Category: Blog

THE FUTURE IS UNKNOWN, SO PLAN ACCORDINGLY

I saw a great Forbes article recently that reinforced the fragility of forecasting using a quarter century-old anecdote about the Pentagon changing the way they identify future threats. The change stemmed from a review of how quickly the geopolitical landscape evolves—yesterday’s adversaries can become tomorrow’s allies. Rather than focusing on one specific forecast, it was more prudent to be prepared for all possible outcomes.

This echoes what we often say at Dimensional: Plan, don’t predict. We all have views about what the future may bring: companies that will succeed, economies that will grow, markets that will take off. Markets set prices based in part on the aggregate of these expectations. So, market prices already represent a forecast of the future. However, some investors may let their personal forecasts drive their asset allocation decisions. Dogmatic adherence to forecasts dictates concentrated investments that fall short in the event the future differs from our predictions. Diversifying portfolios is a tacit admission that we don’t have a crystal ball. You reduce the range of outcomes by preparing for what you can’t see coming.

Country stock market returns are a good example of this. Going all-in on one country because you have a view on where their stocks are headed opens you up to a wide range of outcomes. The average difference between the best and worst performing developed market countries over the past two decades was over 50 percentage points. Get your call right, and you’ll look like a hero. Get it wrong, and you’ll be as apoplectic as when Chevy Chase’s character loses the rock, paper, scissors game in Vegas Vacation.

Article By: Wes Crill, PhD, Senior Client Solutions Director and Vice President at Dimensional Fund Advisors

Past performance is not a guarantee of future results. Actual returns may be lower.
In USD. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Diversification neither assures a profit nor guarantees against loss in a declining market. MSCI country indices (net dividends) for each country listed. MSCI data © MSCI 2026, all rights reserved.
All expressions of opinion are subject to change. This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions. Diversification neither assures a profit nor guarantees against loss in a declining market.
Risks include loss of principal and fluctuating value.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value
Dimensional Fund Advisors does not have any bank affiliates.

MARKET EFFICIENCY EXPLAINED: WHY STOCK PRICES BEHAVE THE WAY THEY DO

NVIDIA smashed records and analyst predictions in late May 2026 when the company announced quarterly revenue of $81.6 billion. You might have expected great news like this to send the AI chipmaker’s shares soaring. Instead, they fell. That seemingly illogical result illustrates one of the most important ideas in investing: market efficiency.

The concept, popularized by Nobel Prize-winning economist Eugene Fama, is often misunderstood to mean that markets price stocks perfectly. Some investors might point to market crashes, bubbles and dramatic daily swings as evidence that the efficient market hypothesis must be wrong. But that’s not what the hypothesis actually says. Instead, it states that asset prices reflect all available information about those assets. Understanding that distinction can help investors make better decisions—and perhaps avoid costly mistakes.

MARKETS PRICE THE FUTURE
The stock market is forward-looking: Stock prices are based on what investors collectively expect will happen in the future. Every trading day, millions of investors evaluate earnings reports, economic data, interest rates, new products, geopolitical events and countless other pieces of information. They use this data to constantly update expectations about a company’s future earnings and cash flows. The investments they make based on this new information collectively set the price of the company’s stock.

This constant incorporation of new information is why NVIDIA’s blockbuster report wasn’t enough to send the stock higher. Investors likely anticipated extraordinary results long before the company released them, and those expectations were already reflected in the stock price. When the news arrived, it fell short of what investors had already priced in.

In much of our lives, we’re comfortable with market prices. We rarely question the price of apples at the store, for example. We just assume that the price is what it needs to be, based on supply and demand. Stocks often inspire a different mindset. Many investors approach investing as if the assignment is to outsmart the market—finding hidden bargains or identifying tomorrow’s winner before anyone else does. Sometimes lightning strikes and the stock they pick jumps. But many investors wind up like the ones who bought shares of NVIDIA just before the quarterly announcement expecting an easy win, only to be sorely disappointed.

DON’T VOLATILITY AND BUBBLES PROVE MARKETS ARE INEFFICIENT?
Investors often ask, “If the market is so efficient, why is it so volatile? And how can the market be efficient when history is full of boom-and-bust cycles like the dot-com and real estate bubbles?”

In fact, volatility is exactly what you would expect from an efficient market. Markets are constantly digesting new information. When information changes rapidly, prices should adjust equally fast. Volatility is evidence that market expectations are responding to new data, not that they’re broken. What about bubbles? The efficient market hypothesis says prices reflect all available information. The problem during bubbles is that investors become overly optimistic about what that information means for the future.

