Every day people trade, sell and negotiate prices on the stock market through brokerage accounts, advisors, and retirement plans. Just about anyone can do it. But to be successful, you have to learn how to beat the stock market.
Sounds simple enough, right? Not exactly. As you already suspect, beating the stock market or beating the average return on investment is a bit more complicated than that.
First, you need to understand how the market works and the strategies people use to beat it. Here’s a guide on how to beat the stock market in 2021.
What is the Market?
When you hear someone refer to the stock market, they usually reference one of the large stock indexes.
A stock market index, such as the S&P 500 or Dow Jones, is typically used as the benchmark for stock market performance. This is because these indexes track the performance of top companies.
When you read a report that the stock market is closed for the day or is moving up or down, that report usually refers to one of the major indexes.
Investors and analysts use these reports to plan out how they will buy and sell their stock in hopes of making a profit down the line or soon.
What Does “Beating the Market” Mean?
As previously mentioned, your goal as an investor is to beat the market, but what exactly does that mean? Beating the market refers to an investor or corporation seeing better than average returns.
So how can you tell if you’re getting the best return possible? You’ll need to compare your returns to the returns of major indexes such as the S&P 500.
If you see better returns on your investments than those in one of the major indexes, then congratulations, you’ve beaten the stock market.
Before you celebrate, however, you’ll need to keep in mind that beating the stock market is a long-term game.
You’ll need to continue researching more stock market strategies to make sure it’s not a one-time win.
What the Market Normally Returns
If beating the market means gaining a larger than average return on your investment, what does an average return look like?
Over the past century, the average market return has been 10%. This number was calculated by analyzing returns in popular stock indexes such as the S&P 500.
While 10% may not seem like much, you should understand that the average market return is not guaranteed.
Often, investors can see far less or far more due to the stock market’s volatility as a whole. In other words, don’t invest and expect 10% back.
Another important note is that this average is taken by looking at investments over time, typically a year. In most years, the market will go up, but there are down years as we have just witnessed.
Even if the market doesn’t go up, you can always hold onto your investment for another year. By holding onto it, you allow yourself to sell it for a higher price later.
Strategies To Beat the Stock Market:
You can beat the stock market if you stay invested for the long term. Avoiding the urge to sell stock when it drops or buy stock as it rises can be difficult. If you’re patient, you could see your long-term investment pay off. Below are a handful of strategies that beat the market.
The never sell strategy is based on a study that showed how over 30 years, a significant amount of stock gains occurred in only ten trading days. In other words, the most gains were being seen in short windows across a period of time.
Because of this, some investors believe that the best way to play the stock market is to hold onto investments or never sell.
This strategy highlights the unpredictability of the stock market, in that no one truly knows where stocks will land in the short term. But if you wait out the tough times and stay disciplined when the market rises, you could see a strong gain when you need it later on.
Indexing Two Ways
You may already invest in an index fund for its combination of low-fee management and portfolio diversification.
An index is also great for people tempted to sell during downtimes, which is not a good long-term strategy.
Although an index fund will always aim to match the market’s return, it won’t necessarily help you beat the average return.
To do this, you should consider shifting some funds into a retail sector exchange-traded fund (EFT). This particular EFT acts similarly to an index but for retail stock instead.
A retail EFT can help you beat the average return if you have the patience to hold on during large sell-offs. But unlike a stock index, these retail EFTs are managed by you, giving you more direct control and more risk.
Buying on Dips
In a perfect scenario, you would be buying low and selling high at every opportunity. But timing the market can be very tricky.
Instead, you should consider using the dollar cost average, referred to sometimes as the constant dollar plan.
The dollar cost average is a strategy that involves dividing your investments in equity into smaller investments spread out over regular intervals.
This strategy can help you reduce the impact market volatility has on the stock you’re purchasing. It can also help you avoid losing large sums of money in hopes of timing the market right.
Go With Diversity
Profile diversity gives you a better chance of protecting yourself from the volatility of the market. For example, let’s say you primarily invest in a particular stock or sector of the stock market.
If that sector suffers a setback (think about what the COVID-19 pandemic has done to several sectors)— your portfolio will suffer as well.
On the other hand, if you diversify your investment portfolio, meaning you invest in different sectors, your chances of taking a hit lower.
Diversification can help your portfolio stand strong in times of market volatility and downtimes. By spreading out your investments, you’re spreading out risks as well.
What Is Ahead for the Economy
While no one can accurately predict the future, you can look at past trends to see where the economy is headed.
Over the past year, shut-downs forced companies to adapt and change their business models. Knowing this, you can start planning on where to invest next.
Look for sectors of the market that have thrived post-shut downs and calculate the risk of investing in them now.
If you believe the service or model that the business uses will continue to work, they might be a great investment opportunity.
But this goes beyond looking at the past year as well. For example, green technology and electric vehicles have steadily increased for some time now. It’s projected to continue rising as new technology breakthroughs occur. Take your knowledge of past trends to help you develop a plan to invest in the future.
Hopefully, by now, one of your big takeaways is that beating the stock market is a long-term game. While no strategy is perfect, the ones described above require patience and discipline.
Some investors have trouble rationalizing that holding onto their stock in downtimes can be very beneficial. It’s also quite tempting to sell when you believe the price to be at a high point.
But if you want to beat the stock market, you’ll need to go against those impulses, especially if you’re going with any of the above strategies. These strategies are for the long game, and they will only work if you allow them to.
Micro-Cap Stocks That Have Been Soaring
Now that you understand strategies that can help you see larger than average returns, it’s time to look at where to invest.
If you want to find a sector that will allow you to make a small investment with the chance of a huge return, micro-caps might be for you.
A micro-cap is a company that has a market capitalization between approximately $50 million and $300 million. These are smaller companies, often new start-ups, which means they carry more risk.
However, as a small company, they have a better chance of doubling their size when compared to well-established companies.
This makes micro-cap investments high-risk, high-reward. But you can reduce this risk by staying up to date with the latest news in the micro-cap market.
Here are some stocks to target when you are ready to start investing in the micro-cap market.
Many people are familiar with Yelp and other review platforms. While people commonly associate them with restaurant reviews, Yelp is used for various other services.
This was highlighted over the past year, as the pandemic forced many restaurants to close or shut down dine-in services. But people continued using review platforms for other services, such as home services like plumbing.
Yelp’s business plan helped the company stay relevant in uncertain times and is a good sign for you to invest in it.
Prior to the pandemic shutting down businesses after business, the gig economy was already on the rise. Once shutdowns were in full swing, businesses leaned hard on freelancers.
As a freelance platform, Up-Work became even more vital to the gig economy during the pandemic. Its stock price soared 200% this year.
The pandemic has shifted many jobs to work from home or freelance for the foreseeable future. This means an investment in a free-lance platform like Up-Work could be a smart choice for you.
Following the shutdown of dine-in services, well-known food delivery services such as Uber Eats or DoorDash thrived.
Don’t feel bad if you missed an opportunity to jump on any of these companies. No one knew what the outcome of 2020 would be.
However, there are still smaller delivery service companies that are ripe for investment. One such is Waitr Holdings, which initially took a hit back in March of last year.
But as restaurants remained closed for dine-in, the demand for carrying out rose, which gave Waitr Holdings a massive bump.
Become a Better Investor With Dear Retail
What do veteran stock investors and newcomers have in common? They’re both looking for new investment ideas. If you’re looking for ways to become a better investor, join Dear Retail. Discover a community of like-minded investors who will help you understand the small-cap and micro-cap markets. Dear Retail investors have the advantage of getting the latest stock market information from a single reliable source. Sign-up today.
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