Is the stock market rigged? No. Not in the way you think.
When I think of something being rigged, I think of carnival games. Something that appears to be winnable, that’s really not.
Casinos aren’t rigged. The “house” has the statistical advantage over the players, but the games aren’t rigged.
Is it possible to beat the stock market? Yes. Is it possible for you or I to beat the stock market? Maybe.
Here’s the thing; just like there are people who play professional football in the NFL, there are professional investors who consistently beat the stock market. What do those people have in common? They’ve worked extremely hard at their craft. They’ve dedicated resources to becoming the best.
Back to the question of you beating the stock market; are you willing to invest the necessary resources? If yes, great. If no, you can still be a successful stock market investor. Whichever path you choose, I’m going to share some insight to help you become a happy investor.
As a financial advisor, I’ve been helping people save and invest for over 20 years. I’m honored to be named to Investopedia’s list of the top 100 financial advisors many years running.
Here’s what we’ll cover:
- Why beating the market it so hard
- Understanding behavioral finance
- Active versus passive investing
- Your risk profile
- Making a plan
Let’s get started.
Why beating the market is so hard
Every time a stock market trade is made, there are two parties to the transaction; one is buying, and one is selling. One reason making money trading stocks is difficult is because your timing has to be correct when you buy and when you sell.
Interest in stock trading has grown in popularity thanks to platforms like Robinhood. Unfortunately, the vast majority (85%) of people have lost money doing it. While it’s certainly possible to make money investing without the right training and approach, the odds are against you.
It’s an understatement to say financial markets are complex. There are so many ways to take part in the markets and to invest. In order to become a successful investor, you need to choose an approach, learn everything you can about it, and stick to it. On the LifeBlood podcast, I’ve interviewed many successful traders. Here are three of my favorite episodes:
You can also check out our Trading Courses if you’d like to dig deeper.
Understanding behavioral finance
Our brains are amazing. They’ve kept us alive for 200,000 years, and keep us at the top of the food chain. But they aren’t great at investing.
Daniel Kahneman (Nobel Prize winner) became fascinated with our financial decision making. In his book, Thinking Fast and Slow, he detailed how 90% of that process is based on emotions. The first time I heard that, I found it hard to believe. After thinking about it, I know he’s right. The more aware we can become of our feelings and emotions, the better we can become at making logical decisions.
The same part of our brain that responds to mortal danger is the part that responds to financial loss. So when you open your 401(k) statement and see the balance has gone down, your instincts tell you to sell, just as they tell you to get out of the building when you smell smoke. This response is helpful to avoid death, but not helpful with investing.
Intellectually, we know we’re supposed to buy when prices are low, and sell when they’re high. But emotionally, we want to do the opposite. When we see a potential investment going up, we have a fear of missing out and we want to buy it. When we see an investment going down, we want to sell it.
Here’s a helpful way to think about investing: If you’re 35 years old, and you intend to retire at 65, you’ve got 30 years to invest. You’ve decided to invest all your money in Amazon stock. Would you rather the price of Amazon be high or low?
You’d rather the price be low for the next 30 years. The only time you want the price to go up is on the day you intend to sell. If you could buy shares of Amazon for $1 for 30 years, and on the day before you retire, sell all your shares at $100, you’d take that deal.
Having the right perspective is essential to your success as an investor.
Active versus passive investing
Kamal Gupta went from being a professional gambler to managing a hedge fund and beating the stock market for 103 consecutive months. Long story short, it’s possible to beat the stock market.
What does Kamal know that many investors don’t? He knows the importance of taking a rules-based approach to investing, and sticking to the program. Once he figured out his approach to trading, he followed it and never deviated.
You can listen to my interview with Kamal on the LifeBlood podcast.
Kamal was an active investor.
The opposite of active investing is passive investing. Instead of trying to beat the market, a passive investor attempts to get the same return as the market. If you’re not willing or interested in spending the resources to learn how to invest, passive investing is probably the right approach for you.
Jack Bogle, Founder of Vanguard, pioneered passive (or index) investing. His thesis was that over the long-term, it makes financial sense to get the same returns as the overall market. Using low-cost index funds, you can successfully invest and achieve your financial objectives.
Your risk profile
Regardless of whether you choose to be an active or passive investor, you need to understand what your profile. Put differently, are you an aggressive or conservative investor? Your risk profile will inform your asset allocation, or mix of investments.
If you’re invested too aggressively, you’ll be stressed out about your investments. If you’re too conservative, you may have a difficult time achieving your objectives. You need to figure out what’s right for you.
In service of doing that, you can access our Risk Profile for free.
Making a plan
Once you’ve decided which approach you’ll take and what kind of investor you are, it’s time to make plans. The term “financial plan” is needlessly complicated. A financial plan is simply deciding where you want to be, looking at where you currently are, and figuring out how to close that gap.
The time you have (time horizon) plays an important role, as does account type. Getting clarity on your investment plans will set you up for long-term success. In service of helping you do that, you can access our Goals course for free.
The stock market isn’t rigged. People have been successfully investing and reaching their objectives for generations. But it won’t happen on its own. You’ve got to take an active interest and decide what type of investor you’ll be.
If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
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