I’m often asked about the origins of the term “evidence-based investing”. For example, Did I come up with it? And what does it mean?
To answer the first question first — No, I didn’t! Dimensional Fund Advisors has used the term for many years, and several advisory firms that use DFA funds have embraced it too.
I’ve never found the term “passive investing” particularly helpful; no investing strategy is truly passive and, in marketing terms, the passive label is pretty disastrous. So when, two years ago, Wendy Cook began a debate about a possible rebrand, I was all for consigning “passive investing” to the dustbin. For those who aren’t familiar with her, Wendy’s based in Oregon and does a very similar job to me and my colleagues at Regis Media — in other words, helping advisers to promote the benefits of low-cost, long-term, highly diversified investing.
The term “evidence-based” was Wendy’s preference and, I’ll be honest, I was in two minds about it at first. After all, probably every active manager — and every adviser who claims to the ability to identify managers who will outperform in the future — would say they base their decisions on some form of evidence.
Indeed, there are a few advisers who broadly share my philosophy but don’t like the name — among them my friend Rick Ferri, a contributor to my original documentary for Sensible Investing TV, Passive Investing: The Evidence.
What swung it for me, though, and why I came round to Wendy’s point of view, is that the reliance on hard evidence is the key differentiator that sets evidence-based advisers apart from the vast majority of their rivals.
Evidence does however need to be defined. There’s evidence and there’s evidence, and in the next two posts I’m going to be explaining what the likes of Wendy and I, and the hundreds of advisers around the world who now describe themselves as evidence-based, actually mean by it.
I’ll start tomorrow by explaining what it’s not.