Evidence-based Investing
If you go to a doctor, you expect them to have studied medicine to a very high level. If they recommend medication or surgery or medication, you would assume that they are basing that advice on evidence that the treatment has consistently worked for patients in the past. You would also expect the doctor to have your very best interests at heart.
There is no reason why investment advice should be any different. Unfortunately, though, for several decades, it wasn’t like that at all. Until 2012, financial advisers in the UK were paid commissions by fund management and insurance companies to sell their products, and more expensive products generally earned higher commissions. This led to millions of people being sold investments they would have been better off avoiding.
But there is another problem. Historically, advisers have mainly recommended high-fee, actively managed funds — in other words, funds that try to outperform the market through a combination of stock picking and market timing. The evidence overwhelmingly shows that only around 1% of funds beat the market, over the long term, net of costs. Furthermore, those very few funds that do outperform are almost impossible to identify in advance.
The good news is that there is an alternative. More than 60 years of independent, peer-reviewed, academic research has shown that the most efficient way to invest is simply to buy and hold a broadly diversified portfolio of low-cost index funds and, other than rebalancing your portfolio every year or so to restore the original asset allocation, to keep trading to an absolute minimum.
Despite a huge rise in the popularity of index funds in the United States, most advisers in the UK continue to recommend actively managed funds instead. rockwealth, by contrast, has been one of the pioneers in so-called evidence-based investing. By using low-cost funds, we have been able to save our clients up to £80,000 a year each in investment fees alone.
