What is evidence-based investing and how can it help you grow your wealth?

It is hard not to be influenced by the noise and volatility that is part and parcel of investing. You only need to turn on the TV news to see stories that can materially affect the global economy, from political change to regional conflicts.

There are always periods of confidence and uncertainty, or opportunities for you to invest in companies in ascendance that look to be the next big thing.

Yet consistent research and data demonstrate that making active investments based on emotions, biases, or the latest trends can lead to suboptimal results and may hamper your progress toward your long-term financial objectives.

Evidence-based investing can help to temper cognitive and behavioural biases that may not be conducive to sound investment decision-making. It ignores current trends and short-term fluctuations in favour of a long-term vision.

At VWM Wealth, we have recently completed our move to an evidence-based investment approach for all our clients. So, read on to discover what evidence-based investing is and how it could help to grow your wealth.

Evidence-based investing involves making decisions based on data and research

While there may be enticing returns associated with speculation or chasing the latest trends, the evidence demonstrates that these approaches typically entail more risk and erratic long-term performance, ultimately undermining your wealth accumulation.

Similarly, it may be tempting to liquidate your investments during an all-time market high or at the start of a predicted dip. However, “timing the market” is all but impossible – indeed a report by Schroders shows that returns are, on average, 1.7% higher in the year following an all-time high than they are at other times.

Furthermore, markets reach all-time highs more often than you might think, demonstrating that even after significant downturns, the market has historically always bounced back.

For example, data from Trading Economics shows that after a significant dip during the pandemic, the UK stock market reached a new all-time high in February 2023.

Moreover, the Schroders report found that of the 1,176 months between January 1926 and December 2023, the US market hit new highs just over 30% of the time, 354 months in total.

Evidence-based investing examines long-term market observations and trends such as these to make informed and disciplined investments based on research, rather than trying to “beat” the market or follow the latest noise and short-term fluctuations.

Notwithstanding market volatility, leaving your investments untouched over long-term horizons could lead to more consistent returns.

Forbes reports that between 1980 and 2021, the S&P 500 closed a daily session with a positive price return 54% of the time. So, the odds that stocks will be up or down on any given day were roughly equivalent to a coin toss.

But if you look at a full year over the same period, the S&P 500 ended the year with a positive price return over 75% of the time, despite average intra-year drops of 14%.

Source: Forbes

So, while you may be tempted to liquidate your investments or alter your strategy amid a market downturn, the evidence suggests that sticking to a long-term investment plan could be a more stable path to seeing better returns.

Moreover, rather than regularly moving your investments to try and cash in on the latest trend, it can be beneficial to leave them untouched.

For example, selling your investments could trigger a taxable event, such as taking you over the threshold of the Capital Gains Tax Annual Exempt Amount.

Conversely, passive evidence-based investing aims to track and capture returns from long-term market growth, rather than attempting to beat the market through active trading or trying to utilise market timing.

Evidence-based investment strategies

Evidence-based investment strategies include diversifying your portfolio, focusing on long-term horizons, managing risks, and maintaining cost-efficiency.

Each strategy is supported by research and data that demonstrates its unique value in helping you achieve your financial goals.

Diversify your portfolio

Creating a well-diversified portfolio across various asset classes, sectors, and regions is an important part of managing risk and achieving more consistent returns over time.

The table below shows the performance of six different stock market indices between 2013 and 2023.

Source: JPMorgan

As you can see, it is hard to predict which region will perform best in a given year. This demonstrates the potential value of diversifying your portfolio and spreading the risk across different regions so profits in one balance losses or weaker performance in another.

Focus on long-term horizons

As you read earlier, focusing on long-term investment goals and strategies, rather than reacting to short-term market volatility could lead to more consistent returns.

Markets are generally efficient, and even after historical downturns such as the Wall Street Crash or the 2008 financial crisis, the market has eventually continued to grow and reach new all-time highs.

Manage risks

Even with evidence-based investing, there are inherent risks and there is usually a direct correlation between risk and return.

Although elements of evidence-based investing, such as portfolio diversification and long-term horizons can help to protect you against risk, understanding the risks involved in any investment is vital to protecting yourself against them.

Maintain cost efficiency

Evidence-based investing generally keeps management fees low as the investments are long term. Taxes are similarly low because the long-term nature of the investments means there are few taxable events.

Get in touch

We will be going into further detail about evidence-based investing and exploring some of its more technical aspects in future articles.

If you are interested in learning more about our move to evidence-based investing and what it could mean for you, get in touch.

Email us at hello@vwmwealth.com or call us on 0141 229 4004.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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