When dealing with investors I have heard a number of questions. The most frequently asked is; what will the market do next?
Every one of them believes someone knows what will happen next. Investors are in constant search of the ‘expert’ that will give them the answers and ‘beat’ the market.
Unfortunately, there are no answers to the question; what will happen next? While investors are searching for the right answer they lose money unnecessarily.
The markets and random and unpredictable. Therefore, predicting the future is a futile journey.
This is evidenced by the Dalbar research study which looks at individual investor performance over a 30 year period. The latest study revealed that the 30 years ending December 31, 2016 average annual performance S&P500 earned 10.16% while the individual investor earned 3.98%.
Why the difference? It can partially be explained by the investors search for the ‘best’ manager. This is called track record investing and it doesn’t work.
The invisible hand of the market sets prices more efficiently than any other process known to man. Is it perfect? Indeed, No. There is no perfect price; only what a willing buyer and seller negotiate.
The market instantly incorporates the collective mind of every market participants. Markets work. Unfortunately, most investors never tap their real power.
In fact, Gene Fama Sr won the Nobel Prize in Economics in 2013. His theory Efficient Market Hypothesis was written in 1965. It nearly five decades to prove his theory valid.
The theory states that all knowable information is already in the price of securities. Of course, there is more to the theory but I will refrain from becoming too detailed.
Needless to say you need to stop trying to beat the market and let the market forces work for you. This will be accomplished by owning equities….globally diversify….rebalance. These 3 simple rules will lead to a successful investing experience.