Evidence-based investing (EBI) is an approach to investment management that is grounded in empirical research and data analysis. Rather than relying on speculation or intuition, EBI uses rigorous scientific evidence to make informed investment decisions. This approach has gained popularity in recent years, particularly among investors who seek a more rational and disciplined investment strategy.
One company that has become known for its commitment to EBI is Dimensional Fund Advisors (DFA). Founded in 1981 by David Booth and Rex Sinquefield, DFA is a global investment management firm that offers a range of funds and investment strategies that are designed to reflect the principles of EBI.
At the heart of DFA’s approach to EBI is a focus on asset class investing. This approach seeks to capture the returns of broad asset classes, such as stocks and bonds, rather than trying to beat the market by picking individual stocks or timing the market. By focusing on broad asset classes, DFA seeks to capture the long-term market returns that are available to all investors, rather than trying to outsmart the market with speculative investments.
One of the key principles of DFA’s approach to EBI is a belief in the efficiency of markets. This means that they believe that prices reflect all available information and that it is impossible to consistently beat the market by picking stocks or timing the market. Instead, they focus on the long-term market returns that are available to all investors. The firm uses a combination of quantitative and qualitative analysis to identify and select stocks and bonds that are expected to perform well over the long-term.
Another key principle of DFA’s approach to EBI is a focus on low-cost, passive investing. DFA’s funds are designed to minimise costs and maximise returns by investing in a diverse range of low-cost index funds. This approach is designed to reduce costs and increase returns over the long-term, by avoiding the high fees and underperformance that are often associated with actively managed funds.
DFA’s commitment to EBI has been recognized by the academic community, with numerous studies supporting the effectiveness of their approach. For example, a study by Morningstar found that DFA’s funds consistently outperformed their peers over the long-term, while a study by Vanguard found that DFA’s funds had higher returns and lower expenses than their benchmarks over a 10-year period.
One of the key benefits of DFA’s approach to EBI is the focus on long-term investment returns. By avoiding the short-term speculation and market timing that are often associated with active management, DFA’s approach is designed to capture the long-term returns that are available to all investors. This approach can be particularly beneficial for investors who are focused on long-term goals, such as retirement planning or wealth transfer to future generations.
However, it is important to note that EBI is not a one-size-fits-all approach. While DFA’s approach to EBI may be effective for some investors, it may not be suitable for everyone. Investors should consider their own investment goals, risk tolerance, and investment time horizon when evaluating EBI strategies.