This is the latest in a series of posts from Rick. To see prior entries click here.

Although the emotional roller coaster led me to leave the brokerage firm, I definitely wasn’t ready to give up on a financial career. After sending out hundreds of resumes, I eventually saw a job posting in the Wharton alumni newsletter for a position in the Treasury group at Anheuser-Busch in St. Louis, Missouri. I sent my resume and cover letter and was surprised to find myself called in quickly for an interview. As good fortune (and solid preparation) would have it, I earned a job as a financial analyst at the world’s largest brewer at their headquarters. It was such a good fit for me that I stayed with Anheuser-Busch for 25 years, eventually working my way up to Assistant Treasurer.

During my time there, a group within our section was charged with figuring out how to “fix” Anheuser-Busch’s pension fund. It had been underperforming its benchmarks for several years, despite having a highly rated (and expensive) institutional investment consultant whose primary job was to pick the “best” U.S. and international investment managers. Per the consultant’s recommendations, the pension plan routinely cycled in new managers who had delivered great, recent, historical performance. However, it always seemed to be the case that once Anheuser-Busch invested money with the new managers, their performance failed to beat their benchmarks. Hence, the problem we needed to fix.

The head of the team studying this problem sat in the office right next to me. I was always curious about the pension committee’s work because I remained a dedicated personal investor. I still bought individual stocks, but I had learned my diversification lesson well enough to also hold some mutual funds. In addition, I kept up with Barron’s and the Wall Street Journal and would often sit in on presentations from various economists and other experts forecasting economic and market data.

I was as shocked as anyone when the team delivered its report: After an exhaustive study, this internal group recognized that no investment manager could consistently beat the market benchmarks, and it was very expensive to keep trying. What was even more surprising was that the Pension Committee agreed immediately. They fired the consultant, ditched the active investment managers, and reinvested all of the plan’s money into index funds. (And remember…a corporate pension fund doesn’t pay taxes. If an individual investor had followed the same approach, the results would be even worse after taxes!)

After the initial shock wore off, I became a little skeptical of the Pension Committee’s decision. I truly believed that my education and the time I spent researching investments must have created opportunities to earn higher expected returns than a simple index fund. So, I said to my friend in the office next door, “Hey, please show me your evidence!”

He gave me the report, and the evidence turned out to be strong…overwhelming in fact. I realized I was in the same boat as the pension plan—spending way too much time and money trying to find the right mix of investments to beat the market. I sold all my stocks and active funds and put my savings into index funds.

My whole life changed after I did that. Besides earning higher returns with this new approach, I gained back all the time I’d spent reading financial publications, listening to financial presentations, and spending my weekends poring over my portfolio’s performance. I calculated how much time I saved: 240 hours a year—the equivalent of 6 weeks annually!

Lesson Learned: No investment professional can reliably and repeatably outguess the market.

We now understand that the market reflects all known information about a stock, based on the millions of transactions that occur every second. It’s dangerous (and inaccurate unless you have illegal, inside information)  to assume that you, or any other investors, know something that every other market participant doesn’t. In other words, no one is smarter than the aggregate knowledge of everyone currently invested in the market, and an investor shouldn’t pay more for fund managers who claim they can beat millions of other participants who have determined a stock’s fair price.

One must be humble to admit that you can’t beat the market. It’s especially hard for people who are very smart and successful in other areas of their lives who, often, mistakenly translate excellence and success to the wild world of investing one’s life savings. True investors must accept that their skills and knowledge in one area don’t help at all when it comes to investing. We know this because studies show again and again that most individual investors tend to earn lower returns than even what the market would indicate they should earn because of poor investment choices, bad timing of their trades, and the fees they pay.

The good news is that you don’t have to give up on investment success when you admit that you likely won’t be able to consistently outguess, or time, the market. In fact, by recognizing this fact, you’re actually taking control…of your investing, your decision-making, your life, and your emotions. You gain back all the time you used to spend thinking about investments and managing your portfolio so you can focus on the more important things in your life, like your family, your work, and having fun.

I was fortunate to realize this back in the 1980s simply because Anheuser-Busch was way ahead of the curve in adopting index funds. Today’s investors have advantages that we didn’t have back then—namely, a wide selection of evidence-based investment options that are better than plain-vanilla index funds.

In my opinion, freedom comes through adopting evidence-based investing. Freedom from worrying about getting in at the right time, while also increasing one’s odds of higher expected returns over the long term. These investment options are based on mountains of evidence about specific characteristics of groups of stocks (known as factors) that offer higher expected long-term returns. We apply these same principles for our clients at Hill Investment Group. We have developed a diversified portfolio that seeks to give investors better odds of earning higher returns than they might achieve either through index funds or actively managed funds.  In addition, due to continued competition and mounting evidence of the success of such an approach, costs continue to go down.

At the beginning of each year, money managers and financial experts release many predictions around what the forthcoming 12-months will bring from an investing standpoint. But forecasts rarely pan out, particularly in a year as unpredictable as 2021. It is hard, if not impossible, to outguess the market.

