Investing in the stock market can be daunting, especially for new investors. The sheer number of stocks to choose from can be overwhelming. However, the good news is that you don’t need to pick individual stocks to succeed in investing, thanks to the simplicity of Index Investing. According to S&P Global research¹, by simply buying a low-cost index fund, you can outperform 88% of professional investors over the long term.

Index investing is a passive investment strategy that involves buying a broad market index like the S&P500. Owning the S&P500 index means you own part of the top 500 companies in the US, all in a single transaction. As companies rise and fall, the index will automatically rebalance which means you own more of the winners and less of the losers.

One of the main reasons why index funds can outperform most professional investors is their low cost. Actively managed funds, where fund managers pick stocks in an attempt to beat the market, often have high management fees and transaction costs. These costs can significantly eat into your returns. On the other hand, index funds have much lower costs because they simply aim to replicate the performance of an index. Some investors may choose to go with an active fund manager if they are looking to participate in an uncorrelated strategy or to reduce some of the volatility associated with equity investing.

Another advantage of index investing is diversification. When you buy an index fund, you’re essentially buying a small piece of every company in that index. This spreads out your risk and can lead to more stable returns. In contrast, picking individual stocks can expose you to the risk of a single company performing poorly.

The evidence supporting index investing is compelling. According to a report by S&P Dow Jones Indices, over a 3-year investment horizon, 80% of large-cap fund managers failed to outperform the S&P 500. Over a 15-year investment horizon, that number increases to nearly 88%. This means that by simply investing in a low-cost S&P 500 index fund, you could outperform nearly 88% of professional investors over the long term.

The result of this style of investing has been impressive to say the least. An investment of $100,000 in 1984 would be worth $9.62 million (m) as of March 2024, with an annual return rate of 12.1%. The same amount invested in Australian property would only be worth $2.96m with an annual return of 8.8%pa. Australian shares (ASX200 index) had an average return of 10.3%, turning $100,000 into $4.99m, according to Vanguard². While many fortunes have been made through property investing, the reality is property has underperformed equities over the long term. While these long-term average return rates do successfully capture the various changes in the economic cycle over the last 40 years, it is still important to note that past performance does not represent future performance.

All investing carries risk and shares can be volatile over short periods but long term they tend to outperform many traditional asset classes. Investors who can ignore short term volatility for long term performance tend to do better than those who try to time the market. For those unsure when to start investing, a simple strategy that pairs well with index investing is dollar cost averaging, which simply involves investing a fixed amount at regular intervals, regardless of market conditions. This strategy can reduce the impact of market volatility and lower the risk of making poor investment decisions based on short term market fluctuations.

Even Warren Buffet, one of the most successful investors of all time, endorses index investing. In his 2013 letter to Berkshire Hathaway shareholders, Buffet revealed that he has instructed the trustee in charge of his estate to invest 90% of his money into a low-cost S&P 500 index fund for his wife’s benefit after his death. In 2007, Buffet also famously bet a million dollars that a simple S&P500 index fund would outperform any selection of five hedge funds, a bet he won in 2017 with proceeds going to charity, further affirming the power of passive investing.

In conclusion, while picking stocks may seem exciting, the evidence suggests that most people – including professional investors – may be better off investing in low-cost index funds. So, if you’re a new investor feeling overwhelmed by the stock market, take comfort in the fact that you can do well by keeping it simple. Remember, the goal of investing is not to achieve spectacular returns, but to achieve satisfactory returns consistently over a long period. And index investing is a proven way to do just that.

How to invest

Australian investors who are looking to invest in the S&P500 index have several Exchange Traded funds listed on the ASX that allows them to buy the S&P500 index in a single transaction. They also have the option if they wish to currency hedge the position or not, which would help reduce the impact of currency movements. Some examples of the ETFs available are listed below.

To purchase an ETF, simply log into your nabtrade account, research your preferred ETF, and read any associated disclosure documents supplied. When satisfied, look up its ticker and invest.

iShares Core S&P500
Provider: Blackrock
Ticker: IVV
FUM*: $440B
Fee (p.a.): 0.04%

S&P500 AUD hedged
Provider: Blackrock
Ticker: IHVV
FUM*: $1.65B
Fee (p.a.): 0.10%

SPDR S&P500
Provider: StateStreet
Ticker: SPY
FUM*: $1.24B
Fee (p.a.): 0.09%

Vangaurd US Total market
Provider: Vanguard
Ticker: VTS
FUM*: $4.26B
Fee (p.a.): 0.03%

¹S&P Global research: S&P Global research

²Vanguard index charts: Vanguard

Important Information

Domestic equities, warrants, mfunds and international trades up to $1,000 are $9.95 per online trade. For trades over $1,000 and up to $5,000, brokerage is $14.95 per online trade. For trades over $5,000 up to and including $20,000, brokerage is $19.95 per online trade. Over this amount, brokerage of 0.11% of trade value per online trade applies.  All fees and charges are charged in Australian dollars. Each international trade will include a foreign exchange conversion spread on the transaction value. The spread ranges from 0.50% to 0.80%, depending on the transaction value. This is subject to change at any time. 

For more details on fees and charges refer to the nabtrade Financial Services Guide.

The information contained in this article is gathered from multiple sources believed to be reliable as at March 2024 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB does not guarantee the accuracy or reliability of any information in this article which is stated or provided by a third party. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. ©2024 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686

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