Evidence-Based Investing & Investor Psychology

Header Briefing: Evidence-Based Investing & Investor Psychology This briefing synthesizes insights on building resilient portfolios by understanding the interplay between evidence-based strategies and investor psychology. The focus is on long-term principles, asset allocation, risk management, and disciplined decision-making amidst market noise.

Key Insights:

• Market performance is decoupled from economic headlines. Markets are forward-looking and price in economic data months in advance. Bad economic news can even trigger market rallies if the outcome is better than feared. This reinforces the principle that reacting to news is a poor investment strategy. (Source)
• Recent market reversals validate long-term diversification. After years of US market dominance that fueled investor sentiment to abandon international stocks, 2025 saw significant outperformance in other markets, like Canada. This serves as a powerful reminder that single-country risk is real and diversification remains a core tenet of resilient portfolios. (Source)
• Factor investing strategies are becoming more accessible. While previously limited to institutional investors, new ETFs are emerging for retail investors that tilt portfolios toward academically-supported factors like small-cap, value, and high profitability. This provides a direct, evidence-based alternative to traditional market-cap-weighted index funds. (Source)
• Central bank policy reinforces the case for owning productive assets. One source claims the Federal Reserve has pivoted from "quantitative tightening" back to injecting liquidity into the economy. This policy of money creation, if true, tends to devalue currency over the long term, making ownership of assets that can generate real returns (like equities) more critical than holding cash. (Source)

Latest News:

• Federal Reserve Policy Shift Claimed. A new Federal Reserve policy of injecting $40 billion per month into the economy allegedly began in December 2025, ending the prior period of quantitative tightening. This shift is interpreted as a tailwind for asset prices but does not eliminate the risk of a recession. (Source)
• New Factor-Tilted ETFs for Retail Investors. Avantis Investors, in partnership with CIBC, is launching a suite of Canadian-listed ETFs that provide exposure to factors like small-cap value and profitability, offering retail investors an accessible, evidence-based alternative to broad market index funds. (Source)

Emerging Ideas / Undercurrents:

• The Diversification Debate Reignites: Investor recency bias, which favored US-only portfolios after a decade of outperformance, is being challenged by 2025's strong returns in international and Canadian markets. The debate highlights a core conflict between following recent trends and adhering to the evidence-based principle of global diversification.
• "Productive" vs. "Unproductive" Hedges: A key disagreement is visible in the treatment of assets like gold. One view holds that gold is an unproductive asset with low expected long-term returns, whose price is driven by fear. The opposing view sees it as a necessary hedge against currency debasement from central bank policies.
• The Rise of "ETF Slop": A growing concern is the proliferation of complex and risky ETFs (e.g., leveraged, single-stock covered call) marketed to retail investors. These products are often designed to cater to emotional and cognitive biases rather than support long-term financial goals, creating new behavioral traps for undisciplined investors.

Actionable Steps ("Header Actions"):

• Audit Your Portfolio for Home Bias: Given the recent outperformance of non-US markets, review your asset allocation. Evaluate if your portfolio is overly concentrated in a single country and ensure your level of international diversification aligns with your long-term strategy.
• Investigate Factor-Tilts: Research the new generation of factor-tilted ETFs (e.g., Avantis). Compare their methodology, holdings, and fees to your current equity exposure to determine if they offer a better fit for your goal of capturing long-term risk premia.
• Critically Define the Role of "Hedges": If you hold assets like gold or cryptocurrencies, clearly articulate their purpose in your investment plan. Are they a strategic hedge against inflation based on evidence, or a tactical bet on market sentiment? This clarity helps prevent emotional decisions based on short-term price swings.
• Filter for Simplicity: Be wary of the "ETF slop" trend. Before adding any new product, especially a complex one, ask if it genuinely improves your portfolio's long-term expected return or if it's catering to a behavioral urge like fear of missing out or a desire for high income.

Source Highlights:

• 2025 Was Nut(s): A Canadian CIO's Review (Link): A year-in-review that uses concrete 2025 market data (e.g., Canadian market outperformance, real estate correction) to powerfully illustrate timeless, evidence-based principles like diversification, ignoring news, and staying invested through volatility. It also provides useful updates on new products for evidence-based investors.
• The Fed Just Hit the Reset Button (Link): This source provides a macro perspective, arguing that a recent (alleged) Federal Reserve pivot back to money creation will continue to devalue currency. It makes a strong case for why a disciplined, "always be buying" approach to owning productive assets is essential for long-term wealth creation.

Next Directions:

• Deep Dive: Research the academic evidence behind investment factors (Value, Profitability, Size). Understand their historical performance, the rationale behind them, and the potential for long periods of underperformance.
• Valuation Analysis: Explore the relationship between stock market valuations (like the Shiller P/E ratio) and subsequent long-term returns. While not a market-timing tool, this can help set realistic expectations for your portfolio.