A bubble doesn’t mean the market failed; it means investors collectively reached conclusions that turned out to be wrong.

MARKET EFFICIENCY HAS ITS LIMITS
Are markets perfectly efficient? Probably not—and that may be a good thing. Economists Sanford Grossman and Joseph Stiglitz famously identified what has become known as the Grossman-Stiglitz paradox: If markets were perfectly efficient all the time, no investor would have any incentive to spend time researching companies or uncovering new information. After all, if stock prices already reflected everything there is to know, there would be no reward for doing the work.

But if nobody gathered new information, markets would become less efficient over time. Markets need a small amount of inefficiency to motivate investors to seek out new information. Those efforts help keep prices reasonably accurate. Rather than viewing markets as perfectly efficient or hopelessly inefficient, it may be more useful to think of them as highly competitive systems that are constantly moving toward efficiency, even if they never fully arrive there.

WHAT DOES THIS MEAN FOR INVESTORS?
While markets may not be perfectly efficient, you may be better off investing as though they are. Why? To outsmart the market, you would need to have meaningful information no one else has. In 2025, more than 17 billion shares worth more than $1 trillion traded in the U.S. every day, on average. Those trades were conducted by institutional investors, hedge funds, quantitative trading firms, analysts, economists, sophisticated computer models and professional investors around the world, all competing to identify opportunities before everyone else. Finding something they’ve missed may not be impossible, but it’s vanishingly unlikely.

The belief that markets can be outsmarted can lead to counterproductive behaviors. One of the most dangerous is market timing. This is the strategy of making decisions on whether to buy or sell financial assets by attempting to predict future market prices. History suggests timing the market is remarkably difficult to do consistently. Studies have repeatedly found that the average equity investor’s returns tend to trail the S&P 500, largely because poor timing decisions caused them to buy after markets had already risen and sell after markets had already fallen.

Accepting the idea of market efficiency can be surprisingly liberating. During periods of high volatility or big market drops, you can rest assured that the market is doing exactly what it’s supposed to be doing as it incorporates new information. Rather than chasing headlines or trying to predict every market move, you can focus on what you can control: maintaining a diversified portfolio, sticking to a long-term investment plan, keeping costs low, and allowing compounding to work over time. If you have any questions about market efficiency or your portfolio, please don’t hesitate to reach out.

sources: https://nvidianews.nvidia.com/news/nvidia-announces-financial-results-for-first-quarter-fiscal-2027
https://www.google.com/finance/beta/quote/NVDA:NASDAQ?window=YTD
https://www.chicagobooth.edu/review/eugene-fama-efficient-markets-and-the-nobel-prize
https://www.aeaweb.org/aer/top20/70.3.393-408.pdf
https://www.cboe.com/insights/posts/2025-u-s-equities-year-in-review/
https://www.dalbar.com/press-release/dalbars-2026-qaib-report-shows-narrower-investor-gap-amid-a-complex-and-volatile-market-year/

A GUIDE TO THOUGHTFUL SPENDING

It has never been more tempting to spend money. Every day, we’re pressured to buy something, whether through traditional ads, targeted recommendations or the curated lifestyles of online influencers. The messages are constant and persuasive.

Financial professionals like us spend a lot of time talking about how to save. But knowing how to spend well is equally important. And for many, spending is surprisingly fraught, wrapped up in behavioral biases and the psychological imprints of past experiences.

Unexamined spending can lead to extremes. On one end of the spectrum, you find overspenders who rack up debt and land in financial hot water. On the other end are those afraid to spend, depriving themselves of things they can afford that would give them pleasure.

Ultimately, spending is unavoidable. Ideally, we find a middle path that allows us to cover necessities and spend on the things that truly bring joy, whether that’s hobbies, travel, experiences with your family and friends, or simple everyday pleasures.

So how do you engage in thoughtful spending? These tips can help.

CONSIDER YOUR VALUES
One of the best ways to become a mindful spender is to spend in line with your values. Take the time to identify what matters most to you. These could be things like health, family, community, security or creativity. Before making a purchase, consider whether it supports one or more of these values. Doing so can help you avoid potential behavioral traps, such as signaling—spending money to shape how other people think of us.

It’s one thing to buy a nicer car because you need it. It’s another to buy one because you want to broadcast status to neighbors.

If you can truly afford to do this, there’s not necessarily a lot of harm done financially speaking. But it’s still worth asking whether the motivation reflects something you truly value or simply a desire to impress others.

And if the purchase stretches your finances, the irony is clear: Spending to appear wealthy actually undermines your financial security.

COMPARE AND DESPAIR
Closely related to signaling is the phenomenon of keeping up with the proverbial Joneses.

