Investing in the Stock Market: Outperform or Follow the Market?
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Before reading this article
⚠️ In order to understand this article, it is essential to have read the article ”Invest actively or passively, stock or ETF?”
I get some questions (or statements) about whether to try to beat the stock market? Is it a good idea or a bad idea? Are these people who try to beat the market charlatans or messiahs? 🤔
Like everything in life. Nothing is completely white or completely black in stock market investments.
Let's analyze this question in a whole. Should we try to beat the stock market? 🤔
⚠️ Investing involves risk of losing money. This article can only be taken for entertainment purposes❗
Investing in the Stock Market: Outperform or Follow the Market?
What do those who want to beat the market want?
First, those who want to beat the market, want to outperform the average of a particular stock market. Before we get into the details. The question is How does the stock market perform on average? 🧐
▶️ The Downsides of Trying to Outperform the Market
Stock Market Performance
To understand the stock market, you need to analyze the performance of index funds or certain ETFs (also known as trackers). Because they follow a specific stock market.
Here is the performance of 2 ETFs that followed the stock market for 10 years. From 2013 to 2023.
- A Global ETF (world) – VT
- An American US ETF – VOO
| S&P 500 (VOO) (American Market) | Vanguard Total Stock (VT) (Global Market) | |
|---|---|---|
| Annualized average over 10 years | + 12.53% | +8.28% |
| Annual Commission (TER) | – 0.03% | – 0.07% |
| Annualized gross total | + 12.50% | + 8.21% |
⚠️ This data is from February 2013 to February 2023. Past results are not a guarantee for the future!
⚠ If you want to check the performance on the day you read this article. You can check on the site ETF.com.
🔺Therefore. Those trying to beat the market, between 2013 and 2023, had to do:
- More than 12.5% annualized on average, if they wish to beat the American market.
- More than 8.21% annualized on average, if they wish to beat the global market.
This is the first point I make to those who try to beat the market. By taking into account past results. You need to have an average performance of more than 12.50% annualized over 10 years to beat those who invest in a VOO ETF (SP500).
🔺Which means that trying to beat the market is very difficult in the long run❗
Transaction Fees
👉 When looking to outperform the stock market. Transaction costs should not be overlooked ⚠️
Note that buying and selling at the right time is essential to make money on the stock market, with an active strategy ❗
Indeed, those who seek to outperform the market generally make a lot of trades. In any case, they make more trades than passive investors.
⚠️ Lots of trades = Lots of commissions for trading accounts.
Whereas with a diversified ETF, you only need to invest once a month. With a cheap stock broker. It's about 3 CHF per transaction.
🔍 So, about 3 CHF per month. That is, less than 40 CHF per year in commissions..
🔺 Here is a table with a simulation. Between the passive investor who buys an ETF per month at 3 CHF per transaction compared to the active investor who makes a purchase or sale per week at 3 CHF per transaction.
How much will they spend on average in transaction management fees? 🧐
| Average price 3 CHF per transaction | Buy or sell ETF, once a month | Buying or selling shares, one transaction per week |
|---|---|---|
| Average commissions per week | 3 CHF | |
| Average commissions per month | 3 CHF | 12 CHF |
| Average commissions per year | 36 CHF | 144 CHF |
In this example, there are 108 CHF that the active investor spends more per year than the passive investor who only follows the stock market ⚠
▶ Therefore, to be profitable, the active portfolio must make an average of 9 CHF more per month compared to the passive portfolio (for this example).
⚠ You got it! An active investor must have more profits than the passive investor to be profitable.
Investment time
This is an important point for me and those who have a minimalist lifestyle.
Although trading can be fun. I don't want to spend my life watching the stock market status 2 hours a day.
In reality, when you want to outperform the market, there is no miracle. You have to analyze, sell, buy, calculate, etc. All this takes time and … no results are guaranteed 😶
🔺 I prefer (by far) to spend only 5 minutes per month on a few ETFs.. Without paying attention to the fluctuations in my stock market investments.
Actually, I like to focus on more important things in my life. Like my girlfriend, my travels or this blog. Rather than analyzing the stock markets for a few hours a day.
The risks
Note that risks are an important point. Especially for those who want to invest large sums regularly.
For example, a Global Total Market ETF is like owning some of the best stocks in all 4 corners of the planet. With very varied areas.
