Some people say that if I had £2k that I wanted to invest now, the best option would be to use a stock market tracker fund. These type of funds mimic the performance of a main index, such as the FTSE 100 or NASDAQ 100. Personally, I think that there are better ways to invest in order to actually try and beat the stock market.
Playing around with my allocations
The first way I’d try and beat the stock market is by excluding companies that I think are likely to underperform this year. For example, let’s say that I want to try and beat the FTSE 100 as my benchmark. Looking through the index, there are several companies that I think could struggle this year. This includes companies with heavy debt levels that will find it more expensive to service such debt due to rising interest rates.
On the flipside, I also want to focus on overweighting money in stocks that I think will outperform. A stock market tracker won’t do this, which is why I think my overall return could beat it. A couple of stocks that I’ve written about recently are Hargreaves Lansdown and Barclays. With my £2k, I’d invest a larger chunk in these two stocks than others. Then, if my view is correct and the shares do well, my return should be higher than the FTSE 100 index.
Other ideas to try and beat the stock market
Another angle I’d consider when trying to outperform is to look at things from a sector view. So instead of just picking stocks I like, I’d pick sectors I like.
For example, rising interest rates should be of benefit to banks and financial services in general. I’d expect this sector as a whole to perform better this year than consumer discretionary, such as luxury goods retailers. The cost of living crisis could mean that demand will fall for this area. As a result, if I focus on buying stocks from finance and not from consumer discretionary, my return should be greater than the stock market in general.
A final way I’d invest is to have a mix of stocks in my portfolio, but not go overboard. With £2k, I’d select between six and 10 stocks to include. If I choose a large number (eg, 50), then my transaction costs and lack of exposure to a specific company could really hinder me in trying to outperform the benchmark. I want to give myself the best chance possible. So I’d diversify my holdings, but still have enough skin in the game to be able to benefit from a move in my favour.
Points to remember
I do need to be conscious that trying to beat a benchmark isn’t easy. By overweighting or underweighting some stocks, I could pick the wrong ones. My subjective views on how sectors could perform could also be wrong. In this way, there’s a risk I underperform the passive route.
