Why Do You Want to Beat the Market?

on

Just about every investor at some point compares his or her investment returns to the market. Professional investment managers advertise their services by comparing their performance to the market. Look up any mutual fund or ETF, and you can easily find a chart showing its recent performance relative to the market.

The message is everywhere: Beating the market is an important and valuable thing.

But why?

Why Do You Want to Beat the Market, Anyway?

Seriously, why? What’s the reason? Why is it important to you? What, specifically, will it help you achieve?

See, the whole point of investing is to build a better life. When you invest, you create financial resources that you can use to do the things you like to do.

Maybe you want to buy a house in a few years. Maybe you want to help your daughter through college. Maybe you want to be able to support yourself without working.

No matter what, the investment return itself is never the goal. The goal is the thing you’d like to be able to do with your life. The investment return is just one tool you can use to make it easier to do that thing.

So, again, why do you want to beat the market?

One argument is that getting a better return will make it easier to reach your goals. That’s actually the entire argument behind investing as a whole, since investing provides a better expected return that what you get from a savings account. If it didn’t, you would just keep all your money safe and sound in the bank.

It’s the additional return that makes investing a powerful tool, and that same logic could be used to argue in favor of trying to beat the market. After all, if the market returns 8% and you get 10%, you’ll be able to reach your goals even sooner.

Six Reasons to Stop Obsessing About Beating the Market

But it’s not that simple. There are some real downsides to trying to beat the market. Let’s look at a few of them.

1. It Won’t Make You Happy

A better return may make it easier for you to reach your goals sooner, and that certainly might make you happy. But a better return all on its own will not.

You may think that’s obvious, but I’ve seen plenty of people get so caught up in improving their investment return that they lose sight of what they’re actually doing it for in the first place. And that is not a path to an enjoyable life.

2. You Probably Won’t Succeed

If it were easy to beat the market, it would be a no-brainer. Kind of like it’s a no-brainer to use a savings account that pays 1% over one that pays 0%.

Unfortunately, beating the market is incredibly difficult and unlikely. Studies have repeatedly shown that 80% to 90% of people who try to beat the market fail to do so, and that’s only looking at professional investors.

Average investors often underperform the market by 4% to 5% per year, usually as a direct result of their attempts to get better returns.

The fact is that the odds are against you. Trying to beat the market will most likely result in losing to it, which will make it harder for you to reach your goals, not easier.

3. It Detracts from Your Life

The people who ARE able to beat the market on a consistent basis (and there are incredibly few of them) are only able to do so with a huge investment of time, energy, and money.

They devote their lives to investing. To researching and understanding the businesses they’re investing in and the environment in which they’re making those investments.

You could certainly attempt to do that too, but it would require you to sacrifice in other areas. Assuming you keep your day job, it would presumably mean less time with your family and friends, less time to relax, less time to actually enjoy your life today.

Is that really what you want?

4. It Takes the Focus off the Real Goal

Chances are, once you start focusing on beating the market you’ll keep focusing on that goal above all else.

It’s not that you’ll forget that you’re saving for financial independence, or your child’s education, or whatever it is that the money is actually for.

It’s just that you’ll subtly and slowly lose touch with those ideas. Investing will start to become all about the performance, rather than the life it allows you to live — and that’s a slippery slope.

5. You’re Probably Not Comparing Yourself to the Right Thing

What is “the market” anyways? Is it the U.S. stock market? What about international stock markets? What about bonds? What about all the other kinds of things you could invest in, and all the different ways you could combine them?

Investment managers regularly compare their returns to inappropriate benchmarks in order to make themselves look good, so this kind of thinking is a real problem.

You likely wouldn’t do it on purpose, but finding the right comparison for your unique investment portfolio isn’t easy. And comparing yourself to the wrong thing could lead you way off track.

6. Market Returns Have Been Really Good!

Let’s not forget that market returns have been very good over the long term. Which means that while it’s possible to do better, there’s really no NEED to do better.

You’re not settling when you accept average market returns. You’re putting yourself in a really good position to reach your goals.

Focus on YOUR Goals

In the end, the only thing that matters is your ability to reach your personal goals and do what you want with your life. THAT is the point of investing — and you don’t need to beat the market to do it.

So stop worrying about it. It’s not a real or helpful goal. Focus on the simple things that matter, stick with them, and spend the rest of your time actually enjoying yourself.

Matt Becker is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families. His free book, The New Family Financial Road Map, guides parents through the all most important financial decisions that come with starting a family.

Related Articles:

The post Why Do You Want to Beat the Market? appeared first on The Simple Dollar.

Comments

Post a Comment