Trust Market Prices

Trust Market Prices by Jeff HollandDon’t let outside noise interfere with your long-term plan.

The market effectively enables competition among many market participants who voluntarily agree to transact. This trading aggregates a vast amount of dispersed information and drives it into security prices. In 2015, 98.6 million trades a day took place in World Equity Trading and the dollar volume was $447.3 billion a day. (Source: World Federation of Exchanges)

When was the last time you met anyone who has made their fortune from outguessing stock prices? I would guess you have never met someone like that. Perhaps you’ve met people who earn fees from buying public stocks, or maybe people who put together real estate funds, but the odds are that you’ve never met a person who said, “Yeah, I trade stocks all day and make millions a year.”

A Practically Priced Market

People trust market pricing everyday. When they buy groceries, fruits, vegetables or cars, we accept the prices as an estimate of value and make decisions accordingly.

The same is true of stocks; a stock’s current price is affected by all known information about a company. A company’s equity, its perceived prospects for future earnings, and its perceived risk all go into the price. Given all of that information, a stock’s current price reflects aggregate expectations about risk return.

The Guessing Game

Stock prices adjust very quickly to new news. For example, if there’s a takeover event before the market even opens, the price will adjust to that new information.

Trying to outguess the stock market is a very stressful game, with no realistic chance of success. If you try to outguess the market, and you don’t trust market prices, you are essentially trying to do the impossible, which will only serve to add undue risk—and anxiety.

Over the last 15 years, only 19% of mutual funds survived and beat their benchmarks. Why keep fighting the markets? Let markets work for you.

Beware the Prognosticators

Market prognosticators, who have no clear track record or accountability to you, are constantly in the headlines. They predict that the market is going to go down in the near future and encourage us to “sell everything,” abandoning our long-term plan.

The only thing that is going to move the market—now and in the future—is future unknown news.

Prognosticators create anxiety, which causes people to sell. Our experience is that, once a person sells, they never get back in. They’re done with the wealth building returns of the markets, for life.

A better approach is to trust market prices because, invariably, the prices are correct. Public equities—when owned in a smart and diversified global way—are always fairly priced with a positive expected rate of return, otherwise nobody would buy them. The individual’s long-term plan is what matters; not what the talking heads on TV say.

The media gives voice to people who make very provocative statements. If you are going to invest based upon the media, you’ll be gambling. Why gamble when you can use financial science to increase your wealth?

Don’t fall prey to the antics of the media. Stick with your plan. If you need help telling fact from fiction when it comes to your investments, contact us.

Jeff Holland

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