Can you really beat the market? Consistently? Year-after-year? Really?

4 min read
Sep 23, 2020

Many individuals continue to invest in a basket of stocks in hopes of outperforming the Standard & Poor’s market indexes. But this is a very difficult endeavor even with the help of a financial advisor. As a matter of fact, this year now marks the 10th year in a row that the majority of institutional managers, the pros, failed to outperform their index counterparts. Which begs the question; is managing your own portfolio, with limited time and resources, really the best option for you?

Here’s a hypothetical for you: who do you think racked up more wins over the last decade: the total of championships titles of Lebron James + Tom Brady + Serena Williams (in their respective sports) or equity indexes versus active managers? 

The research shows beating the market is unlikely

If you add all of the championship titles of these three elite athletes over the last decade (9 combined) their performances still don’t equal the winning record of market indexes over professional investment managers. Over the last decade indexes (e.g. the S&P indexes) beat their professional manager counterparts, each and every year. Ten year in a row! 

Research shows that equity indexes, as defined by the Standard & Poor’s beat professional fund managers consistently:

Manager performance against the S&P500 index

Source: Stock Pickers Underperformed During Coronavirus Market Turmoil

These stock-pickers’ argument has been that they would do better during periods of heightened volatility, or downturns. But the data shows they’ll need to come up with another line on that as well. Research shows that even in years of high market volatility, the professional managers fell short of their index counterparts.

Then there’s the practice

So the data says it’s unlikely, but let’s charge ahead. If you’re still ready to make a go of it, you’ll want to prepare for the technical challenges and emotional aspects of self-portfolio management. 

On the technical side, you’ll need to manage: investment research, asset allocation, diversification, rebalancing, account choice, and tax loss harvesting. That’s assuming you’re on the buy and hold side of things. Day-trading is it’s own can of worms that adds that much more complexity.

On the emotional side, whether you’re a pro or average Joe, you’ll have to manage dozens of cognitive biases that get in the way of rational decision making and can lead to big mistakes, especially when it comes to market timing decisions.

If it sounds hard, that’s because it is. But don’t feel too bad, even the most famous investor of all time, Warren Buffet, failed to beat the market over the last decade. Again, not just over the entire ten years, but each and every year.

Warren Buffet (Berkshire Hathaway) vs. the S&P500 Index (2010-2019)

Source: Motley Fool, June 2020

It is true that Berkshire Hathaway is a major corporation with a lot of management complexities that individual investors don’t have, but Mr. Buffet himself readily admits to his underperformance. This year, he even conceded that investing via Exchange Traded Funds (ETFs) is the best option for most individual investors. 

So what should you do?

Most investors will be better off taking Warren’s advice. That is, to allocate the majority of their portfolio to a diverse mix of low-cost ETFs for their future retirement income. Although you may have to give up bragging rights for your latest hot stock pick at your next neighborhood get together, you may actually retire better off than the rest of them!  

Even investors who seek better than market index returns can still invest the majority of their retirement portfolio in ETFs while pursuing alpha. By segregating your core retirement portfolio from more speculative high risk/reward alternatives, you put their nest egg on a reliable path while leaving room for upside. For example, while the core retirement portfolio is returning near the market, you can pursue breakout growth opportunities like Tesla, before 2020, that is. Or hedge funds, or private equity, or even crypto for the particularly brave-hearted. The point is that you take care of the core first before taking those active bets.

Now, armed with a bit more information, which approach makes the most sense for you? 

Roy Satterthwaite

VP Financial Advisor @ Farther

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