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What If Investing Was a Science?

Newtown Square Friends & Neighbors, November 2022

Science has made huge contributions to our quality of life. We live longer and better because of medical science. We travel more comfortably and go farther because of science. Scientific breakthroughs have brought certainty, clarity and control to our lives. Wouldn’t it be great if all the things that come with science could be made available to investing?

You may not be aware of it, but science has had a huge impact on investing for over 88 years. Schools like the University of Chicago, have engaged in groundbreaking research that has resulted in 17 Nobel Prizes in the field of economics.

One of the wonderful things about living at this point in time is that the computer and digital age, allows for the processing of massive amounts of data, and it has allowed researchers to verify the efficacy of their research. There is now actually PhD level math behind the science of investing.

The breakthroughs have taken a lot of the mystery out of investing. When discovered and applied properly, they can be life changing and life saving. For example, how much risk is in your portfolio? 

Rather than broad ambiguous terms like conservative, moderate or aggressive, an investor can actually mathematically measure the amount of risk of one portfolio against another. Measurements make it easier for an investor to build a portfolio that matches their risk and return preferences.

Science has also added an important component to diversification. Diversification is not just owning different kinds of investments. To academia, it’s also measuring how those different investments will offset each other under different sets of economic conditions. Investors can get this measurement before they invest so they know in advance whether or not the portfolio they are considering is truly diversified.

These are just some areas of investing through which science has made huge strides in impacting the quality of peoples’ lives. And the great thing about science is that it’s a mountain that has no top. The best is yet to come.