The practice of overseeing and caring for the financial well-being of clients and their families is serious business, and yet our industry is driven by sales and marketing as much as any other line of work. Things are changing for the better though. Investors are becoming better informed and more financially literate about the big differences in which advisors deliver financial advice and investment management.
“Evidence Based Investing” is a term that we use quite a bit. And while it may not be a mainstream phrase, it accurately describes how we think about our investing approach. So perhaps that begs a question: what are the other approaches? There really isn’t a specific name for them but maybe they fall under the categories of “Conventional Wisdom”, or “Evidence Free Investing”.
These are ideas, notions, and beliefs that pertain to investing that have been around for a long time. Many of these have been sold and marketed by the industry for years and decades and used at the basis for brokers and certain financial advisors to manage their clients’ investments. And some of these sound right; they make intuitive sense in some cases. That’s why the industry has had such success selling based on some of these ideas.
So here’s a few things we don’t believe, followed by a brief comment that is grounded in evidence:
Focusing on beating market averages is more important than minimizing costs and taxes
Markets are not at all predictable in the short term, and remembering to control what can be controlled is of paramount importance. Avoiding mistakes is more effective than obsessing over beating a benchmark, index, or your neighbor.
Returns can be generated without assuming risk
On the contrary, risk is the price that must be paid in order to enjoy higher returns. No exceptions.
Close monitoring of news and headlines is an important part of managing investments
Paying attention to the markets and the news of the day is obviously important. But people make the mistake of assuming that developments in politics, economic data, and other current events should dictate constant changes to investment portfolios.
Choosing the right funds is more important than controlling behavior
Behavioral mistakes can destroy any financial plan, regardless of the specific investments.
It is reasonable to expect to be able to consistently identify which managers will outperform in the future
It is foolish to assume that past winners will continue to beat the competition. Evidence shows that the reverse is usually the case.
Concentrated portfolios are superior to diversified ones
Diversification reflects an acknowledgement of the basic premise of unpredictability. It also provides a natural buffer during market turmoil that increases the chances of sticking with an investment plan.
Correctly timing the markets is a critical task for investors to accomplish in order to achieve solid returns
Getting the proper allocation among the various asset classes and maintaining discipline is by far the most important part of an investment plan. As Peter Lynch said, “more value has been destroyed anticipating corrections than has been lost in the corrections themselves.”
Wall Street analysts have special insights into where the markets are headed
The only thing to say about Wall Street’s market predictions is how predictably bad they are. One of the most pervasive myths in the investing business is that there is such a things as the character from the infamous E.F. Hutton commercials from the 1970’s and 1980’s. There is not wizard behind the curtain.
We now have much more widespread dissemination of research, data, and various studies that have been eye opening for a lot of investors. The result of this has been overwhelmingly positive for those investors and practitioners that remain open minded to challenging the conventions that for a long time were assumed as truths.
For further reading on this topic: A Guide to Understanding Investment Basics
As always, thank you for your trust and confidence in us. Your feedback is always welcome.
Michael Traynor CFA®
Chief Investment Officer
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