Thursday, August 5, 2010

Can You Invest and Beat The Market Consistently?

It is possible to beat the market. There are people, stock brokers, hedge fund managers, retail investors, or even your neighbor who reported fantastic gains from doing that.

But the real issue is whether one can do it consistently over the long run. When it comes to investing for retirement, you should not look at the market gyrations over a day, a month, a year, or even five years.

If you want to retire with a comfortable amount, you need to be able to beat the market for the entire time you invest, else you are just wasting your money, time and effort. The reason is simple, the financial crisis of 2008 has shown that a few missteps can wipe away all your gains and even make you bankrupt.

The fact is it is not easy to beat the market consistently. 80% of professional mutual fund managers fail to beat their benchmarks, what more an ordinary investor like us who do not have the skill or resources?

The professionals sift through news, analyze charts, research companies, and have networks that we cannot access or afford. Yet most of them could not beat the market. They are after all humans and are susceptible to mistakes.

Bill Miller of Legg Mason Value fund is a good example. He beat the S&P 500 from 1991 to 2005, but lost to the market in 2006 and bombed in 2008. That failure resulted in the S&P 500 outperforming his Legg Mason Value fund from 1991 to present. Thus, a pro with an illustrious track record can also make mistakes and lose his hard-earned reputation.

Since the odds are against amateurs and selecting the few professionals who outperform is difficult, why not just benchmark your investment to the market by investing in a diversified portfolio of index funds?

Can't Go Wrong Investing In Index Funds

Index funds remain the best choice for investors because of their simplicity, low-cost, and reliability. Picking a good index fund only require some understanding of the underlying components, expense ratio, and other hidden cost.

Since index funds don't require active trading, you enjoy lower costs and taxes - which will help improve your investment results.

Index funds may be boring (just buy and forget) but they work and will give you consistent results compared to the market. When you track the market (minus cost), you no longer worry about human mistakes erasing all your past gains.