Can Retail Investors Beat the Market?

Nov 16, 2013

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Retail investors have a variety of different options when it comes to building a stock portfolio. One approach is to pick a selection of stocks that the investor believes will perform strongly. Another approach is to simply invest in an exchange traded fund (ETF) that tracks the market index. In the first case, we are trying to outperform the market, and in the second case we simply earn the market return.

Unfortunately, outperforming the market in the long run is difficult to do. Mutual funds attempt to outperform the market through researching and selecting a variety of stocks. However, the majority of mutual funds do not outperform the market. In fact, once fees and transaction costs are taken into account, the majority of mutual funds underperform the market.

And this leaves us with an important questions. If so many professionals are not able to beat the market, how can a retail investor expect to do so? Is it more sensible for retail investors to buy an ETF that tracks the market, and not worry about trying to outperform the index?

The answer varies depending on your level of commitment. While the majority of mutual funds underperform the market, there are some that outperform the market. So for a retail investor, it is possible to outperform the market, but it is not easy.

A retail investor must be willing to put in the time and effort to create their portfolio, if they want to have a chance at beating the market in the long run. Another useful tool is to make use of independent research (for example at Equitymaster) in order to make good decisions. Finally, a high degree of patience and discipline is required.

If you are an investor that is willing to put in the high level of effort required to beat the market, then you should absolutely do so. However, if you do not have the time or desire to do this, it is more sensible for you to invest in a fund that tracks the index. This way, you still earn decent returns in the long run.

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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