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Part: 2 Trying to Beat the Market

Part 2: Trying to Beat the Market

To most people, using an indexing strategy seems like a strategy destined to be average. Most people think of themselves as above average. If you view yourself as an above average investor, then you are probably motivated to beat the market, not join it!

Joining the market entails passive investing. However, to beat the market, you must take action. The more actions you take, the more likely it will be that your emotions and other psychological biases will flourish. One method of trying to beat the market is an attempt at market timing. However, if the professionals at Fidelity Magellan, Brandywine Fund, and numerous investment newsletters can't do it successfully, you probably can't either.

The human desire to be a high performer might best be illustrated in the mutual fund industry. There are thousands of actively managed mutual funds. Yet, most of them don't beat the market at all and only a precious few beat the market several years in a row. Most of this underperformance is due to the expenses actively managed funds charge. Some of the expenses you know about, others you probably don't.

The desire to be an investment winner also makes you susceptible to the investment scam. Ponzi schemes, pyramids, and other scams have been perpetrated on unsuspecting victims all over the world. Serbians lost $2 billion, Albanians lost $1.2 billion, Romanians lost $1 billion, and Russians lost $500 million. Since consumers in the United States are a little savvier, the scams are more sophisticated. When people want to believe they can get rich quickly, they are easy targets for the unscrupulous.

The very attempt to beat the market dooms many investors to a poor investment performance and increases the chance of experiencing a major blunder.



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