This year saw the passing of two giants of the investment world. The first was Harry Markowitz, who in the 1950s developed a concept now known as Modern Portfolio Theory. Markowitz’s key insight was one that today we view as so fundamental that it’s easy to take it for granted: Markowitz was the first to articulate and quantify the importance of diversification. He later won a Nobel Prize for this work.

This year also saw the passing of Charlie Munger. In contrast to Markowitz, Munger viewed the notion of diversification as “balderdash” and dismissed it as “a rule for those who don’t know anything.” In his more than fifty-year collaboration with Warren Buffett, Munger assiduously avoided diversification, opting instead for big bets on a small number of holdings.

Though they held opposite views, Markowitz and Munger were both revered for their contributions to the world of investing. Their legacies are a reminder that, when it comes to personal finance, no one has a monopoly on the “right” answer. There’s always more to learn. On that note, and as the year comes to a close, I thought it would be useful to revisit some of the new research we’ve examined in these emails over the past year.

Among the many debates in personal finance, one in particular seems never-ending: the debate between active investing and passive. On the one hand, the data seems conclusive—that passive is the better way to go—but new research often uncovers nuances worth understanding. This year, a study by Morningstar provided color on one such nuance.

When it comes to actively-managed funds, Morningstar found, some are far better than others. Or to put it another way, some are far worse than others. Morningstar put one sort in particular in a category of its own: tactical funds. These funds have delivered results so poor that Morningstar described them this way: “They came. They saw. They incinerated half their funds’ potential returns.”

What’s a tactical fund? Unlike a typical mutual fund, which is usually limited to a single asset class, managers of tactical funds have the freedom to adjust the allocations in their portfolios in response to economic forecasts. The challenge, of course, is that forecasting the direction of the entire economy is even more difficult than trying to forecast where a particular company or industry might be headed. For that reason, Morningstar found, ordinary single-asset-class actively-managed funds don’t do so badly before fees. It’s only after fees that they tend to underperform.

Tactical funds, on the other hand, have delivered terrible results by every yardstick. The lesson: I still don’t recommend any type of actively-managed fund, but if you’re going to go that route, it’s important to know which sort truly represent the third rail. Also, in making investment decisions, avoid the mistake tactical managers seem to make. You can do that by tuning out market commentators and maintaining a steady asset allocation despite the headlines of the day.

Why is active management so challenging? One answer lies in a CIA report titled “Do You Really Need More Information?” This report reveals a key irony in investment research: It turns out that investment managers who take the time to really do their homework are actually doing themselves—and their investors—a disservice. That’s because, in many realms, it turns out that gathering more information tends to make forecasts less accurate. But to add insult to injury, more information does accomplish one thing: It makes us more confident in those less-accurate judgments.

This difficulty is a key reason I’m in the passive investing camp. The reality, however, is that personal finance still involves innumerable other decisions. Financial planning, in other words, is about more than just choosing mutual funds. And much as we might try to be evidence-based in making those decisions, there’s a fundamental obstacle: As the saying goes, all data is about the past while all decisions are about the future. That is, we can try to be logical in making decisions, but at the end of the day, decision-making still involves some amount of guesswork.

That’s where Harvard professor Cass Sunstein’s new book, Decisions about Decisions, may be of interest. Sunstein surfaces a subtle point about decision-making: Though the two terms might sound synonymous, there’s a difference between picking and choosing. In Sunstein’s framework, some decisions lend themselves to choosing—that is, making careful, research-based decisions. But other kinds of decisions don’t benefit from gathering facts and data. In those cases, investors simply need to pick an option and not deliberate. By understanding the difference, investors can better allocate their time and energy.

One area where the data has been immensely frustrating for investors: international diversification. Look at a long-term chart, and you’ll see a clear benefit to diversifying your stock portfolio outside the U.S. But for an investor who’s held international stocks in recent years, it’s felt more like the incinerator Morningstar described. International stocks have lagged virtually every year since 2008. Despite that data, however, investment manager Cliff Asness, in a paper published this year, argues that it still makes sense to diversify. The paper’s title: “Not Crazy.”

I happen to agree with Asness, but this debate gets at a larger, recurring challenge in finance: At what point do we know that things have permanently changed—that we can’t expect reversion to the mean and that, therefore, historical data is only leading us astray? Without the benefit of hindsight, there is, of course, no answer to that question. But there’s value in simply being aware that it is a question. That knowledge can help us avoid ever being too confident in an opinion and can thus help us avoid ever going too far out on a limb with a decision.

Investors, in fact, have faced a similar challenge with value stocks. According to Dimensional Fund Advisors, between 1927 and 2021, value stocks outperformed their growth peers by more than four percentage points per year, on average. But in recent years, value has felt like a losing battle. Despite cautions that their valuations have gone too far, growth stocks have dominated the market for most of the past 15 years. Today, some of these companies carry market capitalizations in the trillions, and because of that, many have argued they’re riding a knife’s edge. Still, they’ve only continued to increase in value.

Because of this phenomenon, commentators have been cautioning for years that the S&P 500 Index was becoming dangerously top-heavy. And yet it’s only become even more top-heavy as those largest stocks have outpaced the rest of the market. Year-to-date 72% of stocks in the S&P have underperformed the overall index. The lesson: Yes, there’s value in paying attention to the market and in listening to what observers have to say, but ultimately we need to recognize that no prognosticator can know exactly how things will turn out.

Finance professor James Choi provides a useful perspective on this topic in a paper titled “Popular Personal Financial Advice versus the Professors.” He looked first at some of the most well-known findings in the finance literature then looked, for comparison, at how investment practitioners actually operate. Among the topics Choi explored: debt, international diversification and mental accounting.

On many of these topics, Choi found a disconnect between professors and practitioners. But he wasn’t so quick to criticize the practitioners. In many cases, he found that the way finance theory was employed in the real world wasn’t entirely unreasonable, even if it wasn’t entirely by the book. The lesson: There’s value in following the research, but we should view it as just one element in the mosaic, and not gospel.