Is it possible to beat the market?
Note: If you’re viewing this via RSS or E-Mail, click here to view the original post and add comments.
One question I get asked frequently, and see online that many people are curious about, is whether or not it is possible to beat the market. Very often, we hear of individual stock prices that have skyrocketed, followed by “If only I had invested then…”
Let me preface the following by saying individual stock picking is risky, and for most people does not end well.
For example, shares of Apple (AAPL) closed yesterday just above $700.00 per share. Just 10 years ago, in 2002, shares of Apple were trading at just over $7.00 per share.
Let’s look at that by the numbers:
Had you invested $250,000 into Apple stock in 2002 (at $7.00 per share), you would have owned 35,714 shares. Today, those 35,714 shares would be worth roughly $24,999,800. Congratulations, you would have beaten the market and made just shy of $24.75 million dollars.
Of course, there are numerous other examples of stocks that have beaten the market over the past few years.
The Dark Side
Just as there are numerous examples of individual stocks that have beaten average market returns, there are just as many (and likely more) that have underperformed the market and produced less than favorable returns for investors.
Unfortunately, the reality is that it is entirely possible to lose your entire investment should a stock plummet. Because of the vast differences in sectors and how the economy affects each sector, some stocks may flourish while others sink drastically.
Recently, we watched the IPO (Initial Public Offering) failure of Facebook (FB). In the weeks leading up to the IPO, the media glorified Facebook as the next big thing in terms of an individual investment. People talked about how it would be the next big winner, and told you that you would be crazy not to invest. Unfortunately, they were wrong.
Are Mutual Funds the answer?
When it comes to beating the market, a number of people view mutual funds as the answer. While mutual funds can be a great investment vehicle (full-time professionals to manage my money? yes, please), they may not always be the best investment.
Why might they not be the best investment? Simple: FEES.
Mutual funds are businesses, and businesses have fees and costs to run.
Here are some typical fees:
- Sales Loads:A sales load is basically a commission paid to a broker for selling mutual funds. There are two types of sales loads on mutual funds:
- Front-End: Paid when shares are purchased
- Back-End/Deferred: Paid when shares are redeemed or sold
- Redemption Fee: Sometimes, people view this as a back-end sales load. However, instead of being a commission paid to your broker, the redemption fee is actually paid to the mutual fund – thus it is not a sales load and can be charged in addition to a sales load. The SEC has limited redemption fees to 2%.
- Exchange Fee: An exchange fee is sometimes charged when an investor moves money from one fund to another within the same mutual fund group.
- Account Fee: Some funds will charge what is essentially an “Account Maintenance Fee” if your account does not meet certain criteria.
- Purchase Fee: Similar to a redemption fee, a purchase fee is not a sales load. Purchase fees are paid directly to the fund, and are sometimes charged in addition to a front-end sales load.
- Management Fees: These fees are paid out annually out of the fund’s assets to compensate management and advisers who manage the fund. Mutual fund managers make good money, and that money comes as a result of these fees.
- Distribution Fees: Also called “12b-1 fees,” these fees cover the costs of marketing, advertising, printing, etc.
It is estimated that in any given year, approximately 50% of mutual funds beat the market. However, it is much less common for a mutual fund to consistently beat the market year over year.
If you’re looking to invest in mutual funds – I really like Vanguard. They have some of the lowest fees in the industry, and a great selection of funds to choose from.
The Bottom Line
Is it possible to beat the market? Yes, but it’s not very likely. Hopefully none of you are here to find “get rich quick” schemes, because I don’t believe in that. Investing in individual stocks can be fun, but very risky. If you choose to do this, I would recommend doing so with only a portion of your overall investment portfolio (say, 5-10%). Mutual funds can be great investments, but make sure you do your research and minimize fees. There are a number of other alternative investments to individual stocks and mutual funds, which we will go over in the future.
Readers: Have you had any success picking individual stocks? How do you feel about mutual funds? – I’d love to hear your feedback in the comments below!
Disclosure: RPRX – Long
Information in this post should not be regarded as professional advice, or a recommendation to buy. Guess what guys? I am not a registered investment professional (most of you know that – I just need to say it). I do my best to make sure all information I provide is accurate, but make sure you do your own due diligence before investing. I write for educational and entertainment purposes only. Seek out the counsel of an investment professional before making important decisions regarding your money – it’s common sense. I’m working on getting a disclaimer page together – hopefully this covers my ass until then