An easy way to track your performance is by measuring how much an investment has grown over time. But with no point of reference to compare this percentage to, how can you truly know how good it is?
Investors (both institutional and retail) use the S&P 500 as a benchmark to gauge how their investment portfolios are performing.
This is because the S&P 500 is a good representation of the US market as a whole – meaning that you can compare your own performance against the market.
What is the S&P 500?
The Standard & Poor’s 500 is a market index (hypothetical portfolio) of the top 500 companies listed on stock exchanges in the United States.
The larger a company’s market cap, the more impact the stock has on the index’s overall value. For example, the top 10 largest companies contribute just over 26% of their market capitalization.
The S&P 500 is one of the most popular equity indices, with over $4.5 trillion invested in assets tied to its performance and an average annual return of 10-11%.
So, if your performance matches the S&P, then you've done pretty well – but what happens if you outperform it?
How can I beat the S&P 500?
An investor can say that they 'beat the S&P 500' when their investment portfolio performs better than the rate of return of the S&P index.
So if the return of the S&P 500 for a given year was 10%, to beat it, the return of your portfolio would need to be just more than that.
It’s certainly possible to beat the S&P 500 – provided, of course, that you take actionable steps toward reaching your goal:
1. Take more risks
Why? Generally, investments with higher risk have higher potential returns.
Keep in mind: it works both ways – so while you can make more by taking risks, you can also lose more.
High-risk investments may include young start-ups, which are riskier because they don't have an extensive operating history.
For example:
- Cannabis stocks are seen as having larger than normal risk, but also a larger than normal upside
- Investors that invested in cannabis companies pre 2016 saw a large return on their investment when recreational use was approved in California in 2016
- Canopy Growth corporation went from $2.50 to $12 by the end of 2016
Few investors could have predicted this, but the ones that took the risk earned an outsized return.
Bottom line: the ideal formula for investors is asymmetry; a limited downside in order to have an unlimited upside.
2. Buy the dips
One of the ways that investors outperform the S&P 500 is by buying various stocks at lower prices and then successfully selling at the peak, increasing their return.
Why? There are times where one stock within the index may soar, while others will fall – so if the investor is able to pick the one stock that soars, they will avoid the headwind of the stock that falls.
Keep in mind: True dips, which are temporary price drops, are hard to distinguish from patterns that show significant downturns – especially when you’re a beginner!
Bottom line: Everyone would buy the dips if they could successfully identify them, as it is an effective way to outperform the S&P 500. The difficulty is predicting the dips.
3. Think small
Since the S&P 500 only includes large-cap stocks, a useful strategy may be to focus on small-cap stocks with the potential for huge growth.
Why? Whilst small-cap stocks are considered riskier, they also provide the opportunity for outsized returns.
For example:
- The junior mining sector includes mining companies that have just begun their journey towards becoming a fully-scaled mine
- Although a majority of junior mining companies will fail, 1 in 20 could be the ten-bagger that every investor dreams of
Bottom line: It’s not always unwise to bet on the slow horse, and sometimes a small-cap stock will provide great opportunities!
4. Getting lucky
Some investors will outperform the market without a complex game plan, and others will manage it without hardly trying at all – but that’s hardly a strategy!
Another solution would be to invest in a suitable exchange-traded fund (ETF) or index fund, as these instruments track indexes like the S&P 500, and so their performance is almost exactly correlated.
For this, you’ll need to take into account:
- The risk profile of the investment
- Historical returns
- Expense ratio
- Fees paid to invest in the EFT
Keep in mind: Although these instruments are often less risky than individual stocks, you might need to invest in a higher-risk one to outperform the S&P 500.
With all of the above strategies in mind, remember that knowledge is one of your greatest assets when it comes to outperforming the S&P 500.
If you have access to the same quality of information that the hedge funds use and pay thousands of dollars for, you’ll be far better positioned for success.
But how does the average retail investor access this information?
That’s where Opens comes in.
What is Opens and how does it work?
Opens provides the same quality of information that the hedge funds use to make their investment decisions, but at a fraction of the price.
Features
- Receive a single stock recommendation every month, curated by industry experts, presented in a clear and focused one-page memo
- Access information akin to heavy institutional-grade reports, all in an easy to read and digest format
- Stay up-to-date and discover interesting opportunities with a wealth of investing shows hosted by Opens
Why Opens?
- Our internal strategy team is made up of sector-specific analysts – industry veterans with years of practical experience
- When the team identifies a sector for investment, our analysts get to work to identify the best stock to invest in that sector
- All the features and expertise you need to outperform the S&P 500
So, why not visit our website to learn more about Opens? Sign up for our service today – your investment portfolio will thank you!
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