Is it worth trying to beat the market?

[alex123711]

Or are you better off sticking to indexing, knowing the odds of beating the index are very low.

[bostonimproper]

I think there are other goals that are probably more important to try and tackle first, like:
- allocating your investments in a tax optimal way and
- tuning your allocation to reflect your risk profile (e.g. limit volatility if that’s important to you during accumulation or withdrawal)

[Humanofearth]

Considering the low and decreasing returns of stock indexing (failed to beat money supply growth over decades time frame) with high concentration and counterparty risk (typically held in a single country rather than diversified like holding a quarter each between Singapore, Dubai, Switzerland, and USA), I would say yes.

Id trust real estate across 5-10 countries more and likely get bigger returns. Or just hold some btc/eth directly if you understand the technology.

[jacob]

OP, since you've started three other threads on the same topic in the last 2 years, what have you learned so far?
viewtopic.php?p=264658#p264658
viewtopic.php?p=264659#p264659
viewtopic.php?p=252690#p252690

[IlliniDave]

You have to answer that for yourself. My observation is that some people are compelled to try to "beat the market"* and will never be content just taking what the market gives. Other people find trying to beat the market stressful and tedious to the point it undermines their quality of life. I'm more aligned with the latter and have found over a few decades that buy/hold/diversify stocks/bonds suits my temperament much better and easily outpaced the goals I had when I set out. There's approximately a 50% chance I could have done better over time by trying to be a beater, but there's also approximately a 50% chance (arguably higher) I'd have done worse than I have. At a certain point I accepted just doing a little better than good enough. Success can be had both ways.

*sounds like you don't mean that in the traditional sense, rather it appears you mean investing in other asset classes that you think might do better than stocks. Or do you mean investing in real estate and beating the real estate market, investing in crypto and beating the crypto market, etc.? You could always define 'the market' as the average passbook savings account return and beat the market by putting everything in CDs.

[PhoneticNachos]

Most people are not interested in delving into the minutia of individual stock investing. For the vast majority of people they should stick to index funds.

Almost everyone here on this forum though is probably of the mind that they could, if inclined, develop personal investment strategies.
But again, even those predisposed towards investing, still may not want to devote the time/energy to eke out a few more basis points/quintiles of profit for their troubles.

As someone that relishes spending hours and hours of most days researching and planning out stocks to buy, especially now, compared to the last couple years. It is a lot of effort. I use finviz.com and a few other places to sort and analyze stocks to screen for potential investments.

I have funds in just about every possible asset class/category to some degree, though some are more from my index funds in my 401k.

Lately I have become rather obsessed with regional banks, they have a lot of great value, good dividends, a few are prime investments, great cash flow, low price to book value etc.

I could talk all day long about stocks and all the lists I keep and organize, hundreds of stocks.

I have an alphabetized list that grows by around 2-4 stocks a day.

Keep in mind that this does not mean I will ever invest in even a tenth of them, but I will sort through them every pay period and make investments accordingly.

Which also includes me potentially adding to previous investments too.

[suomalainen]

Which market? Even if you clarify that, it's not really a relevant question since $2 is obviously worth more than $1 (or a 1.2x return is better than a 1.1x return) so of course it's "worth" it. But can you beat the market? Are you a more skilled investor than average? If you are, try; if you're not, don't try.

Regardless of the answer to that question, portfolio allocation (think asset/liability matching in the context of risk tolerance, liquidity needs, return expectations, holding period, etc.) is probably a more important skill that everyone would benefit from developing or at least thinking about, even so-called indexers.

[WFJ]

Or are you better off sticking to indexing, knowing the odds of beating the index are very low.

The probability of any individual investor beating the market over a sustained time period is equal to showing up at your local YMCA basketball and finding an NBA player playing a pickup game.

[PhoneticNachos]

The probability of any individual investor beating the market over a sustained time period is equal to showing up at your local YMCA basketball and finding an NBA player playing a pickup game.

This is true, easier said than done for many. It is possible to beat the market average return, but for most it is probable that they will not.

Why managing your locus of control is so important. So called "winning in the margins", things you can do over time to improve your results.

Why investing rules, criteria are so important, performing proper due diligence, analysis.

With active trading, investor psychology is a massive factor in you performance, as a forex trader that is something I have had to explain over the years to a lot of people who I have talked with about ideas.

The book 'The Psychology of Money' by Morgan Housel, is a recent example of a timeless process that all successful investors learn to some degree or another. Certainly been written about before, but he is a great writer, and puts things very succinctly.

Regardless of the answer to that question, portfolio allocation (think asset/liability matching in the context of risk tolerance, liquidity needs, return expectations, holding period, etc.) is probably a more important skill that everyone would benefit from developing or at least thinking about, even so-called indexers.

A lot of what I said to WFJ applies to this too, I wholeheartedly agree

[Bankai]

For the vast majority of people, the vast majority of the time, the answer is NO.

[ertyu]

I wonder if the conclusions of the above chart change if we assume inflation + a rising interest rate environment

[Bankai]

I suspect so - the more difficult the environment, the bigger the gap I'd expect between the index and the 'average investor' outcome.

