Last week was the annual Blogger Wisdom series on Abnormal Returns. It is a true honor to be included among a group of such smart, insightful people. Here were my responses to the different questions asked throughout the week.
What do you know with a high degree of confidence about investing that does not require any statistical support? (Full post here.)
You have no control over the market. The implication is that you should spend way less time thinking about the market and worrying about short-term moves.
If we had 1,000 years of market data what kinds of things would get validated? What things would lack support in the data? (Full post here.)
You would think the effectiveness of most investing and trading strategies would be confirmed or disconfirmed with 1,000 years of data. At the same time, markets are adaptive and anything we learn from 1,000 years of data might be altered as investors incorporate that information into their decision rules.
Regardless of how much data is available, people will always reach different conclusions about the same set of data depending on their preference for minimizing Type I or Type II error. For me, I’m generally more concerned with implementing a bad idea than missing out a good one.
Ten years from now, what will we be embarrassed by that we were excited about in 2017? (Full post here.)
First, the idea of robots replacing financial advisors is way overblown. People who provide investment-only services are at risk, but advisors providing comprehensive financial planning as well as advice that goes beyond financial statements will thrive.
Second, investors using a heavy dose of alternatives will not do much better than a traditional stock and bond portfolio over the next decade – in fact, I think they will do worse. Too many investment advisors are using alternative investments for the wrong reasons and they have unrealistic expectations for the potential improvement to a portfolio. Diversity is not diversification, particularly if fees destroy the allocation alpha.
If you could (magically) impart one piece of wisdom to all investors what would it be? (Full post here.)
I’d love all investors to truly understand how financial markets work. If they could see financial markets as a complex adaptive system, it would eliminate the futile cause and effect thinking that plagues so many investors. This framework would also help investors realize how difficult it is to find and profit from temporary market inefficiencies.
In addition, people that understand financial markets know that losses are incredibly normal, so they would spend less time trying to predict them and more time focusing on things within their control like savings rate, costs, taxes, etc.
What’s the one thing investors should do to simplify their lives? (Full post here.)
One of my most popular articles this year explains the importance of simplification through the context of Colonel Blotto, which is a classic zero-sum game in which one player’s gain is another one’s loss.
There are lots of suggestions in the article, but the easiest is to hire a financial advisor that acts as fiduciary at all times and emphasizes financial planning over investing. A good financial advisor makes life simpler, improves financial outcomes, and gives you more time to spend doing things that are more important in life.