Beat the market: dreams or reality?

One of the biggest mistakes investors make is thinking that they are able to beat the market over the long run. The average stock market return has historically been around 10% per year. In the last decades, it was around 9% per year.

And there are all kinds of people who want to beat this numbers.

Beat the market promises

So they trust famous fund managers (that run mutual funds or hedge funds) to beat the market for them. These “star” managers pick different stocks and they try to do that. Most of them don’t succeed. But small percentage does – but only for some years. After that, they just fall down to average or below average.

The name of the game: give investors minimum or even negative returns!

But the interesting thing is: at the start when the fund is very successful it has only a small number of investors – it is off the radar of most people. When it becomes successful it attracts the masses. And then the inevitable happens – the fund loses ground and starts underperforming. And the mass of investors starts to get below average or even negative returns.

There are hundreds of examples of this. Let me just give you one of them. Well known Magellan Fund reached its peak over the market in 1992. Between 1977 and 1990 the fund averaged a 29% annual return under the management of a famous Peter Lynch. At that time the fund attracted a huge mass of investors – they had assets of more than $100b. In the next 20 years, the fund started to become a failure. The returns the fund has in the last decades are quite terrible.

What was the end result? Most investors got the returns that are far below the market returns and often in the negative territory.

So, don’t dream about beating the market! Instead, focus on getting what the market gives you with the minimum possible costs.