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Many people enjoy being actively involved in their investments, which can range from purchasing individual stocks to investing in thematic exchange-traded funds (ETFs). While the excitement of do-it-yourself (DIY) investing can be appealing, it may distract us from our overall financial goals and potentially lead to losses. As the renowned investment guru Warren Buffett has wisely advised, “Never risk permanent loss of capital.” The Sage of Omaha also recommends that most investors should consider a simpler approach. He is well-known for stating, “In my view, for most people, the best thing to do is own the S&P 500 Index fund.” In other words, he suggests investing in an ETF that tracks the broader market and simply earning market returns. But why is that so? Is getting an “average” stock market performance really good enough? While may have been referring to the S&P 500 Index—the benchmark index in the United States—the concept of diversification extends to any broad market ETF. Investing in a broad market ETF instantly diversifies your portfolio across hundreds or thousands of companies with just one transaction. This diversification spans various sectors and industries and ideally includes multiple countries. This applies to both stock and bond ETFs. For example, the MSCI All Country World Index (ACWI) provides international exposure to stock markets, covering 23 Developed Markets (DMs) and 24 Emerging Markets (EMs). The index includes 2,760 companies and represents approximately 85% of the global investible opportunity in equity markets. With well-diversified sector and country weights, investors can effectively “buy the market” through any ETF that tracks the MSCI ACWI. By gaining “market exposure,” you can adopt a more hands-off approach towards tracking your investment portfolio. Why is this beneficial? Historical data indicates that the annualised returns from global stocks typically range from 7-8% over the long term. For instance, the MSCI ACWI has provided annualized total returns of +8.31% since its inception on December 31, 1987, spanning nearly four decades. This long-term performance suggests that a diversified, broad market approach can offer steady returns, reducing the need for constant oversight and managing individual investments. Beating the market in the short term is challenging, but consistently outperforming it over the long term is even more difficult. This difficulty is evident even among professional investors who manage actively-managed funds. A study by Dimensional Fund Advisors found that in the U.S. mutual fund industry, only about one in five equity funds survived and outperformed their benchmarks over a 20-year period. The performance of fixed income funds was even less impressive, with only 15% managing to outperform their benchmarks over the same period. This data highlights the challenges of consistently achieving superior returns, even for seasoned professionals. By just exposing ourselves to the market risk, we can take the element (or allure) of “beating the market” out of the equation. That’s mainly because owning the index means getting exposure to  doing well. For example, in a market cap-weighted index—like the S&P 500—investors will be getting more exposure to the companies whose values are rising over time. Conversely, losing companies that see their market values fall will have less of an impact on an index’s performance and may even drop out of it over time. When we actively invest, we often research individual companies and thoroughly analyse their financials to understand the business. This means that you can’t simply buy a stock and forget about it; the “set and forget” advice doesn’t apply to individual stocks or actively managed/thematic ETFs. Instead, these investments require constant monitoring to ensure that your investment thesis remains valid. In contrast, investing in the broader market or an index allows for a true “set and forget” strategy. Indices naturally remove underperforming stocks and include successful ones over time, reflecting the market’s overall growth. This is why global stock markets tend to rise over time and typically offer annualised returns of 7-8%. By allocating a core portion of your portfolio to broadly diversified market ETFs, you can participate in market growth without the need for active management or the constant concern of outperforming. This doesn’t preclude you from buying and holding individual stocks or other assets if you choose. However, having a foundation in the broader market instils a level of discipline in your long-term wealth-building strategy, ensuring you earn the market returns that are due. It's free! Don't miss out on the latest financial market movements. FSMOne aims to help investors around the world invest globally and profitably, follow for bite-sized finance analyses and exclusive happenings.