“Invest in the Market” encompasses three beliefs about how markets work and how to capture long term returns.
The Efficient Market Hypothesis states that stock prices are reflective of all available information. While we know this is just a hypothesis1, we do believe that investing as if it were true is a sound approach supported by theoretical and empirical research. The opposite of this approach would be trying to “outguess” the markets, which hasn’t fared too well in the past.
The second belief is diversification or “don’t have all your eggs in one basket.” Diversification can help smooth out returns — it will likely keep you from having the portfolio that is shooting the lights out, but will also likely keep you from having an overly-concentrated portfolio that could be subject to significant declines.
When investing in a diversified portfolio, it can be tempting to chase performance. Moving from a sector that has done poorly recently to a sector that has done well recently can seem like a prudent move, however this is market timing in disguise (more on that soon).
Chasing performance can also apply to investment managers. Our approach to investments is more closely related to passive indexing than conventional investment managers, so performance-chasing investment managers is avoided and fees are kept low.
Invest in the market
The third belief represented by “invest in the market” is that we must avoid market timing. Correctly predicting market movements with any consistency is impossible and most investors understand that they should ignore such predictions. However, the temptation to do so often creeps back in when emotion enters the equation. Which leads us to our next investment principle, “manage emotions.”
1Professor Eugene Fama, who defined the efficient market hypothesis in 1970, said in 2016 “The point is not that markets are efficient. They’re not. It’s just a model.”
Investing involves risk including loss of principal. No strategy assures or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.