Are you ready to become a better investor – to enhance your understanding of the most important principles that drive the creation of wealth – without it hurting a bit? With that goal in mind, we have obtained the rights to share with you a special series of articles on the principles of evidence-based investing.
Each insight will take only a minute or two of your time to explore one essential concept about investing, with an emphasis on ensuring that evidence, not emotion, guides the way. Before you know it, we’ll have introduced you to several solid principles, based on more than a half-century of peer-reviewed inquiry into how capital markets efficiently and effectively deliver long-term wealth to patient investors.
Don’t worry, unless you specifically ask us about it, we’ll skip the Greek calculations and multi-factor modeling. Instead, we’ll translate each insight into its meaningful essence: the “What’s in it for me?” you need to know, so you can apply the science of investing into your own portfolio.
You see, being a better investor doesn’t mean you must have an advanced degree in financial economics, or that you have to be smarter, faster or luckier than the rest of the market. It means:
- Knowing and heeding the insights available from those who do have advanced degrees in financial economics
- Structuring your portfolio so that you’re playing with rather than against the market and its expected returns
- Avoiding your own most dangerous behaviors – ingrained through eons of evolution – that tempt you to make the worst financial decisions at all the wrong times
Are you ready to become a better investor on these terms? If so, we hope you will enjoy this article series.
How do you achieve every investor’s dream of buying low and selling high in a crowd of highly resourceful and competitive players? The answer is to play with rather than against the crowd, by understanding how market pricing occurs.
What causes market prices to change? It begins with the never-ending stream of news informing us of the good, bad and ugly events that are forever taking place.
Even experts who specialize in analyzing business, economic, geopolitical or any other market-related information face the same challenges you do if they try to beat the market by successfully predicting an uncertain reaction to unexpected news that is not yet known.
If we compare diversification to the adage about not putting all your eggs in one basket, an apt comparison would be to ensure that your multiple baskets contain not only eggs but also a bounty of fruits, vegetables, grains, meats and cheese.
Before we even have words to describe it, most of us learn about life’s general risks when we tumble into the coffee table or reach for that pretty cat’s tail. Investment risks aren’t as straightforward. Here, it’s important to know that there are two broadly different kinds of risks: avoidable, concentrated risks and unavoidable market risks.
Like a bucking bronco, near-term market returns are characterized more by periods of wild volatility than by a steady-as-she-goes trot. Diversification helps you tame the beast, because, as any rider knows, it doesn’t matter how high you can jump. If you fall out of the saddle, you’re going to get left in the dust.
There are a number of factors that drive expected returns, but among the most powerful ones spring from unavoidable market risks. As an investor, you can expect to be rewarded for accepting the market risks that remain after you have diversified away the avoidable, concentrated ones.
In “What Drives Market Returns?” we explored how markets deliver wealth to those who invest their financial capital in human enterprise. But, as with any risky venture, there are no guarantees that you’ll earn the returns you’re aiming for, or…
In our last piece, “The Essence of Evidence-Based Investing” we explored what we mean by “evidence-based investing.” Grounding your investment strategy in rational methodology strengthens your ability to stay on course toward your financial goals, as we: Assess existing factors’…
By considering each new potential factor according to strict guidelines, our aim is to extract the diamonds of promising new evidence-based insights from the considerably larger piles of misleading misinformation.
In our last piece, “What Has Evidence-Based Investing Done for Me Lately?” we wrapped up our conversation about ways to employ stock and bond market factors within a disciplined investment strategy, as well as how to extract the diamonds of…
In our last piece, “The Human Factor in Evidence-Based Investing” we explored how our deep-seated “fight or flight” instincts generate an array of behavioral biases that trick us into making significant money-management mistakes. In this installment, we’ll familiarize you with…