Evidence-Based Investing: What Is It?

When it comes to choosing an investment style that works for you and your specific needs, you’ll likely come across terms such as passive investments, active investments, emotional investing, and evidence-based investing without much knowledge of what they are or how they differ. Below you will find information to assist you in your decision as to which types of investments you are pursing. Learning more about evidence-based investments, and active versus passive investing will allow you to make a more fully informed investment decision.

Actives Versus Passive Investing

To begin, you need to understand the difference between active and passive investments. It’s important to note there are a variety of portfolio strategies that incorporate both active and passive investments. At times, experts may recommend a blend of both types in an effort to create the appropriate portfolio for your specific needs and tolerance for risk.

Active Investing

As the name implies, active investing tends to be a more hands-on approach. With this type of investing, you or your money manager is looking at more short-term fluctuations in the prices of stocks and bonds to decide when the best time is to sell or buy. Active portfolios are often tended to by an analyst or a team of analysts who are able to use various factors when deciding when and what to buy or sell.

Passive Investing

If we think of active investing as being a hands-on approach, consider passive investing more hands off. Passive investing strategies take a long-term look at the market in comparison to Active Investing. Passive investing strategies typically involve less buying and selling and more buying and holding. A certain amount of discipline is required with passive investing. Resisting the urge to buy and sell based on current market conditions or economic climates can often be difficult.

What Is Evidence-Based Investing?

With this approach to investing, investors make decisions about buying and selling based on what they know to be factually true. Instead of basing decisions on current market trends or conditions, investors turn to research, education and historical data to guide their decision-making process.

Evidence-Based Versus Emotional Investing

Emotional investing is, as it sounds, investing with your emotions. As you hear unsavory news about a company’s CEO, your first reaction could be to quickly sell your stock before it tanks. But what happens if say, one month later, news breaks that the company’s new CEO has plans to double the company in size by the end of next year. Suddenly, their stock could be on the rise once more. Allowing your reactions to news headlines, political changes, or shifting economic climates to affect your investment decisions is considered emotional investing.

Unlike emotional investing, the decision to buy or sell with evidence-based investing is not made based on current shifts in climate or news. It remains steadfast through trends and climate changes because it is based on predetermined factors and considerations.

Whether you choose to take a do-it-yourself approach to portfolio management or select an investment advisor to help you along the way, you’ll want to consider which types of investing will work best for your portfolio and unique needs. Understanding the difference between popular investment terms including active, passive, behavioral and evidence-based is the first step to making informed decisions about your investment strategies.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.