Simplicity Beats Complexity: How to Succeed in the Stock Market
A question I’m often asked by colleagues and friends is, “How can I succeed in the market and invest effectively?” Over the last two decades, I’ve traded everything from equities and fixed income to derivatives across both emerging and global markets. I’ve also worked closely with fund managers and various investors, analyzing and refining strategies to implement in my own work.
One key lesson I’ve learned, and which is confirmed by plenty of data, is that simple, consistent strategies can perform just as well—if not better—than many sophisticated approaches run by professional managers.
What Does “Doing Well” Even Mean?
For many people, “doing well” in the market means growing their money at a rate that outpaces inflation (so their wealth doesn’t lose purchasing power). Others aim to beat a specific benchmark—often a well-known index like the S&P 500. Some investors simply want stable, reliable gains over time. The key is to understand your own goals and how success is measured.
Different Fund Strategies
Investment funds pursue various approaches to achieve “success”:
Passive Funds: These try to mirror an index at the lowest possible cost (e.g., S&P 500 index funds).
Active Funds: These can use more complex tactics—like derivatives (buying and selling options), leverage (investing with borrowed money), or multi-asset trading—to beat the market.
But at the end of the day, all funds aim to make money—just like retail investors do.
Performance vs. Benchmarks
Fund managers typically measure success by comparing returns to a benchmark, often the S&P 500.
The S&P 500 is widely viewed as a key benchmark for the U.S. stock market. It consists of 500 large-cap companies across various sectors and is market-cap weighted, meaning larger companies have a bigger influence on overall performance. For example, at the start of 2024, NVIDIA’s weight in the S&P 500 was 3.2%. By November 2024, it grew to 7.2%, driven by a 191% increase in NVIDIA’s market capitalization—compared to a 27% rise in the S&P 500 overall—reaching roughly USD 3.413 trillion.
How do professional investors stack up?
Twice a year, S&P Global releases the SPIVA Scorecard (S&P Indices Versus Active), showing how well active mutual funds do (after fees) against S&P benchmarks over 1-, 3-, 5-, 10-, and 15-year periods.
As of late 2023, 88% of active large-cap funds underperformed the S&P 500 over the past 15 years.
In the last three years, around 80% failed to beat it.
Why Active Managers Struggle
Zero-Sum Game Every stock trade has a buyer and a seller. In large-cap stocks, both sides are often institutions. They can’t both be right, so consistently outperforming the market is tough.
Fees Eat Away at Returns Actively managed funds charge fees (e.g., expense ratios) that can exceed 1%. Managers must outperform by at least that fee percentage just to match an index fund.
If even the pros find it so challenging, should we give up on investing altogether?
Absolutely not. Holding cash means inflation erodes its purchasing power. Bonds and bank deposits can offer some inflation protection, but they often underperform when inflation (and interest rates) rise—especially long-term bonds.
In emerging markets, local-currency deposits might help in the short term, but EM currencies can be volatile and lose value quickly. They’re a diversification tool, but carry high risks:
The Russian Ruble lost about 25% of its value vs. the dollar over the last five years.
The Turkish Lira lost around 80% in the same period.
Long-Term Equity Performance
Historically, the S&P 500 has averaged around 12.5% annual returns over the last 30 years, while inflation (CPI) has been about 2.53%—though it spiked to 7% in 2021 and 6.5% in 2022 post-COVID.
However, returns aren’t linear. Over three decades, there were 6 down years (averaging a 17% drop). In contrast, the average positive year was around 20%.
Can an Ordinary Investor Outperform Professionals?
By simply buying and holding a low-cost ETF, investors can often outperform most professional managers over the long term.
A broad-based index-tracking ETF, such as SPY or VOO, offers instant diversification at low cost. This means you benefit from the overall growth of the market without the added expense of high management fees. As a result, for many investors, this simple, low-cost approach can be a far more effective strategy than attempting to pick and choose individual stocks or pay for active management.
What If I Invested at the Market’s Peak?
It’s understandable to worry about investing at market highs. This concern isn’t unfounded—if you started investing in 2007, just before the Global Financial Crisis, the S&P 500 would have dropped by about 57% from its October 2007 peak to its low in March 2009.
Yet, according to Investec research, even if you buy at a peak, a well-balanced portfolio (often 60% stocks and 40% bonds/fixed income) has historically outperformed cash over the following decade. The key principle here is: it’s not about timing the market; it’s about time in the market.
Warren Buffett (1988): “Our favorite holding period is forever.” He also advised, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
So, what can you do to improve returns further and worry less about market timing?
Dollar-Cost Averaging (DCA)
Peter Lynch: “The real key to making money in stocks is not to get scared out of them.” And, “If you put money in gradually as the market goes down, there’s a good chance you’ll beat someone who waits to invest everything at the exact bottom.”
Putting a fixed amount of money into the same fund (ETF) on a regular schedule—regardless of price—can smooth out volatility over time:
You buy more shares when prices are low, which lowers your average cost.
DCA can be automated by reinvesting dividends into the same stock or fund.
Going Beyond 60/40
A classic portfolio might allocate 60% to equities and 40% to bonds (or short- to medium-term deposits). Remember:
Bear markets are part of the cycle, and recessions eventually end.
Bull markets have historically lasted longer than bear markets.
Some investors adjust their allocations by increasing equity purchases during downturns—when prices drop more sharply—then returning to a 60/40 mix after recovery. This approach can boost long-term returns even more.
Final Thoughts
You don’t need a formal investing education to do well—discipline, patience, and cost-awareness matter more.
Active managers often underperform due to fees and the zero-sum nature of markets.
Time in the market usually beats trying to time it. Even investing at a peak often works out over a decade or more.
DCA and strategic allocation (like 60/40) help ride out volatility, and you can improve returns by adding more in downturns.