An evidence-based approach is one where good, quality decisions are being made based on a combination of critical thinking and the best available evidence.
So, what’s evidence-based investing? Simply put: It’s investing that‘s backed by undeniable research. It’s fact supported investment decision making with the goal of producing better results for investors (our clients).
As a novice, it’s the only way you should invest if you’re looking for consistent results. So if you don’t like to gamble, this is the way. Here are the 2 main evidence-based investing principles we subscribe to on behalf of our clients:
Fact #1 – Stock pickers underperform unless they get lucky.
Evidence shows that most investment professionals regardless of their intelligence or expertise fail to consistently pick and choose winning stocks that beat the market. The only times they do are if they take excessive risk or get lucky for a long period of time.
This goes for expensive teams with fund managers that run Hedge Funds or Mutual Funds, all the way down to your local guy or gal Investment Advisor that buys stocks for their clients. In fact, it’s especially true for local Investment Advisors picking stocks. Do you really think your local advisor is smart enough to buy or sell a stock and perfectly time the market (on your behalf)? They may convince you they can but they’re just blowing smoke.
Nobody can predict the future regardless of how smart they are and how many letters they have after their name. And this is the main reason why we choose index funds as core holdings for our clients. Index funds are diversified baskets of thousands of stocks and bonds which represent “the market”. Evidence suggests simply owning “the market”, the benchmark which stock pickers and fund managers can’t beat, gives an investors the highest probability of achieving their investment goals. So how do you buy the Market? Well, the best way to do that is through an investment vehicle called an ETF (Exchange Traded Fund)
Fact #2 – Fees damage performance and should be minimized
Stock markets have averaged near double-digit returns over the past 40 years. Nobody seems to care about fees in a return environment where people are averaging 10% or 11%. But in an environment where stocks are expected to return 5 or 6%, fees are impossible to ignore.
Research has proven that lower product fees result in better returns. See for yourself. Go to any online calculator and look up the end value difference between an investment portfolio or fund compounding of $1mil at 7% instead of 6% over 25 years. Hint: It’s a lot.
The bad news: Economists are expecting a slow growth environment with low returns. If you expect the next 10 years to look like the last 40, you’re in for a rude awakening.
So what to do? if you aspire to see your money grow, one of the best way to get ahead is by finding ways to cut your product fees. And the best way of doing that is by switching out of expensive product you currently own into lower fee product.
It just so happens that passive index ETFs are low fees. These ETFs typically cost a fraction of what an actively managed mutual fund, seg fund or hedge fund costs on an MER yearly basis.
We build portfolios where a majority of the holdings we have our clients invested in consist of low fee ETFs because that’s what the evidence suggests.
We suggest you consider doing the same.
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