With near-record-low interest rates decimating many retirement portfolios and the major stock indices trading at record levels, more and more income-starved investors are taking a second look at the stock market in hopes of finding individual stocks that will beat market returns and bolster their portfolio.
How hard can it be? Over the last 20 years, the S&P 500 has realized an annual compound rate of return of 7.66%; that doesn’t seem like very much. But finding such stocks is, in fact, challenging, according to Learn-To-Trade.com; even professional investors have a difficult time doing it.
Professional mutual fund investors—those who are supposed to have the skills necessary to beat the market—have a pretty bad track record. Over the last 10 years, only 24% of professional investors beat the market.
Does this mean the vast majority of professional investors are underperforming the market? Or does it mean they are beating the market, but keeping all of the gains with higher fees? Research suggests trading costs and higher fees eat into investor profits.
One study followed 2,076 actively managed U.S. domestic equity mutual funds between 1976 and 2006. The researchers found that after fees, three-quarters of the funds showed zero “alpha” (returns in excess of the markets). The study also found that 24% of the funds were run by unskilled managers; this resulted in negative alpha or value subtraction.
Most alarmingly, only 0.6% displayed any true skill at consistently beating the market; that number is statistically indistinguishable from zero.
So if the professionals can’t beat the market, is it reasonable to think that you can? Beating the market isn’t easy, but it is a reachable goal—or rather, could be one of many investing strategies.
When it comes right down to it, the average investor will not beat the market, for many reasons: they might be impatient, let their emotions get in the way, or simply don’t know what they’re doing.
That’s because many would-be investors see the major indices running higher and think it’s easy to make money in a bull market. Having said that, beating the market is a reachable goal. And if you approach the market in the right way, you can improve your chances of success.
How can you do that? People go to school to get trained to become a doctor, lawyer, electrician, or learn a trade. It’s the same with investing; becoming a successful investor or trader takes similar trading and mentorship.
To be successful, you have to understand how the stock market works. Unfortunately, many people think they can invest or trade without any background, or worse yet, think they are prepared to take on Wall Street and Bay Street after watching a few free online videos.
A comprehensive approach to investing in the stock market needs to take more than momentum into consideration. After all, investors can also make money when the stock market is going down and sideways.
Keep in mind that high returns are just one goal. Controlling risk is also an important goal, but even that is relative to what kind of investor you are. Investors like returns and dislike risk on different levels. An investor concerned with high returns might want to consider stocks with greater volatility, while a more risk-averse investor may want to favour lower-return, lower-risk investments.
It’s important to have a diversified portfolio, which could include having bonds and low-cost index-matching exchange-traded funds and individual stocks. You might also want to consider forex (foreign currency) trading, stock option trading, futures trading, risk management, and capital preservation.
Taking market courses in Toronto with Learn-To-Trade.com can equip you with the right tools to trade in any market. Whether you’re new to trading or have some experience, the Learn-to-Trade.com courses will reveal and make clear all of the intricacies of successful trading.
The Learn-To-Trade.com course is an easy and pleasant learning process. As a professional trading firm, the experts at Learn-To-Trade.com share first-hand investing experience and provide you with a foundation to succeed in the stock market using proven technical analysis techniques that can be applied to any financial market.
That includes learning how to confidently trade in both falling and rising markets, how to identify trends as they emerge, learn channel trading in sideways markets, apply support and resistance analysis, and use risk management techniques to preserve your capital.
At Learn-To-Trade.com, our goal is to provide our members with the knowledge required to begin trading confidently and effectively while applying trade management techniques, and to provide a professional and supportive trading environment where our members can interact with other traders and staff.
Barras, L., et al., “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas,” University of Maryland web site, February 2010; https://www.rhsmith.umd.edu/faculty/rwermers/FDR_published.pdf.