Investing in markets
What's your guess?
At a gathering of financial advisors in August of 2013 participants were asked to estimate the number of jelly beans in a jar.
While their guesses covered a wide range, together the average estimate of all participants was very close to the actual amount.
Together, we know more than we do alone.
Millions of participants
Today's financial markets are accessible to millions. You can place trades from your phone or computer.
And while you may not know the value of a stock or bond, you can be sure that with so many participants helping to determine the prices that there the aggregate knowledge of all of the participants is more accurate than you or I may guess on our own.
Markets do react
Prices are a signal. They adjust quickly when unexpected events change our view of the future.
Where prices go from here is just another guess made by all market participants.
Prices adjust quickly
When news hits the market, markets adjust quickly. Illustrated here is the price of Heinz stock adjusting to news that it would be bought by Berkshire Hathaway on February 14, 2013.
Let the market work
We will show you next how to take advantage of market-based investing, a distinct and different approach from hiring a manager to try to beat markets.
Pros lose more than they win
Markets work. Paying an advisor or a mutual fund manager to guess what markets will outperform is a poor strategy. Few funds survive, few are winners, and those "winners" often relied on taking more risk than you meant and gambling to do so.
A better approach is to harness the power of markets.
1) Jelly Bean. For illustrative purposes only. Illustration based on voluntary participation at advisor event hosted by Dimensional Fund Advisors (DFA) in August 2013. Results audited by DFA.
2) Markets do react data source: Dow Jones-UBS Orange Juice Subindex. Dow Jones data provided by Dow Jones Indexes.
3) Heinz closing price source: Bloomberg
The security identified is shown for illustrative purposes only to demonstrate the investment philosophy described herein. These materials are not, and should not be construed as, a recommendation to purchase or sell the security identified or any other securities. Actual holdings will vary for each client, and there is no guarantee that any client will hold the security identified.
4) Outsmarting other investors is tough.Past performance is no guarantee of future results.In US dollars. US-domiciled mutual fund data is from the CRSP Survivor-Bias-Free US Mutual Fund Database, provided by the Center for Research in Security Prices, University of Chicago. Beginning sample includes funds as of the beginning of the 15-year period ending in 2014. The number of funds as of the beginning is indicated below the exhibit. Survivors are funds that are still in existence as of December 31, 2014. Winners are funds that survive and beat their respective benchmarks over the period. Funds are identified using Lipper fund classification codes and are matched to their respective benchmarks at the beginning of the sample period. Loser funds are funds that did not survive the period or whose cumulative return did not exceed their respective benchmark.