10 Research-Tested Investment Principles for Improving Your Returns

I don’t know about you, but when I need advice, I try to find the most knowledgeable and experienced person possible. If my car needs repair, I want a mechanic who has fixed hundreds of cars. If I needed surgery, I’d want a surgeon who had years of training and who had successfully performed dozens of operations of the type I’m getting.

It’s the same in the world of investment. When clients need solid advice, I urge them to listen to people who have spent years studying market and investment performance and who have developed reliable guidelines based on empirical, research-tested evidence. Based on Nobel Prize-winning investment research, these ten investment principles can help you achieve superior results with your investment portfolio.

  1. Let the market decide the price. The financial markets are the world’s most efficient valuation mechanism. The price of a given asset is the result of thousands — maybe millions — of individual buying and selling decisions, taking place all over the world. Trying to second-guess the market in deciding how much to pay is a recipe for failure.
  2. You can’t outguess the market. No one — whether savvy individuals, hedge fund managers, or mutual funds — can consistently predict which segment of the market will be the best or worst performer during a particular period. Trying to do it will most often result in frustration and missed opportunities.
  3. “Past performance is no guarantee of future results.” This phrase is on every investment prospectus and newsletter for a reason: it’s true. For example, research shows that most mutual funds in the top 25% of performers for a given five years will typically be less highly ranked the following year. Basing investment decisions on past performance is not reliable.
  4. The markets are efficient; let them work. Research demonstrates that over the long term, the financial markets consistently reward investors who are patient and disciplined.
  5. Investment returns are multidimensional. For stocks, such dimensions include company size, value vs. growth characteristics, and profitability. For fixed-income assets, time to maturity and creditworthiness are prime drivers of performance. The contrasting growth characteristics of stocks and fixed-income assets are an additional dimension to be considered. Your portfolio should encompass as many of these dimensions as possible.
  6. Diversification is your friend. Related to the dimensionality described in #5, a portfolio that is broadly diversified along all the dimensions will experience less overall volatility in value.
  7. Don’t try to time the market. No one, including financial professionals, can say with certainty what the market will do during a specific time. Rather than trying to predict the unpredictable, focus on diversification, discipline, and a long-term strategy fitted to your specific situation.
  8. Emotional investing is a mistake. While the value of our assets is of great importance to us, allowing our feelings to guide our investment decisions is unwise. Markets go up and down, but investors need to keep their emotions on an even keel in order to experience long-term success.
  9. Headlines aren’t the whole story. The goal of the financial media is to garner clicks, “likes,” “follows,” and above all, advertising revenue. Reacting to sensational headlines will rarely further your long-term financial goals.
  10. Concentrate on what you can actually control. Diversification, rebalancing (adjusting your asset mix in response to market action and other events), and sticking to a disciplined, long-term strategy are your research-tested keys to success.

Would you like to put these scientifically tested principles to work for your investment portfolio? I help people take the guesswork out of retirement planning, investment for higher education, and other important financial goals. Please get in touch to learn more.

Stay Diversified, Stay YOUR Course!