For decades, investors have focused on one thing: beating the market. An investor that regularly outpaces major market indices — whether in a bull market or bear market — is said to be in the top echelon of their craft, like Warren Buffet and Carl Ichan, some of the greatest investors of their generation. But it isn’t just professional investors who have the opportunity to achieve high returns, even individual investors can do so with the proper outlook and mentality.
While it isn’t easy to beat the market, it certainly isn’t impossible. In fact, there are many strategies traders can use to gain an advantage and increase the return on their investment portfolio.
Can anybody beat the market?
The term “beating the market” most often refers to beating a market benchmark. A benchmark is a standard — whether it be a stock market index, bond index, or other — that investors use to compare their performance. These benchmarks are what can be used to compare trading strategies and their success. The most common benchmarks include the S&P 500 and Dow Jones Industrial Average (DJIA), which have become the standard benchmarks investors use to see how their performance sizes up against the market as a whole. So, the next time someone tells you they can consistently beat the market, what they mean is that they are obtaining portfolio returns that exceed major market benchmarks.
If you want to be a trader who regularly beats market benchmarks and is revered by others, it’s best to understand some dos and don’ts of investing before you begin on your quest. The following are based on some commonly referenced financial tips.
The dos
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Do have an investment strategy
What type of investor are you? Do you prioritize value investing by identifying companies trading below their market value? Or maybe you identify more with growth investing and identifying companies on the rise. Whatever type of investor you are, we have understood that deciding on an investment strategy is an important step for the average investor. Over time, you will develop more skills around your trading strategy and become more adept at identifying potential investments. How do you know if your investment strategy is good enough? We believe you should always be able to explain to a friend or family member why you are investing in a certain asset, whether it be for the regular cash flow or high return potential.
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Do consider cutting your losses
At some point you will inevitably make a wrong investment decision. Instead of trying to ride out your losing investments until they make you back some money, some individuals may want to consider cutting your losses. Of course every situation is different, so speak with your financial planner or consider your own situation.
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Do diversify
Professional money managers fully understand that diversification is one of the most important aspects of a sound investment strategy. They typically claim expecting to ride the waves of a single market or sector is a fool’s errand. Markets ebb and flow, and one way to combat losing your lunch on the way down may be through diversification. A properly diversified portfolio may consist not only of stocks across a wide range of sectors and industries, but other assets such as bonds, real estate, and alternative assets as well.
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Do understand order types
The uninitiated investor will simply use market orders for all of their trades, not caring about the price they get for a certain investment. This can be a huge mistake. If you utilize different order types, when appropriate, it may help you more financially. For instance, placing a limit order when you’ve identified the price you are willing to pay for a particular asset, or placing a stop-loss order on a volatile asset, will help curb potential losses on a trade that begins to go south.
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Do invest for the future
While it might be tempting to trade for the short term gains, keeping a long term focus on investing is the better bet. Investors who focus on the long term usually are not weighed down by short term market fluctuations and news. You might not beat the market this week, but if you keep an eye on the future you may have a better chance of beating the market in the long run.
The don’ts
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Don’t get caught up in your emotions
Investing is an up-and-down business. One minute you might feel like you fully understand the market and how to beat it, and the next, you might be watching your latest investment as it continues to dive deeper into the red. The worst thing you can do as an investor is to get caught up in the emotions of investing. You will win some trades and lose others, that’s just the nature of market risk. Investors who are able to stick to their convictions and keep their emotions in-check are better equipped for investing in the long-run.
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Don’t forget about taxes
Active investors can easily forget that with each trade comes its own tax implications. Profiting from trades will result in an increased tax bill from the government. On the flipside, every loss comes with an eventual tax advantage. You can write off lost income from a stock trade, and while this still means you are at a loss, it might help take some of the sting out of a negative trade. Before investing, understand the capital gains tax you will pay on short and long term trades, as well as the tax rate for any other income gained from investing.
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Don’t try and be perfect
When it comes to market timing, too often traders attempt to buy at the exact bottom and sell at the exact top. But the pursuit of perfection in an investment can turn a good idea into a terribly executed trade in real time. To avoid this mentality, set boundaries on a trade before it is executed. You can do this by stating an entry and exit point for every trade you make and stick to these boundaries.
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Don’t invest alone
The best investors don’t attempt to build their financial future all on their own. As an individual investor you might not have access to the high-powered trading capabilities of big financial institutions, but that doesn’t mean you can’t utilize any number of resources at your disposal. There are plenty of financial analysis tools, market indicators, and other resources you can utilize to improve your portfolio performance. For instance, eToro’s CopyTrader allows you to invest right alongside other traders and potentially benefit from their wisdom.
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Don’t just rely on stocks
Sometimes you have to invest outside of it. This means trading alternative assets who have the potential for greater returns than equities. Cryptocurrencies are one alternative asset class that has seen major growth in the past decade. This alternative asset class is backed by strong technology and a positive growth trajectory into the future.
Playing the market with TIE
Instead of attempting to trade by yourself, you could instead utilize the services of an algorithmic trading strategy to take the guesswork out. TIE is a cryptocurrency data analytics firm that aggregates crypto-related information to inform its trading strategy. Specifically, TIE looks at how in the nascent cryptocurrency industry, it is market sentiment, and not fundamental analysis, that drives prices. Think market sentiment doesn’t matter? Just take a look at how the price of Bitcoin is reflective of its sentiment via TIE’s analysis:
With this information at-hand, The TIE has partnered with eToro to provide TheTIE-LongOnly portfolio. This algorithmic trading portfolio is optimized for market sentiment indicators. Using machine learning and algorithmic trading tools, the TIE portfolio is rebalanced each month. From the beginning of the year and to date, the portfolio has generated over 225% return after fees, giving investors an uncorrelated portfolio that far exceeds the market. (Remember, past results are not indicative of future results).
None of this is to be deemed or considered investment advice or a personal recommendation, and rather is to be used for informational purposes only. Please seek advice from your professional advisor or tax planner for what is best in your particular scenarios.