Graham Stephan Says This Is How You Can ‘Beat the Market.’ Is He Right?

Making smart investments is important -- so should you heed Stephan's advice?

Graham Stephan is an investor and YouTube personality who focuses on offering financial advice. Stephan recently offered some advice for people looking to make smart investments with their money.

Specifically, Stephan addressed the possibility of beating the market -- and offered some strategies to help you build wealth in your brokerage account by earning generous returns. Here's what Stephan suggested.

Stephan's investing advice is worth reading

Stephan warned recently on Twitter that picking individual stocks is usually not going to be the best way to beat the market.

"Your chances of picking a winning stock are <0.33%," he warned. "In an analysis of 26,000+ stocks from 1926, Prof Bessembinder found that the average stock loses money and lasts only 7 years."

This doesn't mean you can't make wise investments, though, or that you are doomed to perform poorly when investing. Stephan just believes you shouldn't buy individual stocks if you want to be a successful investor. "You don't need to pick stocks to beat the market," he said.

Instead of trying to buy individual stocks, he advises "passive index investing," which means buying index funds that track the performance of financial indexes such as the S&P 500.

"Indexing works because it's not a static portfolio - It's a strategy," Stephan explained. He detailed how stocks are added to the S&P 500, which includes 500 of the largest U.S. companies chosen based on liquidity, market cap, and positive earnings.

Stephan also said when you invest in an index fund tracking the S&P 500, you get the benefit of new companies being added and removed from the fund (and thus from your portfolio) quarterly without transaction costs.

Stephan also said that using tools to help you find the best time to buy into index funds can also help your investments perform better.

Should you listen to Stephan's advice?

Stephan is exactly right that index fund investing is the best approach to maximizing the chances of earning favorable returns. As he points out, most actively-managed investment portfolios do not beat the S&P 500.

You may not want to try to time the market, though, as even the best strategies for doing so can fail. Missing even one of the top best days in the stock market can have huge long-term consequences for your portfolio, so rather than being strategic about when you buy index funds, you may be better off just using a strategy called dollar cost averaging and buying into an index fund with a set amount of money on a steady basis.

But while Stephan is correct in advising that you should invest in index funds, he may not be right when he says that, "You don't need to pick stocks to beat the market." The reality is, index funds aren't usually going to outperform the market as a whole. In fact, some index funds -- like an S&P 500 -- are usually used as barometers to show how the market is doing.

What Stephan should have explained is that you don't need to beat the market to get rich and you usually shouldn't try. The S&P 500 produces average annual returns of around 10%, and if you invest in it and earn these average annual returns, you should be able to grow your portfolio substantially over time without trying to beat the market.