An Introduction to Evidence-Based Investing – Part 2
Read the first part here: An Introduction to Evidence-Based Investing – Part 1
It’s not hard to see why EBI isn’t as popular as traditional investing. A disciplined, long-term approach that might garner a steady return of 6 or 7% a year is easily overshadowed by exciting reports of a stock that would have snagged you a 5,000% return, or how so and so made a ton of money in a week with this one obscure stock. What they neglect to mention is that even those which may be real are one-off fluke events that were inherently unpredictable. Often, they involve extremely volatile stocks that are just as likely – if not more so – to evaporate your invested capital. Like playing the lottery, for every one person who gets lucky, thousands (or millions) more may incur substantial losses.
While much less dramatic, many established banks and active fund managers also operate on similar principles. They highlight their experience and expertise in being able to identify the best stocks to invest in and the best times to enter or exit the market. Yet, as Dalbar and countless more researchers have demonstrated, conventional active management consistently produces subpar results, falling below the market in their attempts to beat it. In addition, the high fees investors often have to pay further erode returns. After all that, the majority of funds do not last beyond 15 years, with many having far shorter lifespans.
We prefer to keep things simple and costs low. Capital markets have always grown over the long term (a fundamental by-product of capitalism), and even periods of major financial devastation have their effects fade after at most 15 years. In the history of the stock market, investing with the index for longer than that has always reaped positive returns in the end. It is theoretically possible that a disaster of unprecedented magnitude may break this pattern and wipe out your savings, but you’d likely have more important things to worry about in such an apocalyptic event.
Until then, EBI will give you a much better likelihood of achieving financial security without undue stress and fretting, freeing you to concentrate on the things that truly matter in life, and work towards a retirement without fear of destitution.
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