Prosperity Capital Advisors

Evidence-Based Investment Management

Since the inception of the stock market, one of the most common ways to buy and sell securities has been through “conventional management,” sometimes referred to as active management. This is the practice of trying to select individual securities, such as stocks, bonds, mutual funds, or ETFs, and purchasing the ones that you feel will “over-perform” and sell the ones that you feel will “under-perform.” In addition to securities selection, conventional investing attempts to time the market on when to buy and when to sell in hopes of maximizing return.

In the 1970s the first indexed fund entered the marketplace and “indexed investing,” a passive management strategy, became a less expensive alternative that simply tracked the holdings of a specific financial market that stays constant regardless of market conditions. One of the most well-known examples of an index is the S&P 500. An index fund would be a fund designed to track the exact holdings of the index itself, in this example the S&P 500. It is important to note that investors cannot actually own an index; the closest thing they can invest in is an index fund, which bears a cost.

Now, with the advancements in data analysis and the collection of historical information spanning decades of diverse market conditions, evidence based active managment strategies have emerged that are designed to provide investors with low-cost and efficient alternatives designed to reap the benefits of both conventional and indexed strategies, while minimizing the respective inefficiencies.

Introducing Evidence-Based Investment Management

While the market is unpredictable, there are significant aspects of investing that can be controlled. PCA focuses on these known factors within its evidence based active management strategy, putting them to work to our advantage.

Our approach to investing focuses on removing the speculation often seen in conventional or active trading; it can also provide greater diversification and flexibility that are often overlooked by indexing strategies.

Through comprehensive data analysis and the work of leading experts and Nobel Prize-winning theories, we have found the following to be our fundamental investing conclusions:

Seven Pillars of Evidence-Based Investment Management

1. Markets are efficient over time
2. Value stocks generally outperform growth stocks
3. Small stocks generally outperform large stocks
4. More profitable companies generally outperform less profitable companies
5. Diversification is key to long-term investment success
6. High cost portfolios minimize overall performance
7. Structuring a proper time horizon is crucial to overall financial planning success

Click here to learn more about our investment fundamentals.