Market Efficiency: Don’t Try to Time or Beat the Market
Monthly AIRE Perspectives – April 2021
Dear Friends and Valued Clients,
Those of you who have worked with us for a number of years have heard our most important messages with regards to investing on a regular basis, but we always feel it is beneficial to reiterate them and provide additional data to support these perspectives. When it comes to investing in the public markets, we strongly believe the following:
The markets are efficient, which means that stock and bond prices instantly reflect all relevant, available, known information, as well as the market’s consensus expectations concerning unknown information. In other words, a particular company’s stock price reflects everything that is known about that company, plus the consensus expectations about the future of that company, given where we are today in the economy, where the market expects things to go in the future, and how that might reflect on that particular company’s future earnings.
For this reason, we feel that picking stocks or timing markets are not productive activities in the long run when it comes to investing. Over the years, we have shared a large amount of statistics and data to back these statements, and have added two articles below which provide more recent data.
PLEASE MAKE SURE TO READ THE TWO ARTICLES BELOW!
The most important decision, based upon your cash needs, risk tolerance and time horizon, is to determine what percentage of your overall portfolio to allocate to what we call the five major categories: (1) equities, (2) fixed income, (3) cash, (4) real estate and (5) alternatives / other investments.
The next most important decision is to determine the investment mix of sub-asset classes within the above categories. For example, sub-asset classes for equities might include large cap, mid cap, small cap, international and emerging markets stocks. These should be chosen with regards to the correlations of these asset classes to one another.
The final decision is which particular investments to buy for each sub-asset class. While still important, the impact of the choices here pale in comparison to the impact of the first two decisions. In other words, the particular investment we choose to buy for our large cap stock exposure is not as important a decision as how much we should allocate to the five major categories of equities, fixed income, cash, real estate and alternatives / other investments.
Do not allow the news and the ups and downs of the market to deter you from the unemotional asset allocation model you have in place. Timing the markets is statistically one of the most damaging actions an investor can make.
Do not try to predict the direction of the market or pick stocks based solely on predictions. These activities are not worth the risk-return trade-off, and timing the market has proven to be counter-productive. Do not ask “what should I be doing now?” or “what do you think the market will do next?” or “what stock should I buy?”No one knows. The solution for each person should not be based on market predictions, but rather, based upon the principles of asset allocation and portfolio construction, taking into account risk tolerance, time horizon and goals. This strategy should bear in mind the correlation of the different components in the model, and the investor should not concentrate so much on the performance of individual components than on the overall model and how those assets move together.
The portfolio should be rebalanced periodically (taking tax ramifications into account) in order to prevent the asset allocation model from falling out of balance. Furthermore, the asset allocation model itself must be reviewed periodically to ensure that it is still appropriate to the investor's goals and needs.
Throughout the years, we have often shared statistics and data to support the above comments and ideas. However, we thought we should also provide updated and more recent statistics. To this end, we wanted to share two articles with you – the first one on stock picking that the second one on market timing. You can click on the links below in blue to view each article:
Most Investment Pros Can’t Beat the Stock Market, So Why Do Everyday Investors Think They Can Win? (This article cites a 2020 report that found that nearly 90% of actively managed investment funds failed to beat the market over a 15-year period.)
A New Reason Investors Shouldn’t Try to Time the Stock Market. (This article cites a new study that found that moving in and out of stocks both lowers returnsand adds to volatility.)
Once again, we would like to thank you for your trust and loyalty, and look forward to speaking with you in the upcoming month.
The commentary and opinions expressed in our articles on this page reflects the personal opinions, viewpoints and analyses of the AIRE Advisors, LLC employees writing the article. The articles on our website should not be regarded as a description of advisory services provided by our firm or performance returns of any AIRE Advisors, LLC’s clients. Any past performance discussed in these articles is no guarantee of future results. The views reflected in the articles are general in nature and made to provide education about the financial industry. These views and opinions are subject to change without notice. Any mention of a particular security, sector, and related performance data is not a recommendation to buy or sell that security or in that sector. Our firm manages client accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the articles. To determine what kind of investments may be appropriate for you, please consult your financial advisor prior to investing. Also, please note that all investing involves risk and the possible loss of principal capital.
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