➡ Therefore, the risk of losing everything is very low with a Global ETF
To give an example, as of the day I am writing these lines. The VT ETF corresponds to investing in approximately … 9,430 stocks. With different domains and regions.
Whereas if we invest actively, you have to diversify your purchases 😬
In reality, every action must be analyzed in order to understand several aspects. For example:
- The sales area
- The sales region
- The financial performance of each company
- Company debts
- The dividends
- Stock portfolio management
👉 Again, I don't see the point of having a stock. In my opinion, the total market ETF is simpler and more diversified. Which reduces the risk of losing money!
▶️ The Benefits of Trying to Outperform the Market
Although so far I have only mentioned the negative aspects of trying to outperform the market. There are a few points where investing passively, in an ETF or index fund, can be questionable compared to managing an active portfolio.
Which ones?
Neutralization of profits
When you have an ETF, some falling stocks will decrease the overall stock market profit.
👉 As a result, underperforming stocks offset the stock market's earnings returns.
To give an example, on the global VT ETF that I analyzed earlier. It is almost impossible for all 9,430 stocks to have profits at the same time.
Therefore, taking into account the hundreds of stocks in an ETF, there will certainly be a portion of stocks that will make losses. Which consequently, will neutralize the profits of the stocks that have performed the best.
This is a point mentioned by active traders. They are right about this!
Indeed, without the worst performing stocks, the overall performance of the portfolio would be better. Passive investors like me would make more money.
On the other hand, I ask a question 🤔
Who can know in advance which stock will rise or fall? At what precise moment? How many stocks should be bought or sold to be successful?
👉 In reality, these are questions that no one can know for sure in advance!
In this case, we are entering into speculation. In this universe, there are always losers and winners who play musical chairs. Therefore, no one can guarantee which side we will be on 😶
However, between mid-August 2014 and mid-August 2024. I remind you that for example, a Global VT ETF achieved an average of 8.89% annualized in 10 years.
During this time, we have experienced several crises that have not helped the overall stock market performance. For example:
- Wars
- Pandemic
- High inflation
▶ Despite this, +8.89% of annualized profits on average over 10 years
All this in:
- Spending only 5 minutes per month trading
- Around 3 CHF per month in commissions for the purchase of ETFs
- 0.07% annual in commissions for the investment fund (TER)
- Investing in major stocks, in major stock market countries, worldwide
- Approximately 9,430 shares in a stock portfolio
I think we're not bad 😉
Become the owner of your stock?
Another aspect that can help you invest actively is the fact that you become the owner of the stock you buy.
In fact, when you buy a stock, you become the owner of a small part of the company you are investing in.
Whereas with an ETF, in theory, it is the investment fund that owns the stock you invest in.
👉 This means that you need to have confidence in the group of the investment fund of your ETF. Therefore, never choose investment funds with a dubious reputation!
Conclusion
Investing in the Stock Market: Outperform or Follow the Market?
Over a long period of time, outperforming the stock market is very complicated!
I'm not saying impossible because some people do it. I congratulate them by the way!
However, I am of the opinion that if we take stock:
🔍 Time VS Performance VS Commissions VS Risks
👉 A Global Total Market ETF (or SP500 ETF) with a low TER is the best option, in my opinion.
Here is a table to summarize this article:
| Disadvantages of trying to beat the market | Benefits of Trying to Beat the Market |
|---|---|
| Some ETFs have very high performance. Therefore, beating the stock market is very difficult! | It is possible to become the owner (part of) the shares you buy. Not with an ETF. |
| Typically, transaction costs are higher when trying to beat the market compared to when trying to follow the stock market. | Possibility to speculate with the purchased shares. Which sometimes will be a winning game and sometimes will be a losing game. |
| Higher investment time when trying to beat the market. No guarantee of profitability | Don't buy a questionable ETF |
| The risks of losing everything in the stock market are higher compared to some ETFs. | Avoiding ETF TER fees |
| Easily influenced by negative emotions of financial market speculation | |
| More complicated stock portfolio management compared to an ETF |
⚠️ Investing involves risk of losing money. This article can only be taken for entertainment purposes❗
Investing in the Stock Market: Outperform or Follow the Market?
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Investing in the Stock Market: Outperform or Follow the Market?
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