The Evidence-Based Investor

Author Archives: TEBI

  1. Learn to tame your inner chimp

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    For many millions of Britons, 2023 was a financial wake-up call. A combination of inflation, higher interest rates and concerns about the economy all contributed to a sense of unease about household finances.

    According to a recent survey, 57% of British adults say the cost-of-living crisis is a major financial concern. Running out of money was a major concern for 38% of respondents. Not saving enough for retirement was the third-biggest worry, affecting 26% of people, with anxiety peaking among those aged between 41 and 55.

    Such fears are entirely understandable. The question is, what can you do to allay them? Inflation and the state of the economy are out of our control. So too are the financial markets. And no one is immune to life events like marital breakdown, or losing your job or business, that can seriously harm your financial wellbeing.

    But there’s one thing we can control that has a huge bearing on our financial future, and that’s our own financial behaviour. By having a plan, controlling our expenditure, investing enough money and maintaining a long-term focus, we maximise our chances of achieving our goals.

    But there’s one thing we can control that has a huge bearing on our financial future, and that’s our own financial behaviour. By having a plan, controlling our expenditure, investing enough money and maintaining a long-term focus, we maximise our chances of achieving our goals.

    It sounds so easy, doesn’t it? In practice, though, it can be anything but. Why? Because, when it comes to money, we’re all prone to self-sabotage. In the words of Benjamin Graham, the investor and academic who was a mentor to Warren Buffett, “the investor’s chief problem, and even his worst enemy, is likely to be himself.”

    This is a strange phenomenon. After all, football players don’t deliberately score own goals, and batsmen don’t hit their own wicket on purpose. So why are the financial crises people face so often self-inflicted? A book by psychologist Steve Peters called The Chimp Paradox provides the answer.

    READ THE FULL ARTICLE HERE

     

    PREVIOUSLY ON TEBI

    Fund selection: the hired beat the fired

    How wide is the gender pension gap?

    Do you know your risk capacity?

     

    NEED AN ADVISER?

    The evidence shows us time and again that investors tend to enjoy better outcomes when they work with a financial adviser. If you don’t already have one, we may be able to help.

    Wherever you are in the world, we will try to put you in contact with an adviser in your area whom we know personally, who shares our evidence-based investment philosophy and who we feel is best able to help you. If we don’t know of anyone suitable we will tell you.

    We’re charging advisers a small fee for each successful referral, which will help to fund future content.

    Click here and let’s do it.

     

    © The Evidence-Based Investor MMXXIV

     

     

  2. Investors look for patterns that don’t exist

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    Perhaps you never believed in the man on the moon. But you may well have thought, at some stage, that you saw the shape of an animal in a cloud. Or perhaps it was a face you saw in a vegetable, a piece of fruit or a slice of toast?

    All of these are examples of a psychological phenomenon called pareidolia. It refers to our tendency to perceive recognisable patterns in random or ambiguous visual stimuli.

    The human brain is wired to recognise familiar objects and shapes, particularly faces. Even when there’s only minimal information suggesting a face or form, people still see it clearly.

    Pareidolia was once considered to be a symptom of psychosis. It’s now generally recognised as a common part of the human experience and indeed, as an evolutionary adaption that’s central to our ability to learn.

    For our ancestors, pareidolia was vital for survival. It meant they could recognise friends and foes quickly. It also helped them to communicate, to hunt, and to develop tools and cognitive skills.

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    PREVIOUSLY ON TEBI

    Why women benefit from financial advice

    Style drift means you don’t know what you’re buying

    Six lessons from A Random Walk Down Wall Street

     

    TEBI ON YOUTUBE

    Have you visited the TEBI YouTube channel lately? There’s already a wide selection of high-quality videos on there. Why not subscribe and be one of the first to see our latest content? You’ll also find our videos on Instagram and TikTok.

     

    © The Evidence-Based Investor MMXXIV

     

     

  3. Diverify, diversify, diversify

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    I once had the privilege of doing an interview with the Nobel Prize-winning economist William Sharpe at his California home, in which we discussed the finer details of academic finance. But the final question I put to him was a simple one: what is the golden rule of investing?

    “There is a rule in real estate,” Sharpe answered, “that the three most important things are location, location, location. My rule in investments is that the three most important things are diversify, diversify, diversify.”

    It was, in fact, another Nobel laureate, and a contemporary of Sharpe, Harry Markowitz, who first established the importance of diversification in investing in his famous dissertation Portfolio Selection in 1952.

    Until then, financial professionals had assumed that the best investment strategy was simply to choose a selection of securities that were thought to have the best prospects. Markowitz showed that far more important than the individual securities within a portfolio was the portfolio itself, and, specifically, the extent to which the performance of those securities correlated with one another.

    “A good portfolio, Markowitz wrote, “is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies.” More memorably, he later described diversification as “the only free lunch” in investing.

    This approach to portfolio construction became known as Modern Portfolio Theory. Up to this day, more or less all portfolios have been built, at least to some extent, on MPT.

    READ THE FULL ARTICLE HERE

     

    PREVIOUSLY ON TEBI

    Watch out for silent partners when using active funds

    Do you have an issue with horizon risk?

    The case for fixed-income index funds

     

    HOW TO FUND THE LIFE YOU WANT

    If you want to learn more about saving for retirement, we recommend you read the award-winning book How to Fund the Life You Want by TEBI founder Robin Powell and Jonathan Hollow.

    The book is published by Bloomsbury and is primarily aimed at a UK audience.

    Buy the book here on Amazon, or, if your prefer, here on bookshop.org.




     

    © The Evidence-Based Investor MMXXIV

     

     

  4. The power of doing nothing

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    There are many reasons why we’re extremely fortunate to live in a wealthy country like the UK in the 21st century. One of the biggest is the quality of the healthcare we now enjoy. Treatments are commonly available today which would have been inconceivable to our grandparents.

    In fact, until the middle of the last century, many doctors and surgeons were more likely to harm their patients than they were to help them. So-called iatrogenic disease, or disease directly caused by medical intervention, used to be a big problem.

    Unfortunately, there are still some professions which arguably do more harm than good today. Research by Morningstar suggests that active money management might be one of them.

    Proponents of active management often cite the manager’s ability to do something as a positive advantage that actively managed funds have over passive ones. For example, they can buy stocks they think are undervalued or sell those they consider undervalued; they can reduce their risk exposure when they’re expecting markets to fall, or increase it when they think they’re about to rise.

    READ THE FULL ARTICLE HERE

     

    PREVIOUSLY ON TEBI

    The best and worst of times to be an investor

    The fundamental flaw of active ETFs

    Stockpicking is like looking for a needle in a haystack

     

    FIND AN ADVISER

    The evidence is clear that you are far more likely to achieve your financial goals if you use an adviser and have a financial plan.

    That’s why we offer a service called Find an Adviser.

    Wherever they are in the world, we will put TEBI readers in contact with an adviser in their area (or at least in their country) whom we know personally, who shares our evidence-based investment philosophy and who we feel is best able to help them. If we don’t know of anyone suitable we will say.

    We’re charging advisers a small fee for each successful referral, but you will pay no more than you would if you contacted the adviser directly.

    Need help? Click here.

    © The Evidence-Based Investor MMXXIV

     

     

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