Past performance doesn’t predict future returns
The best performing fund doesn’t keep outperforming.
The best performing market doesn’t keep outperforming.
But we act like they do.
When we pick funds, we sort by past returns.
In fact, higher past returns are linked to lower future returns.
Don’t pick stocks, funds, or assets by past performance.
Instead, pick an asset allocation based on your own situation, risk tolerance, and goals.
The economy isn’t the stock market
I often hear people saying the economy is doing well, so the stock market is a good investment.
It’s actually the opposite.
Stock returns are slightly negatively correlated with the economy.
When the economy does well, stocks do slightly less well.
When the economy is doing poorly, stocks do slightly better.
This is because
Markets are forward looking
Markets price expectations, not data.
When the economy does well, markets price in higher profits.
When higher profits are realised, the market doesn’t go up, because this is all expected information.
The bar is set higher, so disappointments are likelier.
When the economy is doing poorly, the opposite happens.
Markets expect lower profits, so it becomes easier to beat expectations.
This is why the best returns happen after the worst crashes.
But
You can’t beat the stock market by studying it
The market is the aggregate of all market participants’ information.
They are all competing to bring new information to prices.
You are but a single person.
In our professional lives, a lifetime of study makes you an expert.
But in the market, you are competing against thousands of experts everywhere, all at once.
You can’t beat the market by studying it.
That’s alright, because
Experts are wrong, mostly
Market experts are terrible at forecasting.
In 2023, market forecasts for the S&P 500 ranged from 3650 – 4750. It ended at 4769.
If market forecasts were reliable, the market would rush to price them in. You wouldn’t be able to get any advantage from them.
You get what you don’t pay for
In most areas of life, when you pay more you get more.
Paying more gets you a better plumber, flight, hotel room, location, etc.
But in investing, in the famous words of John Bogle, you get what you don’t pay for.
Investment returns are always after costs and taxes.
You certainly can’t control the returns.
But you can control the costs and taxes.
And paying for experts doesn’t get you much.
And finally, for the busy, lazy, or overworked people out there
Doing less nets you more
Your investment portfolio is like a bar of soap.
The more you touch it, the less you have.
This is one of the few areas in life where you can “set it and forget it”.
So embrace it. Set it, forget it, and figure out what you can do with your time instead.
Thanks for reading.
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