Here's Why Most People Can't Beat the Stock Market

Does "market efficiency" sound like investing gobbledygook?

For many people, the phrase is hard to comprehend. When they see the stock market soar or plunge, they might think prices are out of whack.

When they hear about a lucky few making a killing or sad sacks losing their shirt, efficiency probably isn't what comes to mind.

But for most investors, it's helpful to dispense with these knee-jerk conclusions.

Every day, buyers and sellers come to the market and together determine an asset's fair value. This means the prices at which those trades are executed already incorporate all the information available to those buyers and sellers.

The market is an efficient information-processing machine.

No, prices aren't necessarily right, whatever that means. But they are fair, according to the efficient market hypothesis, the idea coined in the 1960s by Nobel laureate Eugene Fama, a professor at the University of Chicago Booth School of Business.

The implication is that anyone who buys or sells thinking they can make a killing based on mispricing is likely to be disappointed. That doesn't mean it's impossible. Just unlikely.

Research going back decades provides ample evidence that money managers can't seem to beat the market consistently.

Are there sensible alternatives? One option is to rely on what capital markets can deliver while modifying your portfolio based on your risk tolerance and investment goals.

In Episode 45 of The Informed Investor, Dimensional's Mark Gochnour, Head of Global Client Services, Wes Crill, Senior Client Solutions Director, and Jake DeKinder, Head of Client Communications, dig into the misunderstood concept of market efficiency and show how this elegant idea can help most people have a better investment experience.

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