Despite some significant bumps in the road in the past decade, the stock market has been pretty steadily on the upswing for the past year. This has been inspired many people to wonder how they can make their own fortune by playing the stock market. While investing in an index fund or mutual fund can be a safe way to play the market by diversifying your investment (provided you choose the right fund with low fees), some people want to take a more creative approach by trying to beat the market themselves or by looking for a service or solution to beat the market.
Unfortunately, this is often not the best way to invest. In fact, you can end up wasting a lot of money chasing returns or looking for the next big thing that is going to help you to become the next Warren Buffet.
Why Trying to Beat the Market is a Waste of Money
You can buy hundreds of books on how to beat-the-market, take advantage of “insider” stock tips and newsletters or waste your money in countless ways seeking the advice of so-called experts who are going to help you “beat the market.” Unfortunately, this is usually not going to get you anything and in a best-case scenario you might only be out the cost of the book or the newsletter. In a worst-case scenario, you may end up losing a fortune.
The reality is, no one can predict the market and if someone had a sure-fire winning system for making a fortune in the stock market, they probably wouldn’t need to sell books on their system in order to get rich. Even some of the foremost investment experts in the world did not predict the collapse of the real estate bubble (and the mortgage-backed securities market that went along with it) or the collapse of the tech bubble. As such, the average “investment expert” that is out there selling books or promising a sure-fire system to make money probably isn’t going to actually be able to teach you some way to beat the system that the experts haven’t figured out yet.
This isn’t to say you should not ever buy investment books, but when you do you should focus on ones that teach solid principles of investing like how to evaluate a company’s financial statements to tell if the company is sound or how to diversify investments to protect your cash. Books that teach the fundamentals are not the same as those promising a way to game the system.
Of course, you may also be wasting money by trying to beat the system on your own too. Once you’ve learned the basics of investing, you may think you can develop an investment strategy that is going to do better than the mutual funds or the index funds ever would. Of course, some people do get lucky or are successful in doing this, but far more people who dabble in day-trading or who try jumping in and out of stocks don’t do very well.
The problem is, in most cases, that it is too tempting to react to swings in the market emotionally and it is too tempting to try to jump into the latest hot investments (which, unfortunately, may already be cooling off by the time the average investor hears about them). Investing in such a way that you are trying to “beat the market,” therefore, often fails unless you have a really solid investment strategy that you can stick to. Even then, there is an element of luck involved.
So, with all of these things working against you, it may be best to simply stick with the basics of mutual funds, index funds or a balanced portfolio put together with the help of investment fundamentals or a financial expert and left alone to (hopefully) grow. This can be a surer path to riches than trying to craft some strategy to help you beat an unpredictable market.