What Every Investor Should Know
10 ways to help improve your odds of success
1. Can professional fund managers predict which stocks will go up or down?
If fund managers could consistently identify winning or losing assets, you would expect their returns to show it. But they don’t.
Historically, only about one in five funds survives and outperforms over 20 years. That’s based on our research of 2,860 equity funds that existed in 2004. Two decades later, more than half of these funds had folded, often due to poor performance. And only 18% of equity funds were able to survive and outperform their benchmarks over this period. Your chances are even worse for fixed income funds, where only 15% survived and outperformed. Are those odds you’d bet your savings on?
US-Based Active Fund Performance, 2005–2024
2. Why not just invest in the funds that have outperformed?
Some investors select funds based on past returns, but relatively few winners keep winning. Research shows that most funds ranked in the top-performing 25% based on five-year returns did not remain in the top 25% in the next five years. Only around one in five of the top-performing equity funds stayed on top, and only about a third in fixed income did.
In other words, past performance offers little insight into a fund’s future returns.
Percentage of Top-Ranked Funds that Stayed on Top
3. If stock picking doesn’t work, are there more reliable ways to invest?
Rather than basing an investment strategy on trying to pick the winners and avoid the losers, one approach is to simply buy and hold a slice of a market index through an index fund, gaining ownership of many different stocks. Over the past century, that approach would have rewarded you with a return that far outpaced inflation—and it would have helped you avoid the stress of trying to predict the future.
GROWTH OF A POUND, 1956–2023 (COMPOUNDED MONTHLY)
Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
4. Can I do better than just buying index funds?
Yes, because index funds’ focus on matching—rather than beating—benchmarks can be unnecessarily rigid. For instance, index funds have to buy and sell stocks when the benchmark they track changes its holdings, which can happen as infrequently as once a year. Like shopping for roses on Valentine’s Day, that leads to a lot of people buying the same thing at the same time, which drives up prices. Constraints like this mean that when you invest in index funds, you may be leaving money on the table.
Buying pressure can drive up prices
5. So how do I set myself up for success?
A more effective investment approach for fund managers is to be flexible, buying and selling stocks throughout the year based on information backed by financial science on what can improve expected returns.
Academic research into decades of stock returns has identified long-term drivers of outperformance. Smaller companies, those with lower prices, and those that are more profitable have had higher returns, on average. By investing systematically in the areas with higher expected returns, you can aim to beat the market.
The Drivers of Outperformance
6. Why should I invest internationally?
Investment opportunities exist all around the world, but the randomness of global stock returns makes it difficult to predict which markets will outperform from one year to the next. For example, Austria was the best-performing developed market in 2017 but the worst the next year (and, in 2021, the best again). Holding a globally diversified portfolio that targets higher expected returns better positions you to capture higher returns wherever they appear. And a strong year in one country can help offset a weaker one elsewhere.
Ranked Annual Returns for Developed Markets, 2004–2023
7. What about those hot tips I keep hearing about?
Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. If you find the barrage of hot tips tempting or unsettling, consider the source and what is news vs. entertainment. Do yourself a favour: Tune out the noise.
8. What should I do when the market tumbles?
Markets go up and down each day. When they fall, it’s tempting to pull money out in the hopes of avoiding losses. You can put money back in when things turn around, right? Think again. Research has shown that there’s no reliable way to time the market. It has also shown that the impact of being out of the market can be profound, even for just a short time. Staying invested—focusing on the long term—helps to ensure you’re in position to capture gains when prices rise.
MSCI World Index total return, 2014–2023
Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
9. So, when is the right time to invest?
Every day, stocks are priced to deliver a positive expected return. That means now is always a good time to invest. This goes against the “buy low and sell high” mantra that leaves some people trying to find just the right moment to invest. Frequent reports of all-time market highs may keep you from buying, thinking surely what goes up must come down, so I better wait.
But research shows that buying shares at all-time records has, on average, produced similar returns to stocks bought following a sharp decline. That means trying to time when to get into and out of markets is unlikely to lead to better results.
MSCI WORLD ANNUAL RETURNS, 1970–2023
Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
10. How can a financial adviser help?
We rely on professionals in so many areas of our lives. When you get sick, you can scan the internet searching for a remedy—or you can go to a doctor who has years of training on the best, safest way to help. Trusting an expert with your financial health is no different.
