This Is How You Can Beat The Market Without Fail


With this article, I am going to present several ways that investors, especially retired investors, can beat the market without fail. However, what I will be presenting may not be what you are expecting, particularly if you have a narrow notion of what beating the market means. In other words, one of my primary objectives will be to expand your mind and attitudes regarding what investment performance is truly all about. 

Moreover, this speaks to one of my biggest pet peeves as a financial professional, which is listening to the common refrain that most active managers can’t beat the market (S&P 500). The reason this aggravates me so much, is that I have never found it practical or useful as a professional manager to even try to “beat the market.” Investors are unique, and as such, possess investment objectives that are also unique to their own goals, objectives and risk tolerances.

Simply stated, investing is not a one-size-fits-all. Therefore, it has always made more sense – to me at least – to manage portfolios that were designed to meet the individual client’s specific goals, objectives and risk tolerances. In other words, I prefer to design portfolios that get the job done and often without regard to short-term price volatility.

More to the point, the market (S&P 500) simply may not be a suitable investment for every client. On the other hand, this does not simultaneously suggest that those investors should not invest in stocks at all. Instead, investors might be better served to build a portfolio of individual stocks that meets their specific goals, objectives and risk tolerances. A good example could be a portfolio of blue-chip dividend aristocrats with a long history of increasing their dividend every year. In contrast, the S&P 500 would also include stocks that don’t even pay a dividend.

As I will illustrate later in the article, and in the accompanying video, a quality dividend growth stock with a starting current yield that is higher than the S&P 500 and at the same time fairly valued will produce more dividend income than the market the majority of time, if not over every timeframe. In other words, it will beat the market based on total income produced and is highly likely to meet or beat it on a capital appreciation basis over the long run as well.  Superior businesses bought at fair value will generally produce above-average (the market is an average) results over the long run.

Building Investment Portfolios to Meet Your Goals, Objectives and Risk Tolerances

To summarize, total return may not be the only criteria with which to judge a portfolio’s performance by. The amount of income the portfolio is generating relative to the market may be a more important objective that is often overlooked. The amount of risk taken would be another.  Nevertheless, generating more income than would be available from the market (S&P 500) is a relevant objective for investors in retirement that are fortunate enough to be able to live off their dividends.  

This would further explain why investors might choose bonds, CDs or other fixed-income securities. These are typically not purchased with the goal of beating the market. Instead, fixed-income investments are normally purchased because of the safety and/or predictability they offer and for higher current income if available. (Note: this can be difficult to accomplish today due to our long-running low-interest-rate environment).

Realized Versus Unrealized Gains and Losses

Additionally, performance calculations that include unrealized gains and losses can also be problematic and dangerous to an investor’s long-term financial security. For example, investors that were pouring money into technology stocks in 1998, 1999 and 2000 were crushing the market during that timeframe.  However, only two or three years later many of those same investors had lost 80 or 90% of their hard-earned money. The “false profits” (unrealized gains) of the technology bubble magically and in short order dissipated before their very eyes. Suddenly, the same investors who once were trouncing the market, where suddenly substantially underperforming the market.

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Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit ...

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