The Evidence-Based Investor

Author Archives: TEBI

  1. Fund selection: the fired beat the hired

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    By ROBIN POWELL

     

    Outperforming the financial markets by identifying what securities to buy and sell, and when, is very hard. To quote Mark Hebner in his award-winning book Index Funds: The 12-Step Recovery Program for Active Investors by now in its tenth edition: “Picking stocks or bonds is an ill-fated strategy that wastes time, energy, and money.”

    Yes, there are bound to be a few winners, but the vast majority of ordinary investors who attempt it will fail. In fact, even professional investors, who devote their working lives to it, and have far more information and much better resources at their disposal than the rest of us, find it almost as difficult.

    S&P Dow Jones Indices keeps a regular scorecard on the performance of active fund managers called SPIVA. Morningstar has something similar — the Active/Passive Barometer. What these scorecards tell us, time and again, is the most active managers underperform the market most of the time. Over meaningful time periods, only a small proportion of managers succeed. Nor does this just apply to fund managers in the U.S.; professional stockpickers all over the world have exactly the same problem.

    READ THE FULL ARTICLE HERE

     

    This article is based on the book Index Funds: The 12-Step Program for Active Investors. The issues it raises are addressed in Step 5:

     




     

     

    PREVIOUSLY ON TEBI

    Do you have an issue with horizon risk?

    The fundamental flaw of active ETFs

    Six Lessons from A Random Walk Down Wall Street

     

    CONTENT FOR ADVICE FIRMS

    Through our partners at Regis Media, TEBI provides a wide range of high-quality content for financial advice and planning firms. The material is designed to help educate clients and to engage with prospects.  

    As well as exclusive content, we also offer a wide range of pre-produced videos which explain how investing works and the valuable role that a good financial adviser can play.

    If you would like to find out more, why not visit the Regis Media website and YouTube channel? If you have any specific enquiries, email Robin Powell, who will be happy to help you.

     

    © The Evidence-Based Investor MMXXIV

     

     

  2. There’s widespread confusion about dividends

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    By ROBIN POWELL

     

    Let’s face it, we all like the idea of free money. Some will recall the excitement of learning they were in line for a windfall by virtue of having a few pounds saved with a building society that was about to demutualise. Then came PPI compensation payments for loans you couldn’t remember taking out. Personally, just finding a pound coin left in a supermarket trolley can put a spring in my step all day.

    The investing equivalent is the dividend payment, except there’s an important difference between dividends and the windfalls mentioned above: they don’t actually make us any better off.

    Let’s back up for a moment. I’m not saying dividends aren’t important. On the contrary, they’re an integral part, along with capital appreciation, of an investor’s total return. But it’s a complete fallacy that dividends are effectively free money. Indeed there’s a name for this phenomenon in financial academic circles — the free dividend fallacy.

     

    One hand gives, the other takes away

    Simply put, if a company you own pays a dividend, the price of the stock drops by the amount of the dividend. In other words, dividends are not a free handout from a company to its shareholders — they directly affect the overall value of the firm.

    The extraordinary thing is quite how enduring this misconception has been. Academics Merton Miller and Franco Modigliani addressed it as long ago as 1961, in their seminal paper on dividend policy, which introduced what is now known as the Miller-Modigliani (M-M) dividend irrelevance theorem.

    READ THE FULL ARTICLE HERE

     

    STILL CONFUSED ABOUT DIVIDENDS?

    You might like to watch in this video we recently made for Index Fund Advisors to explain the free dividend fallacy.

     

    INTERESTED IN INVESTOR BEHAVIOUR?

    Here are some articles you may also enjoy:

    Stop looking for shortcuts

    Six lessons for investors from Daniel Kahneman

    Learn to embrace uncertainty

     

    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

     

     

     

     

  3. Picking stocks is like looking for a needle in a haystack

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    By ROBIN POWELL

     

    The human brain is a truly wondrous thing. Though weighing only around three pounds, it contains approximately 86 billion neurons and is capable of processing around a billion billion (that’s 1,000,000,000,000,000,000) calculations every second. And yet, strangely enough, there is a simple concept that even this extraordinary organ struggles to understand — randomness.

    Why is that? Well, human beings have evolved to dislike uncertainty. We crave predictability. We want to understand the complex world we live in and to feel a sense of control over our own destiny. So we see patterns where none exist; we mistakenly read meaning into entirely random data.

    Say, for example, you watch someone flipping a coin. If the coin lands heads up several times in a row, you might think that tails is “due” to come up next. You might, conversely, assume that, because it’s gone on so long, the run of heads is likely to continue. Either way, your thinking would be flawed, because the probability remains exactly 50:50.

     

    Markets are far more complex than we realize

    We make the same mistakes when thinking about the stock market. We like to think we understand the market. Even those who accept they don’t understand it nevertheless assume there are very clever people who do and can be trusted with managing their investments.

    But the stock market is an immensely complex ecosystem, driven by a multitude of factors including economic indicators, company performance, political events and investor psychology. In fact, it was shown as long ago as 1900 by a French mathematician named Louis Bachelier that, at least in the short term, stock prices move in an entirely random fashion.

    READ THE FULL ARTICLE HERE

     

    This article is based on the book Index Funds: The 12-Step Program for Active Investors. The issues it raises are addressed in Step 3:

     




     

    PREVIOUSLY ON TEBI

    The fundamental flaw of active ETFs

    Six Lessons from A Random Walk Down Wall Street

    How wide is the gender pension gap?

     

    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

     

     

  4. Do you have an issue with horizon risk?

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    Everyone should have a long-term investment horizon. But we also have different time horizons for different goals and need to be aware of how those horizons change.

     

    Financial advisers are always telling their clients to invest for the long term. It is important to think about returns over 15 or 20 years, not what happens on the markets from day to day.

    This is referred to as having a long-term time horizon. Since you are thinking about your finances well into the future, you should invest in the stock market where long-term returns will be better, even if there is more volatility in the short term.

    Generally, this is great advice. Many investors have compromised their wealth by reacting to short-term market movements and buying or selling at the wrong time; or by keeping their money in cash and earning below inflation returns.

    However, as a single piece of advice it can also be too simplistic. That is because every investor has a number of different time horizons, requiring different approaches. There is also the risk that your time horizon changes, or that it might suddenly be shortened by something outside of your control.

     

    Matching your horizon to your strategy

    This is called horizon risk — that your time horizon and your investment strategy don’t match.

    It’s all well and good to invest for the long term when you are building a pot of money for when you are no longer working. But not all of your financial needs are only going to be 20 or 30 years into the future.

    READ THE FULL ARTICLE HERE

     

    WHAT TO READ NEXT

    Here are some more articles you might like to read:

    Seven steps to better returns

    Three golden rules of investing

    In praise of simple investing

     

    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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