Many investors strive to “beat the market”. Meaning they attempt to out-perform a benchmark.
Everyone tries to beat the market, but very few are successful. There are a few reasons for this:
- Fees. If we pay an advisor to manage our accounts, or even manage investments on our own, there tend to be trading, management, and administration fees that the market doesn’t include in their numbers.
- Taxes. We are taxed on gains we make on investments either when the gains happen or when we withdraw the money (with the exception of those inside of a TFSA). This will usually take 15-20% of our profits.
- Inability to see the future. As we talked about last week regarding timing the market, it’s near to impossible to consistently time the markets to take advantage of all the good and avoid all the bad.
- Human behaviour. We also have something that the indexes don’t have: feelings. We can get scared, and panic sell our holdings. Or we can get swept up in the excitement and hop on a bandwagon just because it’s trendy. We can be our own worst enemy at times.
Just like we talked about with timing the markets, it takes a lot of knowledge and research to successfully pick stocks and buy and sell them at the right time in order to beat the market. It’s also very risky and is hard to do consistently.
So, we return to our usual pattern of buying diversified investments, holding them, and rebalancing as needed. The downside is we will never make a killing. But, we will also never get killed. The most we can underperform is by the amount of fees and taxes.
And those returns are nothing to sneeze at.
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