Trying to beat the market is kind of like trying to individually guess how many jellybeans are in a jar. If you’ve participated in that type of a guessing game, you likely found that two things were true. The guesses were all over the board, and the average of all the guesses was shockingly accurate. The market works in a similar fashion, both in terms of pricing stocks and the long-term returns in the market.
Nobody has a complete picture of a single company in the market. An individual person can only contribute a sliver of the total information available about it. When everyone contributes their sliver of information, a very detailed picture of the company is formed, and the price reflected in the market is very accurate.
In the same way, looking at only one year of investment returns doesn’t show the entire picture of the market. As additional years of data becomes available, the long-term picture of the market becomes clearer, and the returns of a given year seem more random. There aren’t many years that return close to the long-term average.
So, what can be learned from this example? The path to a healthy investment experience doesn’t seem to come from trying to beat the market. Rather, it seems like it comes from taking a long-term, diversified1 investment approach and not focusing too much on the returns of a single year. The article from Dimensional Fund Advisors, “The Uncommon Average,” dives further into this topic with data and examples from previous years in the market.
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Diversification does not ensure better performance and cannot eliminate the risk of investment loss1