A Scientific Framework for the Art of Investing
Scientific progress is evident in virtually every aspect of our lives. The magnitude of change over the last few decades is overwhelming in every way except one—the way most people make their investment decisions.
Science and the field of medicine have deeply benefited from an evidence-based point of view to solve problems and answer difficult questions. And now, so has investing.
Enter Evidence-Based Investing (EBI), a well-organized investment approach that uses historical data, research, and our collective knowledge of risk and return to maximize the likelihood of reaching your desired outcomes, while minimizing risk and reducing frictions from high costs and taxes that can negatively impact your results.
As compared to more conventional investment approaches that are commonly driven by emotion, instant satisfaction, and market timing, the Evidence-Based Investing approach relies on wisdom, facts, data, and time spent in the market.
To expose the many downsides of the conventional approach and provide a road map to investing success, Savant developed a whitepaper that introduces the concept of Evidence-Based Investing. The paper helps investors best capture market gains, while avoiding the pitfalls of conventional approaches, such as market timing.
Before we discuss how EBI works, let’s differentiate the conventional investor from the evidence-based investor so we can better understand each.
Conventional Investor vs. Evidence-Based Investor
- The conventional investor views markets as an opponent for them to outsmart. The evidence-based investor views markets as an ally and appreciates their collective wisdom.
- The conventional investor emphasizes feelings over facts. The evidence-based investor utilizes facts and emphasizes process over outcome.
- The conventional investor scours the world for numbers that fit their narrative. The evidence-based investor welcomes opposing data and reserves the right to change their mind when necessary.
- The conventional investor compounds their mistakes through attempts at timing the market. The evidence-based investor understands compound interest and thus the importance of time in the market.
How does Evidence-Based Investing work?
Savant’s investment philosophy is designed to build globally diversified portfolios that minimize unrewarded risks and maximize after-tax return. EBI offers a way to put our philosophy to work by answering investment questions in an orderly, analytical, and scientific manner via a four-step process.
Step #1: Challenge Conventional Wisdom
Conventional investment wisdom tries to answer questions that cannot be validated. There are countless unverifiable questions and statements that dominate investment news daily, so EBI uncovers the right questions to ask.
Step #2: Ask Meaningful Questions
These are questions that are tailored to the individual investor and have answers that can be proven or disproven with reference to evidence. This requires the collective knowledge of an experienced investment team.
Step #3: Apply the Evidence
Once the right questions have been asked, evidence can be applied to solve problems that integrate both the advisor’s expertise and the individual investor’s personal values and goals.
Step #4: Monitor for Effectiveness
The final step in EBI is evaluating the effectiveness and efficiency of the process. This involves closely analyzing portfolio performance (after all costs) and revisiting the investor’s goals and values.
Built on logic and supported by compelling data, we believe Evidence-Based Investing can put you on a path toward building your ideal future. To help you understand the process, we will take a deeper dive into the four steps through additional blogs and informational videos.
For more information, download our EBI whitepaper or consult with your financial advisor.