There are two fundamental pieces of information that stock brokers like to hold back when asking a client to invest their money. One is that you can beat the market. The other is that you cannot. Sounds confusing? Allow me to explain.
The world of professional traders does not like the home gamers to know that they can beat the market. The biggest assured profits in the industry come from running funds where they handle all the hard decision making (day to day trading) for the masses. Some traders will even steer their investors into index funds that will behave exactly the same as the market (or an individual sector) as a whole. By doing this, it allows them to collect entry and exit fees that allow them to make money regardless of the fund’s actual performance. They do not want individual investors to know that it is very possible to outperform the market on your own. Simple math tells us that the market is going to outperform 50% of the money invested into it, and it is going to underperform the other 50%. If a person does their research, analyzes trends, and shows foresight towards upcoming performance – there is no reason that person cannot finish in the better 50% consistently. There is numerous anecdotal evidence available for people that have routinely beaten the market on their own time – too much to believe that is just a series of lucky coincidences.
But wait a minute; didn’t I say that you also cannot beat the market? Yes, I did. The fact of the matter is, no matter what your broker will tell you during a down market, even good stocks rarely provide gains when the market is falling. Some investors put their faith in a portfolio of “counter-cyclical” stocks. These are stocks that are believed to perform better in market recessions or pull backs. While there certainly are a number of stocks that do perform better than others during these periods (i.e. Wal-Mart, by virtue of offering cheap products), they still typically go down as the market falls (just at a lower rate). Technically, one can still beat the market by losing less than the Dow, but – at the end of the day – he or she is still losing. If one were to foresee the market as a whole falling in the near future, they would always be better off to pull his money off the table altogether as opposed to just shifting it into counter-cyclicals, where he will still feel losses.
Note: Please bear in mind for the purpose of this article; I have ignored the concept of shorting (betting against the market). While shorting can make a significant amount of money in a down stock or market, it is also a bit dangerous for the laytrader to consistently engage in. While regular stock buying puts a limit on your losses (no stock can go below zero) and allows for limitless gains (the upper cap is only the price that the public is willing to pay), short selling allows for limitless (and immediate) losses and does place an upper cap on gains.