Why Do You Have to Beat the Market?

beat the market

If you spend any time learning about investing, you will undoubtedly come across someone trying to teach you how to beat the market. Or someone selling you on their ability to beat the market for you. The claims are everywhere.

“Check out these 10 funds that beat the market over the last 3 years!”.

“Sign up here for the secret to outperforming the S&P 500!”

These claims can certainly be appealing, but are they really worth pursuing? Should beating the market really be our primary investment objective? The answer to both of these questions is largely no. Here’s why.

Our personal goals have nothing to do with beating the market

For most investors, the number 1 goal is retirement. Some are also putting money away for their children’s college education. Other goals, such as saving for a down payment on a house, likely don’t fall into the category of investing as much as simple saving, but all of these goals share a common characteristic: they have nothing to do with beating the market.

Of course you want fair returns, but what you really want is a plan that helps you reach your goals. By focusing first on returns, you are ignoring other important factors such as how much money you already have saved, how much money you need, when you need it, your tolerance for risk, your other investments, and on and on. Beating the market won’t make you happy. Investing your money for the things that truly matter to you will. Make sure the right priorities are kept in focus.

Market returns are above-average

A common refrain from someone selling a market-beating strategy is that market returns are just “average”. On the surface that statement makes a lot of sense. And it’s a great selling point because very few people strive to be average. Everyone likes to feel like they can find an edge. But the reality is that this selling point is a lie. Market returns are in fact above average.

It’s been shown year after year that most mutual fund managers underperform the market. It’s also been shown that a portfolio of index funds tracking the market will beat a portfolio of actively managed funds (trying to beat the market) over 80% of the time. When these facts are presented, it becomes pretty clear that market returns are actually significantly above average when compared to the people trying to sell us on their market-beating strategies.

On top of that, there’s research showing that individual investors do even WORSE than the funds they choose. In other words, by buying and selling these funds at the wrong times, we are underperforming the funds that are themselves already underperforming the market. That’s double underperformance! Those market returns should start looking pretty darn good right about now.

Risk tolerance is just as important

The return you earn on your investments matters, but just as important is your ability to handle the ups and downs of your investments. Investors seeking maximum returns can look no further than the stock market. That’s where the big long-term returns come from. But it’s no secret that the stock market can swing high and low pretty wildly, and those big movements can scare a lot of investors. And when we let fear take hold, we often end up buying high and selling low, which is one of the worst things we can do as investors.

Understanding your tolerance for market movements is a crucial piece of successful investing that a focus on beating the market completely misses. Know that higher expected returns only come with additional risk and build an investment plan that balances your desire for return with your capacity for risk. A balanced approach might not get you the best returns when the market is on fire, but it will help keep you from selling out when the market is tanking. That alone will do more than almost any other tactic to keep you on track for your financial goals.

Trying to outperform is more work

Not only are market-beating strategies actually more likely to underperform the market, but they will take more of your time and energy to do so. Because let’s face it, there is no quick and easy trick to beating the market. The people who are actually successful at doing so (and they do exist, though they are very few and far between) are successful because they dedicate their lives to investing. They poor over earnings reports. The meticulously understand history and its lessons for today. They spend a lot of time and a lot of money searching for information that can give them an edge. Simply put, it’s a lot of work. And most of the people who put that much work in are still unsuccessful.

How much time do you really want to dedicate to investing? If it’s truly your passion and you simply love spending hours each day doing research, then go for it. But if not, why shouldn’t you be happy with a simple market-based portfolio that will outperform 80% of other investors with almost no effort? I don’t know about you, but I would rather have that time free to spend with my family, work on a hobby, or just relax and watch the Patriots game.


When we step back and look at the bigger picture, it becomes pretty clear that beating the stock market is a fairly irrelevant goal for most of us. We have actual financial goals that truly matter to us, and these goals are most effectively achieved if we completely ignore the desire to beat the market. So feel free to let go of the marketing hype and spend your time and money in a way that truly benefits you.

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45 Comments... Read them below or add one of your own
  • DC @ Young Adult Money July 17, 2013

    For the most part I agree: trying to beat the market is pretty pointless for the average investor. The problem is hindsight is 20:20. For example, when Circuit City went out of business Best Buy stock doubled in price in a short period of time. Most investors (even average Joe investors) think they should have or could have caught something so basic as a Best Buy stock increase when Circuit City went out of biz. This encourages you to try to find more opportunities where stocks will outperform…and the cycle is vicious 😉

    • Matt @ momanddadmoney July 17, 2013

      It’s always interesting to me when people use the term “average investor” in the way you do here. What, in your mind, is an average investor? Given that the only public data we have is on investment professionals who do this for a living, and given that on average they do worse than the market, isn’t it only logical that when you include the entire population of non-professionals as well that the “average” performance is significantly below the market? And if that’s true, then the conclusion is really that the majority of investors, and likely the vast majority, would be better off with market returns. You’d have to be significantly above average to do otherwise.

