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3 ways to beat the market

I’m amazed at the number of ways people claim to be able to beat the market that are obviously very unlikely to beat the market. I’m mainly talking about day trading and looking at technical charts.

There is no way you know what a share is going to do in the next minute, hour, day or even the next month. There are some companies out there that will have spent huge sums of money on top-quality computers, they have a distinct advantage over Joe Bloggs who’s at home on his little laptop looking at a candlestick trading graph.

It has been proven by numerous studies that a lot of people would be best off by just investing in a low-cost quality index and hold for the long-term. This can be as simple as owning Vanguard MSCI Index International Shares ETF (ASX: VGS) and buying regularly. Just doing this will lead to good returns over the decades.

However, I don’t think it’s too difficult to beat the market over the long-term if you can do one of the following things:

Invest in a ‘better’ index

Broad indexes are decent options like the one I mentioned above, but a number of different indexes have created which actually have long-term potential of outperforming the market.

For example, with how the world is changing it’s quite likely that Facebook, Alphabet (Google), Amazon and other tech companies will continue to be top performers. That’s why BETANASDAQ ETF UNITS (ASX: NDQ), which owns the big tech companies, could be a good choice to beat the market.

Choose a good fund manager

Fees are one of the biggest detractors of long-term investment returns. The Royal Commission has shown how many fees can be applied to financial products.

However, there are a number of genuine, high-performing managers that outperform the market over the long-term that I think are worth holding despite the fees. Sure, over some short-term time periods they may underperform but over five to ten year periods the quality managers will come through.

If you beat the market after fees then the manager is worth it. That’s why I believe Magellan Global Trust (ASX: MGG), WAM Research Limited (ASX: WAX) and Naos Emerging Opportunities Company Ltd (ASX: NCC) will outperform.

But, those managers need to be different than the index, have high-conviction ideas and respect its shareholders.

Hold a portfolio of quality shares for the long-term

The best way to beat the index is to hold a portfolio of businesses that will grow over the long-term. This way means that you don’t have to pay any fees and you can create good diversification yourself.

Individual shares won’t necessarily do amazing over a 12-month time period, but if you can think how much the company will grow in ten years then you have a huge advantage over fund managers who are thinking about the next year not the next decade.

Shares like Challenger Ltd (ASX: CGF), Altium Limited (ASX: ALU), REA Group Limited (ASX: REA) and a2 Milk Company Ltd (ASX: A2M) all have a good chance of being much bigger businesses in a decade from now and could all beat the market.

Foolish takeaway

All three ways can beat the market, particularly if you buy the index, LIC or business at a really good price.

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Motley Fool contributor Tristan Harrison owns shares of Altium, Challenger Limited, MAGLOBTRST UNITS, and WAM Research Limited. The Motley Fool Australia owns shares of and has recommended BETANASDAQ ETF UNITS and Challenger Limited. The Motley Fool Australia owns shares of A2 Milk and Altium. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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