Over the short-term, it’s entirely possible to beat the return of the stock market, as measured by the S&P 500.
The return of the S&P 500 index is a weighted average of its individual components, meaning by definition some of the stocks within the index outperform the “average” return — and if you’re an investor owning one of these stocks, you can beat the market average, as well.
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But over the long run, topping the “average” market return is exceedingly hard to do. Research from J.P. Morgan Asset Management shows that over the 20-year period from 1998 to 2017, the S&P 500 returned an average of 7.1% annually, while the average investor only posted gains of 2.6% annually, barely above inflation.
Why the huge discrepancy? Here are the main reasons why it’s so hard for investors to outperform.
They Don’t Stay Invested
Investing can be an emotional business. When the market rallies, investors can get euphoric, throwing additional money in right as the market peaks. On the flip side, many investors get nervous and panic when the market sells off by 20% or more, dumping their stocks as the market approaches a low.
Investors that merely hold onto their positions and ride them out for the long-term have a much better chance of matching or beating market averages than those who let emotions dictate their strategy.
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They Try To Time the Market
The market typically undergoes a correction of 10% or more roughly every 2.5 years, while bear markets, defined by a drop of at least 20%, generally happen about every six years, according to American Century Investments.
Theoretically, if you can sell your positions before these major market drops and buy back in at market lows, you could easily outperform the market. But the reality is that timing the market with precision is exceedingly hard to do.
In most cases, those who try to make a living timing the market get whipsawed and end up underperforming the market averages. This is due in part to the fact that the bulk of market gains come from just a few days.
From Jan. 1, 1999 through Mar. 31, 2025, a $10,000 investment in the S&P 500 index would have grown to $71,309, according to FactSet. But missing even a few of the best market days would result in considerably lower returns. Here’s how much you’d have if you missed the best 10, 20, and 30 best days in the market over those past 26 years:
- Missing 10 best days: $32,682
- Missing 20 best days: $19,242
- Missing 30 best days: $12,298
Trying to time the market and missing even a few of the best days will annihilate your long-term returns.
They Chase Hot Trends
It takes patience to succeed at investing. Those who trade in and out of stocks trying to catch lightning in a bottle may succeed over the short run, but it’s almost impossible to keep that up over time.
Unfortunately, the popularization of “meme” stocks and other trendy investment options in the financial press and on online message boards makes it seem like “everyone else” is getting rich off these investment fads.
This can instill a “fear of missing out” (FOMO) among investors who may view “buy-and-hold” as “boring,” when in reality, slow and steady wins the race over the long run.
They Pay Fees
One advantage the market average will always have over investors is that it isn’t susceptible to management fees. This requires investors to actually outperform the market simply to “break even.”
Even a low-cost S&P 500 index fund that charges a minuscule 0.03% management fee will significantly eat at returns over time. If you put $100,000 into such a fund and the index earns a 10% average annual return for 30 years, you’d come up about $15,000 short of the index. If you paid a 1% annual fee, which many actively managed equity funds charge, the shortfall would reach over $418,000.
It’s Hard To Pick Winning Stocks
One way to avoid mutual fund and ETF fees is by owning individual stocks bought through a zero-commission broker. However, picking individual stocks comes with its own level of difficulty, as well.
While owning individual stocks can lead to outperformance, it requires a level of skill that’s hard to come by. One academic paper by Hendrik Bessembinder, Te-Feng Chen, Goeun Choi and K.C. John Wei found that from 1990 through 2018, 56% of U.S. stocks underperformed the essentially risk-free one-month Treasury bill.
That’s a terrible record and means that a handful of stocks provided the bulk of market returns — and picking the wrong ones could lead to definitively sub-par results.
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This article originally appeared on GOBankingRates.com: Why Investors Never Seem To Earn the ‘Average’ Market Return
