Understanding the source of investment returns is an important part of being a successful long-term investor. Unfortunately, far too many investors are under the impression that successful investing requires predicting markets. More than 60 years of academic research says otherwise.
Still, investors are often distracted from the focus on their long term goals by the siren songs of market timing, stock picking and investment entertainment as seen on the cable news channels. It’s not the investors fault because many of the strategies presented to investors are designed in sophisticated marketing departments whose interest is in selling not investing.
It may not be the investors fault but he or she is the one paying the price in the form of poor long-term investment results. The results of the average investor over the last 20 years are summarized in this article in Forbes magazine.
There are steps that you can take to be a better consumer of investment advice. Before you adopt an investment strategy, ask yourself these questions:
- Is the supporting research for this strategy independent and unbiased?
- Does the research involve robust data analysis?
- Are the results repeatable and reproducible?
- Is the work published so that the author’s peers can review it?
If you can’t answer these questions with an empathic “yes!”, you should consider a different strategy.
For more information on this topic, please visit our website for our Evidence-Based Investing white paper and our series of short videos on the topic. You are also welcome to contact me with any questions. Also, you can follow me on Twitter (@charlesboinske) where I regularly comment on the latest developments in evidence- based investing.