Fear sells. Most sales pitches about investing focus on fear. The more fear, the better.
Our internal wiring nudges us towards reacting emotionally to the lure of fear. However, there is an antidote; there is a way to stop letting fear unravel your financial life.
The entirety of our approach to investing is to emphasize evidence over emotion. This is a tall order because fear is evoked from the outside. That is, while fear is innate, the impulse to act on fear comes from external forces. Professor Jeremy Siegel of Wharton says, “fear has a greater grasp on human action than does the impressive weight of historical evidence.”
The best way to conquer investing fear is through a combination of data, behavior, and common sense. Taken together these constitute what is known today as Evidence Based Investing. Evidence Based Investing places emphasis on the sources of observed market outcomes rather than narratives and anecdotes.
Evidence Based Investing
In a nutshell, Evidence Based Investing acknowledges that tens of millions of market participants each day establish prices. These prices are based on all known information and cannot be accurately predicted in advance by any system or any person.
Therefore, the most effective manner to achieve premium long-term investment returns is to focus on low cost, broad global diversification, and staying invested throughout all market conditions.
Evidence Based Investing is the polar opposite of the approach used by the big brokers, banks and others typically wearing the “financial advisor” hat. For the main part, these firms preach market timing and stock selection. There is very scant evidence that works, but they still persist.
Let’s Look at the Evidence
Today’s investors have the benefit of 90+ years of market data and 50+ years of peer reviewed research into the sources of market risk and building blocks of returns. One of the main reasons that we utilize Dimensional Funds for our portfolios is their dedication to the science of investing and to follow the science wherever it goes.
Think about the impressive weight of evidence in a practical way: If you are 55 years old, the S&P 500 started out your birth year, 1962) at 69, while the Dow was about 725. Now, the S&P is over 2500 and the Dow is above 23,000. During your 55 years, the S&P has increased more than 37 fold and the Dow more than 32 times.
Silence the Fear
The problem, and indeed the most important daily battle investors face, is that fear is loud. Terrorist attacks, hurricanes, international tensions, political scandals and many other real issues make lots of noise. This noise ramps up the fear quotient and this tends to drown out all of the evidence and reason. Decisions made out of fear often lead to bad choices.
The key to unlocking the grip that fear holds on your financial life is to accept, embrace, and listen to evidence. Finally, what you do, or don’t do , once you have a rational strategy in place, is all important.
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