As anyone who reads my blog regularly knows, I am a big fan of simplicity. And yet, like too much of any good thing (with the possible exception of time spent watching the MSU Spartan games with my dad and son), it is possible to oversimplify one’s money management.
This occurs when investors favor what seem like the easiest answers (the ones that play to our whims and emotions), over the right ones (the ones that are well defined by reason and logic). It’s where evidence-based investing comes to the rescue to help you get the better investing.
Evidence-Based Investing: Simple But Not Easy
Evidence-based investing is vital in the quest for true financial simplicity. Fast, easy investing is based on chasing trends and speculating about future, unknowable events. Its devotees may use fancy labels like “forecasting” or “tactical analysis,” but at the end of the day, it’s still just a crap shoot – and a high-priced, highly uncertain one at that. That doesn’t seem so simple to me.
Evidence-based investing, in contrast, has been shaped since at least the 1950s by a “Who’s Who” body of scholars who have been probing financial markets to answer key questions like: What really drives the better investment returns? How do markets operate? How do frictions such as costs and behaviors detract from investors’ returns?
Academic research demands a considerably higher standard, including a disinterested, objective outlook (no foregone conclusions); robust data analysis; repeatability and reproducibility; and formal peer reviews. Building on this level of academic inquiry, financial professionals like me are tasked with an equally important charge: Even if a relatively reliable return premium or strategy exists in theory, how can we best capture it in the real world – after the implementation and trading costs involved?
The result of this extensive groundwork is an investment strategy for patient investors who are seeking clarity, understanding and cost control … elegant simplicity.
If you would like to find out more about funds practicing evidence-based investing principles, check out this post.
Would you like to begin simplifying your own investment experience by adopting an evidence-based approach? I’ve got a handy new resource for better investing ideas, especially if you’re already on Twitter.
Search on the recently launched Twitter hashtag #EvidenceInvesting, and you will find ongoing ideas there to inspire your strategy – from the latest, great videos coming out of the U.K. to tips tailored for millennial investors, to posts from yours truly (like this one).
While we’re on the subject of the next generation, I am reminded of a conversation I had recently with my daughter, when she was bummed that some of her kindergarten friends were not in her first-grade class. I was explaining to her that many things are out of our control, and how not everything goes the way we’d like. I may have thrown in a comment along the lines of, “Life ain’t all lollipops and rainbows.”
Halfway into my speech, she looked at me without missing a beat and said: “I know, Daddy. That’s just life. I get it.”
Watch out for the day when that girl starts to tweet. Sometimes it takes a six-year-old to best define elegant simplicity.
Have we connected on Twitter yet? I’m over at @GregAdviser. Feel free to shoot a tweet my way once you’ve browsed through the content on #evidenceinvesting.