Ep #95 - 3 Reasons Why Following Investment Evidence Beats Guessing the Market with Mark Hebner
Are you feeling frustrated by the difficulty of understanding investment strategies? Feeling uncertain about which approach to take?
Imagine spending years trying to navigate the complexities of active management, only to discover that it may not be the most effective approach. The struggle to decipher the impact of dividends on investment returns and the challenge of understanding market efficiency theory can leave you feeling overwhelmed and disheartened. It's time to cut through the confusion and gain clarity on evidence-based investing strategies. Let Joe and Mark guide you through index funds and learn to make informed decisions confidently.
What You’ll Learn in Today’s Episode
· Master evidence-based investing strategies for long-term success.
· Discover the advantages of index funds overactive management in growing your wealth.
· Uncover the impact of dividends on your investment returns for sustainable growth.
· Understand the theory of market efficiency to make informed investment decisions.
· Manage risk effectively to build a resilient investment portfolio.
Ideas Worth Sharing
“People can't beat the market. They can't pick stocks. They can't time the market. And there was this entire industry, literally 98%, 99% at that time of the industry, was actively investing with people's money.” - Mark Hebner
“Every academic paper, every academic you speak to only looks at a reinvested total return index for all of their research, all the factor models that we had talked about, all the FamA french indexes, all the dimensional indexes, all use total return. And it's just the default is one of the reasons I was kind of caught by surprise on this, Joseph, is we just always assumed everything was total return.” - Mark Hebner
“When you understand this evidence about this long-term historic data and that the price has always been fair since 1928 till now, then you better understand that those probabilities should apply to you and your investment experience.” - Mark Hebner
Resources in this episode
Lessons from a $30 Million Investing Mistake
When Mark received a $6 million payout at age 32 from selling his company, he lacked investing knowledge. Like many in that position, he trusted a broker who convinced him to actively trade. Over 13-14 years, Mark estimates those actions cost him around $30 million compared to if he had just passively invested in index funds.
Mark decided to educate himself. He discovered the concept of evidence-based investing, which uses academic research on market efficiency and asset pricing. The research showed that actively picking stocks or timing the market fails to beat broad index funds. Mark realized prices quickly incorporate all publicly available information, so individuals cannot gain an edge.
Yet despite this evidence, over 95% of the industry still pitches active investing. Advisors earn higher fees from transactions and face conflicts of interest. Mark knew there must be a better way. He started his firm to spread awareness of passive, low-cost index funds.
When selecting an advisor, find one who grasps evidence-based investing. Ask about their philosophy. Can they explain market efficiency and the futility of stock picking over the long-term? If not, keep looking. While each investor's timeframe differs, maintaining a long-term mindset builds discipline. Periods like the last decade see growth outpace value. But over extended periods, factors like value earn higher returns for bearing more risk.
No approach works all the time. By understanding the evidence, an investor knows what odds to expect. The premiums for value or small cap stocks carry uncertainty in the short run. Yet over longer periods, the academic research clearly shows they are rewarded.
Learn from Mark's mistake. Passive index funds matched to your risk capacity and time horizon provide simplicity, low fees, and long-term performance.
Frequently Asked Questions
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Episode 95 of our podcast discussed evidence-based investing as a strategy that relies on empirical research and historical data to guide investment decisions. It emphasizes diversification across asset classes, passive investing through index funds to replicate market performance, and minimizing costs. This approach prioritizes long-term growth over short-term gains, aiming to achieve consistent returns while managing risk effectively. Focusing on evidence rather than speculation provides investors with a disciplined framework grounded in proven strategies for financial success.
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In addition to the points discussed, the best financial advisors play a crucial role in helping you construct a portfolio that aligns with your financial goals using the best available research. However, even the most skilled advisors are susceptible to market volatility. Research indicates that the majority of professional investors who attempt to beat the market actually underperform it over a given time period.
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To start with evidence-based investing, consider learning about and investing in diversified index funds, creating a balanced portfolio, and focusing on long-term goals. Consulting with a financial advisor who specializes in evidence-based investing can also provide valuable guidance.
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Financial advisors play a vital role in evidence-based investing by helping people achieve financial freedom. They use research-backed strategies to build investment portfolios that aim for long-term growth and stability. By focusing on diversified investments like index funds, advisors reduce risks and aim to maximize returns. This approach helps clients avoid emotional decisions and stay on track to meet their financial goals, ensuring a more secure and independent financial future.