As an investor, are you a dipper and a darter, or an efficient market collaborator?
If you’re not sure, you can tell by how you have – or have not – reacted to this summer’s Greek economic crisis.
As we have advised during any number of past economic crises, the best position for a long-term investor looking to build wealth is to let efficient markets do their work. The evidence supports this philosophy as the best way to capture market returns over the long run. Don’t try to beat the market.
Dimensional Fund Advisors Vice President Wes Wellington agrees. He shares in his views in this 2.5-minute video about the financial crisis in Greece and building wealth.
Here’s a key quote.
“This idea that we should dip and dart and reduce our exposure to risky assets based on some prediction that we or others might make more often than not leads to frustration and failure to capture the rates of return that the world’s capital markets have to offer.”
Wes’s video offers two powerful illustrations of why this is so.
Timing the market is risky
Looking at past economic crises, we can see that the markets have never told us precisely when, where or how precipitously their short-term movements were going to occur. But, they have reliably recovered and soared – usually without warning. Those who did not panic-sell at the bottom and then try to guess when it might be “safe” to return were ultimately rewarded with healthy returns.
Headlines can deceive
Current events give an interesting insight. The Greek financial situation crept up on us like a slow-motion glacier for the past several years. Its chilling effects felt with increased intensity of late. But buried in the onslaught of unfolding news, the evidence reveals that year-to-date returns for most European countries have actually significantly exceeded U.S. returns as of June 30, 2015. The current gap between perception and reality is informative. The loudest headlines may not be the ones worth heeding.
One of the hardest things about being an evidence-based investor is controlling your emotions. Accepting the reality that you can not beat the market and that the media is not your friend will help you stay on track. An emotional decision made at the height of a crisis is likely to be an expensive one. Keeping your emotions under control during a financial crisis is vital for building wealth through investing.