Here’s a simple example of a market at work. It shows how collective knowledge can come together and be more powerful than the knowledge of any one person.
At a client event hosted by a financial advisor, a jar of jelly beans was placed in the lobby and attendees were asked to estimate the number of jelly beans it contained. The participants wrote down their estimates, and whoever offered the closest estimate to the actual count received a prize.
There was a wide range of estimates—409 to 5,365 jelly beans. The average of all estimates was 1,653. The actual count was 1,670.
This experiment has been repeated at other client events, and the average of all guesses is usually very close to the actual count. The principle is that the combined intelligence of a group is better than the knowledge of one person. Together, we know more than we do alone.
In reality, the financial markets work much like any other market, with information and opinions affecting the price of a stock or bond. That price reflects the aggregate view of what the investment is worth at that moment in time. The forces of supply and demand push prices toward market equilibrium—and these forces are at work in the financial markets.
It is important to trust the nature of the markets and avoid giving in to emotions, impulses, the media and other factors that cause poor decisions to be made. Staying invested for the long term, taking a responsible and effective amount of risk, and investing globally, is your best bet to sustain a strong investment portfolio.
To learn more on science-based investment strategies, contact Private Wealth Management Group.