Nicki Hinton-Jones
By Nicki Hinton-Jones on June 28, 2022

Evidence-based investing: What it is and why it’s awesome

Our investment philosophy is built on decades of research-based not on gut feelings or best guesses, but on data. Our managed portfolio services invest in facts, not faith. Everything we do is evidence-based. Read on to discover what that means and why it makes sense for your clients.

What is evidence-based investing?

As the name suggests, evidence-based investing is the process of making decisions based on decades of research and historical data. Rather than looking at short-term market trends or the current climate, it’s an approach rooted in the long-term observation of markets. Our strategies exploit this by positioning to capture well-established performance premiums, such as value and size.

To explain it simply, a value stock is one that is priced below what it’s worth – based on its assets and/or the value of its future cash flows. Long term data shows that over time, investors are paid a premium for owning undervalued stocks. As the market recognises what these companies are worth, their market prices converge with their intrinsic valuations. As always, owning value stocks rather than the whole market brings an element of investment risk – factor risk in this case – which is justified by the expected premium.

Evidence-based decisions don’t waver based on daily movements in the markets. They remain constant and unchanged as they’re based on predetermined, verifiable observations of how the markets have previously performed.

The empirical evidence is supported by peer-reviewed academic research that essentially presents a framework for investing in particular stocks or sectors. This recipe for managed portfolio success is based on time-tested data that not only shows it works, but why this framework is effective.

All the evidence suggests that evidence-based investing is the way forward. After all, as philosopher David Hume once said, “A wise man proportions his belief to the evidence.”

Why should you consider evidence-based investing?

Lower costs

Evidence-based investing involves trading less and holding a diverse range of low-cost funds, which helps to minimise the financial outlay of trading costs. Plus, reducing investment charges with an evidence-based approach leads to higher returns.

Improved focus

It’s easy to be seduced by stocks that are trending but reactionary or emotion-based trading can lead to financial mistakes. An evidence-based approach removes the noise and allows clients to remain focused on the long-term vision.

A repeatable formula

Evidence-based investing isn’t a one-time approach. The framework is repeatable, meaning it can be reimplemented each time a client is ready to invest. The evidence on which the guidelines are based should also be based on repeated studies so you know the results weren’t simply down to luck.

Back-test the data

Within our evidence-based approach we have a long-term historic dataset that allows us to backtest portfolios and apply risk-return scenario analysis, stress-testing positions to create optimal outcomes.

Reach your financial goals with empirical evidence

We design investment portfolios guided by decades of empirical evidence and research by Nobel prize-winning economists. Our goal is to capture capital market return to bring you long-term financial gain. Find out more here.

Published by Nicki Hinton-Jones June 28, 2022
Nicki Hinton-Jones