Baseball season is long. Major leaguers start spring training in mid-February, with a month of practices and scrimmages. Six months, consisting of a 162-game schedule, take us through the summer. Finally, the playoffs fill up October and deliver us a World Series champion by the start of November: One champion. One. Fans of one team are elated and celebrate with a trophy. Fans of the other twenty-nine teams wind up disappointed and look to next year.
Since winning is incredibly hard and the odds are not in any one team’s favor, this disappointment is fairly predictable. Even history’s most successful team, the New York Yankees, has finished atop their peers less than 20% of the time. One way to avoid this hurt would be to cheer for all thirty teams. That’s right, be a “fair weather fan,” not a proud label for a sports fan! However, as an investor, cheering for the masses can help reset your expectations and arrive at a more enjoyable ending.
We have talked for years about how difficult it is to pick winners and losers consistently. Should you be someone who attempts this endeavor, you will have millions of fellow market participants buying and selling securities every day. All will be trying to do the same thing you are…find the winners and avoid the losers. This means competition will be stiff, and trying to outguess market prices is difficult for anyone, even professional money managers.
However, there is an alternative. Rather than basing an investment strategy on trying to find securities that are priced “incorrectly,” be a fair-weather fan and like them all instead.
Consider this: If you flip a coin, your odds of getting heads or tails are 50/50. Historically, the odds of selecting an investment fund that survived for more than 15 years are about the same. Regarding outperformance, the odds are worse. The market’s pricing power makes it very hard for 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 a recent study, only 14% of US equity mutual funds have survived and outperformed their benchmarks over the past 15 years+. That’s not very good, but it’s also fairly predictable. This study is updated every year, and the results are virtually the same each time. Why try to play a game in a way that has a higher probability of losing (predictable disappointments) rather than succeeding?
It’s tough, if not impossible, to know which market segments will outperform from period to period. The following chart makes clear that picking the best and worst performers even at an asset class level is no better than an annual guessing game++.
The temptation to play this game is heightened by the noise coming from daily market news and commentary. Some messages stir anxiety about the future while others entice you to chase the latest investment fad. Bad news sells.
Don’t buy it.
The moral of this story, and many like it, is to focus on what you can control which can lead to a better investment experience.
- Create an investment plan to fit your needs and risk tolerance.
- Structure a portfolio along the dimensions of expected returns.
- Diversify globally.
- Manage expenses, turnover, and taxes.
- Stay disciplined through market dips and swings.
- Work with an advisor you trust, who is a fiduciary and has your best interests in mind.
If you’re a baseball fan, be selective. In fact, cheer on the Royals (shameless plug). If you’re an investor, be a fair-weather fan. Stay diversified.
+Dimensional Fund Advisors, LP, Mutual Fund Landscape, 2018
++Dimensional Fund Advisors, LP
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