“I recommend people the S&P 500 index And I’ve done it for a long, long time.” said billionaire investor Warren Buffett at Berkshire Hathaway’s annual shareholder meeting last May.
This has been pretty good advice and I wouldn’t be surprised if he repeats it again at the next shareholders’ meeting on Saturday.
The best and easiest way to follow Buffett’s advice for an investor is to buy shares in funds indexed to the S&P 500, that is, passive investment funds that replicate the behavior of this index. They are funds that practically all brokers offer and with some of the lowest commissions in the market.
Managers can’t handle the index
In a report published last monthS&P Dow Jones Indices (SPDJI) analysts found that 85.1% of US large-cap stock fund managers underperformed the S&P 500 in 2021. It was the 12th consecutive year that more than half of managers in this category lagged the index.
In other words, investors who followed Buffett’s advice have outperformed most professional money managers every year for more than a decade.
Of course, the S&P 500 (^GSPC) has gone through hard times latelyfalling around 13% from the maximum of 4,818 points on January 4.
It’s not that easy to beat the S&P 500
But as the SPDJI data suggests, it’s incredibly difficult to overweight or underweight stocks in a way that beats the market.
In fact, many of the most popular stocks on the market have fared horribly. On Tuesday, Mike Zaccardi tweeted statistics showing that Microsoft (MSFT), Alphabet (GOOG, GOOGL), Tesla (TSLA), Nvidia (NVDA) and Facebook parent company Meta (FB), are down between 20% and 53% from their highs.
Behind the disastrous earnings announcement last Tuesday, shares of Netflix (NFLX) have now down about 70% from its recently reached high.
According to a different report, SPDJI analysts discovered that just 22% of S&P 500 stocks are down 70% from their recent high.
No one is saying that investors should completely avoid trying to pick winning stocks for their investment portfolio. However, investors should understand that choosing stocks is very difficult and ultimately there is a strong chance that they will underperform in the market.