Every day, you can turn on a cable channel of your choice and hear some talking head opine on why the market is moving up or down. I really wish someone would go back over time and track these guys’ comments/opinions and chart how often they are contradictory. While I don’t have the facts or data, my guess is that the results would be absolutely comical!
Investing history - what it has shown us
History has shown two things related to investing:
- Over the long-term, returns of equities have been positive.
- In any given year WHICH equities will be positive is anybody’s guess.
While this seems strange on the surface, deeper reflection shows that it is absolutely, 100% as it should be. Let’s take each of these topics in turn.
Equities keep displaying a positive return over the long run.
First, we have equities displaying a positive return over the long run. Shocking? Nope. Equities are companies. Companies are built by people. And people are hard-wired by God to strive to create bigger and better things. QED, we would expect equities to see positive returns over the long run.
Over time we will have more people on Earth.
Another “proof” of why this is as it should be: over time we will have more people on Earth, these people will buy more things, this will lead to a larger world economy, the companies that make up the world economy will reap the benefits of this growth, and their gains will be reflected in the price of the equity markets. Long-term growth is what we are wired for.
Equity returns - What seems crazy is actually 100% reasonable.
Second, let’s look at the seemingly craziness of the returns of various equity classes. Again, what seems crazy is actually 100% reasonable. In fact, it is EXACTLY a reflection of the “efficient market hypothesis.”
What would happen if it WERE possible to “beat the market”?
This hypothesis states that it is impossible to “beat the market,” as market prices only react to known information. Suppose that it WERE possible to predict which asset classes outperformed? That being the case, individuals would flock to these asset classes (i.e., demand would increase). Heading back to basic economics, this would lead to an increase in price, which would then deflate the long-term returns.
Why information arbitrage opportunities are rare.
Given the rapid rate of transfer of information today, information arbitrage opportunities are becoming more and more rare. It is for this reason that identifying the best performing asset class a priori has not been possible.
Now, if you are looking for the best asset class (or best factors) over time, that is a different story AND a different topic to cover at a later date.
Enjoy the read and remember, it’s NOT about the money. It’s about how the money supports your goals!
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