When most people hear the words "beat the market," they think of winning big in the stock market. They imagine making a fortune by picking the right stocks and riding them to glory.
But that's not what this phrase actually means. At its core, "beating the market" is all about outperforming the average return on investment (ROI) for a given period of time. In other words, it's about doing better than everyone else who's investing in stocks during that same period.
So how do you go about it? Is it even possible? And if so, what are your odds? At Wisesheets, we're going to take a closer look.
What does "beat the market" mean for an investor's portfolio?
For starters, it means that you are trying to outperform the market by investing in stocks or other securities with a higher return than what is offered on broad markets like the S&P 500 or the Dow Jones Industrial Average index. Those two are the most common "markets" people refer to in this phrase, but there are many different markets you can measure yourself against.
Beating the market starts with careful research and analysis of different companies and their financials, as well as focusing on specific sectors or industries where there may be more potential for growth. The key is finding investments with a higher expected return than the average.
If you're right about your projections, then you would be making more money on your investments than the average return for that market, so you are 'beating the market'.
What does "beat the market" mean for a company?
If a company's earnings, sales, or some other valuation metric are greater than other companies in its industry, it is said to "beat the market".
Financial news sources usually tell you if a company beats the market drastically. Otherwise, you'll have to break out your calculator and ask the companies you want to measure for information if you want to see for yourself.
So what are your odds of beating the market?
Unfortunately, there's no easy answer to this question. Every investor has different levels of risk tolerance and different strategies they use when selecting stocks or other investments, so there's no single answer that applies to all.
Over the past 90 years, just 4% of stocks have accounted for all market gains. That means that the other 96% of stocks have either underperformed or failed to make any gains. So while there's no guarantee that you'll beat the market, it's certainly possible with the proper research and analysis.
At its core, it will depend on who you are and what your investment strategy is. We'll get into some different approaches in the coming sections.
What does the market normally return?
Since 1871, the S&P 500 has grown at a compound annual growth rate of 9.15 percent. This means that long-term investors have seen their portfolios grow by 9.15% per year on average. But, of course, there are no guarantees that this trend will continue in the future.
In most cases, people compare their performance to the S&P 500. Still, if you want to truly understand your performance, you should compare your securities (stocks, mutual funds, ETFs) against a benchmark index that represents the same asset class.
For instance, if you are investing in emerging markets, it would be more beneficial to compare your performance to the MSCI Emerging Markets Index. On the other hand, it wouldn't make sense to compare your emerging market mutual fund to the S&P 500 since they don't share the same stocks, the economies and political environments are varied, and the listed companies frequently face different risks and opportunities.
How can I try and beat the market?
Good question. Many have tried. But before you do, keep these rules in mind.
- Get your finances in order. Only try to "beat the market" when you have an emergency fund that covers you for 3-6 months and no high-interest debt.
- Have a balance. Diversification is good, so you don't have all your eggs in one basket, which would put too much at risk. But make sure your portfolio doesn't end up too closely resembling the S&P 500, since you can't exactly "beat" the market if you are the market. For example, you can have "winners" that keep growing until they reach between 20% and 25% of your portfolio – but once that threshold is crossed, you start trimming them so that you don't have too many eggs in one basket.
- Avoid high fees. If you're paying a high fee (2% or more) for someone else to manage your money, that could be eating into your returns – especially as your portfolio hits the millions. Shoot for funds with no "load fees" and low expense ratios (below 1%). If you're on your own, trading fees should not cost more than 2% of your total purchase price. And by taking a long-term buy-and-hold approach, you can keep trading costs very low.
- Opt for tax-advantaged investment holding accounts first. Make sure you have 401(k) or 403(b)s, IRAs, HSAs, ESAs, or another tax-advantaged account set up. Keep your investments for a year (or longer) if you're using an ordinary taxable brokerage account, as this will lower your capital gains tax rate. That way, your investments will grow without the government taking its cut every year.
- Don't get swayed by emotions or FOMO. Many investors get scared when the market dips, and then end up making decisions based on fear. Others get greedy and go all-in at tops. In either case, it's important to remember that emotions are not your friend when you're investing. Do research, plan ahead, and stick to your plan.
- Do your research. Investigate any stocks or funds you are interested in investing in thoroughly, review the stats and historical trends, look at the company's financials and stay up. Make sure to understand the different types of investment risk: technical, fundamental, macroeconomic, political, and so on. Once you know these risks, you can start researching and analyzing stocks more thoroughly.
Real-life examples of investors beating the market
- Carl Ichan is a big bet maker and takes an activist role in turnaround companies. He's made his billions by taking calculated risks and betting big.
- George Soros is another famous investor who has managed to beat the market, more than doubling his money over the decades. His secret weapon? A combination of fundamental and technical analysis, as well as a hefty dose of macroeconomic forecasting.
- Peter Lynch emphasized buying what he knew and focusing on where Wall Street wasn't. His "buy what you know" philosophy allowed him to become one of the most successful investors in history.
- Warren Buffett has beaten the market by focusing on moats (i.e., competitive advantages) and valuations. He's also big into dividend stocks and reinvesting the dividends to compound his returns.
Related: Dividends Excel Sheet Guide and Template
- Marc Andreessen invests in start-ups — many of which succeed. His strategy? Investing in technologies he understands and betting on the future.
Study stocks you think will "beat the market" better with Wisesheets
Beating the market is no easy feat, but you can do it if you follow the rules discussed above. With a good understanding of the markets and sound investment strategies. Investors can find ways to beat the market and achieve success. Wisesheets makes this process easier by providing you all the data and analytics that you need to make informed decisions about your investments.
All your numbers update in at the click of a button, so you can have the latest stock information at your fingertips. Plus, Wisesheets helps you compare different stocks side-by-side to quickly identify which ones are outperforming the market and which ones are underperforming. You don't need to copy-paste anything manually into your spreadsheet anymore.
So if you're looking for an edge in your investing strategy, try it out for free today.