Morgan Housel, partner at The Collaborative Fund and author of The Psychology of Money puts it well: “There are two ways to use money. One is as a tool to live a better life. The other is as a yardstick of status to measure yourself against others. Many people aspire for the former but get caught up chasing the latter.”

When we see other people spending freely—neighbors renovating their kitchen or friends taking pricey vacations—it can create subtle pressure to match their choices. After all, we humans are deeply wired to avoid appearing like outsiders.

But appearances can be misleading. The people you’re comparing yourself to may be financing those purchases or stretching their budget to maintain a perfect front.

So again, before trying to match anyone’s spending, revisit your own priorities. You may find that the security of living within your means is much more important to you.

BE MINDFUL OF HEDONIC ADAPTATION
Besides being a bit of a mouthful, hedonic adaptation is the tendency for humans to return to a baseline level of happiness even after major positive or negative changes in their lives. In other words, the emotional impact of these events fades quickly over time.

This can have important implications for spending. Many purchases—the latest smartphone, a luxury car, a bigger home—promise lasting happiness. These items might provide a short-term boost in satisfaction, but that feeling typically fades faster than we’d expect.

Understanding this tendency can encourage a bit of pause before making big purchases. If it’s greater happiness you seek, whatever you’re considering buying likely isn’t the solution.

Being mindful of hedonic adaptation can also help guard against lifestyle creep, where spending gradually increases as income rises without necessarily improving long-term happiness. Buying that bigger home requires spending more on things like taxes and upkeep, which may quickly make you feel out of control. Or as Housel puts it: “Sometimes the stuff you spend money on has so much influence over your autonomy…that it’s not clear whether you own things or the things own you.”

On a more reassuring note, just as we adapt to positive changes, we also adapt to setbacks. Difficult events like a job loss or a financial downturn can feel overwhelming in the moment, but emotional recovery tends to be swift.

THINK BEFORE YOU CARPE DIEM
Popular aphorisms encourage us to “carpe diem,” “YOLO” or “live for the moment.” And on a fundamental level, that message has merit. Life is unpredictable, and it’s important to enjoy it. However, the idea also can be used to justify impulsive spending, allowing our present selves to win out over our future selves.

Consider a simple example: Spending $200 on a new pair of boots now may not seem like a major decision. However, if that same amount were invested and allowed to grow for decades, it could be worth thousands of dollars in the future.

This doesn’t mean you should never buy those boots—especially if you can afford them. The key is considering the trade-off and making that decision consciously.

Interestingly, carpe diem—often translated as “seize the day”—may have originally carried a more nuanced meaning. Some scholars suggest it would be better translated as “pluck the day,” an allusion to picking fruit or flowers at harvest time. Seen this way, the phrase originally may be more about appreciation and enjoying opportunities when the moment is right, rather than an exhortation to take impulsive action. That, perhaps, is a useful way to think about spending as well.

A PLAN THAT MAKES ROOM FOR LIVING
It might be easy to think that financial advice is all about pushing you to cut back and save more. In reality, it’s about finding balance. Together, we can build spending strategies that reflect what matters to you most, so you can feel confident about your future without putting your present happiness on hold.

MARKET RETURNS DURING PAST GEOPOLITICAL CONFLICTS

We noted in a recent piece that geopolitical conflicts don’t have to result in disappointing subsequent stock returns because markets are forward-looking and set prices for positive expected returns. But how have markets actually fared during previous geopolitical incidents? Based on 36 years of history, the answer has largely been good news.

While the classification of an event as a geopolitical conflict is subjective, we identified 21 global events since 1990. Charting returns starting from the onset of these events, we see slightly negative returns on average for the first five days, but then positive average returns over subsequent horizons. This would seem consistent with a market resetting prices in light of negative news at the start, which then sets up a positive expected return in the absence of further disappointing developments. After one year, the average return was 14.6%. By comparison, the average return across all rolling 12-month periods was 12.4%.

This is not to imply we’re “out of the woods” when it comes to a market downturn. The 12-month market return was negative for two of the 21 events. There’s always the possibility for worse-than-expected developments, which might provoke further negative reaction from markets. But the takeaway from these data is that investors shouldn’t shy away from stocks during a period of global conflict.

Exhibit 1
Average US Stock Market Returns Following Major Geopolitical Events
1990-2025

Article By: Wes Crill, PhD
Senior Client Solutions Director and Vice President at Dimensional Fund Advisors
See below for disclosures.

