Evidence Based Investing: The Five-Point Plan
Point 1: Markets Are Efficient
Public information is of little fundamental value. New information is so quickly incorporated into asset prices that use of this knowledge cannot be expected to consistently yield superior risk-adjusted returns.
Point 2: Risk and Expected Reward Are Related
Investors who expect or need to achieve higher returns must accept the associated risk. Equity-like returns do not come without commensurate risks. There is no promise of high returns without high risk.
Point 3: Diversification Works
Global diversification across a variety of imperfectly correlated asset classes is the most effective way to reduce risk. Diversification is always working, whether we are pleased with the immediate results. Diversification should be thought of as the equivalent of buying insurance against having all of one’s investment eggs in the wrong basket.
Point 4: Markets Are Unpredictable in the Short Run and Even in the Long Run
In the long run, we expect that equity markets will rise more than fall. Individuals who correctly predict short-term market movements should likely attribute their results to luck rather than skill.
Point 5: Discipline Is Key to Successful Investing
For far too many investors, the variable that ultimately determines the results of their portfolio is not investment returns but investor behavior. Emotions can lead investors to make poor decisions at the wrong times. It is easy to remain disciplined during bull markets. However, it is far more important to do so in bear markets and avoid the far-too-human propensity to sell at market bottoms.
Summary
No matter where your plan goes, we will continue to place importance on evaluating risk tolerance, building a globally diversified portfolio and implementing regular, disciplined rebalancing techniques. Having such knowledge changes the way you approach investing.