Ticker Board

Beating a Market?

Ticker Board

We reference the phrase 'beating a market' throughout this 12-step Program. This is defined as the attempt to obtain a higher net return on investments from a portfolio of stocks, bonds, or mutual funds than from a relevant and investable index or benchmark. The net return includes adjustments for all commissions, loads, fees, expenses, risks, and federal and state taxes. It is calculated over a reasonable period of at least five years, but preferably over 20 years. The net return of an active investor's stock portfolio can then be paralleled to the index fund of a comparable index. The index may consist of the entire stock market or a more specific index, such as small capitalization value stocks. No investor over or underperforms an index. They simply invest in something other than the index. Since the index is the only source of long-term risk and return data, why would an investor subject hard earned savings to anything other than the index?

The most basic tenet of all investing is that exposure of your money to a higher level of risk should be rewarded with a higher expected return. In contrast, lower levels of risk should correlate to a lower expected return. One of the problems with measuring the performance of stock market investing is the lack of a standardized system of benchmarks from which to measure performance. This lack of benchmarking is the black hole of investing. If there is no definitive benchmark, it is impossible to determine if exposure to risk has been properly rewarded. In other words, has the active investor really beaten a market with repeatable skill, or can it just be attributed to luck?