MARKET REVIEW 2025: US STOCKS RIDE ROCKY ROAD TO A THIRD STRAIGHT YEAR OF GAINS

KEY TAKEAWAYS

• US stocks continued climbing in 2025, with the S&P 500 gaining almost 18%, while international stocks soared nearly 32%.
• The Fed reduced interest rates by 0.75 percentage points even as it coped with stubborn inflation, citing labor market worries.
• Value lagged growth in the US, but international small value was among the best-performing asset classes of the year.

US stocks notched their third year in a row of double-digit gains, but it wasn’t the smoothest ride. The S&P 500 hit records in the winter that were followed by a spring swoon. After powering past that to new highs in the fall, the markets cooled a bit along with the temperatures.(1) Still, the S&P 500 was up 17.9% for the year and closed near record levels.(2) The climb came despite tariff uncertainty, interest rate changes, and concerns about the durability of AI’s gains—not to mention the longest government shutdown in US history.(3) Global stocks rose (see Exhibit 1), with returns in developed international and emerging markets better than those in the US. In the bond market, US Treasuries were higher for the year, and the benchmark 10-year yield fell to just above 4%.(4)

Technology companies were below earlier highs at year’s end, but the tech-heavy Nasdaq still advanced 20.9% in 2025. Just months after reaching $4 trillion, NVIDIA became the first public company to reach a market capitalization of $5 trillion, though it wouldn’t hold that level. The headline names associated with artificial intelligence have been strong performers in recent years.(5) But diversified equity portfolios don’t need to chase a few big names to have exposure to AI—the technology touches many types of businesses. Broad diversification can help investors avoid missing out on these winners, wherever they show up.

The US Federal Reserve cut the federal-funds rate by a quarter point three times, in September, October, and December, to a range between 3.5% to 3.75%, the lowest level in three years.(6) In its December statement, the Fed cited labor-market worries as it lowered rates while also noting rising inflation and that not all members supported the rate decrease. But while investors may worry about the impact of Fed rate changes, market interest rates and the federal-funds rate don’t always move as one—the 10-year Treasury yield, for example, hasn’t always gone in the same direction as the fed-funds rate.

Market fluctuations coincided with trade talks throughout the year, most notably with the global tariff announcement from the US in April, after which stocks took a downward turn. But as tariffs were delayed and talks progressed—and with the US reaching a number of trade deals—the market rebounded.(7) Still, questions remained about tariffs elsewhere. In a high-stakes case, the Supreme Court appeared skeptical about the legality of tariffs but has yet to rule on whether any recently imposed levies can remain in place.(8) Adding to uncertainty late in the year, the government shut down in October and November for 43 days. But markets continued to post gains, as they often have during extended closures. Congress reached a deal in mid-November to reopen the government, but only through the end of January.(9)

LOOKING ABROAD
In a departure from recent years, developed international stocks fared better than their US counterparts. The MSCI World ex USA Index gained 31.9%, outpacing the S&P 500 by the widest margin since 1993 and serving as a reminder of the potential benefits of an internationally diversified portfolio. Emerging markets fared even better than developed markets, with the MSCI Emerging Markets Index rising 33.6%. Global equities, as measured by the MSCI All Country World Index, rose 22.3% for the year.(10)

Developed market international stocks outdid their US counterparts by the widest margin since 1993.

Likewise, investors who targeted value stocks outside the US were rewarded; however, value lagged growth in the US. Large caps outperformed small caps in the US and globally, but international small value was among the best-performing asset classes of the year. Longer term, US small value has been one of the best-performing asset classes since 2000. That has included a period of strong performance for the large cap S&P 500: Over the past 10 years, it returned 14.8% annually. That’s a notable deviation from large caps’ long-term average, whereas the returns of small caps have been more in line with their historical performance over that same period. Elsewhere, high profitability stocks were outpaced by low profitability stocks in global developed markets in 2025, while the opposite was true in emerging markets.(11)

In the bond market, US Treasuries returned 6.3%, sending the yield on the benchmark 10-year Treasury down to 4.18%.(12) The broader bond market also posted gains during the year, with the Bloomberg US Aggregate Bond Index up 7.3%, its best annual return since 2020. The Bloomberg Global Aggregate Bond Index (hedged to USD)—a broad benchmark of sovereign and corporate debt—rose 4.9% for the year.(13)

Investors showed increased appetite for gold in 2025, pushing prices up more than 50% to above $4,000 per ounce for the first time.(14) Some market participants view gold as a hedge during economic downturns or against inflation. But since 1970, gold has often experienced large price swings relative to annual inflation. Over the same period, gold prices showed little relation to fluctuations in the US GDP. Whether gold was up or down doesn’t appear connected to what was happening in the economy. Since markets tend to reflect expectations for the economy in advance, it’s not clear holding gold provides additional protection against adverse economic developments.

