Evidence-Based Investing

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.

Filbrandt, The University Division of Savant Wealth Management, uses Evidence-Based Investing (EBI). After decades of working with university faculty, we have found that having a strong backbone of research for our investment process is important to them, given the extent of research within the university community.

EBI is 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.

Compared to more conventional investment approaches commonly driven by emotion, instant satisfaction, and market timing, the EBI approach relies on wisdom, facts, data, and time spent in the market.

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 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 uses facts and emphasizes process over outcome.

• Conventional investors scour the world for numbers that fit their narrative. Evidence-based investors welcome opposing data and reserve the right to change their minds when necessary.

• The conventional investor compounds mistakes by attempting to time the market. The evidence-based investor understands compound interest and thus the importance of time IN the market.

  

How does Evidence-Based Investing work?

Filbrandt’s investment philosophy includes building 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. Countless unverifiable questions and statements 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 evidence. This requires the collective knowledge of an experienced investment team.

Step #3: Apply the Evidence

Once the right questions emerge, we can apply evidence 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 EBI 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.

How Does Evidence Based Investing Apply to You?

EBI is a decision-making framework that makes it possible to evaluate the related topics confronting today’s investor and challenge the wisdom of conventional investment advice.  EBI guides investors to make decisions based on data, academic research, and a defined process rather than speculation, greed, and fear. EBI can generally be expressed in the following formula:

In each of the above ratios, your numerator should be higher than your denominator.  Because we obviously can’t precisely quantify these metrics, think of it as more of a personal scorecard.  If you assess yourself honestly and come up with an overall EBI score of greater than five, you are well on your way to being a bona fide practitioner of EBI.

  

Q. Why is EBI a key component in Filbrandt's investment philosophy?

EBI is critical to Filbrandt’s investment philosophy because it removes emotion from the equation and focuses on an objective, data-driven solution. Without employing an EBI framework, investors can fall victim to their own emotional biases, perhaps to the detriment of their portfolio. 

Capital markets are an ever-evolving ecosystem that react in the short term by the herd mentality of their market participants. EBI allows investors to step away from the mob dictating asset price movements and focus on the bigger picture. By taking a 30,000-foot view of the market environment, we can objectively focus on the factors critical to the long-term investing journey.

  

Question: Can broadly diversified portfolios improve long-term returns and reduce risk?

Answer: From our standpoint, a broadly diversified portfolio is a better option for long-term investors than conventional approaches. Depending on individual goals and risk tolerance, this approach can result in various mixes of stocks, bonds, and alternative asset classes. A portfolio that seeks diversification both across and within asset classes has the potential to be more resilient across a variety of market environments.

Evidence: The evidence we show supports the success and strengths of a systematic, rules-based approach to investment management. The hypothetical illustration below highlights the difference in growth of wealth between a Simple 70/30 Index Portfolio and a Broadly Diversified 70/30 Index Portfolio over a nearly 50-year period.

In Summary

Your investing success is at the center of the EBI approach. The evidence-based strategy we use for investing applies similar principles to those in the field of medicine.

The relationship between client and advisor lies at the heart of any successful investment strategy. This is no less true with evidence-based investing.

- We believe investors who are armed with evidence and logic can be confident that EBI will work for them for many years to come.  If you would like to learn more about how you can apply Evidence-Based Investing to your situation, speak with one of our advisors.

 

Please Note: Limitations of Index discussion. Savant has provided the Index presentation solely to demonstrate the benefit of diversification. Different types of investments and/or investment strategies or allocations involve varying degrees of risk and volatility, and at any specific point in time, or over any specific time-period, any investment or investment strategy can and will suffer losses, at times substantial losses. Therefore, it should not be assumed that the future performance of any specific investment or investment strategy, including the investments and/or investment strategies or allocations recommended and/or undertaken by Savant, will be profitable, equal any historical performance level(s), or prove successful. Please Also Note: The referenced graph do not reflect the rebalancing, composition or performance of any current Savant investment strategy.

This is intended for informational purposes only and should not be construed as personalized financial or investment advice. Please consult your financial and investment professional(s) regarding your unique situation.

Filbrandt, the University Division of Savant Wealth Management, is an SEC registered investment advisor serving clients in academia nationally. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.savantwealth.com.  Our advisers have specific and in-depth knowledge about university employee benefit programs and retirement plans. We work with university faculty, physicians, and other professionals. We are not associated with any university or any retirement vendor, and we have no access to your private retirement or personnel information.

About the Author

Philip R. Huber Chief Investment Officer

Phil has been involved in the financial services industry since 2007. He is a member of the CFA Society of Chicago and is regularly featured in notable media outlets.