The evolution of investing: how we arrived at an evidence-based approach

The fundamental practice of allocating resources to reap future benefits – that is, investing – has existed for millennia. It is perhaps even part of the reason the human species has thrived and survived in the manner it has.

The earliest evidence of financial contracts and investments comes from Mesopotamia around 1700BC, where clay tablets recorded loans of silver and barley with interest rates set by the code of Hammurabi.

Centuries later, the Romans developed early forms of investment with the creation of societas publicanorum – companies that managed public works and collected taxes. Shares in these ventures could be bought and sold, resembling modern stocks.

But for the evidence-based practices and investment culture that we might recognise today, we have to fast forward to the 17th century.

Read on to learn about the evolution of investing and how some of the strategies of the evidence-based approach developed.

Portfolio diversification began with the Dutch East India Company

In the 1600s, British, Dutch, and French ships travelled to Asia via the Silk Road for precious and prized commodities, such as spices, porcelain, tea, and silk.

The journeys the ships took were high-risk. If the ship itself didn’t come into trouble on the perilous waters, then the goods were often threatened by pirates, rats, or simply being ruined by the months-long journey.

This prompted ship owners to find investors willing to fund the expeditions, who would then take a cut of the profits if the trips were successful.

As the industry grew, shipping companies were established to conglomerate multiple ships, allowing investors to buy stocks and benefit from returns across all the voyages a company undertook.

The most notable of these was the Dutch East India Company, which became the world’s first publicly traded company in 1602.

To reduce the financial risk of investing in the journeys, savvy investors would spread their investments across several different voyages, so if one went awry, they still had a chance to break even or profit from the success of the others.

This laid the foundation for what would later become common practice in the world of investing and the evidence-based approach – portfolio diversification.

The creation of the first stock exchange heralded the idea that investors expected their holdings to grow in the long term

The Amsterdam Stock Exchange (now called “Euronext Amsterdam”) is often considered the first modern stock exchange.

It was founded to facilitate the exchange of stocks and shares in the Dutch East India Company. This meant the company could continue to invest and grow while ensuring investors were protected by greater diversification.

The founding of the Amsterdam Stock Exchange also signalled the idea that investors expected their stock to grow in the long term.

This expectation was based on the belief that enterprises, such as the Dutch East India Company, would generate profits and expand over time, leading to increased shareholder value.

This long-term growth perspective laid the groundwork for the modern principles of evidence-based investing, emphasising patience, a focus on long-term horizons, and the anticipation of future gains.

The Great Depression and the postwar boom set a precedent for the tendency for markets to bounce back

In 1929, the US stock market crashed, leading to a decade of profound global economic struggles known as the Great Depression.

Just three days before the crash, the influential economist Irving Fisher famously declared that stock prices had reached a “permanently high plateau”. This miscalculation highlights the dangers of trying to predict short-term movements or time your entry or exit from the market.

The Great Depression had a lasting effect on investment practices and led to increased regulation of the stock market to help ensure such a crash would never happen again.

The decades after the second world war were a period of considerable economic expansion and saw the development of the modern geopolitical and financial order that exists today. This period, known as the “postwar boom”, was typified by large government investment and economic growth.

The significant fall and subsequent rise of the market in the years preceding and following the second world war set a precedent for the tendency of markets to trend toward growth in the long term.

Even after historical events such as the Great Depression, markets have bounced back. This pattern of recovery reinforces the idea that investing with a long-term perspective can help you weather short-term volatility and benefit from the overall upward trajectory of markets.

Democratised and digital investing means market sentiment can be volatile, but a disciplined approach is usually best

In 1971, the NASDAQ stock market index was established, marking the birth of the world’s first electronic stock market. This innovation ushered in a new era of electronic trading.

Then, in 1975, John Bogle founded Vanguard and introduced the first index mutual fund, promoting low-cost, passive investment strategies for individual investors.

As financial markets across the world became increasingly connected by the prevalence of the internet, capital flowed across borders and deregulation in certain regions and sectors led to huge growth in the early 2000s and the subsequent crash in 2008.

The last decade has seen the introduction of cryptocurrencies and blockchain technology as well as investment apps, making it quick and easy for individuals to manage a portfolio of diverse assets from the palm of their hand.

With so many people now able to invest, market sentiment can be highly volatile, influenced by short-term trends and herd behaviour.

Successful investors prioritise their long-term objectives and maintain disciplined strategies, rather than reacting impulsively to market fluctuations.

Focusing on long-term horizons and ignoring short-term “noise” helps you to make more rational and informed investment decisions, and is key to the success of evidence-based investing.

Get in touch

To find out more about our shift to an evidence-based approach and what it could mean for your investments, get in touch.

Email us at hello@vwmwealth.com or call us on 0141 229 4004.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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