Here at Carbon, we are firm advocates of evidence-based investing. But what exactly does that mean?
Well, the financial services industry is full of people making promises they can’t keep – promises about ‘beating the market’, about picking the best stocks, about market timing and about guaranteed returns.
Much as these offers can be tempting for those of us looking to grow our wealth and adequately fund our retirement, they don’t really stand up to scrutiny.
The truth is, markets are hard to beat consistently. Picking stocks based on the view that prices are wrong is like betting on the horses. It can go either way. Even the professionals aren’t very good at market timing. And as for guarantees, think about this: if there were no risk to investing, why would there be a return?
Evidence-based investing is an approach grounded in empirical research and the long-term observation of markets and how they work. This is not an approach based on guesswork or gut feeling or hunches or the idea that any single person has some magic formula for seeing into the future. It is an approach based on verifiable facts and observation.
In a world of slick marketing, spin and hype, the idea of respecting evidence is frequently undervalued. As the great Scottish philosopher David Hume once said, a wise man proportions his belief to the evidence. The danger of doing otherwise was highlighted by the fictional detective Sherlock Holmes, who said if you theorise before you have the data, you begin to twist facts to suit your theories.
The truth, supported by overwhelming evidence, is that consistently beating the market over the long term is extremely hard. Winning fund managers don’t tend to repeat year-to-year, and even the very few who do, tend to capture any additional returns for themselves by charging high fees for their superior skills.
There are dozens of studies illustrating the difficulty money managers have in outperforming the market consistently:
If you’re new to the idea of evidence-based investing and would like to learn more, why not get in touch? We’d be happy to answer any queries you may have.
 New Evidence on Mutual Fund Performance: A Comparison of Alternative Bootstrap Methods, by Blake, Caulfield, Ioannidis & Tonks, June 2014.
 Luck Versus Skill in the Cross Section of Mutual Fund Returns, by Fama, Eugene F. and French, Kenneth R., December 2009.
The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action.
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