Systematic Investing

BY | July 21, 2021

Discretionary vs. Systematic Investing

Within the investment profession, we have two different approaches to investing in capital markets: Discretionary and Systematic. They compare nicely to the relationship we see between Spock and Captain Kirk. The folks at AQR produced a fantastic paper defining discretionary and systematic investing; below is a quote summarizing the differences between the two strategies:

… systematic (commonly associated with the term ‘quant’) generally applies a more repeatable and data driven approach, relying on computers to identify investment opportunities across many securities; in contrast, a discretionary approach involves in-depth analysis across a smaller number of securities and relies more on information that is not always easily codified.”

— AQR, Alternative Thinking: Systematic vs Discretionary | 3Q17

Markets are constantly adapting and evolving over time and the tools that investors (both professional and amateur) have at their fingertips is rapidly increasing. It is no secret that the collection and analysis of data is changing how we live our daily lives. Below is a graphic that depicts the amount of data generated every minute back in 2019:

Over 90% of all the data created throughout the history of the world has been generated within the past 2 years. With the vast increase in data available to investors, it is no surprise that computing power is perhaps the most sought-after commodity on Wall Street. Even Ben Graham, Warren Buffett’s instructor at Columbia University, noted later in his life that computers would become the primary tool for investment analysis at some point in the future due to their ability to analyze massive amounts of information and computational accuracy. Below is another visual showing the advancement of technology on Wall Street; here we see a photo of the New York Stock Exchange from 1937 compared to a recent photo taken during the Covid-19 pandemic. (I choose the pandemic photo since most humans walking the NYSE floor each day are visitors and during the Covid-19 pandemic, the exchange stopped allowing visitors on the floor.)


From Pro Sports to Investing

Competition thrives on Wall Street and within financial markets, so it is only natural that the methods used to manage capital have adapted along with these new capabilities. Over recent decades, the term systematic investing has been popping up more and more. Applying a systematic approach to making decisions and analyzing future outcomes eventually found its way into professional sports. The 2011 film Moneyball highlights how Billy Beane utilized statistics and data analysis to build a baseball team capable of competing against teams with much higher payrolls who could simply buy the best players. Baseball had traditionally taken a more discretionary approach to analyzing players and choosing which prospects teams wanted to draft and sign. The story highlights how a new systematic approach to analyzing players could remove many of the biases and human judgement errors made in discretionary decision making.

The obvious benefit is that systematic processes remove the drawbacks of relying on human judgement which can be plagued by errors and biases. Putting it mildly, our minds are reliably unreliable. Our support for using a systematic approach to investing stems from the fact that humans are by nature emotional creatures and emotions often interrupt the practice of successful investing. This is where a systematic investment process can help protect us from letting our emotions intrude on our success as investors. Below are some classic examples of systematic investing:

Automatic RebalancingSetting bands or target allocations to maintain over time as markets move in various degreesRemoves the urge to time markets or adjust your asset allocation based on recent economic news
Dollar-Cost AveragingInvesting a specific sum of money at a specific point in timeRemoves the urge for an investor to remain in cash and sideline themselves from market returns
Factor InvestingFocuses on using data and statistical analysis to quantify company characteristics that produce higher risk-adjusted returnsAllows mangers to scale their analytical capacity and reduce costs while matching the activity of traditional discretionary managers
Systematic Trend FollowingShifts capital between different asset classes based on price, earnings, trading volume, cash flow momentumAllows investors to follow macroeconomic changes over time without having to predict future GDP, inflation, political action, etc…
Automatic Retirement Plan ContributionsAutomatically deposit and invest a percentage of an individual’s income into their qualified retirement planAvoids the urge to spend before saving and forces investors to save and invest over time compared to jumping in and out of the market


Here at Silicon Hills Wealth, we are confident that employing a systematic approach to engineering portfolios and investing one’s capital is the most reliable way to achieve success in the markets. We realize that there is a balance to be struck between humans and machines. A.I. and Machine Learning are powerful tools for the future of human advancement, but we must acknowledge their limitations and drawbacks. The output of a systematic computer model is only as good as the data being utilized and the individual building the model. Data mining, overfitting models, misusing statistical concepts, lack of an economic rationale, and the fact that the very humans building the models are susceptible to human biases means that choosing the proper systematic approach requires human input. Remember that Captain Kirk and Spock needed each other to successfully navigate the challenges of the next frontier. Systematic processes should be utilized by all investors to avoid common mental errors found in all humans. As humans we can all relate to Kirk; however, we must remember that economic news, the financial press and Wall Street itself tends to be a distraction from the business of successful investing and this is where we can rely on Commander Spock to guide us through the inevitable challenges that will be forever present within the investment universe.

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