Why investors need to learn from financial history
- Robin Powell
- Mar 18, 2024
- 4 min read
Updated: May 22
Learning from investment history is far more useful than relying on personal experience. In
this short video, behavioural finance expert Joe Wiggins explains why history — not intuition or trial and error — should guide your investing decisions.
In most areas of life, we learn by doing. Mistakes are corrected quickly, and feedback tends to be clear. But investing is different. As Wiggins points out, market outcomes are often shaped by luck and noise in the short term. That makes it easy to draw the wrong conclusions from our own experience.
The real danger is that investors may not realise they’ve made a mistake until years — or even decades — later. By then, the damage may be done. That's why Wiggins urges investors to base their strategies on robust, long-term evidence rather than recent performance or market narratives.
He highlights the importance of core principles such as diversification, compounding and long-term thinking. As Wiggins says, a strategy that’s worked for 50 years is far more credible than one that’s looked good for five.
1. Personal experience isn’t reliable
Short-term market movements are noisy and often misleading. You can make poor choices that appear successful, or good ones that seem to fail, purely by chance.
2. It can take decades to recognise a mistake
Investors don’t get the kind of quick feedback needed to learn effectively. Mistakes may only become clear long after it's too late to fix them.
3. Historical evidence is your best guide
Rather than chasing recent trends, build your investment approach around enduring, evidence-based principles like long-term returns, diversification, and compounding.
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Transcript
Robin Powell: The way that human beings generally learn to do things is through trial and error.
In most cases, it’s a sensible and effective strategy.
But, as behavioural finance expert Joe Wiggins explains, it’s not a good way to learn about investing.
Joe Wiggins: There's two reasons. One is the feedback we receive and the other is time horizons. So we think about the way we learn as we grow up. So take a simple example, when we're a child, we put our hand on a, on a hot stove, then we realise quickly because of the short term good quality feedback we get, not to do it again.
So we learn very quickly about what is a good and a bad decision. In investing, unfortunately, we don't get that opportunity. The feedback we get is very poor over the short term because market's so noisy and random over the short term. So we can make good decisions. They look bad over the short term and people can make really bad decisions that look fantastic over the short term.
So we struggle to learn because we get bad feedback and the good quality feedback we tend to get is over the long term.
RP: Of course, there lies a problem.
It could take you, say, 20 years to learn an important lesson.
But, by then, it might already be too late for you to achieve your investment goals.
JW: So what that means is we need to focus on sensible investment principles and we need to focus on the historic evidence to guide us because learning from our own personal experience will mean we're going vulnerable to short term noise, short term fluctuations and poor quality feedback.
The history of financial markets is incredibly important and focusing on robust, impartial evidence in how you frame your decisions is absolutely, absolutely critical. The other point is to have a sound, sensible, evidence informed set of investment principles that guide you. What are the key aspects?
The hold over the long term in terms of investing, so long term approach, diversification, compounding, those kinds of key unimpeachable principles should be your guiding light rather than short term experience in markets.
RP: So a strategy may appear to have worked over, say, two or three years, that doesn’t mean it will carry on working.
A strategy that’s worked over 50 years or more has far more credibility.
JW: I think the other critical thing about investment feedback is can you link the evidence, the information that you're looking at to sound investment principles? Does it make sense? Is there a fundamental reason why what you believe should work?
Rather than it's, it's just happened in markets, therefore I believe it. What's the reason behind this? Can I understand the investment principle so I can understand why equities might deliver a long run return because they're a stream of real cash flows linked to economic growth? That's something real and tangible I can link my beliefs to.
Other things are far more transient and fanciful.
RP: So beware positive feedback loops. And remember, you might learn more about sensible investing from the history books than the weekend newspapers.
© The Evidence-Based Investor MMXXV.
