2024 isn’t over yet, but it’s on track to be a banner year for the stock market. The S&P 500 (^GSPC) has had one of its best performances so far this century. Through Nov. 26, the broad-market index is up 26.2% for the year, which is beaten out only by 2013, when the S&P 500 was up 26.4% through that date.
In other words, if the index continues to rise in December, it could easily be the best performance since the dot-com era.
It wasn’t supposed to be that way. At the start of the year, the median forecast on Wall Street called for the index to reach 5,068 by the end of 2024, implying a modest gain of just 6%. At the time, the top market prognosticators were concerned about the risk of a recession and questioned the ability of the Federal Reserve to achieve a “soft landing” as it aimed to reel in inflation without sinking the economy into a recession.
Instead, Wall Street was wildly off the mark, as the S&P 500 is now above 6,000, nearly 20% above that initial target. However, Wall Street’s end-of-year targets have drifted upwards since then.
Hedge funds are underperforming, too
There’s more evidence that Wall Street is lagging behind the average retail investor this year. Hedge funds are up just 7.5% this year, according to data from Hedge Fund Research and Morningstar.
Wall Street’s inability to forecast this year’s bull run has led to the professionals having missed out on some of the biggest annual gains this year. Macro funds — which make bets around broad trends including stocks, currencies, commodities, and bonds — have performed even worse than hedge funds, up just 2.8%.
For individual investors, there’s an easy way to beat the pros and capitalize on the gains in the S&P 500. You can invest in an index fund, like the SPDR S&P 500 ETF (SPY) or the Vanguard S&P 500 ETF (VOO), whose results mirror the index that they track.
Why index funds are so hard to beat
It’s not unusual for the S&P 500 to beat the average hedge fund. In fact, Warren Buffett once famously bet hedge fund manager Ted Seides that the S&P 500 would outperform a portfolio of hedge funds over period of ten years, and Buffett was right. . By year nine of the bet, the S&P 500 was up a cumulative 85%, while the hedge funds were up just 22%.
Index funds do much of the work investing for you, but they also have an edge that makes them so successful. The S&P 500 is made up of 500 of the most valuable and successful U.S. companies. It’s a selective group to begin with, and many of the stocks in the index have a competitive advantage. What’s even better about the index is that it rebalances multiple times a year, taking out underperformers and adding rising stars.
For example, in September, S&P Global, which manages the index, said that Palantir Technologies, Dell Technologies, and Erie Indemnity would replace American Airlines, Etsy, and Bio-Rad Laboratories in the S&P 500.
Palantir and Dell are both seen as winners in the AI boom so that move should give the S&P 500 more growth potential. Etsy, on the other hand, has struggled to grow since the end of the pandemic, and American Airlines has also underperformed, and its market cap has fallen to below $10 billion.
Index funds won’t gain every year, but they’re an easy way for anybody to be a winner on the stock market. One of the great things about investing is that even an amateur can beat the pros, and despite the attention that hedge funds receive, most underperform.
If you’re looking for an easy way to grow your wealth and beat the pros, buying an S&P 500 index fund is as easy as it gets.
— Jeremy Bowman
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Source: The Motley Fool