How to Win the Stock Market Game [4 Rules]

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Winning the stock market game is a matter of knowing which game you’re playing.

Winning the stock market game is possible but not how most investors go about it. It’s no secret that investors are notorious for under-performing the stock market, realizing returns far below the general market. Data for investor returns shows that the average investor earned an annual return of just 2.6% compared to a return of 7.4% for stocks and 4.6% for bonds.

Investors Losing the Stock Market Game
Why Do Investors Lose the Stock Market Game?

In hindsight, we know why we lose. Investors chase high-flying stocks they hear about on TV only to realize they must have been the last to jump on the bandwagon as the price comes crashing down. Panic sets in and the investor sells out of the stock just before it levels off or stages a rebound.

So why is it so hard to win the stock market game? Why can’t investors conquer their bad habits and earn a better return on their investments?

The answer is because most investors are playing the wrong game!

I've got one of the best analogies for investing I've ever heard to help you beat the stock market. Check out how investing is like playing tennis and some of the tips below but don't forget to scroll down to the bottom of the page for an easy-to-follow infographic that explains it all!

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How the Stock Market Game is a Lot Like Tennis

Let’s look at the game of tennis. Tennis is truly a game of contrast, you are either really good or really horrible, and your skill level determines your strategy for winning the game.

Two professionals playing the game will need to do everything they can to score points. They each know that the other will make few mistakes so the key to victory will be in taking risky shots for the ace.

By comparison, when my wife and I play tennis, the strategy is very different. I can try for the risky shots and get lucky on a few but, more often than not, the ball is going to go soaring over the fence and I’ll be running after it. Since it’s more fun to return the ball back as hard as possible, practicing my best guttural grunt as if I were John McEnroe, I make a lot of these errors and my wife usually wins.

She knows the key to winning this amateurs’ game is to just concentrate on getting the ball back over the net…and making the fewest mistakes.

It turns out, winning the stock market game is a lot like winning in tennis.

The Professionals’ Stock Market Game

I'll detail how to win the stock market game playing by playing like an amateur in a bit. First, let's look at the professionals' game at investing.

Professional money managers are measured against the rest of the managers in their investing style. Around the beginning of the year, you’ll see rankings come out placing managers among the ‘median’ return for their group.

Since everyone is constantly trying to score a few extra percentage points to put them above the median, the professionals’ stock market game is about taking risks to beat your comparison index.

It turns out that even the professionals have a tough time playing their own stock market game. Data from 2012 mutual fund performance shows that just 39% of professional fund managers beat their index while the average fund return actually trailed the stock market (S&P 500) by a percent after fees.

Mutual Funds Losing the Stock Market Game
Professional Investors Can't Even Beat the Market

If the average fund return was 15% and nearly 40% of managers beat their index, there’s a good chance that a lot of ‘professionals’ lagged the rest of the market by a wide margin.

Why? Because they are making big bets and losing big when those bets don’t pay off. They’re trying to serve an ace but hitting the ball into the bleachers!

Before we get to those four rules to win the stock market game, understand that a big part of it is NOT LOSING MONEY! Anyone can make money when stocks are rising. It's the crash-proof portfolio that will keep you from losing your heard-earned returns.

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How to Win the Amateurs’ Stock Market Game

By comparison, most of us won’t face losing our job if our investment returns fall short of the ‘average’ investor. We only need to avoid making the big mistakes and meet our long-term financial goals.

Just as my wife doesn’t have to play like Steffi Graf to beat me at tennis, you don’t have to invest like a pro to win the stock market game.

Use these four strategies to win the amateurs’ game in the stock market.

1) Winning the Stock Market Game with Diversification

The most important amateur’s trick to winning the stock market game is diversification. This means having a mix of investments that react differently to the economy and the stock market. Bonds and stocks rise and fall differently because bonds are a contract for fixed payments while stocks are only an ownership stake in potential profits.

Even within stocks, different companies react differently to the business cycle. Stocks of utility companies do better when the economy isn’t doing well and interest rates are falling. Stocks of retailers do better when the economy is humming along and people are buying lots of stuff.

The idea behind diversification is that, no matter what the economy does, your investments will make a smooth path higher. Some individual investments will fall as others rise but your overall wealth will increase and you won’t suffer the big losses that lead to panic-selling.

Diversifying your investments means investing in more than just stocks and bonds. No other investment has created as much family wealth as real estate and property is great for protecting your portfolio.

For most investors, investing directly in real estate isn't a good idea. It can costs hundreds of thousands just to buy a few properties and you still won't be diversified across property types and regions. Real estate crowdfunding allows you to invest as little as $1,000 in individual properties to build a well-rounded portfolio. You also get professional management of your properties and low fees. I've been investing on the Fundrise platform for three years and love the low-stress solution to real estate investing.

