Can you beat the market? Everyone with money to invest for whatever reason needs to ask this question. Your answer helps you decide what types of investments and investment advisors you want to use.
If you believe you can outsmart Wall Street, what besides your gut tells you so? Few professional managers ever beat the market. Data show that passive investing – meaning to put money in a market index fund and then largely forget it – historically outperforms active investing, where you are dodging in and out of various holdings.
If you always try to beat the market, you’re a speculator. That’s not evil. It’s just that many speculators wish they’d simply invested, especially when they look at their paltry returns after several years.
Consider investing icon Warren Buffett, who remains solidly ahead in his decade-long bet with New York-based asset manager Protégé Partners. Buffett invested in the Vanguard 500 Index Admiral Shares (VFIAX), a low-priced index fund that simply tracks the Standard & Poor’s 500. Protégé chose an actively managed hedge fund.
(Buffett, who did amass much of his fortune by periodically weeding out bum bets, in more recent years maintained that the best holding time for stocks is “forever.”)
Timing the market means, beyond unearthly amounts of luck, plain hard work. Can you spend chunks of time examining investment options? Got an extra four to ten hours a week?
If yes, then being a speculator might be OK for you. If no, think about being an investor and ride a market that’s climbed steadily overall for more than century.
Among your other key questions:
Should you work with an advisor or make your own decisions? If you see yourself as an investor, an advisor is a logical person for you to work with, a professional to help you choose long-term investments that have a track record consistent with achieving your goals.
Your advisor can also help you stay the course when your portfolio goes south and not get too excited when the market does well. You can’t put a price on such a guide: A few years back, investors who stayed the course with stocks in their 401(k)s came out far ahead even after the financial crisis of 2008-2009.
Men are slightly more inclined than women to tackle investing without an advisor, according to a recent Bankrate survey.
How long before you’ll need your investment cash? You might think you have no choice but to speculate: Your timeframe is short and your savings painfully inadequate.
Wrong. Here, you need to think about where to get and how to protect cash, not how much of your money goes into stocks or bonds.
Investing generally doesn’t work to fund short-term needs. It’s even worse at funding emergency ones.
What do you believe? How you invest always comes down to your own belief system. If you really believe you can beat the market and you’re willing to devote time to the adequate research, you might just develop a rare skill – not to mention get very rich.
If instead you believe that markets are truly hard to forecast and want to use a low-cost solution that gives you a good chance to approximate the market, being an investor might be your better choice.
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Josh Patrick is a founding principal of Stage 2 Planning Partners in South Burlington, Vt. He contributes to the NY Times You’re the Boss blog and works with owners of privately held businesses helping them create business and personal value. You can learn more about his Objective Review process at his website.
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