Building Wealth

Introduction to Evidence Based Investing

Our Strategy to Help You Reach Your Goals

March 02, 2017 • 4 minute read
BrightPlan Blog

The next few posts outline BrightPlan’s core tenets in our investment philosophy; our playbook for helping investors reach their goals. The beliefs below are backed up by research and designed to help you intelligently plan for life.

Over the past decade the U.S. stock market has risen from the ashes of the Global Financial Crisis. During the Crisis U.S. stock prices plummeted by more than 50% to multi-decade lows in March 2009, a time when the Dow Jones Industrial Average (DJII) dipped below 7,000 points. Investors have since experienced a Bull Market that has brought indexes to a new all-time high, with the DJII recently tripling from the 2009 low to surpass the 21,000 mark.

The upward rise of markets has prompted excitement, fear, and endless speculation about what the future may hold. Whether you’ve enjoyed watching your portfolio during the rise or sat on the sidelines up to this point, the question remains, “How should I invest moving forward?”

Is it time to invest, to take gains, or to sit on your hands? In our view, the best path forward requires a research-driven investment strategy designed to help you reach your goals. At BrightPlan we are laser focused on helping you discover your goals, create a plan, and take action toward reaching them through prudent investing.  Investing is simply the tool for executing your plan and achieving your goals.

After all, the objective of investing is not just to pile up money without purpose, or pursue great gains regardless of risk. A good investment strategy manages risk and potential rewards to give the highest probability of reaching your goals through all market environments.

Our investment strategy is informed by a combination of tested academic research and deep financial planning expertise. The backbone for our investment strategy is supported by Nobel prize winning research implemented by advisors with over 30 years of experience. These advisors have expertly managed billions of dollars for clients through many market cycles.

This partnership has led to a thoroughly scientific approach to investing. We call it evidence-based investing. Here are a few of the tenets we embrace when building client portfolios:

Tenet #1 - Embrace Market Pricing

While studying the movements of markets in the 1960s, Professor and Nobel Laureate Eugene Fama posited the Efficient Market Hypothesis. His research identified that professional investors had a poor track record of actually “beating the market” through stock picking. After subtracting costs of trading and management, they rarely did better than the market. He hypothesized the underperformance was because markets price information efficiently, thereby driving prices of stocks and bonds to fair market value.

How does this happen? Every day millions of participants buy and sell securities in the global markets. The real-time information they bring to trading floors helps set prices. The market is an effective information-processing machine, made even more effective in the Internet Age through recent advances in information delivery, machine learning, and trading technologies. In 2015 world stock markets processed an average of 98.6 million trades per day, with an average volume of $447.3 billion dollars trading hands.¹

While no one person or organization can see into a crystal ball and predict the future of the markets, stock prices tend to reflect all information available to traders on any given day. As news becomes public, a flurry of trading activity quickly absorbs information and prices it into the market.

The most profound conclusion from the Efficient Market Hypothesis is that the average investor cannot profit from attempts to “beat the market” through stock picking. If Fama’s hypothesis is valid and indeed the market quickly absorbs all pricing information, then attempting to buy mispriced stocks for easy gains is a fool's game.

Trying to pick a set of stocks or bonds that will beat their benchmark (“outperform”) over the long haul is an an extremely difficult task for any investor. Picking the wrong set of stocks can end in tears, as a failed company wipes out the investments of those who held the stock (Enron, Bear Stearns, anyone?). But what about the winners? As you’ll see below, often those who are able to beat the market in one season fail to do so in the next season. The lack of consistency leads many to believe that luck, rather than skill, explained the temporary success.

Instead of gambling your money on the latest “sure bet” touted on CNBC, we believe in investing broadly (diversifying) across many markets for the long haul. Still feeling skeptical?

Read Part 2: Don't Try to Outguess the Market for a case study.

Or check out the rest of the series:

Part 3 - Let the Market Work For You

Part 4 - The Smart Way to Fund Your Future

Part 5 - Focus on What You Can Control

1. In US dollars. Global electronic order book (largest 60 exchanges). Source: World Federation of Exchanges.

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