Here's the Smartest Way to Invest in the S&P 500 in February

Do you want to be “in the market” but know you don’t want the hassle of picking and monitoring individual stocks? You’re not alone. Managing a portfolio of stocks isn’t everyone’s cup of tea. It may also not be your optimal way of building wealth anyway, if the subpar stock-picking performance of most mutual fund managers is any indication.

Here’s a rundown of the best way to invest in the overall market this month, or for that matter, any month.

Simpler is always better

It’s a safe bet that anyone reading this already understands the highest-odds, highest-payoff way of building wealth is investing in the stock market. In fact, given that you’ll also want to outpace the impact of inflation, it’s the only viable choice.

But this path still leaves you with an overwhelming number of ever-changing options. Growth stocks are the market’s most rewarding names right now, for instance, but there was a time not too long ago when dividends drove the bulk of the market’s net returns. Meanwhile, Warren Buffett’s Berkshire Hathaway has regularly outperformed the market for decades now by largely owning hand-picked value stocks.

Nobody really knows for sure what’s going to perform well next.

There’s a solution, however. Rather than trying to determine which stocks are poised to outperform, simply own a slice of the overall stock market, plugging into its average annual (albeit erratic) gain of about 10%.

And it’s not difficult to do so. It’s actually quite easy. One of several index funds meant to mirror the S&P 500 index (^GSPC 0.03%) — which reflects roughly 80% of the U.S. stock market’s total collective value — will do the trick. Some of the most accessible S&P 500 index fund options are the Vanguard S&P 500 ETF (VOO 0.09%), SPDR S&P 500 ETF Trust (SPY 0.08%), and the iShares Core S&P 500 ETF (IVV 0.08%). All three are also low-cost exchange-traded funds, or ETFs, which means they can be bought and sold just like ordinary indvidual stocks.

You’d be wise to take this route to exposure to the broad market too, since they’re very likely your best bet for long-term growth.

Surprising statistics might make you rethink your approach

One would think that mutual fund managers with the time, training, and tools needed to fully analyze prospective investments would regularly beat the market. One would be wrong in coming to that conclusion, though. These professionals actually regularly underperform it.

In Standard & Poor’s most recent update of its ongoing monitoring of all large-cap mutual funds available to U.S. investors, the investment research outfit found that a little over 77% of funds within this category trailed the performance of the benchmark S&P 500. If you stretch the time frame out to 10 years, the underperformance rate rises to nearly 85%. And worse, the few funds that beat the broad market in one of these time frames almost certainly didn’t do so in the other. Things don’t improve when comparing the performance of mid-cap and small-cap funds to their respective benchmarks either.

What gives? It’s just plain hard to beat the market! It’s so hard, in fact, that most hedge funds and short-term speculators can’t do it either.

That doesn’t mean you can’t do it with your own portfolio of individual stocks. In fact, in some ways smaller investors have an edge on institutional stock-pickers. That edge is the smaller size of your portfolio — you don’t push stock prices around with your relatively small trades. You aren’t required to disclose your buys and sells either, which might otherwise tip someone else off to your ideas and subsequently crowd your trade.

Even so, given the difficulty that even the best of individual investors face when looking to beat the market, you may be best served just by owning one of the aforementioned S&P 500 index funds like the Vanguard S&P 500 ETF or SPDR S&P 500 ETF Trust.

Think strategically, and realistically

If you are still interested in trying to outperform the most-watched market barometer, at least consider this compromise: Rather than allocating all of your capital to individual stock picks, why not invest half in an S&P 500 index fund and use the other half for your more speculative ideas? At the very least this mix would tamp down some of the volatility you might expect from owning just a handful of individual names. Moreover, with this kind of foundation in place you can actually afford to be a little more aggressive with your individual picks.

More than anything, however, just remember that owning stocks is still the best way to ensure your invested savings outgrows inflation despite the market’s (occasionally extreme) volatility. Even if your stock-picking skills are subpar, a reasonably disciplined stock-picking approach should fare better than limiting your holdings to bonds, commodities, and real estate. These are the kinds of investments that make more sense later in life, when market-driven growth is no longer your priority and you’re looking to generate income and limit your volatility.