So You Think You Can Beat the S&P 500? A Friendly Reality Check for Aspiring Stock Pickers

7-10 minute read

Author: Tucker Massad

Published September 22, 2024

It’s a truth as old as the stock market itself: we all like to think we’re the next Warren Buffett. Armed with a Reddit account, a few podcasts, and maybe even a subscription to The Wall Street Journal, some of us truly believe that we have what it takes to beat the S&P 500. After all, how hard could it be? Spoiler alert: it’s harder than you think—and no, your "research" likely won’t be enough.

Let’s dig into why this benchmark index keeps laughing in the face of stock pickers, even the well-meaning, spreadsheet-wielding variety.

#S&P 500: The Ultimate Frenemy

First things first: what makes the S&P 500 such a pain in the neck to beat? It’s just a collection of 500 companies, right? Well, these companies represent approximately 80% of the entire U.S. stock market by market capitalization, covering the largest and most successful firms across multiple sectors. This index has averaged a roughly 10% annual return since its inception in 1957, a number that makes it tough to outpace for 'retail investors' like us.

Consider this: SPY, the ETF that tracks the S&P 500, returned 27% in 2021, while your neighbor bragging about his big bet on AMC likely didn’t even come close (unless he cashed out at exactly the right meme moment, in which case, fair play).

#What the Data Says: You're Probably Not Special

Here’s where the numbers get interesting. According to a study by Standard & Poor’s, a whopping 90% of active fund managers underperform the S&P 500 over a 10-year period. If the pros, who are literally paid to do this, can’t beat it, what makes you think your weekend Google rabbit hole into Tesla and Nvidia will be any different?

But let’s entertain the notion for a second. Say you fancy yourself a genius stock picker and you bet big on some of today’s “it” stocks—like Apple, Amazon, or Tesla. You might think these powerhouses are a safe way to outpace the S&P. Well, here’s the rub: all three are already part of the S&P 500! So any gains they make are already baked into the index’s returns, meaning even your best picks are working for...the S&P 500.

Still not convinced? Let’s compare.

#Picking Winners: How Do You Fare Against the S&P 500?

Let’s imagine you picked some of the most popular, high-flying stocks over the last few years. Surely that’s a recipe for success, right? Let’s pit them against the good ol’ S&P 500.

Tesla (TSLA): One of the most iconic stock stories of the 21st century, Tesla has given its long-term holders a wild ride. From 2018 through 2022, Tesla gained nearly 1,900%. Incredible! But let’s say you bought in 2021 when the hype was at its peak—by the end of 2022, you’d be down 65%. Yikes.
Amazon (AMZN): Amazon has been a powerhouse in the e-commerce space, but its stock price has been a bit of a rollercoaster. From 2018 through 2022, Amazon gained 1,100%. Not bad, but if you bought in 2021 when the stock was at its peak, you’d be down 40% by the end of 2022.
Apple (AAPL): Apple has consistently outperformed the S&P 500 over the last decade, but even its stock hasn’t been immune to market volatility. From 2018 through 2022, Apple gained 1,200%. However, if you bought in 2021 when the stock was at its peak, you’d be down 20% by the end of 2022.
Meta (META): Another juggernaut, right? Well, over the same period from 2018 to 2022, Meta delivered an impressive return of 101%—except that its 2022 crash wiped out almost all of those gains, taking a nosedive of over 70% at one point.

#But Wait, There’s More

Alright, let’s dive into some stats that’ll really make you say, “Oh... maybe I should just buy the index.” Because if the previous data didn’t convince you, these numbers might make you gently close your stock-tracking app and finally enjoy a nice, calm weekend. No more compulsively refreshing your Robinhood account at 2 AM.

Here’s a jaw-dropper: according to S&P Dow Jones Indices’ SPIVA Scorecard, only 9.6% of actively managed U.S. equity funds outperformed the S&P 500 over a 15-year period. That’s right, over a decade and a half, less than 1 in 10 professionals—people whose entire job is picking the right stocks—managed to beat the index. Think about it: there’s a better chance that you’ll end up dating a celebrity than picking stocks that beat the S&P 500 over that long of a time.

