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Market Forces 113

Step 4: Time Pickers

held constant with 50% stocks and 50% bonds. Index Portfolio 50 is shown at the fulcrum of the teeter-totter, and the periodspecific expected return can be estimated based on 50 or 86 years of simulated historical returns, the Fama/French FiveFactor Model, or any reasonable method an investor chooses. Current news impacts economic uncertainty and is represented on the left side of the teeter-totter. This economic uncertainty includes the probabilities of future events as estimated by the buyers and sellers. The price agreed upon by willing buyers and sellers is on the right side. Prices move inversely proportional to shifts in economic uncertainty so that expected returns remain essentially the same for a given level of risk. From a fair price investors should expect: 1) a fair outcome, which would be a risk-appropriate or fair return; 2) an equal chance of being greater than or less than that fair return; and 3) the farther the actual return is from the expected return, the lower the probability of its occurrence. So before you trade, ask yourself: 1) Who is on the other side of my trade? 2) Do I think I know more than they do? 3) Am I paying a fair price? In my opinion, your answers are as follows: 1) You don’t know; 2) It’s highly unlikely; and 3) If there are many willing buyers and sellers, by definition, it is a fair price. Time pickers cannot forecast the direction of the market because they cannot know the next news story. There is no competitive edge that exists other than illegal inside information. The best way to earn the market’s fair return is to simply remain invested at all times in a relatively low-cost, passively managed index portfolio (also see hebnermodel.com).

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