With over 200,000 financial advisors in the United States, how do you pick one?
First, eliminate the stock pickers. Those are the people making predictions about which stocks are going to be winners and losers. Cross off the market timers, too. They’re the ones who get into and out of the market, trying to buy the dip and sell at the peak. The problem with these strategies is that it’s unlikely any individual will be able to pick the right stock and the right time—especially more than once.1 Over 50 years of research confirms that people can neither pick stocks nor time markets consistently year after year. The smartest person on the planet isn’t as smart as the market. Markets are smarter than advisors and smarter than I am.
Why is that so? Markets do a sensible job for sensible reasons. Buyers and sellers have to come together to make a trade. Priceshave to be low enough to attract new investors and high enough to entice someone to sell. Both sides have to feel good, or they don’t make the trade
That’s why you should trust the financial advisor who trusts the market.
These are people who help investors try to capture the returns of the market rather than attempting to outsmart it. Decades ofresearch supports this strategy. So does the explosive growth of index funds.2 Our company is based on additional research that has provided insights into how to pursue higher expected returns than index funds offer. But all these strategies are based on thecommonsense idea that markets do a good job of incorporating information into prices. We see that every time a big piece of financial news sends stocks up or down.
Think of the market as a giant information processing machine. Prices change as millions of buyers and sellers react to newinformation coming into the market. Prices settle at “fair” values that seems reasonable to both the buyer and the seller. This shouldbe reassuring to people and give them the confidence to trust the market rather than to fight it.
Historically stocks have returned about 10% per year.3 That’s about 7% above inflation and 6% above what people think of as riskless assets like money market funds. Naturally there are variations, and there is no guarantee, but I think these are generally reasonable returns to buyers of shares in a company. Markets seem to operate the way people hope, which gives us a fair chance of winning.
What’s the catch in all this? It’s daunting to figure out what exactly to do, how to develop an investmentplan. But you can’t avoid it. Few things are more important than developing a well-thought-out plan when investing your life savings.
In my experience, it’s easy to agree with these principles, but it’s hard to stick with them when times get tough. You need to be a long-term investor.
If you accept these fundamental principles of markets and how they work, you owe it to yourself to find an advisor who does too. So trust the advisor who trusts the market.
- Eugene 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
- Index investing has grown considerably in recent decades, with US equity index funds representing 52% of the US equity fund market at the end of 2021. Data sourced from Morningstar; funds of funds are excluded.
- In US dollars. S&P 500 Index annual returns 1926–2021. S&P data © 2022 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.
The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable, and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material.It does not constitute investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.
This material is not directed at any person in any jurisdiction where the availability of this material is prohibited or would subject Dimensional or its products or services to any registration, licensing, or other such legal requirements within the jurisdiction.
“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, DimensionalFund Advisors Pte. Ltd., Dimensional Japan Ltd. and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than theiroriginal value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
Diversification does not eliminate the risk of market loss.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value
Dimensional Fund Advisors does not have any bank affiliates.
These materials have been prepared by Dimensional Fund Advisors Canada ULC. The other Dimensional entities referenced herein are not registered resident investment fund managers or portfolio managers in Canada.
This material is not intended for Quebec residents.
Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise noted, any indicated total rates of return reflect the historical annual compounded total returns, including changes in share or unit value and reinvestment of all dividends or other distributions, and do not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.
This material is issued by DFA Australia Limited (AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Investors should also consider the Product Disclosure Statement (PDS) and the target market determination (TMD) that has been made for each financial product either issued or distributed by DFA Australia Limited prior to acquiring or continuing to hold anyinvestment. Go to dimensional.com/funds to access a copy of the PDS or the relevant TMD. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.
Diversification does not eliminate the risk of market loss.
This material is issued by DFA Australia Limited (incorporated in Australia, AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. This material does not give any recommendation or opinion to acquire any financial product or any financial advice product, and is not financial advice to you or any other person. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives,financial situation and needs. Investors should also consider the Product Disclosure Statement (PDS) and for the Dimensional Wholesale Trusts the target market determination (TMD) that has been made for each financial product or financial advice product either issued or distributed by DFA Australia Limited prior to acquiring or continuing to hold any investment. Go to dimensional.com/funds to access a copy of the PDS or the relevant TMD. Anyopinions expressed in this material reflect our judgement at the date of publication and are subject to change.
WHERE ISSUED BY DIMENSIONAL IRELAND LIMITED
Issued by Dimensional Ireland Limited (Dimensional Ireland), with registered office 3 Dublin Landings, North Wall Quay, Dublin 1, Ireland. Dimensional Ireland is regulated by the Central Bank of Ireland (Registration No. C185067).
WHERE ISSUED BY DIMENSIONAL FUND ADVISORS LTD.
Issued by Dimensional Fund Advisors Ltd. (Dimensional UK), 20 Triton Street, Regent’s Place, London, NW1 3BF. Dimensional UK is authorised and regulated by the Financial Conduct Authority (FCA) – Firm Reference No. 150100.
Dimensional UK and Dimensional Ireland do not give financial advice. You are responsible for deciding whether an investment is suitable for your personal circumstances, and we recommend that a financial adviser helps you with that decision.
Dimensional UK and Dimensional Ireland issue information and materials in English and may also issue information and materials in certain other languages. The recipient’s continued acceptance of information and materials from Dimensional UK and Dimensional Ireland will constitute the recipient’s consent to be provided with such information and materials, where relevant, in more than one language.
NOTICE TO INVESTORS IN SWITZERLAND: This is advertising material.
For Institutional Investors and Registered Financial Instruments Intermediary Service Providers.
This material is deemed to be issued by Dimensional Japan Ltd., which is regulated by the Financial Services Agency of Japan and is registered as a Financial Instruments Firm conducting Investment Management Business and Investment Advisory and Agency Business.
Dimensional Japan Ltd.
Director of Kanto Local Finance Bureau (FIBO) No. 2683 Membership: Japan Investment Advisers Association
This material is deemed to be issued by Dimensional Fund Advisors Pte. Ltd., which is regulated by the Monetary Authority of Singapore and holds a capital markets services license for fund management.
This advertisement has not been reviewed by the Monetary Authority of Singapore and should not be shown to prospective retail investors. FOR PROFESSIONAL INVESTORS IN HONG KONG
This material is deemed to be issued by Dimensional Hong Kong Limited (CE No. BJE760) (“Dimensional Hong Kong”), which is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.
This material should only be provided to “professional investors” (as defined in the Securities and Futures Ordinance [Chapter 571 of the Laws of Hong Kong] and its subsidiary legislation) and is not for use with the public. This material is not intended to constitute and does not constitute marketing of the services of Dimensional Hong Kong or its affiliates to the public of Hong Kong. When provided to prospective investors, this material forms part of, and must be provided together with, applicable fund offering materials. This material must not be provided to prospective investors on a standalone basis.Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice.
Neither Dimensional Hong Kong nor its affiliates shall be responsible or held responsible for any content prepared by financial advisors.
Financial advisors in Hong Kong shall not actively market the services of Dimensional Hong Kong or its affiliates to the Hong Kong public.