Can you believe we're almost finished with the first month of 2021? Where does the time go? But if you're an investor, it's always the right time to take steps to make sure you beat the market.
While that sounds like a great plan, it's not easy to do. According to think tank The American Enterprise Institute, 95% of professionals can't do it. But that doesn't mean you can't -- especially if you follow the steps below.
1. Ignore noisy pundits
Be careful about reacting to the news, because it will set you on a path to buy and sell stocks based on short-term events. To beat the market in any given year, it's important to keep your focus on the long term, which is the secret to accumulating wealth.
Don't believe me? Then consider this: During the 20-year period from Jan. 1, 1999 to Dec. 31, 2018, your overall return would have been cut in half if you missed the 10 best trading days. If you just held on to your holdings during that time, you would've been fine.
2. Don't panic-sell
Once everyone realized that the COVID-19 pandemic would have a negative worldwide effect, many investors sold stocks in a panic. This caused the S&P 500 to drop 12% between March 4 and March 11, and then another 9.5% on March 12. Did you sell during that period? If you did, you may have missed out on the recovery -- and the approximately 16% increase that the S&P 500 ultimately delivered in 2020.
The lesson is, don't panic and sell when the market drops. If you can ride out the volatility, you'll be rewarded with gains.
3. Accumulate cash to buy on dips
Another way to beat the market in 2021 is to have enough cash so that when people panic-sell (see Nos. 1 and 2 above), you're around to scoop up the bargains that these short-term moves deliver. Begin by making a wish list of stocks that you'd like to buy, and track them.
Do your fundamental due diligence, of course, so you know when a stock is overvalued, undervalued, or just right. Then, when the opportunity presents itself, be ready to pounce, as short-term drops are often followed by a recovery.
4. Invest in companies with sustainable competitive advantages
When you select companies in which to invest, make sure that they're strong enough to withstand a market downturn. One way to do that is by investing in companies that are leaders in their fields and have competitive advantages that will guarantee they'll still be doing business no matter what's happening around them.
One company, for example, that can withstand the ups and downs of the stock market is Amazon.com (AMZN 0.19%). It has a brand that everyone knows, offers great prices to its customers, and continues expanding its product offerings. While many businesses may try to imitate Amazon or compete against it, they often fail: This lion is king of the retail forest and plans to stay that way.
Bottom line: Investors who held Amazon throughout 2020 were rewarded with a 75% gain. That's beating the market -- and then some.
2021 has just started, but we've still got about 11 months to go. By following the above steps, you'll set yourself up with a good chance of beating the market, as well as earning the right to brag about outperforming 95% of professional money managers.