What is the difference between Evidence-based Investing and Passive Investing?
Evidence-Based Investing (EBI) and “passive” investing refer to the same investment approach.
However, EBI provides a better, more descriptive title for what this investment approach actually entails, whereas the term “passive” implies a lack of activity – which could not be further from the truth.
The act of implementing and maintaining an investment strategy utilizing a passive (i.e. evidenced-based) investing philosophy is much more complicated than the “passive” label would suggest. For instance, at Portfolio Solutions® we must continually:
- Build deep relationships with our clients in order to truly understand their goals and objectives and deliver the best solutions and advice possible.
- Be knowledgeable about what’s happening in the world in order to formulate and maintain our long term (30-year) forecast of expected asset class returns and risk factors. This forecast is integral to maintaining optimal asset allocations in client portfolios.
- Maintain research on the available fund universe and continuously look for new and/or better ways to gain exposures to desired asset classes.
- Monitor every single client portfolio we manage on a daily basis for breaches in target asset allocation levels (i.e. rebalancing).
Portfolio Solutions® has long practiced and been an advocate of this type of investment philosophy. EBI is a disciplined approach to investment management that takes into consideration data we have from the past and present, while acknowledging that we cannot correctly predict the future – and because of this, investors should not incur the extra costs that active management introduces in hiring talent and buying systems to try to beat markets. EBI Practitioners are long-term, strategic managers who follow the tenants of Modern Portfolio Theory1 and believe diversification is an investor’s best protection against risk. Practitioners do not believe in trying to outsmart or time markets because they believe markets are efficient over time. Discipline is key to being successful.
At Portfolio Solutions®, we practice evidence-based investing so that our clients can work confidently toward their long-term financial goals. Our index investment strategies allow our clients to keep more of what the global markets offer, letting them focus on what matters most to them.
1 Modern Portfolio Theory (MPT), a hypothesis put forth by Harry Markowitz in his paper "Portfolio Selection," (published in 1952 by the Journal of Finance) is an investment theory based on the idea that risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward. It is one of the most important and influential economic theories dealing with finance and investment.