Investing 3.0: Invest Like A Scientist

Introduction

              Investing can be a powerful tool to improve one’s life over time.  Small differences in return and volatility, when compounded over decades can be lifechanging.  An extra one or two percentage points in return make the difference between retiring early or needing to continue working into old age.  A prudent investment strategy may allow a person to leave a legacy to children and grandchildren, while a poor one may leave one dependent on children and grandchildren for support.

              As important as investing is, most people know little about it, and have never formally studied it.  Instead, they rely on what they learn from friends, family and popular media.  Often this knowledge may be outdated, slanted, or just plain wrong.

              Like many fields, investing theory has developed over time, but insights into what drives investment performance are slow to work their way into practice.  Investing is a noisy endeavor, where randomness can deliver good returns for a poor strategy for years at a time, and vice versa.  Most information available to individual investors is presented by parties with something to sell.

              This paper looks at three major paradigms of investing, and looks at the relative advantages and disadvantages of each.  Investors will do well to have a well-thought out approach to investing that they can stick with through good times and bad, and to understand what the data say about their approach.

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