Pursuing a Better Investment Experience
When you listen to the financial news, it can feel as though financial markets and investment decisions are erratic and arbitrary. In the short term, that might actually be accurate. However, over the long term, there are universal investment principles which will ultimately govern your success and which guide our investing decisions.
Embrace Market Pricing.
The market is an effective, information processing machine. Millions of participants buy and sell securities in world markets every day, and the real-time information they bring helps set prices.
Don't try to outguess the market.
The market's pricing power works against mutual fund managers who try to outsmart other investors through stock picking and market timing. As evidence, only 17% of US stock mutual funds have survived and outperformed their benchmarks over the past 15 years.
Resist chasing past performance.
Some investors select mutual funds based on returns. However, funds that have outperformed in the past do not always persist as winners. Past performance alone provides little insight into a fund's ability to outperform in the future.
Let markets work for you.
The financial markets have rewarded long-term investors. People expect positive return on the capital that they supply and, historically, the equity and bond markets have provided growth of wealth that has more than offset inflation.
Consider the drivers of returns.
Academic research** has identified equity and fixed income dimensions, which point to differences in expected returns, namely size, relative price and profitability for stocks and term and credit for bonds. These dimensions are pervasive and persistent and robust and can be pursued in cost-effective portfolios.
Practice smart diversification.
Diversification helps reduce risks that have no expected return, but diversifying within your home market is not enough. Global diversification can broaden your investment universe.
Avoid market timing.
You never know which market segments will outperform from year to year. By holding a globally diversified portfolio, investors are well positioned to seek returns wherever they occur.
Manage your emotions.
Many people struggle to separate their emotions from investing. Markets go up and down. Reacting to current market conditions may lead to making poor investment decisions at the worst times.
Focus on what you can control.
A financial advisor can create a plan tailored to your personal financial needs while helping you focus on actions that add value. This can lead to a better investment experience.
**In 1960, the University of Chicago started developing the first database for historical securities prices and returns information, allowing researchers to analyze the performance of the markets and kicking off the modern era of finance. Four years later Fama — a Chicago student now known to many as the “father of finance” — published his famous Ph.D. dissertation concluding that stock price movements are unpredictable (Fama used his own data for the dissertation). That set the stage for the Efficient Market Hypothesis and the advent of index funds that sought to match rather than beat the market. (Institutional Investor published a less technical version of the dissertation in 1968.) Eugene Fama now sits on the board of Dimensional Fund Advisors. Wealthrise has no direct affiliation with Dimensional Fund Advisors or Eugene Fama.