And it's just as bad for shorter-term wannabe Buffetts. Over a 1-year period, a mere 40% of fund managers beat the S&P 500. So, sure, maybe you’ll have a good year picking stocks. But before you start planning your yacht purchase, remember that you have a 60% chance of falling behind the index, and that’s in a single year. Stringing together those big wins? That’s like trying to win the lottery multiple times.

Now, let’s talk about retail investors—a.k.a. the regular folks like you and me, who are more likely to make stock-picking decisions based on TikTok influencers than actual financial reports. The average retail investor doesn’t just underperform the S&P 500; they dramatically underperform the market as a whole. According to research by Dalbar, the average equity investor earned just 3.6% annually over the past 30 years, while the S&P 500 returned 10.65%. That’s a spread of over 7%. Basically, you could’ve done nothing but click “buy” on an S&P 500 index fund and be sipping cocktails in retirement, while the DIY stock picker is still working a side gig to make up for all the “opportunities” they missed. Ouch.

Another wild fact: according to research from Morningstar, 97% of actively managed large-cap mutual funds underperformed the S&P 500 over a 10-year period when factoring in fees. That’s right: even if you somehow pick a fund that beats the index, you’ll likely lose out once management fees and expenses are taken into account. It’s like paying for a gourmet meal and realizing it’s just a microwave dinner with fancy packaging.

And let’s not forget about survivorship bias—that sneaky little trick your brain plays on you. You hear all about the stock-picking “winners” and start thinking, “Hey, if they did it, so can I!”. But for every winner you hear about, there are a hundred more people who bet big on Blockbuster stock and quietly disappeared. According to another SPIVA report, nearly 57% of all U.S. domestic equity funds didn’t even survive a 15-year period. That’s right—they either closed down or merged, which basically means they performed so poorly that they gave up.

In other words, when it comes to picking stocks, not only is beating the S&P 500 a long shot—there’s a pretty good chance you’ll just burn out, give up, and hand over your portfolio to an index fund anyway. So why not skip the drama and do that from the start?

#The Real Problem: Timing (Spoiler, You’re Probably Bad at It)

The harsh truth is that most people are bad at timing the market, even if they think they’re not. In fact, most retail investors tend to sell after a stock has already plummeted, locking in losses, and then buy again once the price has rebounded. This “buy high, sell low” pattern is what keeps brokerage accounts sad and retirement dreams delayed.

Take this stat: missing the 10 best trading days over a 20-year period (2002-2022) would slash your returns from 9.65% to just 5.02% per year. If you missed the 30 best days? Your returns drop to less than 2%. Good luck trying to guess which days will be the big winners.

#Let the Index Do the Work

If you’re still not convinced, let’s break it down even simpler: the S&P 500 is the lazy person’s dream. It’s like ordering delivery pizza instead of cooking—it’s satisfying, reliable, and gets the job done without much effort. You get exposure to 500 of the biggest, most successful companies on Earth, covering every major sector. And the best part? You’re automatically riding the wave of the winners without having to spend your evenings agonizing over the latest earnings reports.

Sure, some stocks will outperform, but unless you have a time machine (or extreme luck), consistently picking the right ones is like trying to predict whether pineapple belongs on pizza. Spoiler: it doesn’t, and your portfolio doesn’t need any of those wild guesses either.

#The Takeaway: Stick With the Index

So, what’s the verdict? You can absolutely try your hand at stock picking—and if it’s fun for you, go for it. But if you’re looking to grow your wealth steadily and avoid pulling your hair out during market downturns, the S&P 500 is there, quietly outperforming most of us over the long haul.

In a world full of stock-picking wannabes and market-timing hopefuls, the S&P 500 is the tortoise in a sea of hares—and in this story, the tortoise wins, year after year, decade after decade.

The moral? Sometimes doing nothing is the smartest move you can make.