Where Do Returns Come From?

As both an investor and an investment advisor, I am likely more tuned into the movements of the market and the results for investors. I read dozens of investment-related articles every week. I review the results of dozens of asset classes regularly. I read new and old books on money and investing every year. As a result of these inputs, I know of an almost infinite number of choices when it comes to investing my money and my clients’ money.

So where do I look for returns? The answer to this question is in the answer to an even better question:

Where do returns come from?

I look for returns where returns have been found. And because risk is absolutely required in order to gain a return that beats inflation, I only take risk where risk is known to have been rewarded.

Many will look to a new mutual-fund manager whose promises are based on demographic phenomena like the necessary rise in health care needs of boomers. Or they’ll seek out the “wisdom” of a group of investors touting the ability to know the connections within a complex global market.

Some will look to Gold, a commodity which has no ability to grow in intrinsic value and from which no real return can be expected.

Still others are so deep into the political news and steeped in that rhetoric, that they run to the latest fear monger with a website that is sure to SAVE the investor from certain doom that is looming – in the next 12 months!

The high-level category that surrounds all of these strategies is the category that believes in inefficient markets. Those who aspire to beat the market, predict the market, and time the market in commodities or securities are among those who believe that markets are not efficient. They believe they can beat the market.

But they can’t, not for long, anyway. For today, let’s simply start and end with the fact that no one has ever done it long enough for any investor to build a retirement portfolio and retire with it. Some have beaten the market for periods of a few years. But those who have done so have not repeated their performance.

There are only three factors that have been known to produce premium results for investors in the long run. Three areas where disciplined (steady, long term, non emotion driven) risk, taken prudently (diversified and rebalanced) WILL produce return that beats safe or guaranteed investments.

1. The market.

2. Small companies. The smaller the better.

3. Value companies

The model was discovered and built by Eugene Fama and is called the Three Factor Model. It works here in the US and abroad. We teach about this in our monthly workshops if you’re interested in hearing more. Or simply tune in here regularly.

For now, where should we look for something good?

Where we know good has been found.

Stop chasing the empty promises of those who want to be seen as gurus. It’s never been proven that the market can be beaten. Wise investors, small and large, accept this and accept the market’s tremendous return.


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