The title of this article includes an important question, but also my least favorite I've heard in investing circles, because it's often asked in a way that it seems almost loaded -- as though "beat the market" is some sort of inherent goal for investors.
The Loaded Question
Almost every time I've heard the question of beating the market, the asker is implying that there's only one right answer -- "yes." If the answer isn't "yes", then you should just put money into an index fund and not try to invest for yourself.
The problem is that this assumption is absurd. My goal isn't remotely to "beat the market," because my investment goals aren't just to retire or die with a big portfolio.
Instead, I have other goals: I want to be financially secure from economic disaster, I want to consistently beat inflation, I want a boring portfolio that doesn't fluctuate too much on a yearly basis, I want a steady income stream, and I want the portfolio to grow slowly but steadily every few years so I don't have to wait a decade or so before I can "know" that I can touch the money.
Other people might have similar or even different goals, which is the entire point.
Don't get me wrong. I'm not somehow losing and trying to rationalize it -- I've been a dividend, gold, and permanent portfolio investor since I began in high school, which means that I've easily beaten the market.
But I'm not a fool. I know that eventually the market will steadily outperform my strategies for a while, and I'm completely fine with that, because I know exactly what my investment goals are, and "do whatever is slightly more likely to make more money" isn't the only goal.
Still, whether one should beat the market or not as a goal aside, let's look at the data to see if it's actually happening regularly, and why, if not, people often fail.
Do Most Mutual Funds Beat the Market?
Every couple of months, I'll run across an author who shows some data proving crazy things about how most mutual funds and investors don't beat the market.
While technically true, a lot of the "statistics" are incredibly misleading. First, if you're an average investor, you won't beat the market, because even buying index funds means you'll be losing out to mutual fund fees and broker costs.
Here are the facts presented in the typically misleading way, from CNN Money, regarding using equity funds to beat the market.
But as a practical matter you can't know in advance which fund or stock will beat the market -- in fact, over the past 15 years, only 55% of U.S. equity funds did so, according to Morningstar.
And it's also misleading, because it assumes everyone is on the same investment time horizon, and we're not. I have friends and family who are investing for the next 30 years. I'm investing in such a way that I want to be fine both 3 years and 50 years from now, which means I'm settling for -- often -- a lower yield for the sake of safety, and stock up on gold and silver toward that end.
This is extremely misleading, because of a couple of reasons. First, mutual funds that do a horrible job usually go out of business, and there's really no solid way of accounting for that when doing a study.
Second, if you account for fees and whatnot, the results should be far closer.
Third, not all mutual funds are trying to beat the market in a five year time-frame, and many might be long-term equity portfolios trying to beat the market, not consistently every year, but a larger margin over time.
Fourth, a lot of mutual funds are investing in foreign companies and pricing them in dollars. This is useful if you're about to liquidate the funds, but if you're in it for the long-haul, the portfolio could be doing great or out performing another index altogether.
Fifth, some mutual funds aren't trying to beat the market at all. The Permanent Portfolio Fund (PRPFX) is a great example of this. In the 90s, it did very poorly for a well-diversified portfolio -- but over the last 12 years, it's performed well because of that same diversity.
The fund's goal was to beat inflation, plus some over time, in such a way that didn't take big bets on the future of the economy. It has been an incredibly successful portfolio and mutual fund.
Should You Try to Beat the Market?
A question of action is a question of goals, which is something more financial analysts need to learn. There simply isn't a "right" answer, because there isn't some sort of static universal investment goal.
For myself, I'm not trying to beat the market -- I'm just trying to make great money, after inflation, without taking big risks. That means dividend stocks, real estate, a modified permanent portfolio, and precious metals.
I might not beat the market in the next 12 months, but I don't care -- I'll be richer over time, and I'm enjoying a stronger level of financial security than most peoples' portfolios, and that's success to me.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.