What is the best way to invest in stocks without any experience? Start with this index fund

Investing in the stock market has proven to be one of the best ways to generate long-term wealth. But where should first-time investors start? There are literally thousands of potential investments to choose from, not all of which are right for everyone.

The good news is that you don’t have to be a financial expert to turn your savings into an impressive nest egg over time. In fact, there is a simple investment that will allow you to benefit from the best 85% of professional money managers with virtually zero knowledge required.

New investors need to understand these three challenges

What percentage of professional money managers do you think are capable of beating the market over a five-year period? You might be surprised that it’s only about 15%. This means that about 85% of actively managed funds — the term used for mutual funds that try to beat the market by buying and selling different stocks — are actually unable to beat the market over the long term.

There are several reasons for this strange reality. The first is that managing an investment fund involves significant costs. Typically, an entire research team, plus a whole host of support staff, must be paid. Typically, an investment fund will charge what’s called an expense ratio: a percentage of your assets that it will keep for itself each year to cover these costs. Expense rates can vary widely, but those of actively managed funds are often around 1%. That means that, quite simply, to keep up with the market, these funds have to EXCEED market by 1% each year to cover management fees. This creates a structural disadvantage for actively managed funds.

The second reason most professional money managers fail to beat the market over the long term is that in any given year, a minority of stocks may be responsible for most of the market’s rise. In some years, for example, less than half of the stocks included in the S&P 500 index are able to beat the return of the S&P 500 index as a whole. So for every stock an expert manager adds to his portfolio, chances are that stock will underperformance the market — another structural disadvantage.

The final reason why it is difficult for professional money managers to beat the market is that actively buying and selling stocks can accrue additional tax liabilities. Simply holding the same investment for long periods of time, in comparison, generates a much smaller tax bill.

Want to beat the market and avoid these structural challenges? The investment below is for you.

Beat the experts with this simple investment

The answer to the above question is simple: buy shares in Vanguard S&P 500 ETF (VOO -0.25%). This exchange-traded fund (ETF) is an index fund that aims to track the performance of an underlying index — in this case, the S&P 500.

Index funds are a great choice because instead of beating the market, performance simply follows the market. No expensive investment teams required. The fund’s portfolio simply buys and holds whatever stocks are in the index. This reduces fees dramatically. The Vanguard S&P 500 ETF, for example, charges an expense ratio of just 0.03% per year. That means you can keep 99.97% of your capital from year to year. Since 85% of fund managers fail to beat the market over any five-year period, you can instantly join the top 15% of investors by buying this index fund and holding it for the long term. Not bad for an investment that requires no skill or experience!

While owning individual stocks can be a rewarding journey, don’t let inexperience deter you from seeking out the potential financial rewards of investing in the market. If you want to create a high-performing portfolio instantly, buy the Vanguard S&P 500 ETF.