Markets are up. Markets are down. Don’t blink, or they’ll spike or plummet yet again. Given the continuous seeming “betrayals,” I am not surprised by how many people I meet who would love to break up with their investment strategy (if they’ve got one to begin with) and have lost hope that they’ll ever find one they can embrace.
To move past the uncertainty, consider emulating some of the luminaries of the financial economics community and KISS your investments (Keep It Simple … well, you know the rest).
If you look past the noise and fury of daily market mayhem, it’s easier to focus on the more lasting body of work by a “Who’s Who” collection of scholars who have been studying our financial markets since at least the 1950s, seeking answers to key questions such as:
- What drives returns? Which return-yielding factors appear to be persistent over time, around the world and across a range of market conditions?
- How does it work? Once identified, can we explain why particular return-yielding factors exist, or at least narrow it down to the most likely causes?
We can then take these durable principles and sensibly apply them to a practical investment strategy that moves us past the daily confusion, onward to our personal goals – as effectively and efficiently as possible. Such findings point to more dependable factors such as:
- Staying the course in pursuit of market factors that have demonstrated the ability to deliver persistent, long-term returns to patient investors
- Investing according to personal goals and risk tolerances (and ignoring the debilitating distractions)
- Minimizing unnecessary costs
In short, it doesn’t have to be so complicated, as long as you approach the market as you would a global expedition instead of a day hike.
But don’t just take our word for it. Consider what Nobel laureate Eugene Fama is reported to have said about his research:
“The true value of academic research … is that it identifies what we need to focus on to succeed, and helps us to understand it. Investment theory simplifies things that are otherwise shrouded in mystery and confusion.”
Similarly, here’s an anecdote about what the late Nobel laureate Merton Miller said about his own body of work:
“‘If you take money out of your left pocket and put it in your right pocket, you’re no richer.’ When reporters were surprised that he received the Nobel for something so obvious, he quipped, ‘Yes, but remember, we proved it rigorously.’”
What do these sentiments from academic giants teach us about investing? Maybe it’s not so much their higher mathematics that made these luminaries shine, it’s how they have helped us apply KISS to the conclusions.