Most investment pros can't beat the stock market, so why do everyday investors think they can win? (2024)

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• According to a 2020 report, over a 15-year period, nearly 90% of actively managed investment funds failed to beat the market.
• Portfolio managers are often Ivy League-educated investors who spend their entire workday attempting to outperform the stock market.
• If investment professionals can't consistently beat the market, it's unlikely that the typical at-home investor would achieve better results.
• Try commission-free trading with TD Ameritrade »

In the investment community, it's common knowledge that actively managed investment funds typically underperform compared to popular market benchmarks like the S&P 500. Investment professionals who spend their full-time job trying to beat the market usually can't. So why do individual investors think they can when doing it part-time?

Many investors, myself included, have a portfolio of single stocks in an attempt to beat the markets. If you are doing it with "fun money" that you can afford to lose, that's OK. But it's not a good plan for most assets and investment goals. After all, if full-time investment professionals can't be the market, it's unlikely us part-timers will consistently outperform.

Most actively managed funds underperform compared to the market as a whole

Across all domestic actively managed equity funds, 88.4% underperformed their respective benchmark over the last 15 years, according to an analysis of the S&P SPIVA report.

While that number may be shocking, it's not a surprise to those who follow the performance of actively managed funds against the markets. More than 80% of large-cap funds underperformed the S&P 500 over the last five years. In 2019, 79.98% of large-cap funds underperformed compared to the S&P 500, which was just a hair better than the five-year average. This long-running trend is a major factor in a shift in investor preferences to index funds, which mimic the market benchmarks.

Just last year, passive funds reached a higher asset total than active funds. This is evidence that most people understand that passive funds are the right place for the bulk of their assets. But that doesn't seem to be stopping millions of investors from taking on risky positions in an attempt to outperform the markets.

Risky and poorly timed investments can wipe out years of gains

Timing the markets is tempting when you see a regular see-saw in stock prices, but it's been proven over and over that most people will fail when trying to time the markets.

Changing your holdings when you think the market is going down or up typically doesn't work. If it did, the professionals, and everyone else, would be beating the markets more often.

My investment strategy

Not realizing what was about to come, I made an HSA investment in February shortly before the markets dropped. I didn't sell my positions. It took some time, but they eventually did recover. I expect them to go down again at some point, maybe even soon. But again, I expect them to recover in the long-run.

The bulk of my investments are in low-cost, diverse index funds. Over any long period of time, the S&P 500 returns about 10% per year. I'm OK with that average and will just have to ride out the good years and bad years to enjoy an expected long-term return.

While I'm in favor of index funds, it is important to note that not all investors feel the same way.

I'm not giving up on my stock portfolio just yet

Knowing what I do, you would think I would skip out on single stocks and only invest in index funds. I do have most of my investable assets in index funds, but I also have a portfolio of single stocks that makes up less than 10% of my net worth.

I've picked more winners than losers and have generated a 14.09% annual rate of return since opening my account in 2009. That's better than the 10% I aim to get with my index funds, but I know there's a big risk that I won't be able to keep it up.

For comparison, my Roth IRA has earned a 9.87% annual rate of return since its founding 2010, and my rollover IRA has earned 9.46% since I opened it the same year.

Looking at my stocks, it's clear where the biggest gains have come from. Most of my profits are from a few really good stock picks. I've had outstanding gains from Amazon, which I bought for about $225 per share, as well as excellent gains from a large position in the stock of an old employer from the employee stock purchase plan.

During a recent review of The Motley Fool, I read something interesting. According to the founders, who have outperformed the market consistently for years, most of your stocks will probably be duds that follow the market. Some will go down. But if you can pick a few that give you 5x, 10x, or 20x returns, it is possible to beat the market. However, that doesn't make it easy.

I'm only investing part-time, but I do have two finance degrees that included courses in portfolio management, a trip to Wall Street, and classes where I managed a portion of the university's endowment fund in a small team. Most people don't have that kind of background and may not do as well as I have over the last decade.

Keep a long-term focus on your money when investing

The stock market can be very exciting. Movies like "The Wolf of Wall Street," based on the real-life experiences of investor Jordan Belfort, and the fictional 1980s classic "Wall Street" show a side of the market that can make people very rich, but in reality, most people won't be bringing in seven-figures with a complex investment strategy. And the main characters in those movies ended up in prison.

For most people, a long-term focus is the best way to invest. Picking a portfolio of low-cost, diverse index funds should treat you well over time. You may be able to squeeze out a slightly better return picking single stocks, but if the pros can't do it consistently, most of us probably can't either.