#1 How do we compete with other investors in the market? The market is an effective information-processing machine. Millions of market participants buy and sell securities daily, and the real-time information they bring helps set prices. The competition is stiff, and trying to outguess market prices is difficult for anyone, even professional money managers. Rather than basing an investment strategy on trying to find securities priced “incorrectly,” investors can instead rely on the information in market prices to help build their portfolios.
#2 What are our chances of picking an investment fund that survives and outperforms? Flip a coin, and your odds of getting heads or tails are 50/50. Historically, the odds of selecting an investment fund that was still around 20 years later are about the same. Regarding outperformance, the odds are worse. The market’s pricing power works against fund managers who try to outperform through stock picking or market timing. One needn’t look further than real-world results to see this. Based on research, only 22% of US equity mutual funds and 10% of fixed-income funds have survived and outperformed their benchmarks over the past 20 years.
#3 If we choose a fund because of its strong past performance, does that mean it will continue to do well in the future? Some investors select mutual funds based on past returns. However, research shows that most funds in the top quartile of previous five-year returns did not maintain a top-quartile ranking in the following five years. In other words, past performance offers little insight into a fund’s future returns.
#4 Do we have to outsmart the market to be successful investors? Financial markets have rewarded long-term investors. People expect a positive return on the capital they invest, and historically, the equity and bond markets have provided growth of wealth that has more than offset inflation. So instead of fighting markets, let them work for you.
#5 How should we construct a portfolio? Academic research has identified equity and fixed income dimensions, which point to differences in expected returns among securities. Instead of attempting to outguess market prices, investors can pursue higher expected returns by structuring their portfolios around these dimensions.
#6 Should we invest internationally? Diversification helps reduce risks with no expected return, but diversifying only within your home market may not be enough. Instead, global diversification can broaden your investment opportunity set. By holding a globally diversified portfolio, investors are well-positioned to seek returns wherever they occur.
#7 Will making frequent changes to your portfolio help you achieve investment success? It’s tough, if not impossible, to know which market segments will outperform from period to period. Accordingly, it’s better to avoid market timing calls and other unnecessary changes that can be costly. Allowing emotions or opinions about short-term market conditions to impact long-term investment decisions can lead to disappointing results.
#8 Can emotions affect our investment decisions? 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.
#9 Should investors change their portfolios based on what they hear in the news? Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. If headlines are unsettling, consider the source and maintain a long-term perspective.
#10 So, what should we do as investment managers? We offer expertise and guidance to help focus on actions that add value, such as creating an investment plan to fit your needs and risk tolerance, structuring a portfolio along the dimensions of expected returns, and diversifying globally. In addition, we manage expenses, turnover, and taxes and encourage you to stay disciplined through market dips and swings.