Beating the index in 2026

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Welcome to the Supernatural Stocks podcast on Moneyweb, with your host The Finance Ghost – your weekly fix of local and international insights for investors and traders.

Whether you’re talking about professional fund managers or amateurs looking to make money from investing as a hobby, you’ll find that the same concept comes up time and again: beating the index. There’s a lot to unpack here.

In a world where exchange-traded funds [ETFs] are now easily available, including through monthly debit orders or in your brokerage account as and when you feel like them, the index is an investible asset.

Listen/read:
An amazing year for ETF investors [Dec 2025]
Actively managed ETFs signal a new chapter for investors [Oct 2025]
The rise of ETFs and the risks of passive investing [Sep 2025]

Yes, there are fees involved of course, but they are minor in the greater scheme of things.

This means that investors can – and should– buy broad market exposure in a low-cost structure if they are looking to add equity to a portfolio.

The only reason to deviate from this plan and allocate capital to other opportunities is because they feel like they can beat those returns and generate that most elusive of all investment concepts: alpha. The market return is referred to as beta, by the way.

Again, there’s a lot to unpack here. So let’s start by looking at how important it is to pick the right index in the first place if you are going to go this benchmarking route.

We need a building block first

The most basic comparison of all has nothing to do with equities.

For many taking their early steps in the market, the thing they are trying to beat is the return they would get from the bank.

When you’re making that comparison, I recommend taking into account the benefit of your interest exemption each year. If you’re under 65, for example, R23 800 in interest income is tax-free. In other words, the pre-tax yield and post-tax yield are the same. Assuming you’re earning 6%, that means roughly R400 000 in the bank will deliver you a tax-free, essentially risk-free return of 6%.

But then again, a lot of listed companies will do that just with the dividend, let alone the capital return possibilities over several years.

Read: JSE market cap jumps above R8.17trn

Capital returns can be negative, which means your total return can be below the bank – or even in the red. This is why I personally make sure that I’m earning a solid amount of interest as an underpin to my wealth creation journey.

Not only does this give me important liquidity, but there is obviously no guarantee whatsoever that equities will outperform the bank in any given year.

History has taught us that it is highly probable that equities will beat the bank over many years though.

To be clear: the bank isn’t a good benchmark for equity exposure unless you make adjustments for risk. You shouldn’t be comparing risky assets to risk-free assets, as the bank’s role is something different in your portfolio.

I’m not digging into academic debates around whether a money market account at your local bank carries risk or not. Instead, we should be comparing risky assets like shares to other risky assets like an equity index. That is why benchmarking exists.

That’s not so easy though …

Onwards to the equity indices

But which index to choose? There sure are a lot of them!

When you start to dig into sector-specific indices, like the RESI [resources index] or the FINI [financials index], then in my opinion these aren’t suitable benchmarks unless you’ve decided to only buy shares in that sector.

For example, if you’re picking two or three resources stocks, then by all means compare your work to the RESI if you want.

But that shouldn’t be your entire portfolio unless you plan to channel your inner Austin Powers by choosing to live dangerously.

No, the benchmark for a broad portfolio – a sensible portfolio that isn’t just a handful of mining stocks – is always much higher up. Locally, the Top 40 would be the obvious choice, although this brings us neatly to the problem faced by so many fund managers: benchmark hugging.

You see, Naspers is almost 11% of the index all by itself – based on November 2025 numbers for an ETF tracking the Top 40. Gold Fields and AngloGold are good for nearly 16% in aggregate, so the index would’ve obliterated you in 2025 unless you held gold.

Perhaps that’s the point, though? You should’ve held gold!

Read:
Stunning returns from unit trusts and ETFs
Prosus, gold, platinum stocks mask shocking performance of ‘SA Inc’

But whichever way you cut it, tracking against an index with such concentrated exposures inevitably means that you’re going to be drawn to also holding the biggest names in the index as a hedge.

In professional money management, straying too far from the index in any given year can end your career.

Retail investors are only accountable to themselves at least – unlike fund managers, who are accountable to investors – but the temptation will still be there to just match the index if you judge your efforts based on how the index performed.

Fine, what about the MSCI World then? Surely that addresses this concentration issue?

Well, all I can say is you better be ready to hold the big tech names.

