What is Evidence-Based Investing?

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A key part of our capital management approach here at Cedar Point Capital Partners is our focus on evidence-based investing, or EBI for short. But what does it mean to make “evidence-based” investment decisions? Shouldn’t all investments be made on solid evidence?

You might think so, but that’s not always the case in today’s financial industry.

A magnifying glass hovers over a chart

Evidence-based investing, at its core, is about relying on empirical evidence, validated research and long-term historical data to make financial decisions, all with the goal of maximizing your risk-adjusted returns and minimizing your expenses.

It’s about making smart decisions for your money based on facts, rather than emotions, the financial press or a broker’s hype.

If that sounds sensible, or perhaps even obvious, that’s because it is. Evidence-based investing is really an old school investment strategy dressed up in new, trendy clothing: Invest your money in solid companies - stocks, bonds, or other financial instruments - and hold onto them as long as your time horizon allows.

Why evidence-based investing is better

This gets to the heart of EBI—we don’t think it’s better, we know it’s better, based on reams of published studies, research papers and analyses of historical investment performance.

Here are some of the investment facts we know to be true after decades of financial research:

  • Markets are highly efficient and price in nearly all available information almost instantly, meaning your odds of “beating” or “timing” the market over the long term are slim.1
  • Funds with lower costs historically outperform those with higher costs.2
  • Properly allocated assets (based on your risk tolerance) can both maximize your portfolio’s long-term returns and better protect your investments when one investment falls.
  • Effective diversification can produce more consistent returns and reduce volatility through a global mix of investments.
  • Periodic rebalancing of your portfolio is key to maintaining your return and risk targets.

We believe the advantage EBI offers investors is self-evident, and sometimes wonder why more financial firms don’t follow it—but the truth is that humans aren’t necessarily rational creatures. Investors are regularly swayed by the active manager with the golden touch, the Reddit boards with the hot stock picks, and the fear that comes from watching the Dow and S&P at their most volatile. People think they can beat the market or save their portfolios by buying and selling at just the right time.

It’s easy to get wrapped up in the emotions of the market, but research tells us that’s precisely when you lose the most money.

EBI can help us fight those human tendencies by offering time-tested principles that ground us in the market’s most manic moments. Have patience. Let the markets work. Don’t chase alpha.

We know that can be easier said than done at times, but that’s exactly what we’re here for. Call us today to discuss how we can help you build a solid, evidence-based foundation for your future.


Citations:

  1. Fama, Eugene F., Market Efficiency, Long-Term Returns, and Behavioral Finance (February 1997). Available at SSRN: https://ssrn.com/abstract=15108 or http://dx.doi.org/10.2139/ssrn.15108
  2. Sharpe, William F., The Arithmetic of Investment Expenses (March 29, 2013). Financial Analysts Journal, Vol. 69, No. 2, 2013, Available at SSRN: https://ssrn.com/abstract=2241716

The commentary on this blog reflects the personal opinions, viewpoints, and analyses of Cedar Point Capital Partners (CPCP) employees providing such comments and should not be regarded as a description of advisory services provided by CPCP or performance returns of any CPCP client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this blog constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Cedar Point Capital Partners manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.