Why beating the market is so hard
We all like to think we can outperform market returns, but even the best heads in the business rarely get it right – especially over the longer term.
About Paul Clitheroe
Paul Clitheroe is Chairman of InvestSMART. He has been a media commentator for more than 30 years and is regarded as one of Australia's leading experts in the field of personal investment strategies and advice. Paul hosted the Channel 9 program Money, helped establish Money magazine, where he now acts as editorial adviser, and is the author of several personal finance books.
Paul is also chairman of Ecstra and the Ensemble Theatre Foundation. He is also the chair of Financial Literacy and Professor with the School of Business and Economics at Macquarie University.
Can a cat make more money in the share market than professional investors? Back in 2012, the UK’s Observer newspaper set out to find the answer.
It pitted the stock-picking abilities of Orlando, a ginger cat, against three investment professionals from well-known firms (including Schroders) as well as a group of high school students.
Each team had a notional £5,000 to invest in the FTSE All-Share index, with their results tracked over the course of a year.
How did each team perform?
The fund managers drew on decades of investment knowledge and traditional stock-picking methods to close the year with a portfolio worth £5,176 – a gain of 3.5%.
The high schoolers didn’t do so well. They ended the year with a portfolio worth £4,840 – a loss of 3.2%.
Orlando the cat clearly lacked investment experience. Undeterred, he selected stocks by flipping his favourite toy mouse over a grid of numbers allocated to different companies.
Despite Orlando's unorthodox methods, by year’s end his portfolio was worth £5,542, making him the clear winner with a return of 10.8%.
For the record, the FTSE All-Share index finished the 2012 year about 5.8% higher.
While the experiment was more fun than science, it showed just how hard it is for even highly skilled investors to beat (let alone match) market returns. And it becomes even more difficult over longer timeframes.
This has been demonstrated repeatedly by the SPIVA Scorecard, which looks at the performance of actively managed funds compared to various market benchmarks.
The latest mid-2025 SPIVA Scorecard for Australia shows that over the year to June 2025, 69% of actively managed Aussie share funds failed to match market returns. This rose to 75% over a three-year investment timeframe, and by the 10-year mark 84% of active funds failed to outpace the ASX 200.
International share markets are even harder to beat. Around 70% of active funds failed to match one-year market returns to June 2025, rising to 94% over a 10-year investment period.
To add salt to the wound, actively managed funds typically charge higher fees. So, investors can be left nursing considerably lower after-fee returns than the broader market.
The question is, with all the experience, skills, and technology that investment professionals have on hand, why is it still so difficult to consistently outpace market returns?
On one hand, a vast array of factors shape share market movements and those factors become even more complex when we are talking about international markets.
But it’s not just about complexity. As humans we have a natural tendency to be overconfident about our ability to pick a winner. If you need proof, just look at the number of casinos and Ponzi schemes that continue to separate people from their money.
We also have what scientists call behavioural biases – subconscious ways of thinking or behaving that lead us to make poor choices.
Studies have shown, for instance, that we tend to feel the pain of a loss more keenly than the joy of turning a profit. This drives 'loss aversion', which can see investors bail out of shares at the first hint of a downturn instead of simply holding tight and waiting for markets to recover.
“Anchoring bias” can see us give unnecessary weight to the first piece of information we receive. For example, an investor may read a glowing report about a share’s future prospects and refuse to take on board subsequent news that shows the stock is a dud.
Frankly, the list of biases goes on.
Happily, there is a solution to overcoming all these challenges.
The answer lies in being part of the market rather than trying to beat it. And of course, this is exactly the approach that index, or passive, investing involves.
The concept is incredibly simple. Hold a bundle of stocks that mirror the market, and you’ll earn very close to the market returns.
Even better, this is a very low-cost strategy. There’s no need for expensive teams of analysts poring over markets trying to pick the next big thing.
And because you’re holding a basket of different stocks, you automatically get the benefit of diversification, which has been proven to reduce volatility
Indexing is the approach used by the vast majority of exchange-traded funds (ETFs), and it’s no surprise to me that ETFs have become incredibly popular – not just among Aussie investors, but globally.
It’s easier, cheaper, less stressful – and the evidence shows it is likely to be more financially rewarding – to build a portfolio centred around ETFs rather than trying to beat the market.
By all means, add individual shares that you feel strongly about – or ask the family cat for their stock picks.
But if ETFs lie at the heart of your portfolio, the combination of diversification and very low costs is hard to beat over the long term.
This article first appeared on InvestSMART. You can sign up to get a free newsletter, with fortnightly insights from InvestSMART’s team of experts including Paul Clitheroe and Effie Zahos.
Author Paul Clitheroe
Chairman, InvestSMART
Photo by Metro junction
