Investments

Can I Beat the Market?

By Chris Duderstadt

January 26, 2024

Can I Beat the Market?


Key Points – Can I Beat the Market?

  • How Greed Can Impact Investing
  • You Can’t Just Look at an Investment’s Upside
  • Developing an Investment Strategy
  • Patience Is Pivotal
  • 5 Minutes to Read | 24 Minutes to Watch

Can I Beat the Market?

Beating the market is something that many people have tried to do, but a rare few have succeeded. Many investors compare their investments to certain indices when attempting to beat the market. But are indices a good benchmark? Dean Barber and Bud Kasper, CFP®, AIF® have said countless times that there are two emotions that can oftentimes drive your investing decisions: fear and greed.

Schedule a Meeting Get the Retirement Plan Checklist

When the stock market is falling, fear takes over. Has this happened to you before? Maybe in early 2022 or in 2020 right after COVID-19 hit? That fear can take over in a hurry once the market begins to fall. Once you get an inkling that a big market downturn could be coming, it can be very tempting to try to time the market by selling before that happens and looking for alternative investment options.

Greed: Investor’s Worst Enemy

The same applies with greed when the market is on a massive upswing. No one wants to be the only one to not be making any money during a bull market. And no one wants to miss out on the next biggest thing. This is really where trying to beat the market comes into play. Do you know of an investment option(s) that isn’t available on the broad market that can give you a better return? And if you have, how likely is that to remain the case for an extended period?

We Can’t All Be Peter Lynch

Beating the market isn’t an easy feat for several reasons. The stock market is extremely competitive and it’s very efficient. There are the Peter Lynch’s of the world who have beat the market with flying colors1. As the fund manager of Fidelity Magellan, Lynch’s legendary stock picking helped the fund net an average return of 29.2% from 1977-19901. Many investors have tried to follow in his footsteps and haven’t come close to beating the market.

The thing is that beating the market isn’t just incredibly difficult. It’s also incredibly dangerous. According to a 2023 Visual Capitalist study, 95% of large-cap actively managed funds have underperformed their benchmark over the past 20 years2. So, while that proves that beating the market is possible, hopefully that helps shed some light that what people like Lynch and Warren Buffett have done is much more the exception than the rule.

Do You Remember Money Magazine’s Feature on Top-Performing Mutual Funds?

When Dean and Bud were in the early stages of their respective careers, they remember reading a section of Money Magazine that ranked the previous year’s top-performing mutual funds. One thing Dean liked to do is look at those rankings five years later. Most of the time, those top funds from five years earlier weren’t close to the top. That’s why longevity is such a big piece of this picture with beating the market.

If you’re really trying to beat the market, you need to do a ton of research and still have quite a bit of good luck. There are a lot of variables involved. You need to find a fund manager that’s currently beating the market, understand how that fund is being managed and what’s in it, and be aware of how much that fund has grown. The fund size is going to make a big difference in that fund manager’s ability to be nimble and to beat the market.

Let’s go back to the example of Fidelity Magellan for a minute. After Lynch left, Fidelity Magellan failed for a while3. It wasn’t that his replacement wasn’t smart. It’s just that the market became much more challenging to beat.

Considering the Upside AND Downside of Trying to Beat the Market

One important thing to keep in mind is that past performance isn’t a guarantee of future return. It’s easy to get caught up in the upside if that fund has been beating the market, but have you considered the downside? If you’re not comfortable with that, it’s not a viable option for trying to beat the market.

That’s especially the case if you’re in retirement or nearing retirement. Retirement is a time when you need your money to be working for you. You don’t have a paycheck to fall back on. Beating the market in retirement is certainly possible. You just need to proceed with more caution.

Investment risk is far from the only risk that you need to be cognizant of throughout the retirement planning process. It’s our goal at Modern Wealth to help people build financial plans that help them achieve their goals while still taking on the least possible amount of risk. You can see several examples of risk factors and how to mitigate them in our Retirement Plan Checklist. It consists of a 30-question checklist and an age-based timeline of critical retirement considerations. Download your copy below!

Beat the Market

Retirement Plan Checklist

What’s Your Investment Strategy?

Whether you’re trying to beat the market or not, it’s critical to have a clearly-defined investment strategy that incorporates your goals and risk tolerance. What does your money need to do for you to accomplish your goals?

When it comes to risk, it’s pivotal to have diversification within your investments by spreading them across different asset classes and sectors. Going all in on a specific stock(s) can seem like a great idea when they’re doing well, but things can change on a whim. Scrambling to sell and then buying alternatives you haven’t thoroughly researched isn’t a good feeling. Again, this is why it’s so important to consider the downside and not just the upside.

Trying to Beat the Market by Timing the Market

One of the biggest issues with trying to beat the market is correctly timing it. We’ve seen many instances of bull market runs within longer-term bear markets that serve as head fakes. That greed tends to build up during down markets and people will jump back in too early. Even the most experienced and knowledgeable investors don’t always accurately predict the markets. Leaving your retirement and financial future to guesswork isn’t advisable.

Trading Costs and Investment Fees

Last but not least, make sure that you understand the trading costs and fees associated with trying to beat the market. Many people try to beat the market by investing in an S&P 500 index fund instead of on individual stocks, thinking that the index fund will mirror the S&P 500. However, it’s important to factor in investment fees into the equation. After subtracting investment fees from your returns, it becomes challenging to even match the S&P 500’s performance, much less beat it.

And Taxes…

We can’t forget about one of the biggest wealth-eroding factors either as we wrap up with talking about trying to beat the market. We’re talking about taxes. A large percentage of your profit can be wiped away after paying taxes on investment returns. Most investors will have a capital gains tax of 15% or 20% for investments held for a minimum of one year. It will only be 0% if your income is under $44,625 (for single filers) or $89,250 (if you’re married filing jointly). If you hold investments for less than one year, they’re taxed as ordinary income.

So, Do You Think You Can Beat the Market?

Beating the market isn’t impossible. Doing it over a prolonged period, though, is far from an easy feat. Keep in mind that having an investment plan isn’t the same thing as having a forward-looking financial plan. Your investments simply serve as the fuel to power your financial plan, which also should incorporate tax planning, estate planning, and risk management.

If your advisor is only talking with you about investments and how to beat the market, you’re not likely working with a CFP® Professional. At Modern Wealth, we have CFP® Professionals, CPAs, CFAs, estate planning specialists, and insurance specialists that work together on behalf of our clients. Our Director of Investments Stephen Tuckwood, CFA spends hours upon hours analyzing investments so that our advisors can focus more on helping our clients achieve their goals.

If you want to learn more about our team approach to financial planning and how investments fit into the financial planning process, start a conversation with our team here.

Schedule a Meeting

While your investments are important, there’s so much more to financial planning. Let’s build a plan that takes you to and through retirement.


Can I Beat the Market? | Watch Guide

00:00 – Introduction
01:16
– A Story About Beating the Market from the Dot Com Bubble
05:27
– How Do I Stay Retired? May Be the Better Question
07:42
– Risk is Real
13:01 – How Do You Add Outperformance?
14:25
– Direct Indexing
21:27
– What We Learned Today

Articles

Past Shows

Downloads

Other Sources

[1] https://www.cnbc.com/2023/04/25/investing-legend-peter-lynch-on-the-investments-he-regrets-not-making-in-recent-years.html

[2] https://advisor.visualcapitalist.com/success-rate-of-actively-managed-funds/

[3] https://www.washingtonpost.com/archive/politics/1995/01/05/an-accountants-nightmare-13-billion-plus-or-minus/0b072038-612e-4a85-8889-57db77434d03/


Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.