So what is the Hill Investment Group take? We expect the US stock market to be up in 2022 between 6-10%. We also predict that the market will most likely not return between 6-10% in 2022.

You probably needed to read that prediction twice, as it seems to contradict itself. Let us explain.

Why do we expect the market to be up between 6-10% in 2022?

That probably seems too simple of a claim given the current market environment. As of the writing of this post, the total US market is at an all-time high; Omicron is spreading rapidly throughout the US, inflation expectations are higher than they have been in decades. Historically, the market has been up, on average, between 6-10% annually. Clearly, with all of these unique circumstances, we can’t expect this year to be like previous years, right?

That is the beauty of the market. Every year is different, and every year the market takes all of these factors into consideration when setting prices. Investors know all of the risks mentioned above, and the current price reflects a fair price for taking on those risks. No matter how you slice the historical data, the market is up about two-thirds of the time, usually between 6-10%. Whether you look at what political party is in office, what inflation expectations are, whether the market had a positive return the previous year, or even if the St. Louis Cardinals made the playoffs…These factors are incorporated into the current price and usually provide investors an expected return roughly between 6-10% over the long term for taking the risk of investing in the equity markets.

Why do we predict that the market most likely will not return between 6-10%?

Although the market, on average over the last roughly 100 years, has returned between 6-10% annually, it rarely returns within that range in any single year. About 1/3rd of the time, the market has had a negative return, about 1/3rd of the time a return between 0-20%, and about 1/3rd of the time a return above 20%. Dating back to 1928, the market has only had a return within two percent of the long-run average four times! Yes…only four times in nearly a century.

This is why we EXPECT the market to return between 6-10% but PREDICT that it most likely will not.

When investing in the stock market, the range of investment returns is much larger than the average return. This is part of what makes investing so hard and why many investors, especially those that choose to do it themselves, get scared and leave the market just when they should likely stay in…or vice versa. It is difficult to see the long-run average when dealing with such volatile swings year to year. However, when you take the long view, embrace our relationship, and think in terms of decades rather than years, you will start to see the benefit and ignore the year-to-year noise and volatility.

Data from Fama/French US Total Market Index

I still have vivid memories of my first market decline when I was working as a stockbroker. For the first two years of my career, nearly everything I recommended was going up. I was proud of the value I thought I was providing to my clients and impressed with how smart I was.

By 1969, the Dow Jones Industrial Average was getting close to an all-time high of 1,000. Then it started to decline and just kept going down. It eventually dropped almost 40%.

The situation hit me hard. I felt so bad about the losses my clients were experiencing that I couldn’t sleep and had stomach problems. To make things worse, a lot of my early clients were friends of my parents. When I would go home for a visit, I would call ahead and ask my parents to move their car out of the garage so I could park there and close the door behind me. I didn’t want my parents’ neighbors to know I was home because I couldn’t face questions about why their stocks were doing so poorly. I really didn’t know what to say because I didn’t have an answer. It was during this period that I spent one afternoon hiding out in the movie theater watching a Clint Eastwood triple feature!

Eventually, I went to my manager and asked for advice: What can I do? What should I say? He was surprised by my questions and responded bluntly with, “Keep trading stocks.” That was my job, after all. We were brokers, not financial advisors. We were paid to trade stocks because trading created revenue for our firm whether the stocks went up or down in our clients’ accounts.

Then he added something that turned out to be good advice for me. He said that if the market decline was bothering me that much, I should quit my job and go work in a bank trust department. He was right. I wasn’t interested in selling stocks to help a firm make money whether or not my clients won or lost..I left my brokerage job shortly thereafter.

Obviously, I’ve experienced many more market downturns since that fateful time…because that’s simply what the market does. We just can’t accurately predict when. In fact, there have been 10 times when the market declined more than 20% in the past 50 years—with the two most recent happening in 2007-2009 (down 55%) with the financial crisis and in March 2020 (down 35% in 21 days) with the COVID-19 pandemic.

Lesson Learned: Expect that the market will decline and ignore it when it does. 

History shows that market declines are inevitable—higher equity returns wouldn’t be possible without the risk of occasional downturns. Also, market declines are temporary. When you remember these two facts, you’re less likely to let your emotions get in the way of your long-term investing strategy. After all, a loss isn’t a loss until you sell your position.

Of course, ignoring market downturns is easier said than done. I admit that I still feel anxious during these periods, and I know that many investors experience the same sleeplessness and pit-in-the-stomach sensations I felt back in 1969. Today, though, I’m not afraid to face my clients when the markets are bad.

Instead, I like to initiate calls during these rough periods just to ask how they’re feeling and to give them better advice than I could have 50 years ago. Instead of recommending new stock trades, I tell them to do nothing – except the occasional rebalance. This downturn, like others before it, will pass.

Also, I’ve learned, and communicated to all that will listen…especially our clients…to focus on what you can control. The market is not controllable. Your investing philosophy, asset allocation, and personal spending and savings are in your control. Focus your attention, energy, and actions there. And leave the rest to us.