Beating the S&P 500, part 1

You may have heard the phrase “beat the market. ” In this case, the market usually refers to the S&P 500 index. There are other U.S. indices such as, DJIA, NASDAQ 100, NASDAQ Composite, Russell 2000, Wilshire 5000, and many other domestic and international ones. However, the S&P 500 is by far the most used benchmark for investment performance. It is a good benchmark because it represents a well diversified portfolio of large and medium, as well as value and growth, stocks in many industries.

Why do I compare my investment performance against the S&P 500?

An investment that returned 15% sounds spectacular. However, if this happened in 2003 when the S&P 500 returned 28%, then it’s terrible. By comparing against the S&P 500, we get a more accurate measure of the investment true performance.

When I first started, I made several mistakes; including comparing my investment performance against a fixed number like 10%. After a few years, I learned that it’s better to compare against the index — and have been doing it since.

Why is beating the S&P 500 a big deal?

You may also have heard people talk about how hard it is to beat the market. Let us look at the Vanguard 500 Index (VFINX):

The last two bullets are the main reasons why so many people choose to invest their money in index funds. As such, beating the S&P 500 is actually quite an accomplishment for any stock investor.

Show me the numbers!

You can see from the table below (column H) that my 401k managed to beat the S&P 500 from the end of 2000 through the end of 2006. I do expect to beat, or at least come close to, the S&P 500 by the end of 2007.

Note: Prior to 2000, my 401k underperformed because I was over-allocated in my company stock

Beat the S&P500 Performance Detail

Chart updated October 1, 2007

A few notes:

Wow, this is becoming a long post. I will stop right here and part 2 will be ready for tomorrow morning.

Next: Beating the S&P 500, part 2

Pinyo
Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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2 Comments

  1. gravatar
    paidtwice
    August 29, 2007, 14:33

    Are you going to teach us all how to beat the stock market? I will take notes ;)

    I’m guessing your IRA is invested more conservatively but I can be (and usually am) wrong lol.

  2. gravatar
    Pinyo
    August 30, 2007, 5:43

    I am not qualified to teach any one anything. :-) I am just sharing how I beat the market since the beginning of 2000. Mind you, I lost a lot of money prior to that. I considered it tuition.

    My IRA doesn’t get the same benefits as my 401k, but I do experiment a little more with IRA…that’s why you see the differences. I tend to be a value investor so I tend to look for low PEG stocks.

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