MIND OVER MATTERS
A better way to cope with market volatility may be to simply pay less attention. Just this past year, if you had gone to sleep on April Fools’ Day and checked your investment portfolio a month later, you might have assumed the market had been relatively calm. But for investors who spent the month tracking daily returns, the experience likely felt more disruptive. April 2025 turned out to be one of the most volatile months in recent history, as market participants were processing new information about tariffs and trying to make sense of what the developments might mean for businesses, investors, and the global economy.

The same thinking can guide investors’ approach over longer time periods—especially when looking at data across many years or even decades. With reliable stock data stretching back to 1926, we are, as of this year, now able to consider a full century of stock returns. Doing so gives further credence to the merits of focusing on the long run. A short-term view of yearly gains and losses shows what may appear as wild swings in the market, as seen in Exhibit 2, but a long-term view reveals a fairly steady growth of wealth over the 100-year period.

It is natural to want to stay informed about what’s going on in the world. And when markets are volatile, it may be hard to resist the urge to do something. But doing nothing can be a fine course of action. Thinking about investments over the long term might ease the urge to make hasty asset allocation changes. An investor who stayed the course over the long term—riding out the ups and downs of economic shocks, wars, and other crises—would have seen exponential gains in their investment. Declines can be painful in the moment, but markets have shown resilience throughout history. Last year was another example: Investors who stayed in their seats were in a great position to be rewarded.

Article By: Dimensional Fund Advisors

Footnotes:
1. Joe Rennison, “Late Rally Pushes Stocks Back Near Record High,” The New York Times, November 28, 2025.
2. S&P data © 2025 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio; Ben Levisohn, “S&P 500 Hits a Rare Christmas Eve Record,” Barron’s, December 24, 2025.
3. Martin Baccardax, “One Earnings Report Can’t Erase the Stock Market’s AI Bubble Concerns,” Barron’s, November 20, 2025; Rachel Treisman, “The Government Shutdown Is Now the Longest in US History. See How It Compares,” NPR, November 5, 2025.
4. Returns are based on the Bloomberg US Treasury Bond Index as of December 31. Bloomberg data is provided by Bloomberg Finance LP. Source for US Treasuries: US Department of the Treasury.
5. Cade Metz, “The AI Boom Has Found Another Gear. Why Can’t People Shake Their Worries?” The New York Times, November 20, 2025.
6. The federal-funds rate is the overnight interest rate at which one depository institution (like a bank) lends to another institution some of its funds that are held at the Federal Reserve. Source: “Federal Reserve Issues FOMC Statement,” US Federal Reserve, December 10, 2025.
7. Chao Deng and Drew An-Pham, “What to Know About Trump’s Latest Tariffs,” The Wall Street Journal, October 30, 2025.
8. Lawrence Hurley, “Supreme Court Appears Skeptical of Trump’s Tariff Argument,” NBC News, November 5, 2025.
9. Kaia Hubbard and Caitlin Yilek, “Government Shutdown Now Over as Federal Agencies Reopen and Employees Return to Work,” CBS News, November 13, 2025.
10. MSCI data © MSCI 2025, all rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
11. The MSCI World ex USA Value Index gained 42.2%, while the MSCI World ex USA Growth Index rose 21.9% as of December 31, 2025; the Russell 3000 Value Index added 15.7%, while the Russell 3000 Growth Index rose 18.2%; the Russell 2000 Index added 12.8%, while the Russell 1000 Index gained 17.4%; the MSCI All Country World Small Cap Index advanced 19.7%, while the larger cap MSCI All Country World Index rose 22.3%; the MSCI World ex USA Small Value Index was up 38.6% as of December 31, 2025; the Fama/French Developed High Profitability Index rose 19.3% versus 30.0% for its low profitability counterpart as of December 31, 2025; the Fama/French Emerging Markets High Profitability Index rose 32.6%, and its low profitability counterpart rose 20.8% as of December 31, 2025. Past performance is no guarantee of future results. Actual returns may be lower. The Fama/French indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. See “Index Descriptions” in the Appendix for descriptions of the Fama/French index data.
12. “Daily Treasury Par Yield Curve Rates,” US Department of the Treasury. Data as of December 31, 2025.
13. Bloomberg data provided by Bloomberg Finance LP. Data as of December 31, 2025.
14. Spencer Kimball, “Gold Price Reaches $4,000 an Ounce for the First Time Ever,” CNBC, October 7, 2025.

Please see below for additional disclosures