Your financial planning and investing strategies should have a scientific basis
A previous article, “The Solution – ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that individuals are much better off with a well-considered financial viewpoint. A stable set of financial beliefs can help you to keep focused and on track throughout your life. This follow-up article discusses the need for these beliefs to be based upon financial practices that have been established scientifically.
Without a scientific basis for personal financial decision-making, you have no way to distinguish a valid financial planning and investment strategy from an industry marketing sideshow or a trip to Las Vegas.
Regarding best practices in personal financial planning and investing, objective information about what tends to work and what tends not work can be found. However to find this objective information, you must know where to look.
Academic specialists in finance and economics do most of the objective theoretical and statistical research on subjects that directly or indirectly affect the financial affairs and well-being of individuals. The scientific finance literature that they produce exists in bountiful quantities and is the source of the best practices that The Skilled Investor uses. (See: How does The Skilled Investor find and summarize scientific investment information?)
Most of this objective and enlightening information is “hidden” in academic journals and working papers. With the Internet, however, much of this information is now “hidden in plain sight.” One of the primary objectives of The Skilled Investor is to do much of the required digging and synthesis for you. (See: What is The Skilled Investor and who will find it useful?) However, if you would like to do some searching yourself, see this article on one way to get started: Using Google Scholar to find scientific finance articles.
Scientific finance and its limitations
When you decide how to plan financially and how to invest, you ought to be able to point to the high quality research work of some honest, objective, highly-educated, skillful, well-respected, and thoughtful people regarding financial best practices. These people should have: a) developed theories, b) done their homework, c) run the numbers, d) published their findings, and e) had their publications stand up to peer-level criticism. This is a crude summary of the scientific method applied to finance. (See: What is investment science?)
Some readers, particularly those with physical sciences or engineering backgrounds, might read this and say that financial planning and investing is not really a science. They might contend that science and the scientific method require observable, measurable, and repeatable phenomena, explanatory hypotheses, and verifiable experiments conducted by objective analysts who publish their methods and findings for others with similar expertise to critique.
One can always quibble about the degree to which the social sciences, which include economics and finance, can implement properly the scientific method. Unlike the fundamental sciences, which are focused on the study of natural and repeatable phenomenon, finance and economics are really a quantification of history, which is time linear, lacks repeatability, and can only be proven statistically. There will always some small to large level of statistical uncertainty in the findings of finance studies. Furthermore, as time marches forward, a horde of economic, social, political, demographic, technological, and other possibly influential variables keep shifting their relationships in the background. This shifting backdrop can raise reasonable questions about whether findings established using historical data will remain valid in the future.
However, the financial and investment science of the past several decades has been built on an increasing wealth of historical securities market data and on extensive survey research data. These data sets have been sliced, diced, and analyzed statistically by thousands of researchers. When studies looking at different data sets or at the same data from different perspectives reach similar conclusions, then it is reasonable to pay attention to the findings of these studies. It is also reasonable to call them scientific, while taking into account the associated uncertainties.
Without scientifically based financial information, there can be no valid or invalid financial guideposts. However, even with the abundant availability of scientifically based financial information, those who do not do their homework or have ulterior motives will continue to make vacuous financial assertions. Therefore, you need to make choices about whom and what you will listen to and what proof you will require, before you commit your money.
Personal Financial Planning
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Sales load charges and commissions on investment purchases differ from the financial service industry's numerous other recurring methods of charging fees to their retail consumers.
Sales loads are less straightforward to analyze for investment lifetime cost-effectiveness, compared to annually recurring charges. (See: Pay less to get more)
If you have [...])
- Factors Favoring Roth IRA and Roth 401k Plan Contributions (Factors that tend to favor Roth IRA and Roth 401k tax-advantaged plan contributions
In a recent article, "Traditional versus Roth tax-advantaged plan contributions," The Skilled Investor discussed why the average taxpayer would tend to benefit more by contributing to traditional rather than to tax-advantaged Roth IRA and Roth 401(k) retirement plans. This follow-up article in two-parts [...])
- American Funds – Capital Income Builder Fund – Class A Shares (CAIBX) attain a +4 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])
- Searching for Superior Investment Fund Managers is a Waste of Your Time (
Searching for superior investment fund managers is a waste of your money and time
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- 10 Personal Financial and Investment Planning Steps in the Right Direction (Increase your knowledge and accelerate your ability to take leadership in the management of your own personal finances and lifetime investing.
This ten-step personal financial planning process will help you optimize the management of your financial planning and investment management affairs over your lifetime, while greatly reducing the unnecessary waste of your money and your time.
- Most Individual Investors Are Poor Personal Portfolio Managers (Most individual investors are poor investment portfolio managers
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- Dodge and Cox Stock Fund (DODGX) picks up a +8 Fund Authority Score (The table below in this article presents The Skilled Investor's Fund Authority Score and other information for the Dodge and Cox Stock Fund (DODGX).
The diversified investment fund strategy of the Dodge and Cox Stock mutual fund (DODGX)
According to its website and its prospectus filing on the U.S. Securities and Exchange Commission EDGAR system, the investment [...])
- The Lifetime Value You Have Lost by Paying Investment Sales Loads (VeriPlan can estimate the lost lifetime value of investment sales loads that you have already paid in the past
Your personal investment portfolio losses related to past investment sales load payments can and should be measured, when you evaluate the cost-efficiency of your investment strategy.
However, you cannot recapture any of the lost returns (past or future) [...])
- Monitor and adjust your financial plan in a time-efficient manner – Step 9 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION
Time in life is the most precious and perishable asset that a person has. It should be spent enjoyably and efficiently. Scientific investment strategies that rely on relatively efficient financial markets allow people to minimize their time [...])
- Benefits of Traditional IRA Contributions for Renters (
In a series of articles, The Skilled Investor compares different lifetime financial planning projections for Fran and Fred Frugal to illustrate the relative value of adopting different financial planning strategies. Fran and Fred, both age 30, are a married working couple with $100,000 in combined annual earned income. (See the "Fran and Fred's Baseline Lifetime [...])
- A Financial Decision Tool That Becomes Increasingly Valuable Over Time (As a financial decision tool, VeriPlan becomes increasingly valuable with the passage of time
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- Tax-Advantaged Retirement Investing Is Good for Most People (Tax-advantaged investing is very good for most people at most times
A previous article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that individuals are much better off with a well-considered financial viewpoint. A stable set of financial beliefs can help you [...])
- Assess your personal investment return and risk preferences – Step 3 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION."
Investors with different levels of risk tolerance are more satisfied with investment strategies that are better aligned with their risk preferences.
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- The Biggest Personal Finance Story of the Past 30 Years (
The Biggest Personal Finance Story of the Past 30 Years - Part 1
What could the biggest personal finance story of three decades be?
The growth of mutual funds and ETFs? Nope.
The dot com boom and bust? Nope.
Vanishing pensions? Nope.
The not-so-high quality of mortgage bonds? Nope.
A 0% personal savings rate nationally? [...])
- Reduce investment expenses and control taxation – Step 7 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION
Even with optimal investment strategies, there is still substantial room to improve upon net investment performance through continued and vigilant focus on controlling investment costs and tax realization.
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