Evidence-based Investing – Why Is It Important?

Isaac Ong

In the world of investing, there are many different opinions on how the stock market is performing today and in the near future. These opinions vary vastly, even amongst established financial institutions. A famous hedge fund manager could be making claims of an impending crash, while at the same time, a bank CEO could have a more optimistic view of the market. These opinions often change in a matter of weeks. To make matters worse, news outlets are incentivized to broadcast outlandish opinions as they tend to get more attention. As an investor, this can be incredibly frustrating and confusing.

Tuning out the noise

At Providend, we choose to tune out the noise and base our investment philosophy around robust, long-term evidence. Why? If we take a step back and think about it – be it the food we consume daily; to our weekly exercise routine, reliable evidence is key for us to make good decisions and keep to them.

For instance, when it comes to exercising to keep fit and healthy, noticeable results do not appear after 1, 2 or even 10 exercise sessions. However, we persist because:

  1. Scientific evidence has shown that exercise allows our body to build and strengthen muscles.
  2. Empirical observations of how people who exercise regularly over an extended period of time look healthier and have more stamina.

Over time, we can be certain that as long as we stick to it, there will be progress.

This should not differ in the world of investing. Today, we are blessed with an array of long-term empirical data that is accessible to anyone with an internet connection. What sets our investment philosophy apart is the level of scrutiny we give these data sets.

Not all evidence are created equal

A couple of years ago, I had a friend who showed me a particular investment firm strategy, and how the investment returned 15% p.a., based on the past 10 years of data. After doing some quick calculations with this rate of return assumptions, he was confident of retiring a lot earlier than initially anticipated. I quickly reminded him of three things:

  1. The 2009 to 2020 bull market was the longest in stock market history.
  2. 10 years is not a long time when it comes to equity investing.
  3. Solely back-testing data over a specific time period is a very weak form of evidence.

To illustrate the absurdity of this, if any firms’ investment team simply googles for the “Top 5 best performing ETFs in the past 10 years” at any point in time, and invest their clients’ monies in these ETFs, wouldn’t they immediately have the “best performing” investment strategy over the past decade?

At Providend, our aim is to ensure that our clients’ future investment return needs are achieved as reliably as possible. Much like how the quake index of buildings in Singapore is consistently reviewed despite the rarity of major tremors, our efforts to source for reliable investment instruments are unceasing. As such, we use funds like Dimensional and index funds/ETFs because of the thoroughness and robustness of the academic research behind them.

Eugene Fama, a Nobel Laurette who is widely regarded as the “father of modern finance”, developed on the Efficient Market Hypothesis, which underpins the adoption of passive index funds. Today, he sits on the board of Dimensional, overseeing the implementation of his investment thesis – A market-based portfolio with tilts towards smaller, cheaper, and more profitable companies leads to more reliable and higher expected long-term returns. Like most academic literature, much less a Nobel prize winning one, his investment research has gone through numerous peer reviews to ensure that his conclusions are robust and not a result of data-mining bias.

Dealing with Fears, Uncertainties, and Doubts (FUD)

Evidence-based investing also benefits investors behaviorally. Typically, periods of high market volatility serve as a litmus test, because most people start to seriously scrutinize their investments during these periods. Once their investments display patterns not recently seen, a mere 10 to 15 years of back-tested data suddenly seems like a thin rope to cling on to.

Now compare this with a robust, evidence-based investment strategy that is formulated based on almost 100 years of data encompassing multiple world wars and financial crises, is pervasive across multiple geographic regions, rigorously tested statistically, and has gone through the scrutiny of the academic finance community. Coupled with a comprehensive wealth plan that is crafted based on your own unique purpose, values, and financial goals; sticking through market volatility and realising your life goals can be achieved with a higher degree of certainty and comfort.

This is an original article written by Isaac Ong, Associate Adviser at Providend, Singapore’s First Fee-Only Wealth Advisory Firm.

For more related resources, check out:
1. How Can I Invest Confidently?
2. Active vs Passive vs Evidence-Based Investing
3. The Heart of the Matter Is the Matter of the Heart

We do not charge a fee at the first consultation meeting. If you would like an honest opinion on your current estate plan, investment portfolio, financial and/or retirement plan, make an appointment with us today.

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