Factor Investing
A structured way to seek return drivers — with long droughts and behavioral pain.
Factor investing targets broad, repeatable drivers of returns (factors) rather than picking single stocks. The benefit is clarity and discipline; the cost is that factors can underperform for years, and many investors quit at the worst time.
Factor Basics
Common equity factors (high level)
- Value: Cheaper vs. fundamentals
- Momentum: Recent winners continue
- Quality: Profitability, balance sheet strength
- Size: Smaller companies behave differently than large caps
What People Get Wrong
Implementation Checklist
Make it survivable
- Diversify across factors to reduce single-factor drought risk.
- Use low-cost vehicles; small edges can be eaten by fees.
- Define a holding period; frequent switching increases costs.
- Expect underperformance and pre-commit to a process.
Key Takeaways
Factor investing is systematic, not story-based — but it is not easy emotionally.
Expect long periods of underperformance; design for endurance.
Fees and discipline decide whether a small edge becomes real.
Factor Investing
A structured way to seek return drivers — with long droughts and behavioral pain.
Factor investing targets broad, repeatable drivers of returns (factors) rather than picking single stocks. The benefit is clarity and discipline; the cost is that factors can underperform for years, and many investors quit at the worst time.
Table of Contents
Factor Basics
Common equity factors (high level)
- Value: Cheaper vs. fundamentals
- Momentum: Recent winners continue
- Quality: Profitability, balance sheet strength
- Size: Smaller companies behave differently than large caps
What People Get Wrong
Implementation Checklist
Make it survivable
- Diversify across factors to reduce single-factor drought risk.
- Use low-cost vehicles; small edges can be eaten by fees.
- Define a holding period; frequent switching increases costs.
- Expect underperformance and pre-commit to a process.
Key Takeaways
Factor investing is systematic, not story-based — but it is not easy emotionally.
Expect long periods of underperformance; design for endurance.
Fees and discipline decide whether a small edge becomes real.
Related Terms
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