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.
This is evidenced by the Dalbar research study which looks at individual investor performance from January 1984 thru December 2013. The study revealed that during this period the S&P500 earned 11.10% while the average individual investor earned 3.69%. Keep in mind that during this period inflation averaged 2.80% so the average investor barely kept up with inflation.
Why the difference? It can be explained by the investors search for the ‘best’ manager. This is called track record investing and it doesn’t work. It also is the result of market timing. That is getting in and out of the equity markets at the right time. This has also proven not to work, long term.
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 participant. Free markets work. Unfortunately, most investors never tap their real power.
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.
This along with the guidance of an investor coach/fiduciary adviser will improve your long term results as well as reduce your anxiety. When investors really understand how the markets work they can invest confidently. Because they know that free markets work.