Why You Don’t Need to Outsmart the Market to Be a Successful Investor

By Marjorie L. Rand, CPA, CFP®, RICP®

The market is a complex and dynamic system, with millions of people attempting daily to understand and navigate its intricacies. It can be frustrating to witness someone intentionally analyze trends and then achieve successful investment outcomes while your own efforts seem to yield only modest returns. We can feel that unless we have special expertise in market trends, we’ll never reach success.

However, speaking as a CERTIFIED FINANCIAL PLANNER™ professional with years of experience, I can confidently say that this is not the truth. Experiencing success in the world of investing doesn’t require that you outsmart the market or be stressed about executing perfect trades. Successful investments are entirely within reach—and here’s why…

You Can’t Outsmart the Market

Outsmarting the market usually involves attempting to “buy low and sell high” by analyzing current market trends for inefficiencies or volatility indicators. This is a common strategy used by both portfolio managers and everyday investors alike. It may work sometimes, but it is far from perfect. 

In fact, a new SPIVA report shows that 68% of active fund managers underperformed their benchmarks in 2022. The long-term results of this report are even more significant: 84% of active fund managers underperform after 5 years and 95% underperform after 20 years.

Not only does outsmarting the market involve guessing when to buy in, but you also have to guess when to sell. That means for every gain, you have to be right twice to make timing the market worth it. Unfortunately, market moves can only truly be spotted in hindsight, and outsmarting the market is often closer to playing the lottery than it is to an educated guess.

You can be a successful investor simply by relying on time in the market instead of timing the market. The longer you stay invested in a particular asset, the more likely you are to experience growth over the long term. Considering the S&P 500 Index has averaged around 9.4% for the last 50 years, this strategy doesn’t seem all that bad. Buying and holding often results in much lower stress and a more secure investment experience for the average investor over the long term.

Riding the Wave Is Less Expensive

Trying to outsmart the market has been around just as long as the market itself, and though it rarely works, many people keep trying. Not only are you less likely to outperform the market through market timing, but you could further reduce your returns depending on how often you trade. That’s because outsmarting the market can be expensive. 

Depending on your account type, asset class, and where you are executing your trades, you will likely be charged for every purchase and sale you make, and that’s on top of any taxes owed on gains. The more frequently you trade, the higher your transaction costs will be.

If you held the assets for less than a year, your gain will be taxed as ordinary income at your marginal tax rate, which can be as high as 37%. 

Even if you find an actively managed fund that is able to beat the market, they have to do so by a wide enough margin to cover its higher costs and more. As such, even some funds that beat the market end up with lower returns once fees are taken into account.

Staying Invested Produces Better Returns

Many investors will sell their positions during times of volatility to avoid or reduce a loss. But how do they know when to buy back in? This is one of the most difficult aspects of outsmarting the market, and it often leads to much less growth than staying invested the whole time would have produced. 

For instance, a recent study by Schwab Center for Financial Research found that bad market timing is worse than investing immediately, regardless of the market conditions at the time of investing. This indicates that even in market downturns, or just before a downturn, investors who invest immediately and remain invested will be better off than those who stay on the sidelines or attempt to time the market. 

The time value of money tells us that a dollar today is worth more than a dollar tomorrow, and this is certainly the case when it comes to investing. The longer you are invested, the more likely you are to ride out the fluctuations of the day-to-day market and experience growth. 

Consider Index Funds Instead

One of the most powerful tools available to investors who wish to avoid the complexity of outsmarting the market is index funds. These funds are designed to track the performance of a specific market index, such as the S&P 500 or the Dow Jones Industrial Average.

Index funds offer several advantages:

1. Broad diversification: Index funds hold a broad portfolio of assets, often representing an entire market or sector. This diversification helps spread risk, reducing the impact of poor-performing individual stocks
2. Lower costs: Index funds typically have lower expense ratios compared to actively managed funds. Lower fees mean more of your money remains invested and working for you.
3. Consistency: Index funds aim to replicate the performance of their benchmark index. While this means they won’t beat the market, they also won’t significantly underperform it.
4. No need for market predictions: With index funds, you don’t need to predict which individual stocks or sectors will outperform; your investment simply mirrors the performance of the entire index.

Create a Custom Strategy for Success

The market is famously unpredictable, often catching everyone off guard. Similar to trying to pick the winning lottery numbers, the chances of crafting a stock market strategy that never experiences downturns is next to impossible. A strong investment approach is one that can filter out the noise and concentrate on the long-term perspective.

At Rand Financial Planning, LLC, I help you uncover, design, and live the life you want to lead by connecting your financial strategy with your goals and vision. Together, we’ll co-create a robust, long-term investment road map capable of weathering market fluctuations. Schedule a 20-minute introductory call or reach out to me at 908-895-2406 or marge@randfinancialplanning.com to see if I’m the right fit to help you on your financial journey.

About Marge

Marjorie Rand is founder and financial advisor at Rand Financial Planning, a comprehensive, fee-only, fiduciary financial planning firm. Marge specializes in helping her clients plan for a secure retirement and navigate life’s many transitions through customized, tax-efficient retirement planning. She is passionate about empowering her clients to make the best financial decisions for their life and being by their side no matter what life throws at them. Marjorie spent many years as a CPA, specializing in estates, before founding Rand Financial Planning so she could be a go-to source for all her clients’ financial needs and help them avoid costly mistakes. She has a bachelor’s degree in accounting from Rutgers University and a Master of Science in Taxation from Fairleigh Dickinson University, along with the Retirement Income Certified Professional® (RICP®) and CERTIFIED FINANCIAL PLANNER™ certifications. When she’s not working, Marge enjoys boating, horseback riding, traveling, and hiking with her husband and her dog, Rangeley. To learn more about Marjorie, connect with her on LinkedIn.