Specializing in retirement planning and personalized investment management.

Factor Investing

Factor Heavy

This strategy simply over-weights the documented factors already built into our Core Portfolio.

Factor investing is a strategy that targets specific drivers of return (called factors). These factors are well-researched “tendencies” in the market. There are no guarantees in investing, but factors can help provide better odds.

Stocks, in general, are the primary driver of investment returns. Here are the four stock factors that we use in our design.

  1. Stocks: Over time, stocks tend to outperform bonds.
  2. Size: Over time, small-cap stocks tend to outperform large-cap stocks.
  3. Value: Over time, value stocks tend to outperform growth stocks.
  4. Quality: Over time, companies with higher profitability tend to outperform companies with lower profitability.

Bonds are primarily used for diversification. They will produce some return, but not as much as stocks. We think of bonds as dilution, like water. The more bonds we have in the portfolio, the less volatile it should be. Here are the two bond factors we recognize:

  1. Duration: Over time, longer-term bonds tend to outperform shorter-term bonds.
  2. Credit Quality: Over time, bonds with lower credit quality tend to outperform bonds with higher credit quality.

Notice, we say “over time” in each of our statements. Outperformance will not happen every year. It may not happen over every 3-, 5-, or even a 10-year time periods. In fact, over the last decade, small and value stocks have under-performed mainly due to large-cap technology stocks – a stat that’s been exasperated by COVID-19. Academics and researchers are not fazed though by the latest trend. They point out an eventual reversion to the mean and still stand behind the advantages that factor investing provide over the long-term.

Our Core Portfolios obviously hold stocks in general, and hold a portion in small-cap, value and quality stocks, but the weightings are “factor-neutral”, meaning the stock factors we are not over-weighted. Likewise, bonds in our Core Portfolios are mostly intermediate-term in duration and investment grade in credit quality.

Factor investing doesn’t add more stocks to the portfolio, but it does tilt the portfolio to be heavier in small-cap, value and quality stocks, and potentially lower the credit quality and/or increase the duration of bond investments.

  Core 60 Factor 60
Stocks: 60%    
US Large Growth 10.5% 5%
US Large Blend 10.5% 8.5%
US Large Value 10.5% 15.5%
US Mid/Small Growth3.5%2%
US Mid/Small Blend 3.5% 5%
US Mid/Small Value 3.5% 6%
Real Assets 6% 6%
International Core Equity 9% 9%
Emerging Markets 3% 3%
Alternatives: 5%    
Hybrids 2% 2%
Precious Metals 1.5% 1.5%
Bonds: 35%    
US Investment Grade Core 25% 22.5%
Global/International 4% 5%
Inflation Protection 4% 4%
High Yield 2.5% 4%
Cash/CDs 1% 1%

Factor investing can be considered defensive or aggressive, depending on which factors are used and how.

  • Lowering the credit quality and/or increasing the duration of bond investments would be more aggressive.
  • Increasing small-cap stocks would be more aggressive.
  • Increasing value and quality stocks could be more defensive, but only up to a certain point. If they are really over-weighted, then it becomes more aggressive since you are more concentrated and less diverse.