What Is Evidence-Based Investing? (Hint: It’s the Evidence That Counts)
Traditional Active Investing
Long-term market history
Near-term market forecasting
Peer-reviewed academic evidence
How Do Traditional Active (TA) and Evidence-Based (EB) Investors Differ?
As the public grows increasingly familiar with “passive” or “index” investing, it’s becoming easier for individual investors to gain cost-effective exposure to globally diversified market returns. That’s good news! Even better news is that there is a similar approach we employ for our clients that incorporates the many strengths of passive/index investing while eliminating some of its inherent weaknesses. Beyond passive, we call it evidence-based investing.
More than any other approach, we feel that evidence-based investing rigorously incorporates available evidence on how markets have delivered long-term wealth to patient investors. Our aim is to combine sound strategy with objective advice on how to best apply it, so you can tune out harmful distractions and confidently pursue your own highest financial goals. Here is a brief summary of our the traditional approach differs from evidenced-based investing.
THEY SEE THE FUTURE DIFFERENTLY
- TA investors believe they can successfully predict when and how to trade on breaking news.
- EB investors understand near-term market swings are unpredictable; they ignore the “noise.”
THEY WORK ON DIFFERENT TIMELINES
- TA investors feel a sense of urgency to make the “right” calls to beat the market.
- EB investors assume that time is on their side; they give their plan time to grow.
THEY ARE GUIDED BY DIFFERENT DETERMINANTS
- TA investors act on “expert” opinions (which are vulnerable to biases, blind spots and changeable conditions).
- EB investors are guided by peer-reviewed academic inquiry (for “steady as she goes” resolve).
THEY DEFINE “SUCCESS” DIFFERENTLY
- TA investors define success as outperforming others or making a lot of money.
- EB investors define success as being able to comfortably fund their personal financial goals.
THEY USE RISK DIFFERENTLY
- TA investors don’t distinguish between market risks (factors that are expected to yield extra returns) and concentrated risks (which just add more risk).
- EB investors manage market risk factors (and their expected returns) and diversify away concentrated risks.
THEY CONSIDER COSTS DIFFERENTLY
- TA investors focus on cleverly timed trades over the costs, commissions and taxes they incur.
- EB investors focus on minimal trading, understanding that the costs involved are among the biggest drags on their end returns.
Bottom Line …
EVIDENCE-BASED INVESTORS APPROACH INVESTING DIFFERENTLY
- TA investors try to beat the market through clever stock-picking and market-timing.
- EB investors participate in the market to earn expected long-term returns according to time-tested academic evidence, their personal goals and their individual risk tolerances.
There are many variations of investment management. On one end of the spectrum lies investment management and the traditional active approach and a pure index or pure passive approach sits on the other end. Rather than adopting either of these two approaches, Oasis Wealth Planning Advisors has chosen to adhere to the evidence-based approach to manage our client’s portfolios for the reasons stated above. If you have friends or colleagues that are looking for a similar approach, we would welcome the opportunity to begin a discussion with them.