Starting about thirty years ago, researchers in the medical field were looking for ways to standardize treatments. After analyzing years of data, they saw that very similar populations of people with the same disease diagnosis were receiving widely different treatments from their doctors.
Surely, they thought, a doctor who’s made an accurate diagnosis should be able to give their patient the scientifically-proven optimal treatment. Out of this was born the movement towards Evidence-Based Medicine. Their goal has been to analyze all of the available data, ignoring the anecdotal and the placebo effect, and looking for verifiable evidence of what works.
Evidence-Based Investing works on the same principle. Looking at past data to find verifiably beneficial behavior for the investor, it offers a systematic approach to participating in global markets. This strategy weighs the vast amounts of overwhelming mathematical and statistical data which indicates that active managers and active management strategies add unnecessary risk and cost while lowering the probability they can deliver on their promise: outsmarting the market.
As evidence-based advocate Barry Ritholz points out, most people who think they’re basing their investing on solid evidence really aren’t. He says, “It turns out lots of investing is emotional, reactionary, noise-driven investing.”
In practice, Evidence-Based Investing essentially means sticking with a proven plan for the long-term, even though it may seem doubtful along the way in the short-term.
How A Systematic Approach Saves Time
Joshua Brown, author of Backstage Wall Street and Clash of the Financial Pundits, says that systematic approaches take into account the uncertainty of the future. “They are the best way to express that the future is a) unknowable b) no one can reliably guess at what’s going to happen for extended periods of time and c) other approaches that rely on instinct, intuition and rapid-fire decision making are inconsistent (and costly) to depend upon for something as serious as building a retirement plan or funding future liabilities.”
In other words, even if you had the rare talent for picking undervalued companies, the time and resources required to acquire and analyze all the data you would need to trade them on a short-term basis would far outstrip your returns.
Brown then lists the dozens of ongoing tasks that must be done in lieu of a systematic approach. They range from constant media monitoring to researching thousands of publicly traded companies to hourly activity on your investment account. All of which will bring no guarantee of increased gains. And, in fact, are likely to hurt your performance.
The one bright spot is that all this activity may satisfy your urge to “do something” in response to movements in the market. But evidence shows that’s ultimately counter-productive. In other words just doing “something” when markets get volatile is most often the most costly mistake in the long run.
Remember as always: discipline and the evidence-based approach go hand in hand. So while pursuing an evidence-based strategy will minimize the amount of time you’d need to spend in other strategies, it still requires prudent behavior to be most effective.
We’re firmly committed to the strategies supported by evidence-based investing. So, if you want to save time and pursue the path that is most probable to deliver market returns, talk to your trusted advisor to understand more about an evidence-based approach. He or she can help you deploy a long-term plan that avoids adding active management’s risks and costs to the uncertain future we expect and accept.
Raising the probability of success while reducing time, worry and cost is a prudent strategy worth pursuing.