As a physician, you’re making life-or-death decisions every day. You know the best way to make decisions under pressure is a combination of relying on your clinical experience and consulting the latest research available. That’s the nature of evidence-based medicine: You combine both experience and research.
Evidence-based investing is no different.
To invest well, you need to focus on your needs as well as leverage the research that’s out there.
One Mistake to Make Sure You Avoid
If you’re going to invest, you need a strategy. You likely won’t succeed as an investor if you trade based on emotion, especially ones like fear or greed. Nor will you be likely to succeed if you trade based on the advice of friends and family. As a result, you should never make decisions based on emotions or speculation.
Perhaps the worst starting point is to try to outperform the market. The problem with outperforming the market is that it is impossible to predict the market. By the time you learn of new information, it’s already been factored into the market price.
And, historically, when a sector of the market performs well, a lot more people want to invest in it. This influx of investor capital may result in the sector generating lower returns in the future.
This is why the majority of top-100 fund managers aren’t able to maintain a top-100 ranking year after year. In fact, only about 14 percent of top-100 fund managers stay in the list from one year to the next. Less than a handful make it beyond two consecutive years.
Often, market-timing and security-selection strategies generate returns that are lower than what the market itself produces. That’s a lot of time, energy and higher costs that ultimately results in lost opportunity, not expanded wealth. Instead of trying to beat the market like it’s your adversary, try treating the market as your ally.
If you aren’t making decisions based on emotions or speculation, then to what end are you making decisions?
A Question You Need to Ask Yourself
To what end are you investing? If you are investing toward retirement, you should envision the ideal retirement. How much money will that require? Once you’ve come up with a number, you have a concrete figure toward which you can begin to save.
With that number in mind, you can also determine the kind of investment strategy that will work best for you. Risk and reward are related. Having a plan in place keeps you from taking on more risk than necessary.
The questions you ask should always be true to your life. It’s impossible to know what trends will emerge in the market six months from now. But you can know how much you would like to save in the next three years. Investing outside the context of an actual plan will lead you down paths of frustration and undue risk. Stay focused on what you need.
How You Can Have the Market Work for You
You want to construct a portfolio that will deliver the highest expected long-term returns for a particular level of risk. You want to construct a portfolio that will deliver these returns at the lowest possible cost.
The trick to accomplishing this is research.
Research in capital markets has advanced tremendously in the last 50 years. Objective and high-quality academic research is available to inform investor decisions about which investment approaches are likely to succeed and which are more likely to fail. A high probability resides in remaining globally diversified, avoiding market timing or security selection, and keeping costs low.
Don’t Just Sit Back Idly
Just because you’ve invested doesn’t mean you should sit back idly.
While it isn’t necessarily advisable to check your assets daily — a constant review of your assets can lead to too many trades and thus compromise your long-term approach — it is a good idea to regularly review your overall allocation.
Your investments should be long-term. Expect that during this time your needs will change. Your allocation should be modified to address those circumstances, not what you think the market is doing and/or going to do next.
Make sure you have an advisor who will dialogue about an approach customized to your situation and in line with your goals.
Investing is Just the Beginning
You know how important evidence-based medicine is: You optimize your decisions by relying on clinical experience and academic research. Likewise, if you’re looking to participate in the market, evidence-based investing is backed by academic research, not emotion or speculation.
But investing is just where you begin. You’re building a portfolio to reflect your life, not whatever is going on in the market. For that reason, there are other financial fundamentals you need to consider.
PLEASE NOTE LIMITATIONS: Please see Important Advertising Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com/disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.
PLEASE NOTE LIMITATIONS: Please see Important Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com/info-disclosure/. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.