I have seen the term, “Evidence Based Dentistry” more and more lately. Looking at the ADA website, I see the following description on the subject: Dental research doesn’t do any good if it doesn’t reach the clinician. That’s why the ADA created the Center for Evidence-Based Dentistry (EBD) to connect the latest research findings with the daily practice of dentistry. The EBD website provides on-demand access to systematic reviews, critical summaries and clinical recommendations that translate the latest scholarly findings into a user-friendly format.
Interested parties may dig deeper by going to the ADA Center for Evidence-Based Dentistry.
This brings me to another “Evidence Based” subject: Investing. The image below is from Dimensional Fund Advisors and illustrates the overlapping concepts of investing.
In my recent post, An Index by Any Other Name I wrote about the characteristics of Index Funds. Over the years academically minded innovators from around the globe sought to improve on the best traits of index funds and eliminate their weaknesses. In fact, many of these thought leaders were the same early adapters who introduced index fund investing to begin with. The results are evidence-based investment funds, which offer us several advantages:
Index-independence – Evidence-based fund managers have freed themselves from tracking popular indexes. Instead, they have established their own parameters for cost-effectively investing in the lion’s share of the securities within the asset class being targeted. This reduces the need to place undesirable trades at inopportune times simply to track an index; it allows them to employ more patient trading strategies and scales of economy to achieve better pricing.
Improved Concentration – Untethering themselves from popular indexes also enables evidence-based fund managers to more aggressively pursue targeted risk factors; for example, an evidence-based small-cap value fund has more flexibility to hold smaller and more value-tilted holdings than a comparable index fund. This provides us with more refined control as we construct clients’ portfolios according to their individual risk/return goals.
Focusing on Innovative Evidence – We firmly believe that investors are best served when we make it a top priority to heed the evidence on how markets have delivered long-term wealth. Evidence-based investing shifts the emphasis from tracking an index, to continually improving our understanding of the market factors that contribute to the returns we are seeking. By building portfolios using fund managers who apply this same evidence to their fund constructions, we feel we can make best use of the academic insights we already know, while efficiently incorporating credible new ones as they emerge.
Investment Consulting is a critical component of Wealth Management and we embrace the concept of Evidence Based Investing for our clients and ourselves.