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Nvidia, Apple, Microsoft, Amazon, Alphabet and Meta contribute well over a fifth of the index on a combined basis. Add in Broadcom and Tesla and you’re at over 25%. In fact, the only name in the top 10 holdings that isn’t a technology company is Eli Lilly. Yikes!

Read:
Tech surge propels emerging-market stocks towards five-year high
Nvidia and its friends boost SA unit trusts

Perhaps the answer isn’t to try and ‘beat the index’ after all?

But what does that mean in practice for retail investors?

My approach to these things

The shortcomings of the index in terms of being a benchmark are clear – and believe me, we’ve barely scratched the surface here. Yes, there are other approaches, such as using equal-weighted indices instead of a market cap-weighted index, but the issues remain.

So then what is the usefulness of the index?

In my opinion, the appeal of the index lies in its investibility rather than as a basis for comparison at portfolio level. Instead, I use it to compare at investment level.

By using ETFs, I can gain exposure to the JSE Top 40 with a single investment, or the MSCI World for that matter.

And of course, there are numerous ETFs to choose from on the local market that track local and global indices. If you venture offshore, you’ll find more specialist ETFs than you could ever imagine.

I choose to invest in the indices to achieve beta in my portfolio. But then how do I measure performance, and alpha?

Finance is full of theories and those theories have no shortage of critics. But one thing that is universally important, and accepte, is to identify the cost of capital for any particular investor.

Read:
South Africans are rethinking unit trusts …
Ninety One to list income-focused ETFs on JSE

If an investment by that investor beats the cost of capital, then it creates economic value. Now, the way to do that relies on concepts like the capital asset pricing model, which assumes that the investor – usually a company allocating capital – has a mix of debt and equity … [and] it gets complicated.

I take a much simpler approach that is going to take us back to the most basic building block of all: the bank.

I know that I can get 6% or 7% in the bank. Above the tax-free amount that I get every year, I know that I’m going to pay my marginal tax rate on additional interest earned. I am therefore achieving a blended after-tax return on the cash I have in money market accounts.

Now, every year I get a tax-free savings allocation, just like everyone else in South Africa. Maximising this is absolutely critical, as the government is literally giving me a gift.

I always put this purely in equities and I spread it across the ETFs that I think will do well.

But the anchor for me is always property ETFs, as this is where the tax-free nature of the investment really shines.

Earning a tax-free property dividend in the high single digits is rather delightful, particularly as this is a long-term investment where I feel confident that property will achieve capital gains over time. Fine, that’s the ‘easier’ part of my portfolio at least.

But what about capital above the tax-free savings allocation? How do I decide what to do: the bank, the index and/or single stocks?

This is obviously where financial advisors are very important and you should always get advice. That advice will help you figure out the right mix and how much should be in each bucket. All I’m sharing here is my own experience.

Personally, I tend to only go for single stock exposure where I feel comfortable that it can beat suitable ETF exposure – there’s the benchmark problem again! – in a meaningful way.

Read: Is your index fund as diversified as you think?

If you own a basket of stocks that delivered a 10% return, then owning one stock that delivers 10% is silly on a risk-adjusted basis.

But what if that single stock delivered 11%? Or 12%?

At what point do you feel comfortable venturing out of the harbour with all the other boats and betting on just one boat making it across the ocean? Is it 13%? Is it 15%?

The answer varies for all of us, based on personal risk tolerance and time horizon – and, by the way, position sizing, as a more concentrated portfolio demands a higher expected rate of return for the additional risk being taken.

But over the long-term, just a percentage point or two makes a huge difference. Such is the magic of compound returns!

So instead of beating myself up over an index or sweating over the ‘correct’ benchmark, or for that matter simply sticking to the bank for fear of taking equity risk, I try and set myself an annual goal of percentage returns and then I try to achieve it.

Read:
Offshore exposure in local markets
Thematic ETFs: Investing in global trends beyond tech

In that regard, I behave like an investment holding company that allocates capital to various places in the pursuit of beating its own cost of capital. In this case, I’ve simply decided what my cost of capital is.

No matter how much I like a stock, there’s no point in owning it if I don’t believe that it can beat the index in a meaningful way.

That isn’t because I benchmark against the index or because I want to judge my own performance and feel good or bad accordingly. It’s simply because I can invest in the index any time I want and I enjoy the diversification that it brings, so any stock I buy needs to do better than that!

At this early stage in 2026, I thought it was worth touching on this concept, especially as you start to think about what you’ll be buying this year and potentially selling.

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