Broker Check

The Science of Investing Explained

July 30, 2020

In the world of portfolio management, where chasing “hot stocks” and the objective of “beating-the-market” seem to rule the day, many investors inevitably lose out by suffering huge losses and destroying their portfolios, or, at best, enduring ongoing stress and uncertainty trying to figure out what to do next whether in a time of doom and gloom or manic euphoria.

However, as an investor, having a basic knowledge of academic, Nobel Prize recognized investing science can not only impact your decision-making processes and investment planning, but it can ultimately make a huge difference in your financial confidence. Below are five insights about academic investing that investors should understand and consider when contemplating their investment strategy – and selecting their advisor or better, investor coach – and why.

  1. What is academic investing science?

Academic investing science takes decades of independent and/or collaborative academic research by economic, financial, and behavioral academics such as Eugene Fama, Harry Markowitz, Kenneth French and Meir Statman and applies it to portfolio management. This work has received Nobel Prizes and has provided empirically proven principles that remove the guesswork from portfolio management. It applies a time tested and proven methodology to the investment processes.

For one thing, this science emphasizes that a disciplined approach to investing via a globally diversified portfolio can produce favorable long-term results. What does this mean for investors? They have access to the education and tools to fulfill on their investment strategy via portfolios that are built to last – empowering them to successfully survive times of market volatility and uncertainty while staying focused on their life’s financial goals.

  1. An indispensable tool for investing

Advisors and firms truly committed to the continuous pursuit of financial academic theory do not pretend to be able to predict the future and get their clients in on a hot stock or tell them when to get in or out of the market. Instead, these advisors are focused on obtaining the best possible investment experience for their clients, looking to produce outcomes that balance targeted gains with identified risk tolerances and lifelong investment goals. Following this course, investors have not only an advisor but an investor coach who is an indispensable resource who can powerfully develop them to be disciplined and prudent investors over the course of a lifetime.


  1. Where the Academics of Investing, Finance, and Behavioral Science Unite

Inside the world of academic investing science is a subset of categories that comprise a highly disciplined approach to long-term wealth creation. One area is the Nobel Prize recognized work of financial and economic academics such as Nobel Laureates: Harry Markowitz, whose work on Modern Portfolio Theory guides the design of portfolios to maximize returns per the desired level of risk, and Eugene Fama, who pioneered the Efficient Market Hypothesis which asserts that stocks trade at their fair market value and investors benefit from investing in strategies designed to capture market rates of return rather than attempting to beat the market.

Another discipline is behavioral finance, seen in the work of experts such as Meir Statman, who look at how investors and managers arrive at financial decisions and how these decisions are reflected in the financial markets.

Advisors and coaches who base their investment strategy on the most powerful academic investing principles and behavioral science can create a whole new investment experience for their clients. In turn, investors can alter their relationship with investing in such a way their attitudes and actions relating to money can transform from one of stress and uncertainty to one of empowerment and confidence.

  1. Taking the guesswork out of investing

Applying academic investing science to portfolio management allows portfolios to be engineered to capture market returns while eliminating the need for stock-picking and market-timing. Applying this science eliminates attempting to time when to get back in (or get out) of the market, or which stocks or mutual funds to pick, or which money managers’ advice to follow – empowering investors to stop speculating and gambling with their life’s savings. Having an investment strategy built on academic investing science allows investors to take a prudent, long-term approach to investing and growing their wealth. What does this mean for you, the investor? The ability to obtain and retain a lifetime of self assurance about investing… and your (financial) future.

  1. A rebalancing act

Almost every investor has heard the golden rule of investing: “buy low, sell high”. Academic investing science is a systematic way of putting this in place, where allocations within an investor’s portfolio are evaluated and rebalanced systematically to target optimal, long-term results. This approach – based on extensive scholarly research and Nobel Prize recognized investing science – eliminates the need to chase hot stocks, managers or funds, or time market swings. Rather, it employs a disciplined approach to portfolio management. To quote Nobel Laureate Harry Markowitz, “A good portfolio is more than a long list of stocks and bonds. It is a balanced whole.”

In Conclusion

Possessing a portfolio constructed with academic investing science principles, while partnering with an investor coach who both advocates these principles and stands for this disciplined approach to investing, will enable an investor to know not only exactly what they are doing with their money… but as importantly, why!