.

And while it’s true some fund managers have outperformed their fees for a long time, identifying those funds beforehand is not so simple. What’s more, there’s no telling whether the results came from skill or luck, so you can’t be certain the fund can continue its winning streak.

As a result, your best bet remains an S&P 500 index fund.

What makes the Vanguard S&P 500 ETF Buffett’s top pick?

In Buffett’s big bet against fund managers, he put his money in the Vanguard S&P 500 index fund. Berkshire Hathaway owns a small amount of the S&P 500 ETF in its equity portfolio as well. There are a few things that make it his top pick.

First, as mentioned, it has an expense ratio of 0.03%. That’s one of the best in the industry.

Second, it has a very low tracking error. Tracking error tells you how consistently close (or wide) the ETF tracks the index it’s benchmarked to. That can make a big difference for someone investing on a regular schedule. You want the fund to reflect the performance of the index, so your results match the results of the index over the long run. It’s not worth sacrificing a low tracking error for a lower expense ratio, especially when the Vanguard fund is so cheap already.

There are many options to choose from, but the Vanguard S&P 500 ETF stands out as a top choice. It’s a great option not just among other index funds but among all large-cap stock funds.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, S&P Global, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

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Tesla shares soar more than 14% as Trump win is seen boosting Elon Musk’s electric vehicle company

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NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.

Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.

“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”

Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.

Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.

Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.

Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.

In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.

The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.

And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.

Tesla began selling the software, which is called “Full Self-Driving,” nine years ago. But there are doubts about its reliability.

The stock is now showing a 16.1% gain for the year after rising the past two days.

The Canadian Press. All rights reserved.

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S&P/TSX composite up more than 100 points, U.S. stock markets mixed

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TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.

The S&P/TSX composite index was up 103.40 points at 24,542.48.

In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.

The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.

The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.

The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.

This report by The Canadian Press was first published Oct. 16, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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S&P/TSX up more than 200 points, U.S. markets also higher

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TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.

The S&P/TSX composite index was up 205.86 points at 24,508.12.

In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.

The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.

The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.

The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.

This report by The Canadian Press was first published Oct. 11, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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