The phrase "beating the market" means earning an investment return that exceeds the performance of the Standard & Poor's 500 index. Commonly called the S&P 500, it's one of the most popular benchmarks of the overall U.S. stock market performance.
Everybody tries to beat it, but few succeed.
The Barriers
Investment fees are one major barrier to beating the market. If you take the popular advice to invest in an S&P 500 index fund rather than on individual stocks, your fund's performance should be identical to the performance of the S&P 500, for better or worse. But investment fees will be subtracted from those returns, so you won't quite match it, never mind beat it. Look for index funds with ultra-low fees of 0.05% to 0.2% a year, and you'll get close to equaling the market, though you won't beat it.
Taxes are another major barrier to beating the market. When you pay tax on your investment returns, you lose a significant percentage of your profit. The capital gains tax rate is 15% to 20%, unless your income is very low. And that's the tax on investments held for at least one year. Stocks held for a shorter-term are taxed as ordinary income.
Investor psychology presents a third barrier to beating the market. Perversely, most people have a tendency to buy high and sell low because they're inclined to buy when the market is performing well and sell out of fear when the market starts to drop. This one at least is within your control. Learn how to analyze a stock and consider the company's potential for future gains. It's not foolproof, but at least you'll be buying for sound reasons.
Risk Is Key
One way to try to beat the market is to take on more risk, but while greater risk can bring greater returns it can also bring greater losses.
You might also be able to outperform the market if you have superior information. There are few ways that an individual investor can possess superior information unless they are company insiders, and trading on nonpublic information is a serious crime called insider trading.
Defined more broadly, though, you may have superior information based on your expertise in an industry or a product. There's no crime in investing in what you know.
Some investors have made fortunes through what appear to be superior analytical skills. Household names like Peter Lynch and Warren Buffett achieved their successes by picking individual stocks. Many individuals you've never heard of have attempted similar strategies and failed. Even most professional mutual fund managers can't beat the market.
Sometimes It's Just Luck
Meaning no disrespect, Lynch and Buffett may have just been exceptionally lucky, even if they are financial whizzes. Highly regarded economists have shown that a portfolio of randomly chosen stocks can perform as well as a carefully assembled one.
Yes, you may be able to beat the market, but with investment fees, taxes, and human emotion working against you, you're more likely to do so through luck than skill. If you can merely match the S&P 500, minus a small fee, you'll be doing better than most investors.
FAQs
The average investor may not have a very good chance of beating the market. Regular investors may be able to achieve better risk-adjusted returns by focusing on losing less. Consider using low-cost platforms, creating a portfolio with a purpose, and beware of headline risk.
Can anyone consistently beat the market? ›
It is relatively common to beat the market for 1–3 years at a time. That can largely be explained by luck. But the data clearly shows that even professional fund managers are unable to beat the market consistently over a longer period of time, like 10–15 years.
What percentage of people can beat the market? ›
Over time, the odds of you beating the market only diminish. To prove this, let's look at an example: We saw from the data above that an investor has about a 75% chance of underperforming the market in any given year which means you have a 25% chance of beating the market in any given year.
Do most financial advisors beat the market? ›
But even the best financial advisors are at the whim of the market. Most professional investors who try to beat the market actually underperform it over a given time period. And those who do manage to outperform the market over one time period can rarely outperform it again over the subsequent time period.
Can stock pickers beat the market? ›
Over the last 20 years, stock pickers have had a dismal record. Most haven't come close to beating the overall stock market. But occasionally, there are exceptions.
Can you consistently beat the S&P 500? ›
Beating the S&P 500 consistently is no easy task, and most funds fail. One ETF that is focused on growth and value has achieved this feat. This fund also trades at a cheaper valuation than the S&P 500 right now.
How hard is it to outperform the S&P 500? ›
Yes, you may be able to beat the market, but with investment fees, taxes, and human emotion working against you, you're more likely to do so through luck than skill. If you can merely match the S&P 500, minus a small fee, you'll be doing better than most investors.
How to consistently beat the market? ›
One way to beat the market is to place a large bet on a limited number of stocks. This is the opposite of diversification, which aims to reduce risk. Concentrating your investment eggs in one stock or small basket of stocks increases risk, which also increases the chance of an outsized return.
Who is the most successful stock picker? ›
“Warren Buffett was generally considered the greatest stock picker of all time.
Why is beating the market so hard? ›
High volatility: Stocks are inherently volatile assets, subject to fluctuation in market sentiment, economic conditions, and company-specific factors. This portfolio would be likely to experience significant price swings, which can lead to substantial losses during market downturns.
If your personal fortune includes millions of dollars and a yacht or two, you may be the ideal candidate for working with a wealth advisor. Wealth advisors are the financial professionals whom affluent individuals often turn to when they need assistance managing their fortunes.
When not to use a financial advisor? ›
They don't get caught in analysis paralysis and are good about making decisions for themselves. If you have a handle on your financial life, feel confident in navigating the material available to you, and enjoy doing it yourself, there is no point in hiring a financial advisor. You already have it well under control!
What financial advisors don't want you to know? ›
10 Things Your Financial Advisor Should Not Tell You
- "I offer a guaranteed rate of return."
- "Performance is the only thing that matters."
- "This investment product is risk-free. ...
- "Don't worry about how you're invested. ...
- "I know my pay structure is confusing; just trust me that it's fair."
Rule 1: Always Use a Trading Plan
Once a plan has been developed and backtesting shows good results, the plan can be used in real trading. Sometimes your trading plan won't work. Bail out of it and start over. The key here is to stick to the plan.
Is it worth trying to beat the market? ›
Figuring out whether you can beat the market is not easy one, but the answers generally vary depending on who you ask. The average investor may not have a very good chance of beating the market. Regular investors may be able to achieve better risk-adjusted returns by focusing on losing less.
Do active managers beat the market? ›
Yet active managers haven't become better at beating the market over the long term, as Morningstar acknowledges. While the percentage of market-beating funds fluctuates significantly from year to year, the proportion beating over 10- or 20-year periods is still low.
What percent of professionals beat the market? ›
Question: Over a recent 20 year period, what percent of pros investing in large companies "beat the market? Answer: 94% of investment pros underperformed (see below), so 6% outperformed.
Why can you not consistently beat the market if markets are efficient? ›
Market efficiency refers to the degree to which market prices reflect all available, relevant information. If markets are efficient, then all information is already incorporated into prices, and so there is no way to "beat" the market because there are no undervalued or overvalued securities available.
What percent of active traders beat the market? ›
Last year, 47% of actively managed open-end mutual funds and exchange-traded funds beat their benchmarks - a marked increase over the 43% hurdle rate in 2022. Morningstar refers to the boost as a "surge." Yet active managers haven't become better at beating the market over the long term, as Morningstar acknowledges.
