In investing terms, “beating the market” means trying to earn an investment return greater than that of the S&P 500. The S&P 500, an index comprised of 500 of America’s most widely-known large-cap companies, has become a popular indicator of the performance of the US stock market as a whole – because these companies control a large part of their respective industries. And, picking stocks that outperform this index over time has seemingly become the ultimate “trophy” that takes a spot very few investors’ shelves. Here are just a few reasons why it can be very difficult to “beat the market” – and why you don’t have to beat the market to find investing success:
As an investor, you probably know by now that in order to obtain more reward, you’ll need to take on more risk. Why? Well, a higher potential reward is your technical “payout” for bearing the extra burden of risk. This is a fundamental rule of investing – but it is also the reason why so many individual investors have trouble beating the market.
For your whole investing career until now – whether it be a long time or only a matter of a few months – you have probably tried to balance out your riskier investments with some less risky investments. Every single source you read says something to the effect of “diversify in order to minimize risk!” You may have even answered questions and taken extensive steps to determine your own personal risk preferences. If your risk preferences fall below the market level of risk, you are in the majority. So, don’t stress it! You do not need to take on more risk than you are comfortable with in order to beat the market. You should always be taking the amount of risk that you feel most comfortable with.
2. Investment Fees Don’t Help
Paying crazy prices for your trades can seriously cut your final payouts and is another major barrier that investors face when trying to beat the market. These fees are taken from your returns before you ever see your money. This means that even if you invested in the S&P itself – thereby matching the market returns – you would still return less than the market because your investment fees will be subtracted from your total returns.
However, try not to get caught up in investment fees. Find a fee structure that works for you and allows you to minimize your costs to trading. Regardless, if you just barely miss out on beating the market, then you still had very strong returns!
3. Buy Low, Sell High?
One final reason that investors tend to struggle with beating the market is because of skepticism. We always hear that the best investors are those who are able to “buy low and sell high,” but how do we know where those high and low points are exactly? The honest answer is: we don’t. Most of us find ourselves guessing that a stock has hit its lowest point or selling out when we believe it won’t go any higher – but how much of the time are we actually buying and selling at the perfect moments? Because of our inherent fears of waiting too long, most of us tend to inhibit ourselves from outperforming the market.
That said, skepticism and the feeling of not knowing exactly when to buy or sell are all just typical parts of our investing routines. The more we become familiar with the markets, the easier things become!
Ultimately, it may be tricky to beat the market – and few investors actually do because of some combination of the factors mentioned here. But, for most of us, coming close to market returns can be very achievable. So, don’t let all the talk of “beating the market” get you down – even if you do not beat the market, you should be judging the returns of your portfolio alone for a better indication of your investing success