This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Just about all of us would love to be rich, and some of us are working on it, saving and investing assiduously. It can be easy to feel a bit inadequate, though, especially when you think of those fancy, well-paid money managers, who must be raking it in thanks to their investing skills and knowledge. How can we compete with that?
Well, it turns out that not only do you not need to compete with professional money managers, you can actually outperform them -- and easily.
How to outperform most money managers
Here's the secret: Just invest in a low-fee, broad-market index fund, such as one that tracks the S&P 500 Index (SP: .INX), an index of 500 of America's biggest companies. The S&P 500 has averaged annual gains of close to 10% over long periods -- which is a very respectable growth rate.
Here's how your money could grow if you invested $10,000 annually and it grew at that 10% or a more conservative 8%. (Because the stock market offers no guarantees, over your particular investing period, it could average more or less than 10%.)
| $10,000 invested annually, for | Growing at 8% | Growing at 10% |
| 10 years | $156,455 | $175,312 |
| 15 years | $293,243 | $349,497 |
| 20 years | $494,229 | $630,025 |
| 25 years | $789,544 | $1.1 million |
| 30 years | $1.2 million | $1.8 million |
| 35 years | $1.9 million | $3.0 million |
| 40 years | $2.8 million | $4.9 million |
Proof that index funds rule
Here's just how solid index funds are as investments. The table below shows the percentage of stock funds that underperform their respective benchmark indexes, according to the folks at S&P Global:
| Fund category | Percentage underperforming over 5 years | Percentage underperforming over 10 years | Percentage underperforming over 15 years |
| All large-cap funds vs. the S&P 500 | 78.7% | 87.4% | 88% |
| All mid-cap funds vs. the S&P MidCap 400 | 65.9% | 80.4% | 88.2% |
| All small-cap funds vs. the S&P SmallCap 600 | 61.1% | 88.3% | 86.9% |
| All domestic funds vs. the S&P Composite 1500 | 84.8% | 91.4% | 90.8% |
| All real estate funds vs. the S&P U.S. REIT | 60% | 76.4% | 86.5% |
One reason that some of these funds underperform a corresponding index fund is fees. Just about all funds charge expense ratios (annual fees), and some can approach or exceed 1%. A 1% fee on a $10,000 investment means you give up $100 annually. Many index funds charge just 0.10% or even less -- costing you only $10 or less per $10,000.
Here are a few takeaways from the table above:
- There are many different benchmark indexes to which you can compare your various investments.
- The longer the investing period, the more likely it is that whatever stock funds you're invested in will underperform their benchmark average.
- It therefore makes perfect sense to just invest in the benchmark indexes via easily available, low-fee index funds.
Here's another important point to consider: If these well-trained professionals can't easily outperform a broad index fund, maybe you can't, either. Even super investor Warren Buffett loves index funds. In his will, he has directed that most of the money he's leaving his wife is to go into a low-fee S&P 500 index fund. He even made a 10-year, million-dollar bet favouring index funds -- and won.
If you want to aim for higher returns
Of course, maybe you do want to try for above-average returns instead of average returns. Fine. You might do so with just a portion of your portfolio, though, leaving the rest in index funds.
To chase higher-than-average returns, you might add some growth stocks to your portfolio. They're tied to companies growing at a faster-than-average rate, such as Nvidia, MercadoLibre, Palantir Technologies, Amazon, The Trade Desk, Intuitive Surgical, and Salesforce.
Many growth stocks have performed spectacularly in the past and many will perform spectacularly in the future, but again -- no guarantees. Some will surprise you by flaming out. So it's smart to protect yourself by spreading your dollars across a bunch of them. Our Foolish investing philosophy suggests buying into around 25 or more companies and aiming to hang on to your shares for at least five years.
However you go about it, be sure that you're saving and investing for your future -- and ideally doing so according to a comprehensive retirement plan you've developed.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
