Evidence-Based Investing & Investor Psychology

Header Briefing: Evidence-Based Investing & Investor Psychology This briefing synthesizes insights on building resilient portfolios by combining evidence-based principles with an understanding of investor psychology. It focuses on the interplay between macroeconomic policy, market sentiment, and disciplined, data-driven investment strategies.

Key Insights

• Factor returns arrive in unpredictable bursts, rewarding discipline. After years of underperformance, Canadian small-cap and value stocks dramatically outperformed the broader market in 2025. This provides a concrete example that investors must remain committed to their strategy through periods of underperformance to capture the often-sudden and significant returns of evidence-based factors. Abandoning a sound strategy due to recent poor performance is a common behavioral error that can be very costly.
  • Supporting Data: The iShares S&P TSX Small Cap Index ETF returned 47.94% in 2025, while the Canadian Value Index ETF returned 33.63%, significantly narrowing the performance gap from previous years. (Source)
• Asset class divergence can be a powerful sentiment indicator. The significant outperformance of gold and silver relative to the stock market in 2025 suggests investors are increasingly concerned about currency devaluation, not just optimistic about economic growth. This gold-to-equity ratio has historically served as a fear gauge, rising during periods of economic distress. Tracking this relationship provides a data point on market psychology beyond traditional sentiment surveys.
  • Supporting Data: In 2025, gold and silver prices rose ~67% and ~71% respectively, while the stock market was up ~18%. (Source)
• Monetary policy creates a structural incentive for asset ownership over saving. Recent shifts by the Federal Reserve to resume money creation structurally benefit investors at the expense of savers and wage earners. Inflation, fueled by this policy, erodes the purchasing power of cash and salaries, making investment in productive assets a necessary defensive strategy to preserve and grow wealth. Understanding this dynamic is crucial for developing the psychological resolve to stay invested.
  • Supporting Data: The Federal Reserve ended quantitative tightening on Dec 1, 2025, and began injecting money into the economy, committing to $40 billion per month. (Source)
• The financial industry is increasingly marketing complex products that exploit investor biases. A surge in "ETF slop"—such as leveraged, buffered, or single-stock covered call ETFs—is being aggressively marketed to retail investors. These products often capitalize on behavioral biases like performance chasing or a desire for high income, but their complexity and high fees can be detrimental to long-term, evidence-based goals.
  • Supporting Opinion: "I'm pretty confident saying that most investors don't need buffer ETFs... single stock covered call ETFs, leveraged single stock ETFs, or leveraged covered call ETFs." (Source)

Latest News

• Federal Reserve Reverses Policy, Resumes Monetary Expansion. On December 1, 2025, the Fed ended its quantitative tightening program and began injecting liquidity, committing to creating $40 billion in new money per month. This policy shift is a significant tailwind for asset prices but a headwind for the value of cash savings. (Source)
• Factor-Based ETFs Becoming More Accessible. Avantis Investors is partnering with CIBC to launch Canadian-listed ETFs that provide tilts toward small-cap value and high-profitability stocks. This development expands direct retail access to evidence-based factor strategies previously dominated by institutional firms like Dimensional Fund Advisors. (Source)

Emerging Ideas / Undercurrents

• The Debate on Gold's Portfolio Role: Sources show a clear disagreement on the function of gold. It is framed as a strategic inflation hedge (Source), a key sentiment indicator of market fear (Source), and a non-productive, low-return asset whose demand is driven by fear rather than evidence-based return expectations (Source).
• Passive vs. Factor-Tilting: The discussion is moving beyond a simple passive vs. active debate. Evidence-based investing is presented as a middle path: using systematic, rules-based tilts toward academically identified factors (like value and profitability) within a broadly diversified, low-cost portfolio framework. This strategy aims to enhance long-term expected returns over pure market-cap weighting. (Source)
• Market Concentration Is a Distraction: Despite record-high concentration in the top US stocks (top 7 stocks are 32% of the market), the historical relationship between market concentration and future returns is statistically insignificant. High valuation is a more reliable, albeit weak, predictor of lower future returns, but neither should be used as a market-timing signal. (Source)

Actionable Steps ("Header Actions")

1. Audit Your Portfolio for "ETF Slop": Review your holdings for complex, high-fee products like leveraged, inverse, or derivatives-based ETFs. Question whether they align with your core evidence-based strategy or if they were purchased based on a behavioral trigger like chasing recent performance or high yields.
2. Track the Gold-to-S&P 500 Ratio: Instead of speculating on gold, use its price relative to equities as a sentiment indicator. A rising ratio can signal growing investor fear and a potential flight to safety. Monitor this as one of several inputs to understand the prevailing market psychology.
3. Stress-Test Your Diversification: The dramatic outperformance of Canadian stocks vs. US stocks in 2025 serves as a powerful reminder to avoid recency and home-country bias. Re-evaluate your asset allocation to ensure you have meaningful, strategic exposure to international developed and emerging markets.

Source Highlights

• 2025 Was Nut(s): A Canadian CIO's Review (Source): Provides a rigorous, data-driven review of 2025 market performance through the lens of evidence-based investing. It is the strongest source for understanding factor investing, behavioral biases, and the importance of diversification.
• The Stock Market Is Ignoring The Gold & Silver Warning (Source): This source offers a practical framework for using the relative performance of commodities (gold/silver) versus equities as a real-time indicator of market sentiment and fear about currency devaluation.
• The Fed Just Hit the Reset Button (Source): Clearly explains the macroeconomic backdrop of monetary policy and inflation, making a compelling case for why asset ownership is a critical component of financial resilience in the current system.