Jasmine Birtles
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Can Every Day Investors Beat The Stock Market?
Ruby Layram
9th Oct 2024
Beating the stock market is a pipe dream of many enthusiastic investors. It refers to placing winning investments that outperform the wider stock market and bring substantial returns. When people talk about ‘beating’ the market, they often have dreams of finding hidden gems that could turn £10 into £10,000. After all, legendary investor Warren Buffet has managed to amass a net worth of over $145 billion through smart investments over time.
Buffet aside, is it really possible for everyday investors to beat the stock market?
Annoyingly, the answer to this question is ‘it depends’. It is not uncommon for beginner investors to see returns on their portfolio however, it can take a lot of time and dedication to see the kind of returns that people often dream of when they think about beating the market.
In this guide, we will take a look at the realities of beating the stock market, whether its an attainable goal and how to increase your chances of doing it!
What Does it Mean to ‘Beat The Market?’
First off, let’s clarify what it actually means to “beat the market.”
In investing, the “market” usually refers to a broad stock index like the FTSE 100 (for our UK readers) or the S&P 500 (for our US readers).
These indexes track the performance of the largest stocks in their native countries. So, when we talk about beating the market, we’re talking about getting a higher return on your investments than the return of the FTSE 100, S&P 500 or similar indices over a given period.
For example, if the FTSE 100 returns 6% in a year and your portfolio returns 10%, congrats – you’ve beaten the market! But if your portfolio lags behind at 4%, the market has beaten you.
Although this might sound simple, the professionals often struggle to achieve this consistently, despite all their resources. But does that mean you should give up? I don’t think so! In fact, while consistently beating the market is challenging, it’s not completely out of reach for individual investors.
You just need the right approach, discipline, and patience.
4 Things You Need to Do to Beat the Market
Beating the stock market doesn’t happen without a bit of work. Here are 4 things that you will need to do if you want to see jaw-dropping returns.
1. Spend a LOT of Time Conducting Research
One of the key differences between professional investors and everyday investors is the amount of time they spend researching.
To beat the market, you’ll need to dedicate significant time to researching stocks, studying trends, analyzing financial reports, and keeping up with economic news. This isn’t a hobby-level effort; it’s more like taking on a part-time job!
That might sound daunting, but the more research you do, the better equipped you’ll be to make informed decisions about where to invest your money.
If you’re serious about beating the market, you can’t just follow you gut. Instead, dive deep into the fundamentals of companies you’re interested in, keep an eye on global market conditions, and understand the economic cycles. In other words, do your homework.
2. Use Advanced Technology to Minimise Human Error
It goes without saying that human beings aren’t perfect. We’re prone to impulsive decisions, especially when it comes to money. Advanced trading algorithms and AI investing apps have become increasingly popular because they help eliminate human errors.
Unlike us, algorithms don’t panic during a market dip or get overly excited when a stock is on a hot streak.
By leveraging technology, you can minimize some of the risk that comes with human error. Some platforms and apps help you make data-driven decisions, execute trades at the right time, and analyze massive amounts of information far quicker than any individual investor could.
If you want to increase your chances of beating the market, it’s worth exploring the different platforms that are available.
3. Have Room to Experiment
If you want to beat the market, you’ll need to be comfortable experimenting a bit with your investments.
This doesn’t mean investing everything into flashy new startups that promise the earth. But it does mean creating a space in your portfolio for some higher-risk, higher-reward opportunities.
Keep the majority of your money in stable investments, but allow a portion for riskier assets (those with the potential for big returns!).
Start small, assess your risk tolerance, and don’t gamble money you can’t afford to lose. The stock market isn’t a casino, but having a small portion of your portfolio dedicated to riskier investments could help tip the scales in your favour.
4. Develop a Crystal Ball!
On a slightly less serious note, wouldn’t it be great if you could look into the future and see exactly where the market is going?
In truth, no one can predict the market with absolute certainty. Not even the professionals. You’ll hear a lot of theories, predictions, and forecasts about what the market is going to do, but in reality, there are always surprises.
The best investors learn to manage risk rather than rely on predictions, knowing that while you can’t foresee the future, you can position yourself to weather the storms and capitalize on the opportunities.
3 Investing Strategies That Almost Beat The Market
If spending every waking hour analyzing stock charts isn’t your thing, don’t worry – there are some well-known strategies that can get you pretty close to beating the market (and sometimes even succeed!).
1. Dollar Cost Averaging
Dollar cost averaging is one of the simplest and most effective investing strategies out there. The concept is straightforward: you invest a fixed amount of money into a particular investment on a regular basis, regardless of the market’s ups and downs.
This means you’ll buy more shares when prices are low and fewer shares when prices are high. Over time, this strategy can lower your average cost per share, helping you to potentially beat the market in the long run.
Dollar cost averaging removes the emotion from investing. You don’t have to worry about timing the market, and it helps you avoid the dreaded FOMO that can lead to bad decisions. Consistency is key here.
2. Diversification
Another time-tested strategy is diversification. This involves spreading your investments across different asset classes and sectors to reduce risk. The idea is that when one part of your portfolio is underperforming, another part might do well.
By diversifying, you lower your overall risk and improve your chances of getting a better return than if you put all your money into one investment.
A well-diversified portfolio might not beat the market every year, but over time, it can help you get closer to market-beating returns without extreme volatility.
3. Auto Investing
If you can’t afford a personal investment advisor but want to know the secrets of doing well in the stock market, an auto investor might be the best option for you.
These platforms use sophisticated technology to scan the market, spot potential investment opportunities and manage your portfolio on your behalf. These tools allow you to make smart decisions without needing to spend hours on research and analysis.
There are many different types of auto traders out there. For example, eToro provides a copy trading feature which allows you to automatically copy the trades of experts.
How to Increase Your Chances of Beating The Market
While there’s no guaranteed formula for beating the market, there are ways to improve your chances. Here are a few top tips for success.
1. High Risk, High Reward
If you’re aiming to beat the market, you’ll need to accept more risk. High-growth stocks, emerging markets, and speculative investments may give you higher returns, but they also come with more volatility.
Be prepared for the rollercoaster ride, and only invest what you can afford to lose.
2. Have a Long-Term View
One of the best things you can do to increase your chances of beating the market is to take a long-term view. The stock market will have its ups and downs, but over decades, it tends to trend upward.
By staying invested through thick and thin, you’ll give your investments the time they need to grow. Remember, patience is key.
3. Learn How to Understand Valuation
Understanding how to properly value a company is crucial if you want to beat the market. Look at key metrics like the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, and dividend yields.
These will give you an indication of whether a stock is undervalued or overvalued. The more you know about valuation, the better your chances of identifying companies that have the potential for outsized returns.
Despite popular belief, beating the stock market isn’t impossible. With the right research, strategies, and mindset, you can certainly improve your chances of success.
As a new investor, you should focus on building a diverse, long-term portfolio that minimizes risk and allows you to take advantage of growth in different sectors over time. If you have a bit of money to spare, investing in high-growth companies is a good way to accelerate potential returns.
Remember, timing the market is no easy feat and there is no guarantee that you will see returns. Are you interested in learning more about investing? Why not sign up to the MoneyMagpie bi-weekly Investing Newsletter? It’s free and you can unsubscribe at any time if you find it isn’t for you.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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