Why Do You Have to 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.

Conclusions

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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