May 20, 2023

5 things retail market investors can do to beat the markets

The stock market can be intimidating, particularly for novice investors. It might be difficult to stand out and produce significant returns when there are so many market participants fighting for a piece of the action. Retail investors, however, can outperform the markets and beat the market provided they adhere to a few straightforward criteria. Here are five strategies retail stock market users might use to outperform the market.

Use Cash as King 

The option to store cash is one of the main benefits individual investors have over fund managers and indices. Retail investors can take cash calls and deploy cash more effectively when opportunities arise, whereas fund managers and indices are often fully invested. They can benefit from buying chances when equities are undervalued and prevent losses during market downturns as a result. Retail investors can also lessen their exposure to overvalued equities by using cash as a tool, which lowers the danger of suffering big losses when market conditions shift. Retail investors may be able to earn better returns because to this flexibility than their institutional counterparts, who are sometimes constrained by tight mandates and rules.

Concentrate & don’t over diversify

By concentrating their holdings in a small number of high-quality companies, retail investors can outperform the market in another way. While indexes and fund managers must diversify their holdings to reduce risk, ordinary investors can take advantage of the advantage of increased agility provided by a smaller portfolio. Retail investors can better monitor their investments and react quicker to shifting market conditions by consolidating their holdings. Additionally, small-scale investors can avoid the dangers of excessive diversification, which can dilute profits and make it challenging to produce alpha. Retail investors can concentrate on a small number of high-quality companies with solid fundamentals and competitive advantages rather than spreading their investments too thin.

Trade the trends, not exact tops and bottoms

In contrast to institutional investors, who often enter much later when a trend is established and confirmed, individuals might respond to surprises that lead to new price trends practically immediately. According to Newton's first law, a moving item keeps moving. There is inertia in moving objects. The stock market has a similar characteristic in that trends tend to persist unless a shift in the trend is made. To put it another way, the trend is on your side. Even though this proverb is well-known, some investors might not fully understand its wisdom. The exact tops and bottoms need not be found by investors.

Selling Euphoria

Dealing with euphoric patterns, such as climax peaks, when trading in the stock market is one of the most difficult aspects of it. If not managed properly, these patterns can be very challenging to foresee and result in substantial losses. By employing trailing stops to sell during euphoric patterns, retail investors can outperform the market. By doing this, they can secure profits before the stock price plummets and prevent substantial losses as a result.

Cut losses faster if proven wrong

And last, small-scale investors can outperform the market by hedging their bets earlier. Retail investors can be more nimble and more willing to rapidly cut their losses when things aren't going as planned, but institutional investors frequently hold on to losing positions for years (For example, NIFTY as an index maintains its losers for an average of 4 years). Retail investors may be able to avoid big losses and produce superior returns over time as a result. Retail investors can benefit from fresh opportunities and avoid becoming mired down in underperforming assets by being more prepared to recognise mistakes and move on.

To sum up, there are numerous ways for retail investors to outperform the markets and produce substantial returns. Retail investors can benefit from their flexibility and agility to outperform the markets over time by managing their funds carefully, consolidating their holdings, trading the trends, selling during exuberant patterns, and reducing losses quickly if they are wrong. Even though investing in the stock market might be difficult, sticking to five straightforward guidelines can help retail investors outperform.


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