Last Modified on September 25, 2019

The last decade was a turbulent one for the U.S stock market. March 2009 saw an all-time low with the global financial crisis gripping the markets all around the globe. Since then, the upward rise of the market has confused investors on how to invest. The fear and excitement of what the future holds have always been on the minds of investors while deciding when, where and how to invest. 

This is why an evidence-based portfolio has been a preferred way out for most financial advisors. The aim of having an evidence-based portfolio is to make the most of after-tax returns and protecting portfolios from market lows while reducing risks. Simply put, an evidence-based portfolio works on ‘evidence’ and facts. Also known as passive investing, evidence-based investing capitalizes on returns via a low-cost, diverse, and long-term investment strategy. You might think that most investment is evidence-based, but will be surprised to know that in reality, most investments are based on emotions and hearsay. 

Why is an Evidence-based Portfolio better?

Wondering why an evidence-based portfolio is an ideal way to go? Check out the benefits:

• Based on logic and facts, an evidence-based portfolio minimizes risk.
• It is easy to understand and follow, as factual data is precise and more reliable in comparison to predicting the future and hoping for the best. 
• With emotions out of the picture and proper evidence at hand, you are less likely to make mistakes.

3 Simple steps to build an Evidence-based Portfolio

1. Get rid of all irrelevant questions

When building an evidence-based portfolio, the only relevant questions are the ones that can be verified or proven with answers. With an overload of media information, there are a million irrelevant and meaningless questions that you may hear or read on investment news and magazines on a day to day basis. Don’t cloud your head with questions that are not relevant to your investments. 

2. Consider relevant questions

Naturally, the next step is to consider more relevant and meaningful questions, questions that are in tune with your individual investments. The production of oil in the international market may not be of direct relevance to you, so don’t get bogged down by such fluctuations that you read about in the news. Instead, ask questions like, “Is diversifying overseas a good investment for you?”, and verify it with evidence.

3. Consider the evidence

Once you have eliminated all the irrelevant questions and considered the relevant ones, consult a financial advisor and apply the evidence. Consider different factors related to the investment. Calculate how taxes and inflation affect them. With a clear understanding of the evidence in hand and your goals, you can build a portfolio with minimum risk and maximum returns. 

5 Things to consider before building an Evidence-based Portfolio

1. The news is only half correct

The first step to building an evidence-based portfolio is to know that the news is only partially correct, and sometimes, even entirely wrong. Mainstream media tends to overemphasize and exaggerate facts. Don’t just go by the news. Always back your investment decisions with proper research. If you hear something on the news, go on the internet and look it up. Look for evidence that proves what you heard on the news is correct.  

2. Don’t mix emotions with investments

Just like the popular saying, ‘don’t mix business with pleasure’, you must not mix your emotions with investments either. Gossips from unconfirmed website sources or baseless rumors in the office should not affect your rationality. Don’t make decisions based on your fear of missing out. Never act on impulse, instead, always follow the route of rationality. The key to being rational is to educate yourself on your investments. The more you know, the less likely you are to act on impulse. 

3. Tap into the right sources

While procuring your evidence, tap into the right resources. An internet research may not always be enough. Many government agencies have public resources with investment data. You can reach out to a professional investor for their feedback on a particular investment you are interested in or even hire a freelance research analyst to collate data for you. 

4. Numbers are not everything

A cardinal mistake that most investors make is to only consider numbers while making investment decisions. Numbers may be one way of ascertaining the value of a stock, but they are not all-inclusive.  A company may have some serious safety or quality issues. When building an evidence-based portfolio, go beyond the numbers. 

5. Be patient

Evidence-based portfolio is a long-term strategy and can be a hard thing to master. You may have to go through several failed attempts in the process but be patient and learn from your mistakes. Try to move out of your comfort zone when looking for evidence and speak to experts.

To sum it up

The only way to build an evidence-based portfolio is by collecting facts and data from as many sources as possible. Investors mistakenly take investing to be synonymous with gambling, which is unpredictable and full of risk. Investment doesn’t always have to be that way. With proper evidence, you can reduce risks from market lows and maximize your returns. While building an evidence-based portfolio may seem intricate, but in the long run, backing yourself with data is always beneficial.

Want to know if your investment portfolio is backed by evidence? Consult financial advisors and let them help you gain the most from your investments.