Is It Possible to Beat the S&P 500?
An investor can say that they 'beat the S&P 500' when their investment portfolio performs better than the rate of return of the S&P index.
So if the return of the S&P 500 for a given year was 10%, to beat it, the return of your portfolio would need to be just more than that.
What Does "Good Performance" Look Like?
An easy way to track your performance is by measuring how much an investment has grown over time. But with no point of reference to compare this percentage to, how can you really know how good it is?
Investors (both institutional and retail) use the S&P 500 as benchmark to gauge how their investment portfolios are performing.
This is because the S&P 500 is a good representation of US market as a whole - meaning that you can compare your own performance against the market.
What Is the S&P 500?
The Standard & Poor’s 500 is a market index (hypptheical portfolio) of the top 500 companies listed on stock exchanges in the United States.
The index is market-capitilzation weighted, meaning that the larger a companies market-cap, the more impact the stock has on the indexes overall value. For example, the top 10 largest companies contribute just over 26% of its market capitalization.
It’s important to note that it’s not an exact list of the top 500 companies in the US because other factors are also considered before including a company on the list. Generally, however, it’s regarded as the best index of large-cap US equities and many of the top companies on the list include financial and technology companies.
The S&P 500 is one of the most popular equity indices, with over $4.5 trillion invested in assets tied to its performance and an average annual return of 10-11%.
So, if your performance matches the S&P, then you've done pretty well.
But what happens if you outperform it?
Is It Possible to Beat the S&P 500?
Beating the S&P 500 is of course possible, its just a matter of how likely it is.
The S&P 500 consistently performs well. In order to beat it, you have to consistently perform better.
This is a hard task for any investor, but here are 4 methods you can use to attempt it.
How Can I Beat the S&P 500?
Taking more risk
Generally investments with higher risk, have higher potential returns.
Keep in mind, though, that it works both ways. So, while you can make more, you can also lose more.
High risk investments may include young start-ups, which are riskier because they don't have an extensive operating history.
If you invest in a start-up at the beginning the chances
For example, canabis stocks are seen as having larger than normal risk, but also a larger than normal upside because often they rely on changes in regulation. Investors that invested in canabis companies pre 2016, saw a large return on their investment when recreational use was approved in California in 2016. Canope Growth corporation went from $2.50 to $12 by the end of 2016. Few investors could have predicted this but the ones that took the risk, earned an outsized return.
Of course, the ideal formula for investors is asymmetry; limited downside in order to have an unlimited upside.
Buying the dips
Whilst this isn't a strategy per se, because everyone would do this if they could. One of the ways that investors outperform the S&P 500 is by buying various stocks at lower prices and then successfully selling at the peak - increasing your return.
Over a longer period of time, the S&P 500 typically forms an average. This is because whilst one stock within the index may soar, others will fall - so you get the average price. If the investor is able to pick the one stock that soars, they will avoid the headwind of the stock that falls.
The problem is that true dips, which are a temporary price drops, are hard to distinguish from patterns that show significant downturns (ie they may not return to the same share price as before), especially when you’re a beginner.
A way to beat the S&P 500 is by investing in what the index doesn't. In this case, since the S&P 500 only includes large-cap stocks, a strategy may be to focus on small-cap stocks with the potential for huge growth.
Whilst small-cap stocks are considered more risky, they also provide the opportunity for outsized returns.
A key example of this, is the junior mining sector which includes mining companies that have just began their journey towards become a fully-scaled, producing mine. Although a majority of junior mining companies will fail, 1 in 20 could be the ten-bagger that every investor dreams of.
Some investors will outperform the market without a complex strategy, and sometimes without even trying. Sometimes luck is just on your side.
Now, these strategies all sound like a bit of a gamble, don’t they. Another solution would be to invest in a suitable exchange-traded fund (ETF) or index fund. These instruments track an index like the S&P 500 or a specific sector. However, because you’re trying to beat the S&P 500, you’ll eliminate a lot of them from the outset because they track it, and their performance is almost exactly correlated.
So, you’ll need to consider other ETFs or index funds. Here, you’ll need to take into account the risk profile of the investment, its historical returns, its expense ratio, or the fees you’ll pay to invest in it. Also, keep in mind that, although these instruments are often less risky than individual stocks, you might need to invest in a higher-risk one to outperform the S&P 500.
And that brings us to another option. You could be able to outperform the S&P 500 if you have access to the same quality of information that the hedge funds use and pay thousands of dollars for.
But who does the average retail investor access this information?
That’s where Crux Investor comes in.
What Is Crux Investor and How Does It Work?
Crux Investor provides investors with the same level of report that the hedge funds use to make investing decisions, but at a fraction of the price.
You’ll receive a single stock recommendation every month, curated by industry experts, presented in a clear and focused one-page memo.
So you're getting all of the information that's included in a heavy institutional grade report, in an easy to read and digest format.
To provide you with this service, we have an internal strategy team with sector-specific analysts who are all industry veterans with years of practical experience. So, when the team identifies a sector for investment, our analysts get to work to identify the best stock to invest in that sector.
Crux Investor also hosts a wealth of investing shows to help you stay up to date and discover interesting potential opportunities. For example, our show Ferg's Undersirables seeks to identify lesser-known, niche sectors that make the perfect contrarian investments.
Some of Ferg's Undesirables include:
Ferg also teaches good investing practices:
- The 6 Rules of Investing: How to Scientifically Increase Your Luck
- Inflation is Permanent: One Simple Framework to Understand
- How to Avoid Getting Screwed: Step-by-Step Guide to Researching Financials
- If You Want to Make Money, You Need an Exit Strategy. Here's Why...