A financial adviser can provide expertise and guidance. They can help you focus on taking constructive actions that add long-term value, not impulsive ones you may later regret. And they can help you build a portfolio based on financial science that is expected to outperform the market.
Consider whether you’d benefit from help with any of the below:
If you aren’t already working with a financial adviser, use our form to receive a list of financial advisers in your area.
For informational purposes only. We will provide, free of charge or obligation, a list of advisers near you who are authorised to use our funds. Dimensional makes no representation as to the suitability of any adviser, and we do not endorse, recommend, or guarantee the services of any adviser. In exchange for receiving a list of independent financial advisers, you agree not to hold Dimensional liable for any possible claim for damages arising from any decision you make to engage the services of a financial adviser. We urge you to carefully evaluate any adviser whom you may consider hiring. You are responsible for monitoring your adviser’s investment performance. We will not supervise or monitor the adviser’s activities or your account, and we are not responsible for the performance of your investments. We also have no discretionary authority or control with respect to how your adviser manages your investment assets.
Risks include loss of principal and fluctuating value. Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost. Diversification neither assures a profit nor guarantees against loss in a declining market.
This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
The Dimensional indices have been retrospectively calculated by Dimensional Fund Advisors LP and did not exist prior to their index inception dates. Accordingly, results shown during the periods prior to each index’s inception date do not represent actual returns of the index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains.
Index Descriptions:
Dimensional UK Small Cap Index: January 1990–present: Compiled by Dimensional from Bloomberg and LSPD securities data. Market-capitalisation-weighted index of small company securities in the UK market, excluding those with the lowest profitability and highest relative price within the UK small cap universe. The index also excludes those companies with the highest asset growth within the UK small cap universe. The index monthly returns are computed as the simple average of the monthly returns of four sub-indices, each one reconstituted once a year at the end of each quarter of the year. Maximum index weight of any one company is capped at 10%. Exclusions: REITs and investment companies. The index has been retrospectively calculated by Dimensional and did not exist prior to April 2008. The calculation methodology for the index was amended in January 2014 to include profitability as a factor in selecting securities for inclusion in the index. The calculation methodology for the index was amended in November 2019 to include asset growth as a factor in selecting securities for inclusion in the index. July 1981–December 1989: Includes securities in the bottom 10% of market capitalisation, excluding the bottom 1%. Rebalanced semi-annually. Prior to July 1981: Elroy Dimson and Paul Marsh, Hoare Govett Smaller Companies Index 2009, ABN-AMRO/Royal Bank of Scotland, January 2009.
Dimensional UK Market Index: Compiled by Dimensional from Bloomberg and LSPD securities data. Market capitalisation-weighted index of all securities in the UK. The index monthly returns are computed as the simple average of the monthly returns of four sub-indices, each one reconstituted once a year at the end of each quarter of the year. Maximum index weight of any one company is capped at 10%. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008.
Dimensional UK Marketwide Value Index: January 1990–present: Compiled by Dimensional from Bloomberg and LSPD securities data. Consists of companies whose relative price is in the bottom 33% of the UK’s respective constituents, after the exclusion of utilities and companies with either negative or missing relative price data. The index emphasises companies with smaller capitalisation, lower relative price and higher profitability, excluding those with the lowest profitability within the UK small cap universe. The index also excludes those companies with the highest asset growth within the UK small cap universe. The index monthly returns are computed as the simple average of the monthly returns of four sub-indices, each one reconstituted once a year at the end of each quarter of the year. Maximum index weight of any one company is capped at 10%. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008. The calculation methodology for the index was amended in January 2014 to include profitability as a factor in selecting securities for inclusion in the index. The calculation methodology for the index was amended in November 2019 to include asset growth as a factor in selecting securities for inclusion in the index. Prior to January 1990: Source: Large value and small value portfolio returns from Elroy Dimson, Stefan Nagel and Garrett Quigley “Capturing the value premium in the UK”, Financial Analysts Journal 2003, 59(6): 35–45. Large value and small value portfolios combined at marketcap weights. Created Returns, converted from GBP to USD using the WM/Reuters at 4 pm EST (closing spot), from PFPC exchange rate.
UK One-month Treasury Bills: Provided by the FTSE Tradeweb. Prior to 1975: UK Three-Month Treasury Bills provided by the London Share Price Database.
UK Retail Price Index: Provided by the Office for National Statistics. Crown copyright material is reproduced with the permission of the Controller of HMSO.