If You Can’t Beat Them, Join Them

Lewisburg, PA – The goal of investing is to get an overall market return. The stock market consists of large cap, small cap, micro cap; value and growth; developed international large, emerging markets, emerging small, and emerging value companies. Additionally, there is fixed income, cash, T-bills, and bonds. A broad based, global portfolio may hold 19 distinct asset classes, 12,000 plus individual stocks, and cover the globe in 40+ countries. More specifically, asset classes that have been intentionally designed with dissimilar price movements (sunscreen & umbrellas). They are engineered to not be dependent on any one specific asset class and this lack of dependency is designed to maximize return for a given level of risk.

What is a market return?
In any given year a “market return” equals the asset classes that are positive or are up, minus the asset classes that are negative or down, minus the cost to invest.

Can a market return be negative in a given year?
Yes, in a year when asset classes that are down and drag on the asset classes that are up. It’s important to understand it could be a negative annual net return. It’s still a market return, that’s all the market would give that particular year.

Should an investor try to beat the market or get a market return, from year to year?
Depends on one’s belief about how markets work and where growth comes from?

Let’s examine two opposing views of how to grow wealth through investing:
1. The market is efficient (free markets work)
2. The market is inefficient (free markets fail)

What does the term “efficient market” actually refer to?
Well, the term efficient market refers to the underlying premise of this view that the market, left to its own devices, is efficient. It’s based on supply and demand. The free market is the best determinant of market prices.

What this means is all knowable and predictable information about future prices and movements is already factored into the current price. Therefore, only new and unknowable information and events change prices going forward. In this context, the randomness of the market makes it impossible for any individual or entity to consistently predict market movements and capture additional returns that are unrelated to risk. Markets that are overvalued, or underpriced, are not identifiable in advance.

What does the term “inefficient market” actually refer to?
The basis for this belief is that the market fails to price goods and services accurately. Because there are flaws in the systems, it is possible for some individuals to identify in advance which prices are incorrect and, in effect, predict the future. This belief simply put, overvalued or underpriced markets can be forecasted and predicted. By systematically finding mispricing, it is possible under this belief, to both increase returns and avoid losses in investments.

Is there any proof one way or the other?
The debate about the efficiency of markets has resulted in hundreds of empirical studies attempting to determine whether specific markets are, in fact, efficient. Many investors are surprised to learn that a tremendous amount of evidence supports the efficient market belief. Furthermore, academic research from several noble laureates over the past fifty years in the field of economics strongly supports the theory that markets work.

Evidence supporting an inefficient market is poor. Statistical studies show that professional money managers who use speculative techniques, designed to take advantage of mispricings in the market, are only at a level with what would be expected by blind random luck. In other words, money managers have to achieve a market return plus recoup the transactional costs of active management. It is easier to find anecdotal evidence to support this view. Individuals who have “beat the market,” are easily found on magazine covers and radio shows, TV talk shows or Internet chat rooms. There is an allure to this method of investing that is compelling to our basic instincts as human beings.

Prudence dictates we sell high and buy low. Recent weeks are a dramatic example of why one should rebalance portfolios religiously, taking advantage of the swings in the marketplace and putting dis-similar price movement to work. The goal, a market return. We sell what asset classes are up, down to a target, take the gain and then buy asset classes that are down, up to target. Doing this, the academics have proven, you are always buying low and selling high. Rebalancing is one of the three basic pillars of investing own equities, diversify, and rebalance. It is months like January 2016 that investors appreciate down the road, when you look at the balance of their accounts.

You see, you don’t need to worry about the volatility of the market, and timing the ups and downs. That is if you own the entire market place, rebalance on a regular basis, and let the market do what it does. If you can’t beat them, join them.

About Paul Nichols

Paul is the founder of Financial Abundance, a Registered Investor Advisory firm and EDI, an Estate Planning Firm with offices in State College and Lewisburg. He has been working with individuals, families and businesses for over twenty years, including many Fortune 500 companies. He has educated tens of thousands of people through seminars, workshops and various international speaking engagements where he shared the stage with many notable individuals such as Ronald Reagan, Robert Kiyosaki (author of Rich Dad, Poor Dad), Mike Ditka, General Schwarzkopf, and Newt Gingrich to name a few.

In 2000, after many years of traveling to consult companies and individuals, Paul decided to relocate from Colorado to State College, PA (his wife’s hometown) to develop a local advisory firm.

Paul operates under the core belief that education plus understanding leads to clarity and confidence; resulting in peace of mind. He is a proud father of three and devoted husband of 20 plus years.

Some of Paul’s accomplishments:
Regular contributor to the Centre Daily Times, via the “It’s Your Money” blog
Featured in the movie Navigating the Fog of Investing
Regular contributor to Town & Gown as the publications Investor Coach
Host of the weekly iTunes Podcast, It’s Your Money
Member of the Western PA Better Business Bureau
Member of the Centre County Chamber of Business and Industry