Recent Insights from Dimensional -- You Know More About Investing Than You Think You Do, Principle #2

Dimensional offers six principles of?investing that can help as you reflect on the challenges and options of creating habits in life and investing. Over the next six weeks, Wealth Teams Alliance?will offer these principles for your consideration.?As always, please reach out to Wealth Teams?if you have questions. ~~ Dr. Guy

You Know More About Investing Than You Think You Do, Principle #2

Originally Published September 21, 2023

No matter how familiar we are with investing, we’ve all navigated uncertainty, weighed risks and rewards, and made carefully considered tradeoff decisions. Just by being human, we’ve been compelled to tackle the central challenges of life—which also happen to be the central challenges of investing.

At Dimensional, we believe that having a good investment experience is about more than returns. What matters just as much is how someone feels along their financial journey. And that’s really what the investment business should be about: helping people live better, more fulfilling lives.

Investing better means living better. Not just because it can lead to having more money, but because many of the habits that serve us well as investors serve us well in life, too. By integrating our life and investment philosophies, we can see money as a tool that empowers our plans rather than as a goal in and of itself. Here are six principles that can help you in life and in investing.

Principle #2 -- Plan, Don’t Predict

We’ve all tried to predict what will happen in life, only to be disappointed when it didn’t turn out the way we anticipated. But human beings develop strategies to deal with the fact that none of us has a crystal ball. We apply to a list of potential colleges, not just our first choice. We interview a series of job candidates, even when there’s a clear front-runner. We wear a life jacket on a boat, even though we know how to swim.

Investing is just like life: For maximum peace of mind, we make plans that account for a broad range of possible outcomes. This way, you can feel empowered by the unknown instead of paralyzed by it.

Research has shown that stock pickers consistently underperform their benchmarks.1?But you don’t need to be able to predict winners to have a good investment experience. Over the past century, markets have returned, on average, about 10% a year.2

So don’t try to outguess markets—go with them, even when that means tolerating and being prepared to live through some short-term disappointments. Odds are you’ll have a better investment experience in the long run.

FOOTNOTES

1?Eugene F. Fama and Kenneth R. French, “Luck versus Skill in the Cross-Section of Mutual Fund Returns,”?Journal of Finance?65, no. 5 (2010): 1915–1947. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.

2?In US dollars. Based on S&P 500 index annual returns, 1926–2022. S&P data ? 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

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