Beat The Market? Rethinking Your Goals

by | Portfolio Management


Beat The Market - Bull and Bear

Beat The Market

Everyone wants to beat the market. Volumes of books, articles, and blog posts can be found on how to “beat the market”. But is that the right goal to have? Or should you at least think about it differently?


I contend that most investors fail, in the long run, because they try to beat the market on too short of a time horizon. Yes, I want to beat the market just like anyone else. But does it matter if I outperform the market this month, or this year, or even over several years? Or, are there more important considerations?


What really matters is how your portfolio performs over a long period of time. Too short of a time horizon causes investors to focus on factors other than valuation and forget their investing principles .


How your portfolio performs over your entire investment time horizon is what’s important. I believe long term performance requires long term solutions and that valuation should be the primary determinant of your investment decisions .


Beat The Market Through Cycles

Both bull and bear markets move in long term cycles. A value investor will find more opportunities (bargain prices) at the end of bear markets and at the beginning of bull markets. Therefore a value investors portfolio may be more volatile during times when bargains are available. This is because you should be more aggressive when prices are low.


Cycle of Market Emotions

Beat the Market by Conquering the Cycle of Market Emotions


However, there will be fewer opportunities (bargain prices) at the end of bull markets and the beginning of bear markets. The value investor should have a portfolio that is less volatile when investment prices are expensive.  This is because you should preserve your capital when investment prices are expensive.


The patient value investor recognizes there is less risk, or a greater margin of safety, when you buy investments at a low price. Not only is your risk reduced, but your expected rate of return is much higher.

Volatility and Beating the Market

Portfolio volatility has a large negative effect on long term returns. If you have a positive return of 50% and a negative return of 50%, the arithmetic average is 0%. But you have actually lost 25%, or one-quarter, of your portfolio.

This means that it’s in your long term interest to lower the volatility of your investment portfolio. If you don’t completely understand this principle, read Portfolio Volatility and the Impact on Performance. The mathematics of compounding make it compelling to avoid downside volatility.

Beating the Market and Mathematics

Personally I have beat the market only 6 out of the last 16 years (2000 thru 2015). But is that important? During that period the AAAMP (my retirement portfolio) is up +141% versus 89% (including reinvesting dividends) for the S&P500!


The problem with trying to beat the market in the short term is that it causes you to invest too aggressively when prices are expensive. The more expensive the market, the greater your emphasis should be on capital preservation.

How to Beat the Market in the Long Run

1. Avoid Large Drawdowns


Drawdowns cause exponentially greater damage the larger the drawdown. In other words, it only requires an 11% gain to break-even after a 10% loss. However, it requires a 100% gain to break-even after a 50% loss. This means it is critical to keep drawdowns small.


2. Create an Asset Allocation Plan


A well designed asset allocation plan will take into account your investment horizon, risk management plan, diversification strategy, costs & expenses, investment vehicles, rebalancing policy, and where you obtain your guidance.


3. Embrace High Probability Strategies


High Probability Strategies include demanding a margin of safety, insisting on quality, searching for sustainable competitive advantages, using valuation timing, calculating a probable maximum loss, and implementing a portfolio rebalancing and weighting strategy.

Rethinking Your Goals

In order to beat the market, investors should think long term. Put less focus on short term performance and greater emphasis on high probability strategies that create long term wealth.


Your goal should be to beat the market over your investment horizon because investing is a marathon, not a sprint. Beat the market in the long run by avoiding drawdowns, creating an asset allocation plan, and embracing high probability strategies.


Related Reading: Probable Maximum Loss – How to Control Investment Portfolio Losses


Value Investing Portfolio Management Guides

Arbor Asset Allocation Model Portfolio: AAAMP Global Value Portfolio, Trade Alerts

Dividend Value Builder: DVB Analyzer Newsletter, Treasure Trove Twelve Newsletter, DVB Portfolios Newsletter

Learn More

While Arbor Investment Planner has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.

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