Please ensure Javascript is enabled for purposes of website accessibility

4 Simple Steps to Beating the Market in 2021 (and Beyond)

By Barbara Eisner Bayer - Updated Mar 10, 2021 at 6:59PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

These winning strategies can help you outpace the S&P 500 every year.

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.

Man wearing a crown and sunglasses, fanning a handful of money.

Image source: Getty Images.

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 (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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned, Inc. Stock Quote, Inc.
$2,146.38 (0.19%) $4.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.