Data-Driven Financial Decisions: Why Evidence-Driven Investing™ Works

It’s easy to get caught up in the allure of investing some of your assets into “the next big thing” that you hear or read about, where the future returns are supposed to outperform the market, and the risk is lower than expected. But as the old saying goes, “Slow and steady wins the race.” 

What do we mean by this?

The allure of quick potential gains or the fear of significant losses often drives the investment decisions of individual investors. Yet, there’s a substantial difference between emotion-based reactions and those based on Evidence-Driven Investment (EDI) principles. 

Recent headlines or persuasive stockbrokers may produce emotions that influence the financial decisions of many investors. 

This reality underscores a gap in the financial industry: the difference between decisions driven by solid evidence and those based on speculative, emotional factors.

As Chicago financial advisors, we firmly believe making data-driven financial decisions and applying Evidence-Driven Investing™ tactics makes more sense and is crucial for building durable, sustainable financial independence. 

In our blog, we’ll explore evidence-driven investing and why high pursuers like yourself rely on this investment process.

Overcoming Human Biases

First, it’s important to address the elephant in the room: As humans, we are not always rational—emotions can lead us to chase after high-performing stocks or make panic-driven sales decisions. The two extremes for emotion-backed investment decisions are “fear” of large losses and “greed” – the potential for high returns. 

This is where Evidence-Driven Investing™ (EDI) can make a difference, emphasizing discipline, patience, and adherence to proven investment principles versus decisions based on emotion. This is very important during volatile market periods, inflation, recessions, and other economic events that impact the earnings of global companies.

Evidence-Driven Investing™ – Your Financial GPS System

An easy way to understand Evidence-Driven Investing™ is to compare it to the GPS you rely on when driving. Just as a GPS uses satellite data to plot the most efficient route to your destination, Evidence-Driven Investing™ relies on data and historical results to guide investment decisions. 

This approach minimizes guesswork and emotional biases, producing a more predictable and reliable path to achieving financial goals, much like how you rely on GPS to avoid getting lost and reaching your destination in the shortest time.

No Crystal Ball Required 

Instead of trying to predict the future, evidence-driven investing uses well-established data and peer-reviewed research  developed  over long periods to build portfolios. This approach often focuses on broad diversification, lower costs, and sticking to a predetermined investment plan, even during market ups and downs. 

Research has shown that allocating more of your portfolio to companies that share certain characteristics can increase your potential for return. Although these investments typically bring more risk, Evidence-Driven InvestingTM portfolios are built to most efficiently allocate across multiple sources of risk — even if it means performing differently than headline indexes.

It’s about making logical, informed choices rather than following the media or your emotional instincts. Essentially, it’s investing by looking at what the numbers and research strongly suggest can lead to a positive investment experience over time.

No one has a crystal ball that accurately predicts short-term market movement.

Cogent Strategic Wealth: Your Solution to Uncertainty.

The Case for Evidence-Driven Investing™

One of the foundational principles of Evidence-Driven Investing™ is that markets are highly efficient. That is, everything that can be known is known and is reflected in current securities prices. In a digital world, pricing instantly absorbs and reflects all available data. This efficiency suggests that consistently “beating” or “timing” the market is highly unlikely and does not work short-term or long-term. 

Numerous studies support this principle, showing that attempts to beat the performance of the markets often result in expensive, subpar returns due to timing errors, increased transaction costs, or high fees.

Research consistently shows that funds with lower costs outperform their higher-cost counterparts. This is due to the simple fact that high fees reduce net returns. By minimizing expenses and taxes (sometimes), you tilt the scale in favor of your long-term financial success.

Proper asset allocation is also pivotal in producing Evidence-Driven Investing™ results. By diversifying your investments according to your risk tolerance, this strategy aims to maximize your returns over the long term while minimizing the risks of large losses. Concentrated investments exceed the risk tolerances of most people. 

Bottom line: Evidence-Driven Investing™ focuses on balancing your portfolio’s risk and expected return investment profile. 

How Evidence-Driven Investing™ Works

Here are five ways that Evidence-Driven Investing™ can be used to produce your desired investment returns:

1. Think of diversification as planting a garden with a variety of different crops. If you only planted one crop, you may be more susceptible to poor weather, pests, or disease, which could wipe out your current results. By spreading your money across different asset classes and sectors of the economy, you reduce the risk of big losses if one investment performs poorly, just as a well-rounded garden is more likely to thrive, even with small setbacks.

2. EDI helps structure portfolios to manage risks by analyzing past market behaviors and outcomes. This might involve strategies like adjusting asset allocations to minimize the impact of potential downturns or leveraging findings from behavioral finance to avoid frequent investing biases.

3. EDI typically promotes investing in low-cost index funds or ETFs that track the performance of a particular asset class or sector of the economy. This approach is supported by research showing that actively managed funds often do not outperform the market enough to justify their higher fees.

4. EDI includes systematic rebalancing of portfolios, ensuring that the asset mix remains aligned with your current risk tolerance and investment goals. This process is often triggered by empirical thresholds for asset allocation drift.

5. Using benchmarks and performance metrics grounded in historical market data is one method of aiding investors in assessing the performance of their portfolios. We prefer to make the focus the client’s attainment of stated goals, then building an evidenced-driven plan to accomplish them, then structuring a portfolio using research to accomplish them. .

Learn more about Cogent Strategy Wealth. 

Cogent’s Design | Build | Protect Process

Navigating asset management without expert guidance or feeling overlooked by your current advisor can be potential concerns. Then, add current economic conditions, a national debt approaching $35 trillion, and global instability to the mix. 

But it doesn’t have to be this way. Investment management should be a consistent, data-driven part of your life, providing the freedom you need to shape your financial future on your terms. In particular, when rising longevity could enable you and your spouse to live to age 100.

At Cogent Strategic Wealth, we are deep believers in Evidence-Driven Investing™. This approach is grounded in empirical research and utilizes data-driven insights to shape our investment strategies. 

Our team members’ investment portfolios and our own Cogent Retirement Plan uses the ideas and insights of EDI for ourselves and our own capital. 

Using our Design | Build | Protect wealth management process, our goal is to capture market-expected returns through extensive diversification and tax-smart strategies while minimizing costs and reducing risk. This method has proven successful for many affluent individuals by using disciplined research to enhance investment outcomes, thereby ensuring steady growth over the long haul.

1. Design: This initial phase explores your financial and personal situation. The goal is an in-depth understanding of your circumstances, concerns, needs, and goals. This detailed understanding forms the foundation for all subsequent planning and investment recommendations.

2. Build: The next steps are designing a personalized financial plan and constructing a sophisticated investment strategy. This strategy is tailored to your specific objectives and financial situation while building and preserving wealth to align with your life goals, current situation, and tolerance for investment risk.

3. Protect: The final phase focuses on preserving your hard-earned wealth from various potential risks. This includes implementing strategies to safeguard investments against market volatility and other financial uncertainties, ensuring long-term financial security and peace of mind.

Ready to learn more about our Design | Build | Protect process using Evidence-Driven Investing™? Let’s connect for an introductory discussion.