Hi guys, before I share with you my thoughts on investing in the market, I want to do the usual and share a Warren Buffett quote: 'If you invested in a very low cost index fund – where you don't put the money in at one time, but average in over 10 years – you'll do better than 90% of people who start investing at the same time'. This post breaks down:

• The annual returns from the S&P-500 in the past 10, 50, and 100 years
• Compares the returns from the index to actively managed funds.
• How to invest in an index and the best approach to use.

S&P-500 Returns (10, 50 & 100 Years)

According to Tradethatswing:

• 10 year return: 12.078%
• 50 year return: 10.7%
• 100 year return: 10.5%

Let's assume someone invested $10,000 in the S&P-500 at 18 years of age. Long-term returns average around 10% per year so we use that historical return as the rate of return we can expect to receive in the future. Retirement age is 66, so we invest $10,000 and don't withdraw that amount until retirement. After 48 years, our investment will be worth $1,200,000.

Let's go one step further, let's assume this investor deposits an extra $2000 into the index every year until retirement. After 48 years, our investment will be worth $3,450,000. To get a clear picture on how this looks: The average income in the United States according to Forbes is $59,428. If we multiply $59,428 by 48 years, this will equal $2,852,544.

It appears that passively investing in the S&P-500 over long stretches of time generates higher overall income than working. The average income always increases with time but we can really see the benefits of investing into the market over time.

S&P-500 vs. Actively Managed Funds

Advisor Channel, article by Dorothy Neufeld: 'What is the success rate of actively managed funds? The result: Over a 20-year period, 95% of large-cap actively managed fund have underperformed the index.

New York Times: The article states that a study was conducted by the S&P Dow Jones Indices which found that not a single mutual fund – not one – out of 2,132 has outperformed the S&P-500.

Warren Buffett bet in 2007: Warren Buffett made a $1 million bet with hedge fund manager Ted Seides of Protege Partners. Buffett allowed Ted to pick 5 different hedge funds and bet that the portfolio of hedge funds would not produce better returns than the index over a 10-year span.

After 10 years, the S&P-500 outperformed the hedge funds in all years except in 2008. “$100,000 invested at the beginning of 2008 would be worth $147,889 today if invested in the average hedge fund vs. $225,586 if invested in the S&P-500”

Most Hedge funds/Mutual Funds underperform the index over the long haul.

How to invest in the S&P-500

To invest in the S&P index, you need to invest in an ETF (exchange traded fund). An ETF is traded on the stock exchange just like a regular stock. The ETF that tracks the S&P is called (VOO). You can search for it just like you search for a stock using your broker and you can purchase it.Warren Buffett advises not to place all your funds into an ETF at once because an index can be overvalued just like individual securities. The returns from investing in the S&P-500 during the dot-com boom would produce half the result if you compare it with the returns you would have received after the crash. A good way to mitigate this risk is through a method called Dollar Cost Averaging.

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Dollar Cost Averaging:

Let's assume you are able to invest $5000 a year into the index. Instead of a lump sum investing, you can divide $5000 by 4 and invest $1250 every three months. This means that you can catch a falling market by investing periodically and this will reduce your average purchase price. (This is just a method: not investing advice) Please share your thoughts on investing in the S&P ETF below and any other method you recommend 🙂