Arguably, one of the most important financial and life lessons of all time: Never stop learning.
Taking my own advice, I set aside time every year to attend a few select educational forums in person. As I described in this related Q&A the events I attend are not the stereotypical dog & pony shows bought and paid for by industry sales forces trying to pose as financial thought leaders.
In that vein, Dimensional Fund Advisors’ educational forums are among my favourites, and the recent 2016 – Dimensional Canadian Advanced Conference was no exception. As usual, I enjoyed networking with like-minded advisors, all of whom are as committed as I am to advancing the delivery of best-interest advice to Canadian investors.
Together, we attended presentations by insightful academics such as Nobel laureate Eugene Fama, and professors Ken French and Robert Novy-Marx. Several presentations from Dimensional’s research department focused on how to practically implement the findings in the academic world into real life portfolio management. And finally, on the lighter side, we heard the investor perspective as well, from Big Bang Theory executive producer Dave Goetsch, a Dimensional investor and client of a like-minded advisory firm based in Santa Monica.
Want to never stop learning yourself? Here are 3 key take-aways from my deep dive into the evidence-based investment think tank.
There’s evidence, and then there’s evidence
How do we differentiate game-changing new evidence from the latest fad? Professor Fama explained: While new investment products debut nearly every week and are often marketed as “revolutionary,” most of them are just variations on existing themes. Truly transformative new investment ideas come up much more rarely – like once every decade.
Professor Novy-Marx weighed in as well, describing how it’s not as easy as it might seem to reach reliable conclusions on past performance, especially when using “back-tested data.” Without getting too technical, and to jump to the conclusion, when properly generated, back-tested data can be telling. But if biased or sloppy data is left unchecked by an informed “jury of peers,” there’s ample room for abuse.
My take: If you’re thinking that back-tested data sounds tricky, you are correct! Whether intentionally or accidentally done, there are countless ways to fudge back-tested numbers, which is why academic peer reviews are so important before accepting a study’s conclusions. And to Fama’s point, when looking at “new” investment products, be sure you’re not buying the same proverbial wine in a different (usually more expensive) bottle. For both, it’s best to consult with someone who truly understands this difference and can offer you an objective second opinion on a product’s worth.
Reflections on expected returns
When asked, Professor Fama addressed why investors may want to assume that future stock returns will be lower than historical averages for the next little while – i.e. the equity premium maybe 1 percent per year lower than long-term historical averages.
My take: I have been adopting a similarly cautious outlook and advising investors accordingly for the past few years – and as recently as my last post. It doesn’t hurt to have my advice at least partially validated by a Nobel laureate.
Hearing from a “do-nothing” investor
From the perspective of an evidence-based investor who leads a very active lifestyle, Dave Goetsch reminded us of an important lesson: It’s really hard to do nothing in the face of uncertainty.
My take: While I know how important it is for my clients to stay the course throughout the market’s many moves, it never hurts to be reminded how challenging that can be in practice.
Another learning experience for me and my clients
It’s always hard to break away from my busy schedule to sit and listen and think and collaborate. But in retrospect, I’ve always valued everything I learn and bring back from Dimensional Fund Advisors’ educational forums. And I’m more than okay with the fact that DFA has never given me free golf balls or bestowed a “salesperson of the year” award on me or anyone else for that matter.