6 Ways in which Evidence-Based Investing differs from Traditional Active Investing
You probably know my beliefs about investing.
Rather than playing an expensive game based on information over which we have little control, we recommend investing according to market factors that we can expect to control such as:
minimising costs
capturing returns and
diversifying holdings.
We call this Evidence-Based Investing. That’s because our investment solutions are evidence-based and substantiated by world-leading academics and financial economists.
They’re not based upon the whims of an investment manager or the latest ‘hot stock’.
And it’s certainly not a ‘passive’ approach to investing. Our carefully selected fund managers, including Dimensional, understand what drives market returns and focus on fine-tuning their method of capturing them. Each and every day. To optimise the diversified portfolios we use.
“But how exactly does Evidence-Based Investing differ from Traditional Active Investing?” I hear you ask.
Read on, and I will explain in the six points that follow.
(Hint: It’s the Evidence That Counts)
1. They see the future differently
Traditional Active (TA) investors believe they can successfully predict when and how to trade on breaking news.
Evidence-Based (EB) investors understand near-term market swings are unpredictable; they ignore the “noise.”
2. 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.
3. 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, by working with leading financial economists.
4. 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.
5. 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.
6. 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.
The 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.