In our last post, “Stop Making Mistakes”, we talked about how important it is to avoid reacting to rapidly breaking news and other isolated anecdotes – at least when it comes to your investment activities. In addition, I’d also suggest you avoid making trading decisions based on insufficient or inferior evidence or data. There’s a name for that: I call it junk finance or junk financial research, and it may contribute as much or more to those “obvious” investment mistakes we tend to make.
In a “Junk Science Week” series published a while back by The Financial Post, I was struck by these relevant comments from a column entitled Hope Mongering:
Our standard definition is that junk science occurs when scientific facts are distorted, risk is exaggerated and the science adapted and warped by politics and ideology to serve another agenda. That definition needs to be refined. It was shaped by the idea that junk science is strictly the bailiwick of scaremongers. … But science can also be warped to promote the opposite of fear.
The world of investments is riddled with products, strategies and advice that, at their best, are hope-mongering and at their worst bring pain to your financial health. What marks them as suspect is the absence of peer-reviewed academic research to substantiate that they actually work – over time, across distances and through varied market conditions.
Using solid, evidence-based investing helps you minimize those “obvious” investment mistakes, as described in this Dimensional Fund Advisors’ video called “Applying Science to Investing”:
As we’ve covered in this post and our last one, being swayed by junk finance, hope – and fear-mongering, and today’s hot news is more likely to hurt you than to help you achieve your desired financial goals.
If something hurts, there’s no need to wait for your doctor or financial adviser to tell you to stop doing it.