Can You Actually Beat The Stock Market?

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Investing in stocks is a popular passive income strategy to build lifetime wealth. While index funds might be the foundation of many investors’ portfolios, these investments only match the performance of their benchmark. 

As a result, you might consider investing in individual stocks to potentially beat the stock market. 

But, before you go on a stock-picking spree, it’s important to know the potential risks and determine if it’s actually possible to beat the stock market. 

What Are the Historical Stock Market Returns?

It’s vital to compare your investment performance to the broad stock market. While past performance doesn’t predict future results, you can compare an investment strategy to the overall market. 

S&P 500

The S&P 500 is currently the “gold standard” when comparing the investment performance of stocks and funds. This index tracks 500 of the largest publicly-traded companies on the United States stock exchanges from most industry sectors.

Through 2021, the average annual return is approximately 10.5%. However, the yearly inflation-adjusted return is closer to 7%. 

It’s important to note that this average positive return doesn’t mean an S&P 500 index fund is going to produce a consistent return year in and year out. 

Keep in mind that the market is inherently risky and can be volatile at times. Furthermore, corrections are a normal part of investing.

For example, you may experience an above-average return of 26.89%, like in 2021. On the other hand, you may have to endure a 38.49% annual drawdown, like in 2008 when the Great Recession began.

No investing expert knows how the stock market will perform each year. However, if you’re going to invest in large-cap stocks, you may want to start with the goal of holding investments with the potential to outperform the S&P 500.

Other Stock Market Benchmarks to Watch

It can be useful to monitor certain indexes since they might be more relevant to a particular investment strategy.

Some indexes to keep an eye on include:

  • Nasdaq 100: The 100 largest non-financial companies trading on the Nasdaq exchange. Tech stocks are the primary component of this index.
  • Dow Jones Industrial Average (DJIA): 30 companies from industries including tech, energy, financials and retail.
  • Russell 2000: 2,000 small-cap stocks that have higher growth potential than S&P 500 stocks but carry more volatility due to their smaller market caps.

With the exception of the Russell 2000, many of the stocks in the Nasdaq 100 or DJIA are also part of the S&P 500 index. 

The Odds of Beating the Market

Is it possible to beat the stock market? 

In short, it’s difficult for many professional investors to consistently outperform the market.

The year-end 2021 report from S&P Global Indices reports that 79.6% of domestic mutual funds underperformed the S&P Composite 1500 index in 2021. Plus, 85% of active large-cap funds trailed the S&P 500 for the same period.

What’s worse is that the research firm also reports it’s the 12th consecutive year that active fund managers have trailed the market. 

This observation means the last time the majority of active mutual funds outperformed was during the 2008-09 Great Recession.

While it’s possible to outperform the stock market, most professional fund managers aren’t able to do it on a consistent basis. 

The bottom line is that an actively-managed stock fund with the goal of producing a better portfolio performance than a passive index fund is actually more likely to underperform the market.

Why Most Advisors Do Not Beat the Market

There are several reasons why active large-cap funds do not beat the market. Understanding these factors may help you have better success with your strategy.

Aggressive Investment Strategy

It’s possible that the fund manager can be too eager to have outsized gains to outperform competing funds. Sadly, too much risk can result in larger losses. 

Opting for a strategy that isn’t highly aggressive may increase the odds of outperforming the market.

More Assets Under Management

It can be more difficult for mutual funds and ETFs to rebalance their portfolios without impacting stock prices. 

If you invest as an individual, you’ll likely have more liquidity when moving into new positions.

High Fund Fees

Ongoing portfolio activity from trading fees and taxable gains increases the fund expense ratio. This ratio and the asset management fees reduce the net portfolio performance.

As an individual investor, you can choose a platform that offers commission-free trading to minimize your costs.

Investor Share Liquidations

Investors may sell shares of an underperforming fund to reinvest their capital into another investment that is a better fit. 

These liquidations can force fund managers to downsize their portfolios and not give an investment opportunity enough time to come to fruition.

Too Much Cash

Maintaining a high cash position can damper potential returns. As the fund has less exposure to the stock market, fund managers must rely more on the current holdings to outperform.

Management Change

Every so often, a fund manager retires or switches to a different fund. The new fund manager may have a different investment strategy.

This change in strategy may impact the fund’s performance.

Has Anyone Beaten the Market?

Several active large-cap funds beat the stock market each year, including legendary investors like Warren Buffett and Peter Lynch. 

However, the number of successful professional managers may not be as high as most investors project. It’s also difficult for the same fund manager to accomplish this feat their entire career.

Instead of relying on a potentially fee-heavy stock fund to pick winning investments, a sevice worth considering is  Motley Fool Stock Advisor.

This is a premium investing service that recommends large-cap stocks it projects will beat the market.

Since its inception, the service has had a lifetime performance of 496% versus 136% for the S&P 500 (as of March 21, 2022). 

While not every monthly stock pick turns a profit, it’s an impressive record in comparison to many professional fund managers.

An annual subscription can be cheaper than hiring a professional advisor. Currently, new members pay only $89 for the first year, then $199. There is also a 30-day membership-fee back guarantee that lets you try the service.

