Depend on Market Efficiency – Not Pundits – to Help Protect Your Portfolio
The stock market is an amazing thing, with so many moving parts that it's impossible to predict. So don't even try to determine what it's going to do next, and don't believe people who say they can. Here's what to do instead.

Hardly a day goes by without some self-proclaimed expert making lofty, and sometimes outrageous, predictions in the media about where the markets are heading and what you should do to help protect your portfolio.
You may have noticed their forecasts frequently include dire warnings of Armageddon in the markets. After all, that’s what makes headlines, gets them on those news shows and ultimately sells their services.
Typically, these folks work in the active management industry as analysts, portfolio managers, CEOs or some other position in which they’re paid to hunt for hot stocks and bonds. They need you to need them.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
I’m here to argue that you don’t.
I’m a proponent of evidence-based investing — and the evidence is compelling that investors are more successful when they ignore actively managed funds and invest in a diversified portfolio with an appropriate asset allocation. There’s no hype, no speculating and no gambling necessary. There are some heavy hitters whose research backs me up.
They include Dr. Eugene Fama, who won the Nobel Memorial Prize in Economic Sciences in 2013. Fama first wrote about the efficient-market hypothesis in 1965. That was decades before the Internet and a 24-hour news cycle; and yet, already it was believed that securities markets were extremely efficient in reflecting news as it spread and incorporating that information into stock prices.
Of course, information now goes public in many ways: television, social media, web news, email and, yes, old-fashioned word of mouth. But the outcome is pretty much the same: With the exact same information, some market participants will buy a particular stock, while others will decide to sell. If they come to an agreement on a price, a trade takes place.
However, that’s not all that goes into the pricing of a stock, which then translates into the pricing of the market as a whole. What about an individual’s plans and circumstances? Aunt Betty’s car blows a gasket, so she sells some stocks to pay the mechanic. Newlyweds Jack and Barb cash out their investment portfolio to help with the purchase of their first home. Bob down the street just got a huge promotion, and now he has a lot more money to invest and buy stocks. Meanwhile, Sally just turned 70½ and must start taking required minimum distributions from her IRA.
These highly personal wants and needs are all factored into stock market prices.
We also have to talk about the production and consumption of goods and services. For example, let’s say you go on vacation and forget to pack your underwear, so you run to the local chain store to buy a few pairs. You just made an unplanned transaction and, in so doing, contributed to that chain’s market value. If that underwear was made in Malaysia, you also contributed to that manufacturing sector. That simple transaction had an impact across the globe. Now multiply that by billions of transactions each day.
There are more than 7½ billion people on this planet. All with their own hopes, dreams and needs. All contributing to the global markets. All reacting to information that is readily available.
That’s why the market is so amazing. It is truly an efficient system that can manage all this information and effectively price it in less than a second. The billions of individual transactions going on every day on both sides of the market — buying and selling — quickly and accurately reflect the price and the current information at that exact moment in time.
Is mispricing possible? Yes, a stock could be mispriced at a single moment in time. But the market will quickly and accurately correct that mispricing — so quickly that it would be almost impossible to benefit from a mispriced stock.
How can anyone know, with some semblance of accuracy, the hearts and minds of 7½ billion people and how they will affect the day-to-day or month-to-month price of individual stocks and the market as a whole?
A simple Google search turns up hundreds of articles on the active vs. passive investing debate. Most will tell you active management fails to beat the benchmark index roughly 80% of the time. According to the SPIVA U.S. Scorecard, over the five-year period ending June 30, 2017, 82.38% of large-cap managers, 87.21% of mid-cap managers and 93.83% of small-cap managers lagged their respective benchmarks.
Which means some managers do beat their benchmarks. But here’s the problem: It’s not always the same managers year after year. So, we’re back to speculation and gambling and trying to predict the future — this time trying to predict which manager is going to outperform a particular index. What a waste of time and energy!
What should you do instead?
- Believe in the markets over the long term. It’s impossible to predict the performance of an individual stock or the market as a whole. But you can trust in the efficiency of the market as prices reflect all known information.
- Diversify across many asset classes. Diversification is your friend. Resist the temptation to put all or most of your money into one or two hot stocks or sectors.
- Stay disciplined and rebalance. Don’t let emotions dictate your stock market moves. Keep your portfolio on track as you work toward your goals.
Remember, no one can predict the future, and listening to short-term or alarmist forecasts may not make you a successful investor over the long term. As the markets do what they do — moving up, down and sideways — stick to a plan that’s designed to help meet your personal needs.
Kim Franke-Folstad contributed to this article.
Investing involves risk, including the potential loss of principal.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Jeffrey D. Montgomery is the founder and president of Montgomery Financial Services LLC (www.mfswealth.com). He works primarily with pre-retirees, retirees and affluent small-business owners, helping them grow, protect and distribute their financial assets.
-
Stock Market Today: Great Power Affairs Mesmerize Markets
The U.S. and China are at least talking about talking about tariffs, and investors, traders and speculators are showing a little less fear.
By David Dittman
-
Is Walmart Plus Worth It?
There are tons of exciting Walmart Plus benefits – but are they worth the $98 annual fee?
By Rachael Green
-
Three Options for Retirees With Concentrated Stock Positions
If a significant chunk of your portfolio is tied up in a single stock, you'll need to make sure it won't disrupt your retirement and legacy goals. Here's how.
By Evan T. Beach, CFP®, AWMA®
-
Four Reasons It May Be Time to Shop for New Insurance
You may be unhappy with your insurance for any number of reasons, so once you've decided to shop, what is appropriate (or inappropriate) timing?
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS
-
Before You Invest Like a Politician, Consider This Dilemma
As apps that track congressional stock trading become more popular, investors need to take into consideration some caveats.
By Ryan K. Snover, Investment Adviser Representative
-
How to Put Together Your Personal Net Worth Statement
Now that tax season is over for most of us, it's the perfect time to organize your assets and liabilities to assess your financial wellness.
By Denise McClain, JD, CPA
-
Bouncing Back: New Tunes for Millennials Trying to Make It
Adele's mournful melodies kick off this generation's financial playlist, but with the right plan, Millennials can finish strong.
By Alvina Lo
-
Early-Stage Startup Deals: How Do Convertible Notes Work?
Some angel investors support early startups by providing a loan in exchange for a convertible note, which includes annual interest and a maturity date.
By Murat Abdrakhmanov
-
SRI Redefined: Going Beyond Socially Responsible Investing
Now that climate change has progressed to a changed climate, sustainable investing needs to evolve to address new demands of resilience and innovation.
By Peter Krull, CSRIC®
-
Here's When a Lack of Credit Card Debt Can Cause You Problems
Usually, getting a new credit card can be difficult if you have too much card debt, but this bank customer ran into an issue because he had no debt at all.
By H. Dennis Beaver, Esq.