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
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.
Can people actually 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.
How can you beat the market? ›
The four simple rules to beating the market
- Get your financial house in order. You should only be investing when a few very important boxes can be checked off: ...
- Don't "be" the market. There are huge benefits to diversification. ...
- Don't pay high fees. The fees you pay for your investments seem so tiny. ...
- Invest for the long run.
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.
Can you beat the market picking stocks? ›
Even stock pros rarely beat the market
Because the average person isn't equipped with an understanding of financial statements, technical analysis or how macrotrends affect sector performance, picking stocks can be a risky endeavor.
Has anyone beaten the S&P 500? ›
Rowe Price U.S. Equity Research fund (ticker: PRCOX) is in this exclusive club, having bested—along with a team of about 30 research analysts—the S&P 500 index for the past five years on an annualized basis. U.S. Equity Research is a Morningstar five-star gold-medal fund.
What percentage of financial advisors beat the S&P 500? ›
Key Points. Less than 10% of active large-cap fund managers have outperformed the S&P 500 over the last 15 years. The biggest drag on investment returns is unavoidable, but you can minimize it if you're smart. Here's what to look for when choosing a simple investment that can beat the Wall Street pros.
How do I know if I'm beating the market? ›
The market average can be calculated in many ways, but usually a benchmark – such as the S&P 500 or the Dow Jones Industrial Average index – is a good representation of the market average. If your returns exceed the percentage return of the chosen benchmark, you have beaten the market.
Do money managers beat the market? ›
If a manager invests $100,000 in a company, it may go largely unnoticed. If he invests $1 million, he may raise the stock price in the process. The upshot is that while some money managers can beat the market, they can ultimately become victims of their own success.
Who has beaten the market consistently? ›
Warren Buffett
Those who invested $10,000 in Berkshire Hathaway in 1965 are above the $60.2 million mark today. 1314 Buffett's investing style of discipline, patience, and value has consistently outperformed the market for decades.
On average, only 46% of funds outperformed the total market over monthly horizons; 39% beat the market over 12-month periods; 34% over decadelong horizons; and a mere 24% for their full history. Fees are part of the problem, of course.
Has any investor beaten the market? ›
There are also some exceptional fund managers who have demonstrated an ability to beat the market over the long term. As Buffett concedes in the same report 'there are, of course, some skilled individuals who are highly likely to outperform the S&P over long stretches.
How many stock traders beat the market? ›
And the percentage of active managers who do beat the market is usually pretty small – fewer than 8% in most of the cases above over the last 15 years; and they may not sustain that performance in the future.
Can AI predict the stock market? ›
"We found that these AI models significantly outperform traditional methods. The machine learning models can predict stock returns with remarkable accuracy, achieving an average monthly return of up to 2.71% compared to about 1% for traditional methods," adds Professor Azevedo.
Can I use AI to pick stocks? ›
Can I use AI for stock trading? There isn't an AI that will fully automate stock trading for retail investors, but there are tools like Magnifi, an AI chatbot, that can help you invest better.
Can AI help with day trading? ›
In intraday trading, artificial intelligence uses machine learning techniques, natural processing language (NPL), etc. It is with its help that AI analyses huge market datasets and identifies trends out of it. All of it helps the computer predict the outcome of a trade and make decisions accordingly.
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.
Who has consistently beaten the market? ›
Warren Buffett
Those who invested $10,000 in Berkshire Hathaway in 1965 are above the $60.2 million mark today. 1314 Buffett's investing style of discipline, patience, and value has consistently outperformed the market for decades.
