In our last piece, “Investment 101: Part 9 – Factors That Figure in Your Evidence-Based Portfolio,” we introduced three key stock market factors (equity, value and small-cap) plus a couple more for bonds (term and credit) that have formed a backbone for evidence-based portfolio construction. Continued inquiry has found additional market factors at play, with additional potential premiums (which also seem to result from accepting added market risk, avoiding ill-advised investor behaviors or both). In academic circles, the most prominent among these are profitability and momentum:
Before we get ahead of ourselves, let’s discuss a few caveats.
As a result, opinions vary on when, how or even if profitability, momentum and other newer factors should play a role in current portfolio construction. We would be happy to speak with you individually about our evolving approach. To help you assess whether they may make sense for you, let’s explore how to think about investment information.
As time marches on, relentless questioning from scholars and practitioners alike has been essential to evidence-based investment theory and application, dispelling illusions and laying the foundation for the insights we now routinely harness. Similar inquiry must continue to pave the way to future improvements. But one need only glance at daily headlines to notice a never-ending stream of ideas from competing, often conflicting voices of authority. While being informed is helpful, being overloaded by it can do as much harm as good to well-intended investors. Even when the news is solid (which is never a given), hyperactive reaction can strip away all the advantages of an enlightened investment approach.
So, how do you know what to heed and who to ignore? This is where we believe an evidence-based advisor relationship is critical to your wealth and your well-being. Calls to action that erupt overnight based on scant evidence and concentrated events are unlikely candidates for building into a durable investment discipline. As we outlined in, “The Essence of Evidence-Based Investing,” whenever we assess the validity of existing and emerging market insights, we ask pointed questions that can take years to resolve:
By considering each new potential factor according to strict guidelines, our aim is to extract the diamonds of promising new evidence-based insights from the considerably larger piles of misleading misinformation. We feel you are best served by heeding those who take a similar approach with their advice.