Updated on Wednesday, November 18, 2020
Think you can beat the stock market? According to the latest MagnifyMoney survey of more than 1,000 Americans with at least one investment account, 40% definitely think they can get a better return on their own investments than what theyâ€™d get from a broad index fund such as the S&P 500.
That percentage varies greatly, however, among men and women; Democrats and Republicans; and millennials, Generation Xers and baby boomers.
Some see investing as a game and are ready to play to win. Others tend to want to spend more time sitting on the bench. Hereâ€™s what we learned from our survey.
Investors believe thereâ€™s potential to get more out of the stock market than they put into it â€” or they wouldnâ€™t invest. However, some believe they can â€śbeatâ€ť the market, which â€” for our purposes â€” means getting a better return on your own investments than that of a broad index fund.
Since 1928, the S&P 500 has had an annual average return of 7.7%
Broad index funds are traditionally popular because theyâ€™re easy to understand, offer a simple way to diversify assets and come with lower costs and risks. What they donâ€™t come with, though, is the potentially big payoffs that can occasionally accompany individual stock purchases.
Trying to beat the market is a gamble, and some are more inclined to take their chances than others. At least 40% of respondents said they definitely think itâ€™s possible to beat the stock market, and another 36% think itâ€™s somewhat possible. Thatâ€™s more than three-fourths of investors who share either sentiment, combined.
While that confidence is admiral, in general, experts said trying to beat the market isnâ€™t the best move.
â€śIt is certainly interesting, and a bit disheartening, to hear that so many investors think they can beat the stock market,â€ť said Sarah Berger, millennial personal finance columnist at MagnifyMoney. â€śEven actively managed investment funds tend to historically underperform when compared to popular market benchmarks. If the investment pros canâ€™t even outperform the market, that should be a strong sign that you shouldnâ€™t try to beat it, either.â€ť
So, why do some think their choices are better than those in an index fund? â€śPeople who think they can beat the stock market can be acting on feelings of overconfidence or on self-attribution bias, which is when you chalk up your successful outcomes to your own actions and your negative outcomes to external factors,â€ť Berger said.
Those feelings seem to be driven in part by life experience, personal circumstances and personality. Breaking down respondents further:
Younger generations are more likely to believe in their abilities than older generations. In fact, 55% of millennials think they can beat the stock market, versus 47% of Gen Xers and 16% of baby boomers.
Baby boomers are the most likely to think itâ€™s somewhat possible to beat the market (44%), followed by:
Baby boomers are also the biggest doubters, with 40% stating they donâ€™t think itâ€™s possible to beat the market. Only 26% of Gen Xers and 11% of millennials reported the same.
Meanwhile, Republicans are most likely to believe their risks can pay off, with 54% stating they think itâ€™s definitely possible to beat the market. Democrats (31%) are less likely to hold this belief.
More than 3 in 10 (31%) Democrats and nearly 2 in 10 (18%) Republicans said they donâ€™t think it can be beat.
Even though they may believe they can beat the stock market, most people (40%) still prefer to invest in proven index funds, which is known as passive investing. Just a quarter of people (25%) said they prefer to hand-pick their own stocks (active investing), and 35% prefer a combination of both passive and active investing.
More men than women prefer both passive investing (44% versus 34%) and active investing (28% versus 21%). Meanwhile, 46% of women prefer a combination of both types of investing, while only 29% of men do.
Millennials (31%) are the most likely to prefer active investing, compared with:
Baby boomers (46%) are the most likely to favor a combined approach of both passive and active investing, compared with:
Republicans (47%) are the most likely to prefer passive investing, compared with 39% of Democrats. The percentage of those who prefer active investing is similar across party lines: 25% of Democrats and 23% of Republicans.
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Men, millennials and Republicans were the most likely to agree that theyâ€™re very competitive when it comes to investing. Those who somewhat agreed with it were split fairly evenly across gender, age and political affiliation, while higher percentages of women, baby boomers and Democrats disagreed with the statement.
Is investing a game or a safe way to save money? In general, most believe itâ€™s a safe way to save money (39%), though nearly a third of people (31%) see it as a game. Another 30% see it as a little of both.
Men are more than twice as likely to see investing as a game than women (40% versus 17%), and millennials were more than three times as likely to see it that way than baby boomers (42% versus 13%). As for political affiliation, Republicans (41%) are more likely to see it as a game than Democrats (24%).
It also seems that those with more education are more likely to treat stocks as a game, with 38% of those with a bachelorâ€™s degree or higher stating they do so, while only 29% of those who have no college education and 14% of those with some reported the same. The survey also found that those with no college education (47%) and those with some (44%) are more likely to treat it as a safe way to save money than those with a bachelorâ€™s degree or higher (36%).
While more investors said theyâ€™re willing to focus on maximizing their long-term gains even if it means short-term losses, the percentage (32%) isnâ€™t overwhelming. Meanwhile, 29% said theyâ€™re willing to avoid immediate losses, even if it means sacrificing long-term gains.
In general, Berger said that while there are no guarantees when it comes to the stock market, investors should have confidence that the stock market, historically, has always recovered from downturns.
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â€śHaving confidence that the stock market will eventually generate decent returns is critical,â€ť she said. â€śIf you have no confidence in the market, you may be tempted to pull out your money when you see your portfolio balance dip. If you do that, you are missing out on compounding returns and not giving your portfolio time to rebound. Itâ€™s all about striking the balance between feeling confident enough that the stock market will eventually generate returns, without getting too cocky and thinking youâ€™re able to beat it.â€ť
MagnifyMoney commissioned Qualtrics to conduct an online survey of 1,066 Americans with at least one investment account. The survey was fielded Oct. 9-13, 2020.
Generations are defined as the following ages:
The survey also included responses from members of Generation Z (ages 18 to 23) and the silent generation (ages 75 and older). Due to the low sample size among both age groups, their responses were factored into the overall percentages but excluded from the generational breakdowns.