The myth
In investing, beating the market usually means getting better returns from an investment than an established benchmark (usually an index that represents the performance of the market as a whole).
That’s why some people believe that you should always try to beat the market.
Why do people believe it?
If your investment gives you market-beating performance, you’re very likely to have excellent returns. If you’ve made sure that your goal is achievable based on your time horizon, you’ll probably have more than enough money when you need it.
However, beating the market by surpassing the returns of a benchmark is very difficult to do, even if you’re an expert at investing.
If you follow an active strategy, you’ll have to be very knowledgeable about the market, and able to consistently determine the right time to buy and sell. If your money is in a pooled fund, the manager must be able to do all of these things.
If you do passive investing, your aim will be to match the performance of the market instead of beating it.
When the market is down, beating it means having the value of your investments go down less than the benchmark does. This leads to your losses being lower, or even not experiencing a loss at all.
That’s why understanding what’s happening in the market will always be a good thing for investors, regardless of their strategy.
Risks of believing this myth
While beating the market is always a good thing, it can lead to a lot of frustration and stress if you don’t achieve this difficult objective.
Instead, you should be look at the rate that it will take for you to reach your financial goal. If your returns are higher, great. That means you’ll have more money than you’ll need. If your returns are lower, then you’ll have to evaluate the situation.
Just remember that this rate might be higher or lower than the market. It is also the rate that you should care about matching or beating, because it is the one that matters for your needs.
You could earn less than you would have by beating the market but still make enough to reach your goal. You can definitely still count that as a win.
If you do try to beat the market, remember that you’ll be able to react quicker to news and changes if your investment decisions are made by you and not a fund manager.
Verdict: It depends (but mostly false).
Beating the market would be great, but that shouldn’t automatically be your measure of success.
While having a benchmark will help you stay on track towards achieving your goal, it needs to be aligned with the amount of money you want to earn and how long you have to earn it. If, along the way, you end up getting more than you need, that will be good for your finances as well.
