Can you really beat the pros at their own game? According to a recent Motley Fool article, the answer is yes and it’s simpler than most people think.
A 30 year study found that nine out of ten professional investment funds underperformed the S&P 500 index. Despite advanced tools and full time trading, frequent buying and selling often leads to weaker long term results.
The takeaway? Investors can outperform most professionals by doing the opposite buying quality stocks or index funds and holding them.
From 1991 to 2020, large cap mutual funds in the U.S. averaged a 73 percent annual turnover rate, meaning constant trading activity. This frequent turnover increases costs, taxes, and emotional decision making, all of which drag down returns.
Instead, investors who take a patient, long term approach often come out ahead. Holding investments for years allows compounding to work in your favor and minimizes the impact of short term market swings.
Legendary investors Charlie Munger and Peter Lynch both champion this strategy. Munger believed that a few great investments can define your lifetime returns, while Lynch warned against “pulling out the flowers and watering the weeds.”
In other words keep your winners, and give them time to grow.
For most people, investing doesn’t need to be complicated. A diversified S&P 500 index fund such as the Vanguard S&P 500 ETF (VOO) remains one of the simplest ways to build long term wealth.
Patience and consistency often outperform complexity.
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