Stordahl Capital Management’s Evidence-Based Investment Insights: Bringing the Evidence Home
Welcome to our final installment in SCM’s Evidence-Based Investment Insights: Bringing the Evidence Home. We hope you’ve enjoyed reading our series as much as we’ve enjoyed sharing it with you. Here are the key take-home messages from each installment:
You, the Market, and the Prices You Pay: Understanding group intelligence and its effect on efficient market pricing is a first step toward more consistently buying low and selling high in free markets.
Ignoring the Siren Song of Daily Market Pricing: Rather than trying to react to the market’s ever-changing conditions and cut-throat competition, invest your life savings according to factors over which you can expect to have some control.
Financial Gurus and Other Fantastic Creatures: Avoid paying “experts” to forecast your future moves for you. The evidence indicates that their ability to beat the market persistently is more likely to be fleeting than fantastic.
The Full-Meal Deal of Diversification: In place of speculative investing, diversification is among your most important allies. Spreading your assets around dampens unnecessary risks.
Managing the Market’s Risky Business: All risks are not created equal. Minimize concentrated risks (timing markets and picking individual stocks) by diversifying away from them. Maximize long-term returns by holding large swaths of the market, building in systemic investment risks. Diversification helps manage the necessary risks involved.
Get Along, Little Market: Diversification can create a smoother ride through bucking-bronco markets. It helps you stay in your seat and on track toward your personal goals.
The Business of Investing: At their essence, market returns are compensation for providing the financial capital that feeds the global human enterprise going on all around us.
The Essence of Evidence-Based Investing: What separates solid evidence from flimsy findings? Evidence-based insights demand scholarly rigor, including an objective outlook, robust peer review, and the ability to reproduce similar results under varying conditions.
Factors That Figure in Your Evidence-Based Portfolio: Building on 70+ years of robust evidence-based inquiry to date, three key stock market factors (equity, small-cap, and value) plus a couple more for bonds (term and credit) have formed a backbone for many evidence-based portfolio builds.
What Has Evidence-Based Investing Done for Me Lately: Building on our understanding of which market factors seem to matter the most, we continue to heed unfolding evidence on best investment practices.
The Human Factor in Evidence-Based Investing: The most significant factor for investors may be the “human factor.” Behavioral finance helps us understand that our instinctive reactions to market events can overtake our logical resolve as reasoned investors.
Behavioral Biases—What Makes Your Brain Trick: Continuing our exploration of behavioral finance, we share a half-dozen deep-seated instincts that can trick you into making significant money management mistakes. Here, perhaps more than anywhere else, an objective advisor can help you avoid mishaps that your own myopic view might miss.
Your (Final!) Take-Home
When we introduced our 12 Essential Ideas for Building Wise Wealth, we promised to skip the technical jargon and replace it with three key insights for becoming a more confident investor.
Understand the evidence. You don’t have to have an advanced degree in finance or economics to invest wisely. You need only know and heed the insights available from those who do.
Embrace market efficiencies. You don’t have to be smarter, faster, or luckier than the rest of the market. You need only structure your portfolio to play with rather than against the market and its expected returns.
Manage your behavioral biases. Since you cannot eliminate the emotions you experience as an investor, you must remain vigilant to how often your instincts tempt you off-course, and manage your actions accordingly. (Hint: A professional advisor can add huge value here.)
How have we achieved our goal of informing without overwhelming you? We would love to have the opportunity to continue the conversation in person. Please be in touch with us today, we offer a complimentary 15-minute call to answer your questions and to share how we can help.
This information should not be construed as investment, tax, or legal advice. This commentary reflects the personal opinions, viewpoints, and analyses of the Stordahl Capital Management, Inc. employees providing such comments and should not be regarded as a description of advisory services provided by Stordahl Capital Management, Inc. or performance returns of any Stordahl Capital Management Inc. Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Accessing websites through links directs you away from our website. Stordahl Capital Management is not responsible for errors or omissions in the material on third-party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third-party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites. Please note that trading instructions through email, fax, or voicemail will not be taken. Your identity and timely retrieval of instructions cannot be guaranteed. Stordahl Capital Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.