What is Evidence-Based Investing? 3 Core Principles Explained

As a physician, you're already familiar with evidence-based medicine. Oxford Languages defines it as medical practice that emphasizes the practical application of findings from the best available current research.

Apply that same definition to investing, and you get evidence-based investing: an approach to investing that emphasizes the practical application of findings from the best available current research.

Financial planner Carl Richards, in his book The One-Page Financial Plan, tells a story that captures this idea well. A physician friend once admitted to him that if he treated patients the way he'd been managing his investments, he'd put half of them at risk. In his medical practice, he'd never prescribe a drug without first reviewing the peer-reviewed evidence behind it. But with his own portfolio, he'd been relying on gut instinct — figuring that being smart and well-informed was enough to pick winning investments. Richards notes that most investors fall into this same trap at some point: trusting intuition over evidence, simply because that's what the financial media rewards.

Here's what's striking: most of what you see in financial media isn't evidence-based investing. The main reason is simple — evidence-based investing is boring. It doesn't generate headlines or hot takes. But just as medical research relies on hypotheses, data, and peer review rather than a doctor's gut feeling, financial researchers have spent decades rigorously studying what actually drives long-term market performance. Boring, in this case, is a feature, not a bug.

This post covers three core principles of evidence-based investing. We'll dive deeper into each one in future posts.

1. Passive Over Active

The first principle is favoring a passive approach over an active one. In practice, this means investing in low-cost, passively managed funds rather than trying to beat the market by picking funds or stocks you believe will outperform.

The reasoning holds up over time: the majority of actively managed funds underperform their benchmarks, largely due to the higher fees active management carries.

2. Global Diversification

The second principle is global diversification. Instead of holding a handful of individual stocks, an evidence-based portfolio holds thousands of stocks — spanning not just U.S. companies but international companies as well.

Roughly 60% of total global stock market value is made up of U.S. companies, which means the remaining 40% comes from international and emerging markets. Performance between U.S. and international stocks rotates — some years U.S. stocks lead, other years international stocks do. That's exactly why it makes sense to hold both: it ensures you're capturing the full return available across the total market rather than betting on one region to keep winning.

3. Factors That Can Increase Expected Returns

The third principle is that certain factors can increase expected returns. The two main factors are exposure to small company stocks and value stocks.

The evidence shows that, over long periods of time, small company stocks have tended to outperform large company stocks, and value stocks have tended to outperform growth stocks. Tilting your portfolio slightly toward small and value stocks can increase its long-term expected return — though this is a long-term tendency, not a guarantee for any given year.

The Bottom Line

This is a high-level overview of evidence-based investing — a passive approach, broad global diversification, and targeted exposure to factors like small-cap and value stocks. As Carl Richards' physician friend discovered, the same rigor you apply to reading clinical evidence before treating a patient is exactly what your portfolio deserves too. We'll break down each principle in more detail in upcoming posts.

Ready to put this into practice? If you're an ER physician or high-income professional looking for straightforward, evidence-based financial guidance, we'd love to connect. Schedule a free intro call with Yahara Wealth Management — no pressure, no sales pitch, just a conversation.

This post is for general educational purposes only and does not constitute personalized investment advice. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. Consult a financial advisor before making decisions about your specific situation.