What do we mean by evidence?
Most investment professionals would claim to base their methodology on some form of evidence. So then, what sort of evidence can investors rely on? Generally speaking, reliable evidence has four main characteristics.
Too often, reports are produced, or else commissioned and paid for, by companies with a commercial interest in publicising the outcome. Most academics, by contrast, are independent. They don’t have an agenda or a point to prove; instead they leave it to financial practitioners to act on their findings or not.
It’s based on robust data analysis
We all know the old adage about lies, damned lies and statistics. Often findings are based on too short a time period or a sample that’s too small. Some times the fund industry ignores biases in the data, other times it compares returns to the wrong benchmark, or it quotes performance figures before the full impact of fees and charges.
It’s been peer-reviewed
Publishing research in academic journals gives other academics the chance to analyse the methodology, outcomes and conclusions of a study and provide their own review as to the reliability of the study. Caution is required — there are journals that are less credible than others — but evidence that has been properly peer-reviewed should carry far more weight with investors.
The results have been reproduced
The fourth and final characteristic of findings you can depend on is that they’ve been tested across multiple environments and timeframes. There needs to be a strong element of repeatability to demonstrate that the findings of a particular study weren’t just down to random luck.
The lesson, then, is to be very cautious about anyone claiming that a particular investment strategy is evidence-based. Even if it fails just one of these four important tests, it’s probably worth ignoring.
About Robin Powell
Robin Powell is an award- winning journalist, blogger and content marketing consultant, based in the UK, with specialist expertise in the investing industry.
He also campaigns for better investor education and for greater transparency in global asset management. He runs Ember Regis Group, a content marketing company working primarily with disruptive companies in the financial sector, and he blogs as The Evidence-Based Investor at evidenceinvestor.co.uk.