A:

"Beating the market" means trying to earn an investment return greater than that of the S&P 500 index, one of the most popular benchmarks of U.S. stock market performance.

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, your investment will perform identically to the S&P 500 and investment fees will be subtracted from those returns, preventing you from beating the market. Look for funds with ultra-low fees of 0.1 to 0.2% annually and you'll be close to equaling the market.

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 -15% or more, depending on your holding period.

Investor psychology presents a third barrier to beating the market. People have a tendency to buy high and sell low because they're inclined to buy when the market is performing well and they sell out of fear when the market starts to drop. This buying and selling behavior makes it impossible to beat the market.

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. Success is not guaranteed. You might also be able to outperform the market if you have superior information, but those with superior information are often insiders, and trading on material, nonpublic information is a serious crime called insider trading.

Some investors have made fortunes through what appear to be superior analytical skills. Household names like Peter Lynch and Warren Buffett achieved their successes through picking individual stocks. Many more individuals you've never heard of have attempted similar strategies and failed. Even most professional mutual fund managers can't beat the market, and while this is not a popular theory, Lynch and Buffett may have just been exceptionally lucky, even if they are financial whizzes. Highly regarded economists have, in fact, 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. If you can merely earn the same returns as the market, you'll be doing better than most people.

RELATED FAQS
  1. Does OptionsHouse have mutual funds?

    OptionsHouse has access to some mutual funds, but it depends on the fund in which the investor is looking to buy shares. ... Read Full Answer >>
  2. Have hedge funds eroded market opportunities?

    Hedge funds have not eroded market opportunities for longer-term investors. Many investors incorrectly assume they cannot ... Read Full Answer >>
  3. Are hedge funds on the buy side or the sell side?

    Hedge funds are considered to be on the “buy side” rather than the “sell side” because they actively participate in the markets ... Read Full Answer >>
  4. What fees are associated with target-date funds?

    Target-date funds have two types of fees. The first type of fee is paid to the company managing the fund and selecting the ... Read Full Answer >>
  5. Some of the Best No-load Funds to Consider

    Some of the most well-known no-load funds are the DoubleLine Total Return Bond Fund (DLTNX), Vanguard Short-Term Investment-Grade ... Read Full Answer >>
  6. Can mutual funds fail?

    Mutual funds can fail. Unlike bank accounts, there is no Federal Deposit Insurance Corporation (FDIC) or similar agency that ... Read Full Answer >>
Related Articles
  1. Active Trading

    Market Efficiency Basics

    Market efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
  2. Economics

    The History of Stock Exchanges

    Stock exchanges began with countries who sailed east in the 1600s, braving pirates and bad weather to find goods they could trade back home.
  3. Fundamental Analysis

    3 Long-Term Investing Strategies With Strong Track Records

    Learn why discipline and a statistically valid investment strategy can help an investor limit losses and beat the market over the long term.
  4. Mutual Funds & ETFs

    The 5 Best US Small Cap Value Index Mutual Funds

    Find out which index mutual funds do the best at investing in small-cap value stocks for higher potential returns at the lowest cost.
  5. Investing News

    Building a Case for the Bulls: 3 Opinions

    These three big names are bullish on the economy. Are there good times ahead?
  6. Fundamental Analysis

    5 Predictions for the Chinese Stock Market in 2016

    Find out why market analysts are making these five ominous predictions about the Chinese stock market in 2016, and how it may impact the entire world.
  7. Investing

    The Three Most Notorious Rogue Traders

    The conviction of former Barclays trader Tom Hayes has once again shone the spotlight on rogue traders. Here are three of them.
  8. Mutual Funds & ETFs

    Mutual Fund Fact Sheets: What You Need to Know

    Novice or experienced investors should read mutual fund sheets. Fees and explanations will be discussed providing valuable information to the investor.
  9. Economics

    How Interest Rates Affect The U.S. Markets

    When indicators rise more than 3% a year, the Fed raises the federal funds rate to keep inflation under control.
  10. Investing Basics

    Financial Markets: Capital vs. Money Markets

    Financial instruments with high liquidity and short maturities trade in money markets. Long-term assets trade in the capital markets.
RELATED TERMS
  1. Futures Market

    An auction market in which participants buy and sell commodity/future ...
  2. Capital Markets

    Capital markets are markets for buying and selling equity and ...
  3. Equity Market

    The market in which shares are issued and traded, either through ...
  4. Next Generation Fixed Income (NGFI) Manager

    A Next Generation Fixed Income (NGFI) manager is a fixed income ...
  5. Next Generation Fixed Income (NGFI)

    Next generation fixed income is an innovative approach to investing ...
  6. Warren Buffett

    Known as "the Oracle of Omaha", Buffett is Chairman of Berkshire ...
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center