How to beat the S&P500 Index

Beating the S&P500 index is not easy. As a matter of fact, most funds managers do not accomplish this objective. Though, don't feel bad, you're not alone.

A simple strategy to beat the index - just buy the index and hold on through ups and downs. Without a plan or strategy, it's tough on your stomach. This approach could potentially lead to a large loss and you would be inclined to sell with a loss and have a long road to recovery if you decided to get back into the game.

Beating the S&P500 Index Strategy. Here is my idea and a few rules I apply:

Rule #1 - A portfolio must be fully funded at all times - a portfolio funded 80% will never beat the SP500 index. The 2 exceptions would be the market is trading in a bear market (a 20% decline is commonly viewed as a bear market) and partially funded when the market is in a correction (a 15% decline is commonly viewed as a correction).

Rule #2 - Be diversified in equal positions. I like to hold no more than 4 Exchange Traded Funds (ETFs). Having more than one type of index funds reduces the risk of failing to beat the index because other indexes have historically performed better in the past. Note: the dividends should cover the cost of the trading commission.

Rule #3 - Swing trades often contribute to beating the market when buying on a dip, that is lower than the selling price (e.g. you sell at $90 buy back at $88 or less). You can assure a buy back by initiating a limit buy order. However, the opposite holds true when selling to raise cash (taking profits) and afterwards buying it back at a higher price.

Rule #4 - Keep track and log the highest closing price of each holding, because not every position trades the same. This will assure you're monitoring the stock market movement, and not depend on the business news commentary.

Rule #5 - When to start funding your portfolio. Almost anytime is a good time, the exception would be when the market is in correction or bear market territory. Negative trending is determined from the highest close after trending at least 5+% to the downside and not year-to-date performance.

Rule #6 - Avoid buying inverse ETFs (@SH - short position). Only buy inverse ETFs when the market is clearly trending south to reduce losses, but never try to make a profit.

 15% decline is commonly viewed as a correction
 20% decline is commonly viewed as a bear market

ETF last Correction/Bear Market Decline
highest and lowest trading price - April 2010 through July 2, 2010

U.S. Stock Market last Correction/Bear Market Decline
highest and lowest trading price - April 2010 through July 2, 2010

***July 2, 2010 was the lowest trading day for all indexes