| Markets Work
Current prices incorporate all available information and expectations. Given this, current prices are the best approximation of intrinsic value and any price changes are due to unforeseen events. “Mis-pricings” do occur, but not in predictable patterns that can lead to consistent out performance.
Risk and Return are Related
Total equity risk encompasses both unsystematic (diversifiable) and systematic (market/non-diversifiable) risk—investors should not expect markets to reward them for risks that can be diversified away. They should expect compensation only for bearing systematic risks.
Diversification is Essential
Market performance is unpredictable. A diversified investment strategy allows investors to capture returns of the broad market rather than random gains of individual stocks.
Structure Determines Performance
Successful investing means not only capturing risks that generate expected return but reducing risks that do not. Over 96% of the variation in returns is due to risk factor exposure.
What You Can’t Control:
- Consistently picking winning stocks
- Timing the market
- Media
- Identify a “winning” manager in advance
- Repeat performance of a previous “winning” manager
What You Can Control
- Asset allocation
- Reducing expenses
- Diversifying your portfolio
- Minimize costs and taxes (and turnover)
- Discipline (long-term horizon)
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