What is evidence based investing?

Put simply, evidence-based or passive investing aims to capture the returns of the market through a low-cost, diversified and long-term investment strategy based on these six fundamental principles.

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1    Choose your risk factor

Deciding how risky you want your portfolio to be is the most important of all investment decisions - choosing how much to place in relatively low risk investments such as gilts and bonds, and how much in higher risks like equities and property. It is the long term exposure to the risks that this entails, and the long term rewards that you are compensated with, that ultimately defines how successful your portfolio will be.

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2    Diversify to deal with uncertainty

Long term portfolio profitability depends on not having all your eggs in one basket. A mix of investments at both the individual security level – shares in a number of companies, not just in one or two in the same sector which may fail; and at asset class level – shares or equities, bonds or fixed income investments, gilts and cash, for example, ensure a balance of low and high risk investments. This provides a high degree of protection against the effects of market fluctuation and geo-political swings-and-roundabouts.

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3    Manage the effects of inflation

£100 worth of purchasing power has eroded to just £50 over the last 20 years, all because of inflation - which has been relatively modest in the UK. If you're looking to preserve wealth and maintain a standard of living over 40 years, say, you need to take this into account when building your portfolio and deciding which asset classes to invest in. At BRWM, we always talk in today's money terms and work with real, after inflation returns.

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4    Costs matter

Costs are like inflation - they're always there, nibbling away at your profits - and can mount up in time to quite a substantial sum. Fund managers, brokers and taxes will take their share of costs while you take the risk. 'Active management' - reacting to every twist and turn of the market - will incur costs every time a stock is sold or bought. But reducing costs is the only 'free lunch' in investing. A pound of costs saved is the same as a pound of income earned, but with no risk at all.

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5    Control your emotions

Emotions have the power to destroy significant amounts of wealth. Chasing after supposed fund management 'gurus' can have a devastating effect: between 1984 and 2002 the average US equity investor chasing fund managers who had performed well actually reduced their $100 to $90 - whereas if they'd 'bought and held', the market would have increased its value to $500. We help our clients understand how the market works so that at times of market exuberance or panic, you focus on the long term and stay calm.

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6    Rebalance regularly

We help our clients build a portfolio which reflects your attitude to risk, financial need and capacities. It is important to ensure that the balance of these investments remains the same. This doesn't mean leaving your portfolio unattended: riskier investments will, by and large, deliver greater growth over time, skewing the value of your portfolio towards these assets, and making it an inherently ‘riskier’ portfolio than you ever intended it to be. Regular 'rebalancing' back to the original profile controls the risk and keeps your investments focused on the long term goals.