Markets Work
Capital markets are not perfect and prices are not always right, but markets are so competitive that it is unlikely a manager or investor can systematically profit from mistakes in the market at the expense of other investors.
Risk and Return Are Related
Markets are drawn to a state of equilibrium where risk and return are related. Only non-diversifiable risks are rewarded with higher expected returns like tilting ones assets to a broadly diversified portfolio of value and smaller companies.
The Plight of Active Managers
For active managers to succeed, markets must fail. There have been (and will be) managers that outperform the market, but no more than you would expect by chance, and it is difficult to identify them in advance.
Bring Discipline to the Process
Capital markets are noisy; but in the face of that noise, investors must maintain their discipline and stick to a long-term investment strategy in order to have a successful investment experience that captures capital market rates of return. Some studies conclude that individual investors under perform the market by as much as 7%, likely due to a lack of discipline that results in chasing hot stocks or hot funds or by timing markets. The following chart outlines how holding the index provided increased returns over the average equity fund or the dismal returns of the average investor:
Following decades of empirical investigation of capital markets by literally thousands of financial economists, there is no widely accepted and conclusive evidence that market timing works. A successful timing strategy requires three correct decisions: when to get in, when to get out, and when to get back in. When timing between stocks and cash, for example, the frequency of correct decisions must also be high enough to overcome the higher expected returns of stocks versus cash and taxes. The success rate required to beat a buy-and-hold strategy is unattainable for most investors.
There Is No Crystal Ball . . . and You Don't Need One!
At the root of all forms of active management is some sort of forecast, but the future is by definition unknowable. Although no one can predict the future, you don't need to in order to have a successful investment experience. With capitalism, there is a positive expected return on capital.
Diversification Is Essential
Diversification is the closest thing there is to a free lunch. Proper diversification increases the likelihood of earning expected long term returns and may reduce risk by eliminating risks you are not paid for taking like purchasing individual securities or sectors of the market.
Structure Determines Performance (expected returns)
Asset allocation explains over 96% of the variation of investment returns. Absent of scientific process, investing is unclear, arbitrary and commercial. By using a scientific process one has a higher probability of capturing long term expected returns.
Know Thyself
Investors often exhibit behavioural biases that can lead to poor investment decisions. Overconfidence, self-attribution, mental accounting, searching for patterns, hindsight, regret, and fear are cognitive biases and emotions that can be overcome through the support of a good wealth mentor to ensure wealth and well-being!
Costs Matter
All investors in aggregate form the market. Therefore, it must be the case that the average investor earns the market rate of return less fees and expenses. Managing costs (management fees, operating costs, trading costs, taxes, etc.) allows investors to capture more of the capital market return that is there for the taking. Keeping costs down puts the odds of success in your favour.
Data source: Dalbar, Inc., "Quantitive Analysis of Behavior," Dec 2008. Notes: Past performance is not indicative of future results. All investments involve risk, including loss of principal. Indexes are unmanaged baskets of securities that investors cannot directly invest in; they do not reflect the payment of advisory fees or other expenses associated with any specific investments. 