[7Wannabe5]

Don’t have any skin in this game, but would note that according to the fine print, the individual investors in the chart above would include everybody who mindlessly doesn’t make a choice with mutual fund allocation and then liquidates with penalty in down market because going through bad divorce. IOW, it isn’t limited to active and alert individual investors with some kind of strategy in mind.

[Lemur]

I'm mostly just projecting my own thoughts here - This is not investment advice.

Worth it to understand portfolio tolerance, risk tolerance, withdrawal strategies, etc.

Beating the market over a sustained period of time I think is individual....and at least in my humble opinion not worth it - Just do index funds.

However - consider in the long-run you might have a goal to not beat the market but just sustain enough dividend/return to fund your lifestyle. And in the short-run, you might try to find home runs. And accepting the risk that comes with that.

[mathiverse]

Here are two older threads with discussion about this topic:
viewtopic.php?t=9040&start=60
viewtopic.php?t=7766&start=20

Also a related paper: https://papers.ssrn.com/sol3/papers.cfm ... id=1952850

[suomalainen]

See, the thing that I think gets lost in these types of conversations is that "just do index funds" loses all meaning. People who "do index funds" don't seem to understand that (a) you have to BUY an index fund at some point in time and (b) you have to SELL* an index fund at some later point in time. Ergo, indexers are making buy/sell decisions just like active investors. It's just that instead of investing in specific issuers (presumably) following some analysis, they are mindlessly investing in a market - in the case of S&P500, for example, that market is perhaps a reflection of "the US economy". Now, if you are going to mindlessly buy and sell securities, it is FAR better to buy and sell the US economy than it is to buy and sell a much more volatile individual issuer. But, index funds aren't a cure for making uninformed decisions. They're just a slightly less volatile way of making mindless decisions.

This is why I think the better question is to look at yourself to see how educated are you as to your own preferences and the risks and opportunities in the securities you are interested in trading (be their individual issuers or groups of issuers a-la ETFs / indexes).

* And yes, even though receiving dividends are not technically a sale, it's the flip-side of the stock buyback vs. dividends equation. A stock buy-back by a company increases the value of the remaining shares (i.e., those who choose not to sell). Correspondingly, a dividend can be thought of as a forced sale by holders. So, if you buy a dividend stock, you are agreeing up-front to their dividend (i.e., sale) schedule.

[Lemur]

People who "do index funds" don't seem to understand that (a) you have to BUY an index fund at some point in time and (b) you have to SELL* an index fund at some later point in time. Ergo, indexers are making buy/sell decisions just like active investors. It's just that instead of investing in specific issuers (presumably) following some analysis, they are mindlessly investing in a market - in the case of S&P500, for example, that market is perhaps a reflection of "the US economy".

Perhaps I'm being pedantic, but to clarify its the opposite. At least when I say "just do index funds", I'm taking the standard FIRE approach and I'm not advocating active investing at all. Its completely passive without any sort of market timing. Mindlessly is debatable - there is an implicit assumption with passive investors that the US Stock Market will go up over the long run. And that has to be understood, otherwise there is no point in embarking on this simple strategy. Other funds like International can be titled via an allocation to get some exposure there or added treasury to reduce overall volatility (example: 60/40).

But the key is that this isn't really active...its meant to be a true set and forget. Of course, how many people end up breaking these rules and try to time buy/sells - then you're an active investor.

Yes also acknowledge that this topic has been beaten to death.

[suomalainen]

Mindlessly is debatable - there is an implicit assumption with passive investors that the US Stock Market will go up over the long run. And that has to be understood, otherwise there is no point in embarking on this simple strategy. But the key is that this isn't really active...its meant to be a true set and forget.

My point is that I agree with this - that in these conversations, these assumptions are all implicit. I'm taking a stab at making it explicit. There's no such thing as a "passive" investor. You *have* to activate a purchase (or purchase strategy, if you prefer, like dollar-cost averaging), and you *have* to activate a sale (or selling strategy, which most people never really talk about. It's always about the accumulation stage for dollar-cost averagers, never about the withdrawal strategy). For "passive" investors, they gloss over the "set" part of "set and forget". The "setting" is where the "active" is. Choosing to dollar-cost average into an index fund is no less active (in the singular sense) than day trading. You just do it the one time, on the assumption that "in the long wrong, the market (i.e., the US economy) always goes up". I'm not debating whether that's right or wrong. I'm just suggesting that you are taking a position ... just like so-called "active investors". Just because it's implicit, doesn't make it any less of an assumption-based choice.

Of course, how many people end up breaking these rules and try to time buy/sells - then you're an active investor.

Yes, this too, which is why it mystifies me when these debates are framed around these mythical "passive" investors who seem to be able to take a market return without any real-world buying and selling. Why can't we just be up front about the fact that everyone is buying and selling - it's just that every buyer and every seller has their own set of assumptions about what different securities (both individual and ETF) are worth?