You will receive two monthly stock recommendations that identify companies with long-term growth potential. Plus, Motley Fool Stock Advisor provides a list of 10 “Starter Stocks” that can be worth adding to your portfolio at any time. 

You can also receive weekly “Best Buys Now” updates for attractive current recommendations. 

These recommendations hail from various industries, and the companies may not be part of the S&P 500 yet. As a result, you may have an easier time building a diversified stock portfolio. 

The service even offers an asset allocation tool that can simplify your research process. 

That said, as with any investment, you should perform your due diligence and only act upon recommendations that match your investment strategy.

Read our Motley Fool Stock Advisor review to learn more.

What Are the Risks Involved in Single Stock Investing?

Investing in individual stocks can be an effective way to improve the performance of your stock portfolio. However, this investment approach isn’t risk-free.

Here are some of the main risks of this strategy.

Improper Asset Allocation

It can be easy to overallocate a portfolio into a specific company, industry or investment trend. While you might beat your benchmark if that particular investment has an amazing year, you may assume more risk than necessary. 

A perfect example is the “meme stocks” like AMC (NYSE: AMC), GameStop (NYSE: GME) and Bed Bath & Beyond (NASDAQ: BBBY). These took the market by storm in early 2021. 

The share prices for these companies have surged and crashed in a relatively short period of time. Volatile stocks can require extensive investment tracking to avoid steep losses when you invest in a winning idea.

Various factors impact the stock market and the global economy. No investor knows exactly how their investment portfolio will react. As a result, it’s essential to build a well-diversified portfolio to minimize your risk.

Investment Fees

While most investing apps are commission-free, a short-term trading strategy can result in a hefty year-end tax bill for any capital gains. You can encounter this situation with a taxable brokerage account.

It’s also possible to encounter fees when hiring a financial advisor to help manage your investment portfolio. 

As studies continuously confirm many professional investors don’t outperform the market, the potential results may not be worth the fees.

Changing Personal Investment Goals

A well-known investing reality is that “markets can remain irrational longer than you can remain solvent.” 

You may need to sell your shares to raise capital for a particular expense. Or, a portfolio holding might not appreciate in value as much as originally anticipated.

It’s also common for investors to become more risk-averse as they approach retirement age. Therefore, swapping riskier assets for more stable investments can result in selling underperforming stocks.

How Investors Can Beat the Market

Unfortunately, there isn’t a magic bullet for producing market-beating returns each year. However, investors can follow these suggestions to potentially improve their investing skills.

Invest in Well-Run Businesses

Buying shares of companies that are efficient, innovative and industry leaders may help produce consistent returns. 

Investors should also research the company and understand how it makes money. Being familiar with the stock’s specific risks can help investors know when a stock may underperform. 

When investing in single stocks, it can also be a good idea to focus on large-cap stocks. These companies can be less volatile than small-cap stocks while having promising growth potential. 

Buy Fractional Shares of Stocks

Many investing apps let you buy fractional shares of stocks and ETFs. The investment minimum is usually $5 or less per trade without a commission.

Fractional investing makes it easier to diversify your portfolio when you have a small portfolio balance. Having to buy whole shares can require holding fewer stocks or accumulating more cash before buying stock.

Investors may consider buying stock slices to build a portfolio that holds between 20 and 30 single stocks. This portfolio size is still manageable but gives investors more opportunities to outperform the market. 

Position sizing can also be important to minimize portfolio risk. For example, investors may only allow each individual stock to have a maximum 5% allocation in their total portfolio.

Become a Long-Term Investor

Instead of solely focusing on yearly portfolio performance, adopting a multi-year holding period can prevent panic selling and unnecessary portfolio rebalancing.

For example, Motley Fool Stock Advisor recommends stocks that can potentially outperform the S&P 500 for the next three to five years.

The stock recommendation share price may ebb and flow lower and higher than the overall market during the holding period. 

However, a winning investment can outperform its benchmark when comparing performance after a several-year holding period.

A buy-and-hold investment philosophy also helps remove emotions by ignoring the short-term market noise.

Don’t Time the Market

Another popular investment suggestion is that “time in the market is better than timing the market.” 

Timing the market can result in two negative consequences:

  1. Not buying shares because they are expensive or buying later at a higher price
  2. Panic selling due to a negative news headline or a poor quarterly report 

While there are successful short-term traders, the investment process can be time-consuming for investors with a regular day job. Market-timed trades can also require more skill since you need to understand how to perform technical analysis.

One reason why The Motley Fool has been able to beat the S&P 500 is that it holds certain stocks during the ups and downs. 

Successful stock recommendations don’t always increase in value. It’s common for stocks and funds to dip due to negative market conditions and slow periods. Fortunately, the best stocks can usually bounce back.

That said, it’s important to note that times of weakness can offer an excellent opportunity to buy shares if the stock is a better fit than other investment ideas.


It’s possible, but not easy, for average investors to beat the stock market. Thankfully, there are affordable stock picking services that can help investors find large-cap stocks that have the potential to outperform the market. 

It’s also vital for investors to maintain a diversified portfolio and avoid unnecessary investing fees. Doing so can help manage risk and optimize their investment’s performance.