In this post I’m going to discuss my approach – as a trader – to beating the stock market in 2018. Well…sort of. We’ll get to that in a minute.
ETFs have been a no-brainer
Conventional wisdom these days would have you believe that attempting to “beat the market” is a fool’s errand. Over the past few years, I have lost count of how many times I’ve seen sentiments like these:
- “Just buy an index ETF and be done with it. They’re cheap and they outperform more expensive active managers”
- “There’s no point trying to beat the market, it’s impossible anyway. Even the so-called experts on Wall St can’t do it”
- “This stock market game is easy. I just put all my money in an ETF and I’m up over 20%!”
- “Screw the stock market! Just buy Bitcoin dude…” Admittedly, this sentiment is much more recent than the others!
You get the idea.
Making money in index ETFs is easy, right? Who cares about beating the market? Well, making money in ETFs is easy when the index they track is doing this:
S&P500 ETF since March 2016
It’s a bit less easy when the market is doing this:
S&P500 ETF April 2014 – Feb 2016
And even less straightforward when the market is doing this:
S&P500 ETF July 2007 – March 2009
It’s times like these when financial advisers will extol the virtues of (very) long-term investing. They’ll trot out well-worn clichés like “it’s time in the market, not timing the market”. Meanwhile young guns will try and get ahead by buying the latest “triple-inverse” ETF.
The fact is, the current market environment has been conducive to easy gains. This environment may well persist into 2018 as well, however one thing is certain: A recession, a bear market and more challenging times lie ahead. I’m not hitting the panic button – not by any stretch – but neither have I been beguiled into thinking the markets will remain this easy and buoyant indefinitely.
What if there was a better way to profit from the market than simply buying-and-holding an index ETF?
Anyway, back to beating the market
So, as traders:
- how do we beat the stock market?
- Should we try to beat the market?
- Should we even care what the stock market is doing?
I’m going to answer question 2 first because really, beating the market is only something that becomes relevant when the subject of investment management fees enters the picture.
Fees, fees, fees
If you have a pot of money that is being managed by an investment manager (for example a mutual fund, a financial adviser or a private bank), chances are you are paying them some fees to have your money managed. And chances are, these fees are significantly higher than what you would be paying if the money was invested in an index ETFs. Under such circumstances, you may well want to feel as though the fees you are paying are in some way justified by the superior investment performance the investment manager is providing.
If your investment manager is consistently failing to beat the market, you might start to feel that the fees you are paying are not warranted. You may question your investment manager about what value you are receiving for the fees paid. Under such a scenario you will likely receive answers along the lines of “lower volatility” or “lower drawdown” or even “superior Sortino ratio”…if your relationship manager is trying to impress you with his financial vocabulary.
But as traders, we aren’t trying to justify our exorbitant management fees to anyone. We pay fees, we don’t charge them! Neither are we trying to attract more money to manage and charge fees on…we don’t have a huge marketing budget to cover! We are simply trying to generate monthly income from our trading. You want to make $10,000 per month from trading? That should be your metric, not some quarterly percentage return over and above whatever the market does. If the market should drop by 20% I guarantee you I will no be happy if I beat the market by 2%!
What happens when the stock market has a negative year? I suspect some of my readers don’t know or can’t remember. Typically, most funds and managed portfolios will also experience negative returns. Traders however, can and do make money in falling markets as well as rising markets by short-selling or using options.
So, my answer to the original notion of how to beat the stock market in 2018 is…I don’t even try. All I want to do is trade to generate a consistent monthly income. It’s not the percentage returns that are important to me. It’s the cash profits I extract from the market.
I feel good about my trading when I make in the range of 1-2% per week, which is happening for me with some consistency. In other words, I am trouncing the performance I would have gained if I had just bought-and-held an ETF. So yes, there is a better way.
Do we care about the overall market at all?
Right, so should we even care what the market is doing? Absolutely. We should care about its trend and direction rather than its percentage return though.
We need to respect overall market conditions – respect the trend that is. If we are in a bull market, we want to have a majority of long trades on. I use 75-80% long trades as a rule of thumb in my trading. In a bear market, we want to be mostly involved in placing short trades. Again, I’ll look to be 75-80% short in a bear market. In a sideways market, our long vs short positions may be more balanced.
Having awareness of what the overall market (and sectors within the market) is doing enables us to follow the path of least resistance with our trading. This is what trend trading is all about. Identifying the path of least resistance and exploiting recognizable patterns that occur along the path for profit.
If you want to generate monthly income from the stock market, this is the last article on “how to beat the stock market in 2018” that you need to read. Instead of worrying about beating the market, focus on your trading method and using high-probability setups that give you an edge.