The Importance of Understanding Evidence-Based Investing

At Claris, our passion is helping clients understand how capital markets work and to provide them with the information necessary to become smarter investors.

Evidence-based investing is significantly different from most of the advice heard on Wall Street and in the financial media. It also is different from the strategy followed by the typical individual investor. Because our investment approach is different, it is crucial to understand why we recommend it. Put simply, knowledge is the key to discipline. Therefore, the following five concepts are at the foundation of our investment philosophy and advice:

Markets Are Efficient

Public information is of little fundamental value. New information is so quickly incorporated into stock prices that use of this knowledge cannot be expected to consistently yield superior risk-adjusted returns. Information that is not public is also of no value, because it is illegal to trade on it.

Risk and Expected Return Are Related

Investors who expect or need to achieve higher returns must accept the associated risk. Stock-like returns do not come without appropriate risks. When it comes to investing, there’s no such thing as a “free lunch”; there is no promise of high returns without high risk. Anyone who tells you different is peddling a “free meal” you don’t want to eat.

Diversification Works

Global diversification across a variety of asset classes that behave differently is the most effective way to reduce risk. Diversification is always working, whether we are pleased with the immediate results. Diversification should be thought of as the equivalent of buying insurance against having all of one’s investment eggs in the wrong basket.

Markets Are Unpredictable in Both the Short & Long Run

In the short (or even long) run, anything is possible. In the long run, we expect that stock markets will rise more than fall. Individuals who correctly predict short-term market movements should likely attribute their results to luck rather than skill.

Discipline Is Essential to Successful Investing

For too many investors, the variable that ultimately determines the results of their portfolio performance is not investment returns but investor behavior. Emotions can lead investors to make poor decisions at the wrong times. It is easy to remain disciplined during bull markets. However, it is far more important to do so in bear markets and avoid the far-too-human propensity to sell at market bottoms. Thus, the role emotion plays in the success of an investment strategy cannot be overemphasized.

Since our advent, Claris has put an emphasis on the above principles and things that are controllable such as evaluating risk tolerance, building a globally diversified portfolio and implementing regular, disciplined portfolio rebalancing techniques. If you understand and adhere to these concepts, you will be well ahead of the majority of the investing public.

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