Many professional money managers like to try to pick winning stocks and beat the market. Most of them were unsuccessful. However, one study found that 79% of domestic large-cap stock funds underperformed other funds. S&P 500 Index 2025. Another study found that 95% of actively managed large-cap core funds underperformed the S&P 500 over the past decade.
This is also an important reason why the ETF industry has experienced such a prosperous period in recent years. With so many active funds underperforming, why not just invest in ultra-low-cost index funds and match the index?
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When you invest in individual stocks, you are betting on the success of that company. Because the sample size is 1, potential outcomes could range from home runs to catastrophic.
Your experience can be as positive as your purchase NVIDIA A few years ago, it had a huge bullish rally and outperformed the market by a wide margin. Or maybe it’s like investing Nike Three years ago, watch the value of your investment drop by half. These aren’t just the small, high-risk, small-cap stocks that could be subject to these moves. Even the largest and most successful companies can experience prolonged downturns.
However, when you choose to invest in a broad stock market fund, e.g. Vanguard S&P 500 ETF (NYSE: VOO) or Vanguard Total Stock Market ETF (NYSE:VTI)you can mitigate many of the downside risks that exist with individual companies. You can’t completely avoid it. But because any stock is a small part of a larger portfolio, its impact on overall returns is likely to be small.
The end result of choosing a broad market ETF is an investment in the U.S. economy as a whole, rather than an investment in individual companies. Bull markets and corrections are still possible over time. But peaks and valleys tend to be less extreme. This is a better way to create more stable long-term wealth over years or decades.
An underappreciated aspect of investing in stock market index funds is that it evolves over time. Technology stocks are currently the largest sector in the S&P 500. If you look back, you’ll see that financials were once the largest sector. You will find that energy has a large distribution period. If you want to go back a few decades, railroads were the largest segment of the economy.