      So in all seriousness, what do you mean when you say “average investor”? What percent of the population do you think should seriously be trying to outperform? And why? What’s the end goal?

  • Alexa Mason July 17, 2013

    It sounds like you know what you are talking about, Matt. I personally would never be someone to try to beat the market. Most of it is above my head and I would feel better at a slow and steady pace, focusing on the long term goal.

    • Matt @ momanddadmoney July 17, 2013

      That sounds like a great mindset. Following the market will still be pretty up and down, but your long-term returns are likely to be much better.

  • AvgJoeMoney July 17, 2013

    While many may agree that beating the market is irrelevant, most still don’t know the answer to the important question: what personal return do YOU need on your money to reach your goals? That question makes all the difference when choosing investments.

    • Matt @ momanddadmoney July 17, 2013

      I agree with this to an extent. I think that if your goals can be reached with a small return, then there’s no need to take on unnecessary risk. But I have more reservations about the other end. I don’t think that it’s necessarily a good idea to take on more risk, shooting for higher returns, just because you think your goals require them. It’s a much better bet to stick within your risk tolerance and adjust either your savings rate or your goal.

      So while I wholeheartedly agree that it’s much more important to determine your personal need for return rather than using the market as a benchmark, I think it’s important to qualify “need” and think about other adjustments you can make if necessary.

      • AvgJoeMoney July 17, 2013

        I think we’re making the same point. If the number is low….then why the hell are you taking on so much risk? If the number is high, maybe you should delay the goal, lower the need or save more. My point remains: how can you know which of these you’ll choose until you know the formula?

  • Wayne Sheridan July 17, 2013

    Let me just say, this has been my investment philosophy for 30 years. Vanguard index funds have made retirement a breeze. While I seen the markets go up and down….. I just kept contributing and rejuggling the ratios once a year. I retired one year ago and while I have adjusted my ratio of stock to funds funds just a little I could not recommend this approach (or company) any higher!

    • Matt @ momanddadmoney July 17, 2013

      It’s good to hear from someone with such a long track record! I have all of my investments with Vanguard and couldn’t be happier. If I can look back 30 years from now and know that I stayed the course like you, I will be a happy man.

  • Edward - Entry Level Dilemma July 17, 2013

    Beat the market? I’m happy when my and my wife’s 401(k) isn’t loosing money!

    • Matt @ momanddadmoney July 17, 2013

      Haha, it shouldn’t have been losing money the last few years!

      • Edward - Entry Level Dilemma July 17, 2013

        Hence my complaint about how bad the options are!

  • Grayson @ Debt Roundup July 17, 2013

    Since I am relatively new to investing, I think running with the market and making it easy on myself is the way to go. I like the funds that I am using and they are providing great returns. My main goal is to just have the money necessary to retire when I want to.

    • Matt @ momanddadmoney July 17, 2013

      “My main goal is to just have the money necessary to retire when I want to.”

      Couldn’t have said it better myself. It’s reaching your personal goal that matters, not beating a well-publicized benchmark.

      • Wayne Sheridan July 18, 2013

        The tough part is standing pat when (not if) the drop comes….and it will. That is what makes this work…..stay the course! IT worked for me. I have seen big crashed since 1987…..but I stayed the course and have been handsomely rewarded!

        • Matt @ momanddadmoney July 19, 2013

          Good point Wayne. The true test of your investment resolve will certainly come in a downturn. Let’s hope we can all stay the course during the next one.

  • John S @ Frugal Rules July 17, 2013

    I could not agree more Matt! I always just had to shake my head when I was talking to investors who were putting so much focus on trying to beat the market. The kicker…99% of them were losing like crazy and paying a boatload in commissions. Why on earth put yourself through that? I imagine for some it’s the “thrill” they get, and I get that on one level, but it’s just insanity. Like Joe said, so many can’t answer the question of the return they need and thus have one other reason why they fail.

    • Matt @ momanddadmoney July 17, 2013

      For some it’s definitely the thrill, but for others I think it’s just because that’s what everyone around them is communicating is important. The media can’t report on performance to your personal goals, so they talk about whether such-and-such a strategy or so-and-so investor beat the market. I get why that’s the benchmark for them, but that doesn’t mean it should be the benchmark for us.

