The Patient Investor

Evidence-Based Investing

How do you invest your money over the long-term? If you’ve read much of our work, you’ve probably noticed we embrace evidence-based investing. But what does that mean?

What is Evidence-Based Investing?

Evidence-based investors build and manage their portfolio based on what is expected to enhance future returns and/or dampen related risk exposures, according to the most robust evidence available. This also means sticking with your long-view, evidence-based strategy once it’s in place, despite the market’s uncertainties and your own self-doubts you’ll encounter along the way.

Evidence-Based Investing, Applied

Do you hope …

  1. Investors can come out ahead by finding mispriced stocks, bonds, and other trading opportunities; and/or by dodging in and out of rising and falling markets?

Or do you accept …

  1. The market’s rapid-fire trading creates relatively efficient pricing that is too random to consistently predict?

There is an overwhelming body of evidence suggesting investors should skip the first approach and act on the second assumption. This has been the case since at least 1952, when Harry Markowitz published Portfolio Selection in The Journal of Finance. In their book, “In Pursuit of the Perfect Portfolio,” professors Andrew Lo and Stephen Foerster describe:

“While it’s commonplace now to think of creating a diversified portfolio rather than investing in a collection of securities that each on their own look promising, that wasn’t always the case. It was Harry Markowitz who provided a theory and a process to the notion of diversification. He helped to create the industry of portfolio management.”

Markowitz’s work became known as Modern Portfolio Theory (MPT). Academics and practitioners have been building on it ever since. His initial work and others’ subsequent findings strongly support ignoring all the near-term noise and taking a long-view approach.

Continue reading

The Patient Investor

What Is Interest Rate Risk and Why Should We Care?

Let’s look at interest rate risk. However, before we can fully understand it, we need to set the stage for where we are currently, as it provides an important perspective on why this matters today. Many people have encountered a falling interest rate in their investment experience.

As you can see in the chart below from the Federal Reserve1, the Ten-year Treasury interest rate began falling in the early 1980s, when it peaked at over 15%. While there have been minor upticks over the last 38 years, the overall trend has been downward. You may also note that the 10-year Treasury yield hit an all-time low thus far of 0.32% in March of 2020 and has been moving higher since that time.

Source: https://fred.stlouisfed.org/series/GS10, May 10, 2021

Continue reading

The Patient Investor

Why Invest When The Stock Market Is At An All Time High?

Over the last two decades, the U.S. stock market has repeatedly been making new highs. As a result, this has been a relatively common question that I’ve heard from clients throughout my career. For a client with money to invest, it’s a natural one to ask…”if the market is at an all-time high, why should I invest now?“ And this question is relevant today. On February 19, 2020, the S&P 500 index hit an all-time high, closing at 3,386 as part of a historic bull run that began on March 9, 2009. After a dramatic drop of 34% in March due to the COVID-19 pandemic, the U.S. stock market quickly recovered and the S&P 500 made a new all time-high on August 18, 2020.1   

Clients now are wondering if they’ve already missed the rally or would be better off waiting for a pullback to invest. Or, if they are already invested, they may be considering whether they should sell a portion of their portfolio ahead of a potential downturn. If we drill a bit deeper, “loss aversion” is often the fear behind these thoughts, summarized in the concern of “what if I invest today and I lose money tomorrow?”

Continue reading

The Patient Investor

Why Diversify When It Doesn't Seem To Be Working?

Over the last several decades, we’ve seen strong returns from large U.S. companies and a question that many clients have asked is: “Why continue to diversify? Couldn’t we just buy an S&P 500 index fund and get better returns?”

Dimensional Fund Advisors (DFA) recently posted a terrific blog entitled "A Tale of Two Decades: Lessons for Long-Term Investors" that shares some very insightful data that sheds some light on these important questions.

First, let's look at the numbers over the last decade ... in the chart below, you can see that the S&P 500 (U.S. large cap stocks) had a cumulative return from 2010-2019 that was more than double any of the other listed asset classes. Furthermore, some evidence-based investment managers we use (such as DFA), favor value ("cheap") stocks over growth ("expensive") stocks, as value stocks have been shown to provide excess returns over time. As you can see in the chart below, it wasn't a great decade for value stocks either as the indexes with a value-tilt trailed the market-cap indexes.

Continue reading

The Patient Investor

Eight Wealth Strategies During the Coronavirus

“The utility of living consists not in the length of days, but in the use of time.” Michel de Montaigne

For better or worse, many of us have had more time than usual to engage in new or different pursuits in 2020. Even if you're as busy as ever, you may well be revisiting routines you have long taken for granted. Let's cover eight ways—some effective and others ineffective—to spend your time shoring up your financial well-being in the time of the coronavirus.

1. A Best Practice: Stay the Course

Many investment habits remain the same as ones we've been advising all along. Build a low-cost, globally diversified investment portfolio with the money you've got earmarked for future spending. Structure it to represent your best shot at achieving your financial goals by maintaining an appropriate balance between risks and expected returns. Stick with it, in good times and bad.

2. A Top Time-Waster: Market-Timing and Stock-Picking

Why have stock markets been ratcheting upward during socioeconomic turmoil? Market theory provides several rational explanations. Mostly, market prices continuously reset according to "What's next?" expectations, while the economy is all about "What's now?" realities. If you're trying to keep up with the market's manic moves ... we recommend that you stop doing that. You're wasting your time.

Continue reading