Whether you’ve been investing for decades or are just getting started, at some point, you’ll likely ask yourself some key questions.
You can enhance your chances of long-term investment success by delving into some fundamental principles. These insights, inspired by the research of Dimensional Fund Advisors, aim to shed light on crucial aspects of investing.
What sort of competition do I face as an investor?
The market operates as a highly efficient information-processing system.
Every day, millions of market participants buy and sell securities, contributing real-time information that helps set prices. This intense competition makes it challenging to outguess market prices, even for professional money managers.
For investors, this is actually beneficial. Rather than trying to identify incorrectly priced securities, you can rely on the information embedded in market prices to construct your portfolio more effectively.
How likely am I to pick a fund that survives and outperforms?
When it comes to outperforming the market, the market’s pricing efficiency often works against mutual fund managers who attempt to achieve superior performance through stock picking or market timing.
Should I choose a fund because of strong past performance?
Many investors choose mutual funds based on past performance.
However, research indicates that most US mutual funds in the top quartile of past five-year returns do not maintain their top-quartile ranking in the following five years. This suggests that past performance is not a reliable predictor of future returns.
Do I have to outsmart the market to be successful?
Financial markets have historically rewarded long-term investors.
People expect a positive return on their invested capital, and both equity and bond markets have generally provided growth that exceeds inflation. Rather than trying to outsmart the market, let it work in your favour.
How should I build a portfolio?
Academic research has identified various equity and fixed income dimensions that highlight differences in expected returns among securities. Instead of attempting to outguess market prices, aim for higher expected returns by structuring your portfolios around these dimensions.
Is international investing for me?
Diversification is key to reducing risks. However, diversifying only within your home market may not be sufficient. Global diversification broadens your investment opportunities, positioning you to seek returns from a wider array of sources.
Should I make regular changes to my portfolio help me achieve investment success?
Predicting which market segments will outperform in the short term is incredibly difficult. Avoid market timing and unnecessary changes, as these can be costly. Emotional reactions or short-term market opinions often lead to poor long-term investment decisions.
Can my emotions impact my investment decisions?
Many investors struggle to separate their emotions from their investment decisions. Market fluctuations can tempt you to react impulsively, which often results in suboptimal choices. Staying calm and focused on your long-term strategy is crucial.
Should I make changes to my portfolio based on what I’m hearing in the news?
Daily market news can challenge your investment discipline. Some news can incite anxiety, while other headlines may tempt you to chase trends. It’s essential to consider the source of the news and maintain a long-term perspective, avoiding reactive decisions based on short-term market movements.
So, what should I be doing?
Working closely with a fiduciary adviser can provide the expertise and guidance needed to stay focused on actions that add value. Here are some steps to enhance your investment experience:
- Create an investment plan that suits your needs and risk tolerance.
- Complete our True Prosperity Quiz to find out where you sit and where you need to focus.
- Structure your portfolio around dimensions of expected returns.
- Diversify globally.
- Manage expenses, turnover, and taxes.
- Stay disciplined during market fluctuations.
By focusing on what you can control and sticking to a well-structured plan, you can improve your investment outcomes over time.