2) Keep your Investing Fees Low

Mutual funds charge an average 1.4% a year to pay their managers and overhead cost. Add in a fee for buying or selling the fund and you could need a decent annual return just to break even. You won’t pay annual fees for holding individual stocks but the commissions for buying and selling will add up.

Fidelity reports the average investor on its invest platform makes 77 trades a year. That could cost you upwards of $770 a year in fees even on the cheapest discount brokers.

The solution…don’t sell your stocks! Invest in companies with products that people love and that will be around forever, and then hold the investment until you need the money in retirement. You’ll save on fees and will avoid a lot of the bad investing habits that lose money.

This one isn't as much a problem since the major investing sites switched to no-fee but you still have to watch those hidden fees.

3) Amateurs in the Stock Market Game don’t use Margin

If you don’t know what investing margin is, you’re already on your way to winning the stock market game. Margin is basically a loan your broker gives you to buy more stocks than you can afford. You’ll pay interest on the borrowed money but can increase your return as long as your investments pay off.

Unfortunately, you’ll set yourself up for big losses if stocks fall. Lose 10% on your $5,000 portfolio and you are only down $500. Lose 10% on that same portfolio margined to $10,000 and you’ll lose more than $1,000 with interest.

Investing on margin can be extremely tempting. What could be better than finding that next hot stock and getting triple-digit returns on borrowed money? It's a trap though and one of the fastest ways to lose your money.

4) Getting the Easy Points in the Stock Market Game

win the stock market game investing

The easiest money you’ll ever make in the stock market game is the free money you get from your company’s 401(k) match and from tax savings on retirement accounts. I know it sucks to have your money locked away in an account until you’re 59 ½ but so many people turn down free money by not maxing out their 401(k) or IRA contributions.

If your company matches $0.50 for every dollar you invest in your 401(k), you’ve instantly got a 50% return! If you pay 25% on income taxes, you could invest $1,000 in a retirement account or pay the taxes and only have $750 left to invest in a regular account.

If a lot of the tips for playing the amateur strategy in the stock market game sound like my recent Top 10 Investing Basics for New Investors, there’s good reason for it. It’s only when investors try to boost their returns with complex strategies that they make the big mistakes that ultimately lose money.

The beauty of the stock market game is that you can pick your match. You’re free to play the professionals’ game, analyzing stocks daily for the slimmest of chances at a few extra percentage points. You’re also free to play the amateurs’ game, investing for the long-term win on making fewer mistakes. It’s your decision, just make sure you know which game you’re playing.

How to Beat the Stock Market – Infographic

Here's that infographic I promised on beating the stock market. I confess, I'm not a graphic designer but I'm proud of this one. Feel free to share it or use it on your site, please just include a link to

how to beat the stock market game
How to Beat the Stock Market

The Only Way to Win the Stock Market Game

  • Invest across different asset classes and in different investments within each asset to reduce risk
  • Lose less money to investing fees by using annual rebalancing and avoid selling investments
  • Do not borrow money to invest, it's an investment time-bomb waiting to blow
  • Get all the free investing money through tax deductions and special programs

Stop trying to beat the stock market and understand what's really important in investing. You'll actually ‘beat' the average investor by playing with your rules and by reducing your risk with diversification, saving money on fees, not borrowing to invest and getting the free money. It's the only way to win the stock market game!

Don’t miss the Entire Series and Win the Stock Market Game!

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  • This is some really good information about stock market. I like what you said about how you should have diversification. If you have trouble doing that it might be a good idea to think about getting a professional to help you.

  • I’m currently most invested in stocks (total stock market index, so it’s pretty diverse) and bonds (again, a total index, so total bond market). I really need to add real estate to my portfolio to up my diversification!

  • I like what you’ve writen here, but anyone who has a mortgage and stock market investments is technically using margin. Otherwise, they would have to pay off their mortgage before investing in the stock market.

    • You’re technically right and make a good point but I think there’s a difference between borrowing on a mortgage, which is typically the lowest rate you can get, and borrowing on margin which is generally much higher interest. I mean the specific borrowing to invest which provides the money for no other reason than for the investments.

    • You’re not alone Joe. Most investors are only in stocks (and the majority don’t even have your bond diversification). I’ve added p2p and real estate but even just going so far as to add real estate is a big move in the right direction.

  • My 10 year average on our brokerage account is 14.86%, compared to the DJIA of 9.86% for the same period. I follow the Warren Buffet theory of investing… what you understand, reinvest dividends, hold for the long haul, trade seldom.


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