Better Investment Experience – Part One

Embrace the Market & Don’t Try to Outguess it

February 2019

This is the first of a five-part series that will help you have a better investment experience. This isn’t a deep- dive into investing or the markets, but rather some basic concepts that investors often lose sight of.

Embrace Market Pricing

The market is an effective information processing machine. For every bet on one side of a transaction there is someone probably much smarter than you taking a bet on the other side of the transaction. When we embrace that the market is more often right about pricing than wrong, our whole approach to investing improves.

Millions of transactions per day are used to adjust and set prices and it’s constantly taking in real-time information to do it. No single person can do this nor can they know what the information will be. And even if the price seems off, it’s the best estimate of a securities value that we have. So, embrace the market’s pricing.

Don’t Try to Outguess the Market

Guess what is around the corner?

March Madness! And I’m super excited! This year, for the first time, I’ll be attending the Sweet 16 round in Anaheim, California.

During this time, fans fill out their brackets for this college basketball tradition and give their best guess as to who will win each round and become the ultimate winner at the end.

Before it starts, we have some basic information about the teams and our perceived assessment of what their strengths and weaknesses are. As the tournament gets underway, we will usually encounter events that we did not anticipate, and the ultimate winner turns out differently than expected.

In fact, according to the number crunchers at FiveThirtyEight, the odds for the most knowledgeable fans have a one in 2 billion chance of getting the whole bracket right. That’s pretty dismal, especially considering that they looked at people who knew something about the teams. I suppose then, that a casual observer is doomed.

Now, how’s that relate to the stock market? There are many fund managers who think they can make good predictions based on the knowledge they hold, but I submit that even with that knowledge, their performance is not that great.

Below is a chart showing such an examination. It gives the numbers of how many funds they began with, how many survivors made it to the end, and how many winners did better than the expectations. Take a look:

US-Based Mutual Fund Performance, 2003–2017

The markets pricing power works against mutual fund managers who try to outperform through stock picking or market timing. As evidence, only 14% of US Equity Mutual Funds and 13% of Fixed Income Funds have survived and outperformed their benchmarks over the past 15 years. We would expect a better winning percentage by pure luck.

The big take away here is that even the “experts” can’t consistently outguess the market. We know that overall the market has gains and certain areas of the market do better over long periods of time (more on this in later lessons). Therefore, we should expect a long-term and patient commitment to those areas and diversification of our investment holdings will give us the highest probability of a successful investment experience.

Monson Wealth Management Flat-Fee Program

Most Registered Investment Advisors charge a percentage of assets under management, which translates into the more money you have, the more you are charged, even though the servicing time may be the same as someone who has one-quarter of what you do.

Our Flat-Fee program is designed with these clients in mind. We don’t charge you more just because you have more.

Give us a call and in 15 minutes we can assess your situation to see if this makes sense for you.

“The MWM Flat-Fee Program is designed to give clients that have over $500k invested a fair shake.”

– Eldon Monson CFP®, RICP®