The science of investing

If we cannot learn wisdom from experience it is hard to say where it is to be found

George Washington

There is a new way of investing. One that is based on 50 years of scientific study. Not speculation.

Research gathered over the last 50 years, made possible by the power of computing, has given us huge insights into how markets work.

A vast bank of knowledge can show us which investments are likely to work and which are more likely not to work.

How futile the task of the active, stock picking investor

Historic evidence demonstrates that it is virtually impossible to pick individual consistently high performing stocks. It also proves that market timing can lead to more mistakes than reward.

What the evidence proves is that it is better to invest or diversify across the whole market rather than cherry pick the best performing fund. It also proves that a long-term, game of patience is best.

But,

For the long term investor, one thing is certain: there will be times when you will seriously doubt your investment strategy

Even if you opt for a balanced portfolio which has 50% in defensive investments such as fixed interest and cash, and 50% in shares, your experience in holding this portfolio will typically look like this:

  • 36% of the time your investment will be falling
  • 19% of the time your investment will be recovering
  • 45% of the time your investment will be rising.

Your worst experience might have begun in January 1973 and for 24 months, you would have lost a total of 27%. But, your investments would have recovered in just three months.

This illustrates the danger of market timing

The next worse experience began September 2000, lasted 29 months and took 37 months to recover. This would have been a much stiffer test of your resolve.

Historic evidence does show that the stock market has rewarded investors who can bear the risk of stock volatility and stay committed.