Redefining Investment Advice

Markets throughout the world have a history of rewarding investors for the capital they supply.

Companies compete for investment capital, and millions of investors compete to find the most attractive returns. Markets quickly incorporate information from this competition into security prices.

Traditional investment approaches strive to beat the market by taking advantage of pricing “mistakes” and attempting to predict the future. Too often, this proves costly and futile. Predictions go awry and managers may hold the wrong securities at the wrong time, missing the strong returns markets can provide. Meanwhile, capitalist-based economies thrive—not because markets fail but because they succeed.

The futility of speculation is good news for the investor. It suggests that prices for public securities are fair and that portfolio structure, not mispricing, helps explain differences in average returns. It also proposes that it may be possible to outperform markets, but not without balancing risks and costs against expected returns. Financial research identifies what we believe to be the sources of investment returns.

What is the science behind this research? Who developed it? How should it be put to use?

Weston Wellington, a vice president at Dimensional Fund Advisors, explains why every investor needs to hear this story.