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Knowing what you own is a Myth. Rules-Based Investing Wins the Race

May 09, 2024
They say knowledge is power, and in the investing world, the mantra seems to be "know what you own." But what if we told you this age-old advice is holding you back? Here's why: focusing only on familiar companies limits your opportunities, while rules-based investing unlocks a universe of hidden gems.
Think about it. If everyone's chasing the same "known" stocks, where's the edge? You end up competing in a crowded field, likely getting the same returns – and potentially the same heartburn – as everyone else during a downturn.
This is where rules-based investing throws a wrench into the "know what you own" philosophy. Instead of getting chummy with a select group of companies, it uses a set of predetermined criteria to scan a vast pool of investments, often encompassing thousands of stocks – many you might not even recognize.
Here's the beauty: these rules are based on time-tested financial principles. They act like a sieve, sifting through the market and unearthing hidden potential in companies that haven't hit the mainstream spotlight yet.
Imagine this: a well-designed set of rules could identify a company with a solid track record of increasing sales and earnings, strong financials with low debt, and a valuation that appears undervalued compared to its peers in the industry. This could be your next big winner, but it would likely fly under the radar of most investors stuck in the "know what you own" mindset, chasing the latest hot stock or clinging to yesterday's giants.
Rules-based investing offers several advantages that go beyond just finding hidden gems:
  • Reduced Bias: Our brains are wired for shortcuts, and that can be a recipe for disaster in the investment world. Following a set of rules takes emotions out of the equation. You're not swayed by hot tips or media hype, just following a disciplined approach that removes the temptation to chase fleeting trends or panic-sell during a market downturn.
  • Diversification: The vast pool of potential investments that rules-based investing considers allows you to spread your risk across different industries and sectors. This is a cornerstone of any sound investment strategy, and a key benefit that's often missed by advisors who focus only on familiar companies.
Remember: Rules-based investing isn't a magic bullet. But by letting go of the "know what you own" myth, you open yourself to a world of possibilities beyond the mainstream. So, ditch the familiar and embrace the power of a well-defined rulebook to unlock the hidden potential of the market. After all, the best investments are often the ones no one's talking about yet.