Science has fueled significant discoveries that have improved every aspect of how we live. Our financial lives are no exception. The advent of computer technology half a century ago enabled researchers to analyze huge amounts of data from market history. From this research flowed an understanding of how investment markets generate returns for investors.
When new prospective clients are referred here or arrive on their own, we try to quickly establish a basic understanding of how our investment philosophy draws upon this science. Most new clients have bounced from broker to broker, from firm to firm in search of a better way. By “going where the science leads us”, we believe we have found a better (and different) way to invest.
The difficulty for many investors is that they find the science less than exciting emotionally. This is why the returns actually earned by investors over time usually fall far short of broad market returns. Our job is to help clients comprehend and apply the best ideas from science that persist over long periods of time.
So, how do we apply this science? By focusing on two root principles: asset allocation and behavior. Because of the constant headwinds of inflation, you have to accept some market volatility in order to reap the long-term real (after inflation) returns from stocks. The portion of stocks in your portfolio in relation to bonds goes a long way to determine returns. The other major determinant of investing success is how well you stick to your overall financial plan.
This excellent video from Dimensional reviews how the academic work in finance has helped create the framework for their approach to the investment markets. I think you will find this 2 minutes well spent. Ready for a real conversation?