Investing principle 3: Let markets do the heavy lifting

In investing, there are two main sources of potential returns.  The first is the return that comes from the markets and the second is the return generated through an investor’s skill. At its simplest, the latter mainly comprises two sources: one is to time when to be in or out of the markets (market timing), the other is to pick great individual stocks (stock picking).  

Empirical evidence suggests that trying to beat the market – through either market timing or stock picking - is a tough game, with very few long-term winners.  Our view - in line with both academia and many major institutional investors - is that it is not a game worth playing.  Letting the markets do the heavy lifting on returns takes a great weight off your shoulders; you no longer need to worry about picking the right stock, the right manager or deciding if you should be in or out of the markets.  As one cannot control the returns of the markets, the structure of your portfolio becomes key.

We generally refer to markets ‘working well’. By this we mean that markets are reasonably efficient at pricing in new information. This effectively means that it is very difficult for investors to outperform the broad market, as to do so would require either luck, or the possession of information that is not already in the price.

This phenomenon is known as the ‘wisdom of the crowd’.

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