All of the information used to identify where returns come from is historical data. The data shows us how asset classes behave relative to each other (correlation), how much risk (volatility) is associated with each, and how much return we can expect over long periods of time.
But, it’s important to distinguish between what history can and cannot show us. While historical data does show us how the market works and how we can be ideally diversified to capture returns, it does not tell us which specific stocks or asset classes will be up or down from year to year or anytime in the future. It’s popular practice to analyze data and trends in an attempt to predict what the market will do next, many investors even expect that type of prognostication from their advisor. The problem is that humans simply can’t predict the future. As much as we like to think we can beat the market, the best we can hope for is to guess correctly, which is much more like gambling than investing.
Based on what we know about the market, we can capture amazing market returns with some discipline and patience. We know the market is efficient so it’s useless to try to predict or beat it (part 1), we know we can reduce risk and increase returns with strategic diversification (part 2), and we know that certain asset classes outperform others over time (part 3).
By understanding and putting these principles to work as an investor, you can stop stressing, stop guessing, and let the market grow your money.
Instead of making a guess as to what the market will do next year, put yourself in the best possible position to capture the returns it will offer, whichever sector they come from.