  • Tanya @ The Heavy Purse July 17, 2013

    So true, Matt! I think so many people think investing is hard and scary (and it is when you don’t/won’t take the time to educate yourself) so when they see someone touting an easy way to earn a ton of money – they immediately bite. We caught up in what everyone else is saying and doing and instead of figuring out what we need to reach our goals.

    • Matt @ momanddadmoney July 17, 2013

      What’s funny is, there is an easy way to earn money! It’s called indexing! But what people are usually looking for is an easy way to get “an edge”, and indexing really doesn’t feel like it’s an edge, even though the results show that it is. But you’re absolutely right that it’s very easy to get caught up in comparing ourselves to others, when those comparisons are completely irrelevant and actually harmful. Much better to focus inward.

  • Done by Forty July 17, 2013

    There are so many good lessons in this post. It reminds me of the lessons from JL Collins’s stock series: pick index funds to avoid costs, don’t try to time the market, don’t fall for the allure (& lies) of active investing trying to beat the market, and overall, simple is not only easier, it’s better.

    It’s a great post — thanks, Matt!

  • Andrew July 17, 2013

    Excellent post! I used to try and beat the market but it is generally a fruitless endeavor and usually more expensive. Now I invest in index funds and just want to keep up with the market. Fund managers always claim that they outperform the market when marketing the funds…but can they repeat that performance next year and the year after that. It would be very difficult. That and they charge more fees for their supposedly ability to beat the market.

  • I don’t really care about what the market does as long as my finances improve. If manage funds underperform I’d rather automate or do it myself so I have only me to blame.

    • Matt @ momanddadmoney July 17, 2013

      “I don’t really care about what the market does as long as my finances improve.” Like with Grayson’s comment, I couldn’t have said it better myself. This is really what it’s all about. Thanks Pauline.

  • Budget & the Beach July 17, 2013

    I’m part of the slow and steady wins the race crowd. As long as that line just keeps going up in general, I’m a pretty happy camper. That being said I do need to understand investing a little more than I do. 🙂

  • Andy Knauer July 17, 2013

    Overall I agree with the sentiment expressed in your post except I think there is one caveat. If you have been good at saving and would now like to invest those savings in the market, you need to consider how you time your entry. If you move all your money from a savings/money market/CD into the market at a peak (like it might be these days) you could be in trouble. Better in this case to put your money in over time (called dollar cost averaging) so that you aren’t buying everything at its most expensive.
    Other than this small caveat, I think you are dead on about indexing! Go Bogle!

    • Matt @ momanddadmoney July 18, 2013

      Thanks for the input. It’s actually been shown that investing a lump sum all at once will outperform dollar cost averaging about 2/3 of the time. You can see a well-written article on that here: http://canadiancouchpotato.com/2013/05/31/does-dollar-cost-averaging-work/

      With that said, there’s a psychological component to investing as well and if dollar cost averaging makes it easier for someone to enter and stay in the market, then I think they should go for it.

  • Pretired Nick July 17, 2013

    Super smart reality check, Matt! Keep your eye on the ball and ignore all the irrelevant nonsense and people will be fine.

  • Funancials July 17, 2013

    Unless the first person to retire gets a prize, beating the market is definitely irrelevant.

  • Laurie @thefrugalfarmer July 18, 2013

    Great post, Matt! Often times, I think, because of attitudes like that, we make investing much more difficult than it has to be.

  • Greg July 21, 2013

    I think the simplest way to prove that people’s schemes for beating the market are risky at best is to compare a few of them side by side. In some cases, they literally say the exact opposite thing to make money. At the beginning of this year, I googled “is it a good time to get out of the market” and found plenty of advice saying yes and plenty saying no. Bottom line, nobody knows for sure and very few get it right.

    • Matt @ momanddadmoney July 22, 2013

      Good point about comparing them side by side. Whatever you want to believe, you can find someone willing to argue passionately for it. Not a good reason to trust a lot of the information out there.

  • TheKayla July 23, 2013

    Always a great thing to point out. I think some people get so focused on ‘beating the market’ that they lose sight of not only their true goals, but also make more financial risks and mistakes in exchange, and get no closer to their more meaningful goals in life.

    • Matt @ momanddadmoney July 23, 2013

      Great point that focusing on the wrong priorities makes it more likely to take on unnecessary risks and/or make mistakes. That’s a quick way to get in a lot of trouble.

  • Matt @ momanddadmoney August 5, 2013

    Index investing is a fantastic approach. Much easier and much more effective than almost anything else.

  • Rich Ellinger November 25, 2013

    Totally agree that investing should be about achieving goals. Investing returns are a means to an end. Not an end in and of themselves.

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