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. 1 Everybody tries to do beat it, but few succeed.
Beat the Dow
To perform better than the Dow Jones Industrial Average. Many money managers are rated on their ability to beat the Dow with the portfolios they manage. Beating the averages may also refer to the performance of individual securities.
Research from Dalbar Associates found that over the 20 years ending December 31, 2019, the average equity fund investor underperformed the market by nearly 2% annually (which is nearly 30% cumulatively). Most professional investment managers don't fare any better.
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.
“It turned out that less than 1% of day traders were able to beat the market returns available from a low-cost ETF. Moreover, over 80% of them actually lost money,” Malkiel says, citing a Taiwanese study.
Over the past two decades, Buffett has done reasonably well against the index, actually beating the S&P 500 in 12 calendar years between 1999 and 2020.
Buy on the Dips to Beat the Market
If you never sell, stick to index funds, and buy more when the market declines, you should crush the market's returns. A good strategy is to dollar cost average (purchase no matter what) with index funds every month, rain or shine.
Investors generally fare better in index mutual funds and exchange-traded funds versus their actively managed counterparts. The average investor pays about five times more to own an active fund relative to an index fund. This makes it tougher for active funds to outperform index funds, after fees.
Saving and investing often are used interchangeably, but there is a difference. Saving is setting aside money you don't spend now for emergencies or for a future purchase. ... Investing is buying assets such as stocks, bonds, mutual funds or real estate with the expectation that your investment will make money for you.
Don't just invest in the S&P 500
It may be tempting to just invest in the S&P 500, especially in a year when U.S. stocks are significantly up. But if you do this, you'll be missing out on an opportunity to diversify your portfolio and your long-term returns may suffer as a result.
The result was a fantastic research paper called, "How the Small Investor Can Beat the Market: By Buying Stocks That Are Selling Below Their Liquidation Value" (The Journal of Portfolio Management 1981.7. 4:48-52). According to Joel Greenblatt: ... Equals Liquidating Value Per Share (NCAV Per Share).
Private equity produced average annual returns of 10.48% over the 20-year period ending on June 30, 2020. Between 2000 and 2020, private equity outperformed the Russell 2000, the S&P 500, and venture capital. When compared over other time frames, however, private equity returns can be less impressive.
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