Many people are under the illusion that to be a successful investor you must “beat the market.” This mentality pits investors against the market — like a game or competition. Consequently, in attempting to achieve returns superior to the market, many investors often end up underperforming.
Instead of thinking of the financial market as an adversary to beat, what if we changed our perspective and consider it an ally instead?
This shift in mindset could not only generate successful investment outcomes but also yield positive mental dividends as well. Evidence shows markets are positive three out of every four years, so if we focus more of our energy on capturing the three positive years rather than trying to avoid the one negative year, we can harness the power of markets to build meaningful wealth over time.
Also, by accepting that periodic downturns are an unavoidable reality of long-term investing, we can worry less about market fluctuations, eliminating a major stress in our lives.
Even though this strategy makes great sense, many people still feel the key to successful investing requires being able to predict the future direction of the economy, the stock market or an individual stock.
However, attempting to buy or sell individual stocks or make broad changes to one’s asset allocation at exactly the “right” time, time after time, is virtually impossible. Each day, millions of participants around the world buy and sell over $650 billion of stocks, and even more bonds.
Markets this size are extremely competitive and incorporate new information into securities prices very efficiently. When you attempt to outguess the market, you compete with the collective knowledge of all investors. By harnessing the market’s power, you put their knowledge to work in your portfolio.
In a May 2019 article, David Booth, Executive Chairman and Founder of Dimensional Funds, said “much of the financial services industry is geared toward making people think they can avoid uncertainty. But the future is unknowable. We believe the best approach is to make informed decisions, adjust as your needs and objectives change, and be okay with a range of possible outcomes.”
It is important to acknowledge that nobody likes to see their portfolio go down, and it’s perfectly reasonable to be disappointed when it does, but Booth adds, “We shouldn’t be surprised by it.”
As investors, when we expect there to be downside volatility along the way, we are far less likely to have an emotional reaction to it when it happens. By remaining disciplined and controlling our emotions we circumvent impulsive responses to market movements — which often cost investors more than the downturns they were trying to avoid in the first place.
Rather than engaging in the “loser’s game” of trying to beat the market through a series of predictions and forecasts, investors are wise to let the market work for them and focus on actions that add value, like creating an investment plan tailored to their personal needs and risk tolerance, diversifying globally, managing expenses, taxes and turnover, and staying disciplined through market gyrations. This approach can lead to a much better investment experience — and a better night’s sleep.