Evidence-Based Investing

It’s All On You Now Over the last two to three generations, the financial landscape in the United States has shifted. Many years ago, the average American would go to work for a single company where they would spend their entire career. Eventually, he would retire and begin collecting a company pension – a fixed dollar amount that he would receive for the duration of his life. Upon his death, his spouse, assuming he had one, would receive a portion of that pension (typically half) every month while she was alive. Today, fewer and fewer Americans can rely on company pensions. Most employers have abandoned their Defined Benefit (pension) plans and replaced them with Defined Contribution Plans – 401(k)s, etc. While many could count on receiving a company pension, since 1935, most working Americans could also count on the Social Security Retirement Benefit. Today we are living far longer than lawmakers anticipated when writing the Social Security Act . As a result of this and many other reasons, this national social safety net is woefully underfunded. To make matters worse, our national debt is driving our nation closer and closer to a tipping point. While a case can certainly be made that the United States is careening towards insolvency, we must remember that the nation does not have to actually default on the debt in order for the average American to experience significant economic calamity. As a result of all of this, Americans are having to rely more and more on how much they have set-aside during their careers. But it’s not just how much one sets aside during their working years. It’s also how well those dollars were invested and managed over the years. The wise American knows that their financial security in retirement relies solely on their own saving and investing habits. Unfortunately, they likely have bad habits. There are numerous books written expounding on the average American’s low rate of savings. There is not, however, enough written about the poor investing habits of the average American. These bad habits are, in part, due to the poor counsel Americans receive from academia and the typical Wall Street firm. Investing Is Not Taught The United States is a very educated country. However, most states do not require any financial coursework as a high school graduation requirement . Worse still, even when finance is taught, the topic is broadly covered. From a certain point of view, this is good news for the financial services industry. If the American people are confused or uneducated on financial matters, rest assured the financial services industry is there to help. While certainly good intentioned, too often the financial sector offers platitudes based on academic theories that history suggests are null and void. This book will look briefly at three examples. We will discuss the cliché of investing for the long term. We will also look at financial academia’s shining star, the “Modern Portfolio Theory.” We will then examine the theory of asset allocation. Since both Modern Portfolio Theory and the concept of Asset Allocation are preached with risk management in mind, we will elaborate on a different approach to managing risk. This book is not intended to be a full treatise on portfolio management. The intent is to offer an introduction to the topic. More importantly, the intent is to offer something that is approachable. As stated in the introduction, my experience has been that many investment related books can be intimidating to those at the beginning of their investment educational journey simply due to the size of the book. While my hope is that I offer a fresh perspective to the reader, I also hope that this book is accepted as a solid introduction for those that are just beginning to explore investments and investment theory. Should I succeed, the interested reader will find a Recommended Reading list at the back of the book to further their studies.