You and The Markets

EMBRACE MARKET PRICING!

In 2017 there were

100 million

trades with a value of

USD 353 billion

Per day, average value.

This means a turnover of USD 77 566 billion in 2017.

Markets are very effective data processing machines.Millions of participants buy and sell securities every day and prices are set based on the real time information brought by them, too. A deal is made only if and when both parties are equally satisfied with the price.

DON’T TRY TO OUTGUESS THE MARKET

The market’s pricing power works against active investment fund managers who try to outperform through stock picking or market timing. As evidence, only 14 % of US Equity mutual funds and 13% of US fixed income (bond) mutual funds have survived and outperformed their benchmark over a 15 year period ending on December 31, 2017. And the biggest problem is that no one knows the winners in advance.

RESIST CHASING PAST PERFORMANCE

Some investors select funds based on past results.However, research shows that most US Mutual funds in the top quartile (25%) of previous five-year returns did not maintain a top-quartile ranking for one-year returns in the following year.Past performance offers little insight into a fund’s future returns.

LET MARKETS WORK FOR YOU

The financial markets have rewarded long-term investors.People expect a positive return on the capital they supply , and historically, the equity and fixed income markets have provided growth of wealth that has more than offset inflation.

You remember, we discussed real returns here. If we add to those percentages that average annual inflation than in case of stocks we are close to a 10% nominal return over a long period of time. Of course, past performance does not guarantee future results.

AVOID MARKET TIMING

You never know which market segments will outperform from year to year.

The Callan Periodic Table of Investment Returns shows annual returns for key indices ranked in order of performance between 1999 and 2018 and conveys a strong case for divesification.

PRACTICE SMART DIVERSIFICATION

Diversification helps reduce risks that have no expected return, and can broaden your investment universe.

The next two charts by Dimensional Fund Advisors show developed and emerging markets percentage of annual returns for a 20 period ending as at December 31, 2017. You can locate Hungary on the left chart as indicated with light magenta.It is very difficult to find any other pattern than randomness on both charts therefore it is worthwhile practicing smart geographical divesification, too.