How can the Casual Investor Beat the Market

Beating the market is easy. The problem is that most investors go at it the wrong way! It is almost impossible to pick a series of individual investments that beats the market, since you would have to do a better job of picking those investments than the average investor, which includes a lot of pros who spend more time and have better tools than do you.

At the same time, beating the market using a broadbased, disciplined and systematic approach will almost guarantee beating the market with a minimum of time and effort. But first, let me define “Beating the Market”. My definition is “earning a higher return than the weighted average of the markets you invest in over time”. And, again, that is easy given the right tools and a basic understanding of the market.

So, what is this magic bullet? In short, dollar cost averaging and rebalancing, using index mutual funds representing the markets you want to invest in (and beat!). Think about it… by investing a regular amount each month according to your allocation in each fund, you will, by definition, buy more of each fund when it is cheap and less when it is high. And, by regularly rebalancing your investments to match your allocation, you are selling high and buying low. Beating the market is almost automatic! And, it requires only a few minutes per month. Over 30+ years I have beat the markets by an average of 1-2% using this approach. That may not seem like much, but it will likely increase your retirement nest egg by 25-50% when compounded over many years.

Notice, I said “almost” guarantees. When you use this approach, only 2 things can prevent you from outperforming the markets:
1. High trading costs or expenses which overcome the benefits of the system. Using low cost, no load index funds can keep trading costs to zero and expenses to 0.1 percent per year. Not a problem.
2. Responding to fear or greed and making moves not called for by the system. That’s where the discipline comes in. Don’t do it. The greatest benefit of the system is that it forces you to resist going with the herd, one of the main reasons investors often underperform the markets. You’ll find the system often forces you to make uncomfortable moves, and that is part of the magic.

There you are. Dollar cost average, rebalance, beat the markets. It could hardly be easier.