A frequent topic of discussion with my friends and family is health. I love learning new ideas and strategies for being healthier. Sadly, implementing all the new ideas is much harder than talking about them.
One thing that has been increasingly troubling to me in the world of health, is the complexity and confusion around what is actually good for you and what isn’t. The opinions are endless – Western medicine, Eastern medicine, supplements, essential oils, gluten-free, vegan, and on and on.
I remember when I was growing up they taught me that grains should take up the most room on your plate. Now carbs are demonized.
Essential oils, which until a few years ago I had only heard of being used in aromatherapy, are now being used by almost everyone I know for almost any ailment.
I’m certainly not going to take sides on any of these issues, but this is the point- things change quickly, everyone has an opinion and there is just way too much noise.
Social Currency
I struggle with all this noise because I’m an evidence guy. I don’t take things as gospel because some supplement company claims their pill does magical things or because a friend tells me it “worked” for them.
What I want are the cold-hard facts.
Sadly, such facts are seldom available and even if they are most people don’t use them. We’re social beings. We like to gossip, to feel like we know things (probably why I write this blog) and to do things our friends and family are doing.
What’s going to be more exciting to talk about at dinner, some research study you read that detailed the effect of flaxseed oil on a sample of 45 to 54-year-old men with high cholesterol over a five-year period or a trendy new diet that a friend of a friend of a friend followed that helped them lose 10 pounds in a month?
We all do it.
A Universal Problem
But here’s the thing. The tendency to act this way isn’t unique to health issues. We do this with everything, including investing.
How many times have you heard a friend bragging at a company party about his tax-efficient, well-diversified investment portfolio?
Probably never.
Instead, we hear the stories about someone (again, usually a friend of a friend of a friend) who bought Apple stock in 2003 and made millions or about the manager who has a secret formula that never loses money.
These stories are fun to tell. They make us look good to our friends and family. They give us hope that maybe one day we can “get rich” too.
But just like all the outlandish health claims, these stories can be dangerous.
Sure, you might be able to lose weight eating nothing but steak and broccoli. But is it really good for your long-term health? Probably not.
Sure, the supplement pill everyone is losing weight on might help you lose weight. But what are the risks?
Sure, you could get lucky and pick the next Apple before anyone else knows about it. But what’s the downside if you are wrong?
Using Research to Guide Decisions
Fortunately, there is actual scientific research that has been done, and continues to be done, on both health and investing – research that goes beyond anecdotes and outlandish claims.
Unfortunately, our desire for the quick, easy fix often causes us to ignore the evidence in favor of the anecdote. “You mean I have to consistently exercise, eat right, and get enough sleep? Where’s the fun in that?”
One of my primary jobs as a financial advisor is to help people take the anecdotes with a grain of salt and focus on what research tells us works. My investment strategy is guided by decades of academic research. Here are some key insights you might try at your next social event:
- Stocks tend to have higher returns than bonds1
- Small company stocks tend to outperform large company stocks1
- Value stocks tend to outperform growth stocks1
- Low cost mutual funds tend to outperform high cost mutual funds2
- Diversification reduces risks that have no expected return3
Exciting stuff, right? I realize that it is highly unlikely that any of us are going to start having in-depth conversations about small cap stocks over dinner. When we’re being social, we’ll probably always tend to discuss what’s trendy and exciting.
But when it comes to our actual personal habits, I’d recommend sticking with the evidence on what works.
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Sources:
1Fama, E. F.; French, K. R. (1993). “Common risk factors in the returns on stocks and bonds”. Journal of Financial Economics. 33: 3.
2http://news.morningstar.com/articlenet/article.aspx?id=752485
3Maginn, J.; Tuttle, D.; McLeavey, D.; Pinto, J. (2007). Managing Investment Portfolios: A Dynamic Process. Hoboken, New Jersey: John Wiley & Sons. pp. 231–245.