It's hard to keep pace with advances in medical science. Just look at some of the breakthroughs we've seen since the start of this century:

• human genome sequencing has laid the foundation for personalized medicine;

• immunotherapy treatments have significantly improved survival rates for previously untreatable cancers; and

• the mRNA vaccines developed in response to the Covid-19 pandemic have opened the door for future vaccines against heart disease and HIV.

By comparison with medical science, financial science moves rather more slowly. Academic papers that have genuinely revolutionized investing have tended to be published about once every 20 years. But that's not to say that the progress made has been any less remarkable than that achieved in medicine.

Before the mid-20th century, investing was largely based on heuristics, guesswork, and anecdotal wisdom. But, over the last 75 years or so, to quote Peter Bernstein's excellent book Capital Ideas, "a group of brilliant and stubborn individuals has changed the way we think about risk and return."

 

Nobel Prize Winning Research

As is the way with academia, it has very much been a collective effort. Every breakthrough has been built on the foundations of prior discoveries, tested, and refined by peer review. Academics like Harry Markowitz, William Sharpe,  Paul Samuelson, Myron Scholes, Robert Merton and Eugene Fama have advanced our understanding to such an extent that all have been awarded the Nobel Prize in Economics.

"These scholars," Bernstein wrote, "took investing out of the realm of gut instinct and brought it into the domain of disciplined, repeatable, and empirical science. "He went on: "Investors who rely on science rather than speculation are more likely to win in the long run." While research supports the benefits of evidence-based investing, it is important to note that all investing involves risk, and past academic findings do not guarantee future success.

Dimensional Fund Advisors has just produced a wonderful interactive timeline, which charts the development of academic finance from the early 1950s to the present day. You'll find it here.

If you want to learn more about this extraordinary story, and why investors should rely on financial science rather than speculation, I highly recommend Step 2 of Mark Hebner's award-winning book, Index funds: The 12-Step Recovery Program for Active investors. You can either read or listen to Step 2 here.

Who Do You Put Your Trust In?

But what does all this mean for investors today? Well, to put it simply, you can either put your trust in these afore-mentioned Nobel Prize-winners, or you can follow your intuition or the advice of media pundits or financial product sellers.

"These Nobel laureates," Hebner writes, "serve as a higher power for investors. They provide us with hundreds of peer-reviewed published papers that collectively discredit the myth that active investors can consistently beat the markets. Instead, their research supports the argument that a globally diversified, low-cost strategy maximizes returns at given levels of risk."

Unfortunately, there are still many financial advisors today who have a pre-1950s approach to investing. They base their advice on opinions and continue to recommend active investment strategies such as picking stocks, timing the market, and using actively managed funds.

What Is The Advice You've Been Given Based On?

As the prolific investment author Larry Swedroe explains in the latest episode of The Scientific Investor Podcast, it's vital that, whichever advisor you use, they base their advice on data and evidence, and not on opinions — either their own or other people's.

"Imagine, you're not feeling well… and you go to the doctor," Larry says. "After putting you through a battery of tests, the doctor tells you what the results show. And they pull out a copy of Men's Health and say, ‘Based on what it says here, this is what I think.' You're not going to feel good, so you get a second opinion.

"This time a doctor puts you through the same tests, but when she's finished, she pulls out a copy of the New England Journal of Medicine and says, ‘Based on this, there's a 70 percent chance your condition is this, and we're going treat it this way.' Now you feel a lot more confident because there's peer-reviewed evidence there, not people's opinions. Have the advisor show you the journals that they're citing and the evidence."

The bottom line is this. You would surely insist on an evidence-based strategy when it comes to your health. Why would you accept anything less when it comes to your investments and your future financial security?

 

 Learn the story of Index Fund Advisors, and how IFA has helped so many people invest and relax.

 

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ROBIN POWELL is the Creative Director at Index Fund Advisors (IFA). He is also a financial journalist and the Editor of The Evidence-Based Investor. This article reflects IFA's investment philosophy and is intended for informational purposes only.

This article is intended for informational purposes only and reflects the perspective of Index Fund Advisors (IFA), with which the author is affiliated. It should not be interpreted as an offer, solicitation, recommendation, or endorsement of any specific security, product, or service. Readers are encouraged to consult with a qualified Investment Advisor for personalized guidance. Please note that there are no guarantees that any investment strategies will be successful, and all investing involves risks, including the potential loss of principal. Quotes and images included are for illustrative purposes only and should not be considered as endorsements, recommendations, or guarantees of any particular financial product, service, or advisor. IFA does not endorse or guarantee the accuracy of third-party content. For additional information about Index Fund Advisors, Inc., please review our brochure at https://www.adviserinfo.sec.gov/ or visit our website at www.ifa.com.