The Endless Search For More Knowledge About Personal Finance, Wealth Management, & Investing.
Joshua Street

Quit focusing on beating the S&P 500 and focus on what really matters!!!

Financial Planning, Investing

There are an absurd number of investing articles online and in print about what investment actions to take to “beat the market.” Regardless of whether any of them have actually studied investing formally or read a variety of academic research on the topic, it seems like everybody and their mother has some advice to give about beating the market.  Some of this advice is actually pretty interesting to read too!  The crazy thing is that very few people should ever concern themselves with that as a goal though. How many people do you know whose actual goals are summed up by “beating the market”?  No matter what they outwardly say about wanting to beat benchmarks, it sure seems to me that it’s more important that most people beat the hurdle of having enough money to retire or to send their kids to college…

Therefore, a better question to ask would probably be: what are the most important/impactful things I can do in order maximize my portfolio returns, given the stated portfolio risk level that I’m targeting?

Given that everyone is constrained by their time that they want/have available to dedicate to investing their assets, it’s crucial to start with the most important priorities and work your way down to the least important priorities if you still have time. He’s my suggested list of priorities that are the most important determinants of long-term return, but others may have different ideas:

  1. timing: respect compounding as the most important determinant of portfolio value/growth – no other investment selection decision has nearly as large an effect. Save & invest as much money as you possibly can now, not later.
  2. high level asset allocation: select your mix of high level allocation to broad asset classes (think stocks vs bonds vs alternatives vs cash)
  3. global asset allocation: further break that down by selecting allocations to geographic regions (domestic vs international vs emerging), based on long-term valuation measures such as Shiller CAPE ratios (or cyclically adjusted earnings yields if you prefer to consider it from the perspective of dividends and buyback yields)… consider reading Meb Faber’s Global Value book.
  4. factor selection: then, and only then, do you consider what rough allocation of stocks you should be buying within each domestic allocation, international allocation, etc. based on any number of historically proven strategies/factors that you find most compelling from academic research (dividends/buybacks/shareholder yield, value, momentum, etc.) …consider reading white papers from AQR & Research Affiliates.
  5. security selection: decide how to implement it with buying specific holdings in your accounts by considering whether you have enough time and there’s enough benefit to your portfolio to pick individual stocks (and actually stick with your written down strategy through thick and thin without letting emotions get in the way) or whether you should look to find a low-cost ETF or mutual fund to express that value/momentum/yield exposure instead.

I only go to this much detail here because it kills me with how much emotions come into investing, especially with how important it seemingly is for people to try to beat some arbitrary index or with how “home country bias” affects investors all around world. Most of these “beat the market” articles seem to heavily emphasize a how-to approach to making investing simple, yet the ideas they suggest about spending time picking dividend stocks actually have such an incredibly small effect on portfolio performance.  Plain and simple, you need to get the fundamentals of deciding how much to allocate to asset classes and specific attractive regions first.

As for a couple other themes that often come up in these “how-to beat the market” articles, I do mostly agree with the sentiment of buy & hold strategies, as long as it effectively means investing for long time horizons. I don’t fully agree with a strict buy & hold strategy though, since that is effectively an anti-value play if you’re not rebalancing periodically out of winners that have become relatively expensive and reinvesting that money into the cheaper/better opportunities. On a related note, automatic dividend reinvestment is good for those who don’t plan on taking an active role in their investments, since it keeps investors more fully invested over time without any effort; however, the underlying takeaway is not that using an automatic dividend reinvestment feature is the winning strategy. Instead, investors should redeploy dividends & interest quickly into what they deem is the best way to increase return, given their portfolio constraints.

Investors get more and more educated every day, which is encouraging.  Just looking to help everyone ask the important questions first so that they can get themselves and others around them closer to their financial goals!



Related Posts

Student of Finance

The broader finance industry is constantly evolving and providing new challenges for practitioners and end users alike. Acknowledging this fact, the best way to effectively manage your own finances and the finances of others is to become a lifelong student of finance. Josh Street created the Student of Finance blog to share relevant and timely topics that are related to financial planning, investments, and managing wealth.

Subscribe to our mailing list

* indicates required



The commentary on this website reflects the personal opinions, viewpoints and analyses of Joshua Street and should not be regarded as a description of services provided by his employer or its affiliates. The opinions expressed in this website are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide general education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Any indices referenced for comparison are unmanaged and cannot be invested into directly. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.