1. Diversification
Spreading Risk: Diversification involves spreading investments across a variety of asset classes, sectors, and geographical regions to reduce risk. The idea is that by not putting all your eggs in one basket, the impact of any single investment’s poor performance is minimized.
Asset Allocation: This is the process of dividing your investment portfolio among different asset categories, such as stocks, bonds, and cash. Studies show that asset allocation is one of the most critical factors in determining the variability of returns and the level of risk in a portfolio.
2. Low Costs
Minimising Fees: High investment fees and costs can significantly erode returns over time. Evidence-based investing emphasizes the importance of minimising these costs, typically through the use of low-cost funds or exchange-traded funds (ETFs).
3. Long-Term Focus
Time Horizon: EBI encourages a long-term perspective, emphasizing that markets can be volatile in the short term, but they tend to grow over the long term. Staying invested and avoiding the temptation to time the market is crucial for achieving long-term growth.
Behavioural Discipline: Evidence-based investors are encouraged to maintain discipline during market fluctuations, avoiding panic selling or impulsive buying based on short-term market movements.
4. Market Efficiency
Efficient Markets Hypothesis : EBI is based on the belief that markets are generally efficient, meaning that all available information is already reflected in asset prices. As a result, consistently outperforming the market through stock-picking or market timing is difficult and unlikely.
5. Evidence-Based Decision-Making
Empirical Research: Investment decisions should be based on solid, peer-reviewed research rather than on trends, predictions, or the opinions of market pundits. This involves using data-driven insights from financial studies to inform investment choices.
Historical Performance: Relying on long-term historical data to understand how different asset classes and strategies have performed under various economic conditions helps investors make more informed decisions.
6. Risk Management
Understanding Risk: Evidence-based investors focus on managing risk rather than trying to eliminate it. This includes understanding the risk-return tradeoff and ensuring that the level of risk taken aligns with the investor’s financial goals, time horizon, and risk tolerance.
Avoiding Unnecessary Risks: EBI discourages taking on risks that are unlikely to be rewarded, such as trying to time the market or invest in speculative assets.
7. Behavioural Finance Awareness
Recognizing Biases: EBI incorporates insights from behavioural finance, recognizing that investors often fall prey to cognitive biases (like overconfidence, loss aversion, and herd behaviour) that can lead to poor investment decisions.
Behavioural Strategies: Developing strategies to mitigate the impact of these biases, such as automated investing or adhering to a strict investment plan, helps investors stay on track.
8. Goal-Oriented Investing
Personalization: EBI is tailored to the individual investor’s goals, such as retirement, education, or wealth preservation. The investment strategy is designed to meet specific objectives rather than achieving the highest possible return without regard to risk.
Planning and Monitoring: Regularly reviewing and adjusting the investment plan based on changing circumstances or goals is a critical component of evidence-based investing.
9. Transparency and Simplicity
Clear Understanding: EBI advocates for investment strategies that are transparent and easy to understand. Complex or opaque strategies often come with higher risks and costs, which may not be justified by the potential returns.
Simplicity: Keeping the investment approach simple helps in maintaining discipline and focus, reducing the chances of making costly mistakes.
With a deep understanding of our client’s objectives, we provide tailored solutions to assist clients in achieving their financial goals.
New Horizon Wealth PTY Ltd ACN 632 726 222 is a Corporate Authorised Representative of Lifespan Financial Planning Pty Ltd
AFSL No. 229892
ABN 23 065 921 735
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