3 min read · Aug 21, 2023
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Consistently beating the returns of the S&P 500 index is quite difficult for most investors. Here are some of the key reasons why outperforming the index is challenging:
- The S&P 500 is composed of 500 of the largest, most established companies in the U.S. These tend to be highly efficient and competitive firms.
- As an index, the S&P 500 has very low costs and turnover compared to active investing. The expense ratio is under 0.1% for S&P 500 index funds.
- The S&P 500 is market-cap weighted, meaning larger companies have the greatest influence. Outsized gains from a few mega-cap stocks can drive the index’s returns.
- With 500 constituents, the S&P provides highly diversified exposure to the U.S. equity market, reducing portfolio risk.
- The S&P 500 index already incorporates factors like size, value, quality, and volatility in its composition. Simple factor strategies may not add much.
- Most active mutual funds fail to beat the S&P over the long run due to high fees, turnover costs, and difficulties in stock selection.
- Passive index funds tracking the S&P 500 now account for over 50% of invested assets, making massive outperformance more difficult.
So for an individual investor, consistently identifying stocks that will gain more than the S&P’s blend of largest U.S. companies is an extremely difficult task. Low costs and diversification give the S&P 500 a performance edge that is hard to…
