If you have ever watched the television show “CSI: Crime Scene Investigation,” you know the mantra: Follow the evidence. That is a great rule for a crime scene investigator (CSI), and it is also good advice for those trying to figure out how to invest their assets.
Imagine a CSI who drew conclusions based on intuition, biases or just plain-old guessing. A crime scene conversation might go something like this:
John: “I think the husband did it.”
Jane: “Why do you think that?”
John: “Because in the past three cases, the husband did it.”
Jane: “Do you have any evidence to support that theory for this case?”
Jane: “Great job, John. You have a bright future as a CSI.”
Of course, John would not have a bright future as a CSI. He just went with an untested theory, a hunch that wasn’t supported by any facts. Not following the evidence when investigating crimes can have disastrous consequences. Not following the evidence when managing one’s assets can have serious ramifications, too, such as poor performance, not meeting financial goals and even running out of money.
Academic research has uncovered that:
• When it comes to actively managed mutual funds, past performance is an unreliable predictor of future performance.
• It is difficult, if not impossible, to consistently predict which actively managed funds will do well in the future.
• Asset allocation is one of the most important decisions we can make about our investments.
• Diversification can improve returns without increasing risk or, similarly, can reduce risk without lowering returns.
In the aggregate, decades of research have found that the prudent way to invest is with a diversified mix of low-cost, passively managed funds with asset classes properly allocated and periodically rebalanced. So when it comes to your finances, be like a CSI: Follow the evidence.
The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2013, The BAM ALLIANCE