“Can I beat the market?” is the fourth installment of the Rethink Investing series. You may be interested in the previous topics including: “Why should I Invest?“, “How much risk am I taking?“, and “What should I Invest in?”

In the last installment of the series, I talked about once you decide on your portfolio asset allocation, you can use passively managed index funds to invest in the future growth of the collective global economy in each asset class. This means the performance of your portfolio will only track the broad market. Whenever the market index goes up, your portfolio value will go up, and vice versa. But what if you have some kind of information that allows you to pick a few investments that will earn higher returns than other people?

In other words, can you “beat the market”?

This leads us to another style of investing called “active management.” In fact, most people associate investing with actively managing assets. This means doing research, talking to the right people, and looking for special access to find the investments that are making superior returns at any given time. If it sounds like a lot of work, that’s because it is. The amount of work supports an entire industry of analysts, managers, and brokers. You pay the premium to get access to what they know so you can earn a better return than your neighbor.

So with all the work and money involved, does active management really help you earn higher returns than the market? The answer is, Yes, No, and Maybe.

In any given time, there are always people who pick stocks that make higher returns than the average market return, whether due to real expertise or pure luck. Although most people think they possess a special talent, most of the time luck plays a bigger role. In order to prove that you are not just playing Russian roulette, you need to consistently over a long period of time earn a better return than the market, like Warren Buffett. Since Warren Buffett exists, we can conclude, yes, we can beat the market.

So the question becomes, if you do not possess the special talent to beat the market, how can you identify the professionals who have the track record who do? If Warren Buffett and his team retire today, who else can you follow to make better returns than the market?

That’s where the No comes in. We know someone is beating the market at any given time, but we don’t know who they are. Research has shown that it’s getting tougher in the past decade to find skilled managers to beat the market. Even if we find one with a track record, he/she may not stay good or stay in the business forever. (Some studies have suggested that outperforming fund managers peak at their early 40s .) Moreover, the outperformance needs to be more than the premium you pay in the form of fees and higher expense ratio; otherwise why bother? All of these factors make it more difficult to beat the market consistently in the long-term.

So should you try to beat the market? Maybe. You may be the next Warren Buffett in the making. You may have some insight into the market that nobody has, and the discipline that most investors lack. Also, you may not be investing for the long-term. You can find opportunities to make a big return from time-to-time, either due to market timing and unidentified value. So beating the market is definitely doable. However, if you have the knowledge and conviction of beating the market over the long-term, you probably wouldn’t be asking this question in the first place.