No One Gets Close, But Everyone Gets It Right
You’ve probably participated in the jellybean guessing game. To win a prize, you’re asked to guess the number of jelly beans in the jar. Pretty much every time, very few even get close.
We usually have a laugh and move on. But Jack Treynor, a financial analyst, wasn’t satisfied with accepting this at face value. He took it a step further. It’s obvious most people are lousy guessers. But what would happen if we averaged the guesses? He asked 56 people to guess the number of jellybeans in a jar. There were 850. The average of the guesses was 871. That’s only a 2.5% variation. Only one person of the 56 was inside that number. The rest varied wildly. This is known as the Wisdom of the Crowds. One single person lacks precision and knowledge. But everyone together gets pretty close to the right answer.
In financial markets, prices are determined by countless people bidding on securities. The price at any given time reflects all these people’s best “guesses” on the price. The jellybean experiment can help explain why timing the market (buying or selling a stock or type of stock because you think the price is under or over it’s true value) is not a sound long-term investment strategy. We just don’t know more than the crowd the vast majority of the time.
It’s a much sounder approach to buy and hold a diversified basket of stocks and bonds geared toward our tolerance for risk and our timeframe. Instead of relying on guessing the correct price, an investor can benefit from the distribution of profits or loan repayments (dividends, bond income). And from companies in the portfolio growing in value over time.
Here is a recent market commentary if you’d like to learn more.
Andrew Eppes, ChFC®, RICP®
Andrew Eppes is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. www.SIPC.org. Nexus Advisors, LLC is not a subsidiary or affiliate of MML Investors Services, LLC, or its affiliated companies. 14241 Dallas Parkway Suite 1200 Dallas, TX 75254 972-348-6300. CRN202605-4332496
