Beating the market is a challenging and demanding endeavor. It takes a lot of time, energy, and focus to research the right stocks that will outperform. For passive investors that are mostly invested in Index funds. This quick and easy guide will teach you how to beat any index following these 3 simple steps.
Step 1 – Choose The Index You Want To Outperform
The first step is choosing the index you want to beat, the idea is that your portfolio should be a copy of the Index to mimic its performance. This will make sure you have the same returns as the index as long as your total portfolio value is big enough. So that the commissions are a residual value and won’t lower your returns.
Step 2 – Find A Broker That Pays You Interest On Short Borrow
This is where the outperformance comes in. When a broker lends shares for someone to short they will charge and interest on the borrowing amount. Some brokers reward their clients by giving them a percentage of the interest they charge. So that they lend their shares to short sellers. By using such a broker and with a portfolio mimicking a specific Index, you will be able to have the same return and an added interest received for lending shares to short. Interactive Brokers offers this and allows its customers to receive interest on the shares they lend.
Step 3 – Build The Portfolio
It is important to keep in mind that your portfolio needs to have a certain size. So that the commissions charged will not materially affect the returns. With that in mind you should buy every individual stock in the Index and start receiving the interest from the shares you lend to short.
Most Index Funds have a management fee that is deducted from your investment. Although there are index funds which have virtually no cost associated. Even with the latter, by building a portfolio that mimics the Index you want to beat and lending the shares to short. You will easily have a bigger return and slightly outperform. Despite being extremely difficult to beat the market. The steps provided here will allow a passive investor to improve its returns. If you are invested in Index Funds, consider this as a way to boost your returns.
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