We demand rigorous evidence in medicine because the stakes are high. The stakes of investing are high too — so why do so many people invest by following trends?
When I started at Dimensional in 2010, international stocks were popular — then they fell out of favor. But over the last five years, non-US developed value quietly led the pack. A good reminder of the challenge in predicting which markets win.
Worried the market will sink once a recession is announced? History says the market gets there first. In 2008, stocks fell more than 40% before the recession was even declared — and recovered before the all-clear. Why staying invested matters.
Research on the hot-hand fallacy shows long basketball streaks don’t predict the next shot. The same logic applies to currency markets — whether the US dollar has a positive or negative year, next year’s direction is about a coin flip.
