Skip to main content

Sound Advice: July 27, 2022

Is investing by factor a good idea? 

Stocks can be described in many different ways, but common descriptions include labels such as Value, Quality, Momentum, Small Cap, Defensive, Cyclical, High Dividend, Minimum Volatility, and Multi-Factor.  It should come as no surprise that each of these has a strong following among different groups of investors.

Let’s deal with the definitions first.

Those in the Value group have low price-earnings ratios.  The Quality group leans toward the major companies that are the foundations of the U.S. economy.  Momentum stocks are those with above average price performance over the latest six and 12 months.  Small Cap stocks are those of smaller companies, which tend to grow more quickly, but are more susceptible to downturns in the economy.  Defensive stocks are those of companies whose products and services are essential (think Procter & Gamble).   

Cyclical stocks are those of companies whose progress tends to go through boom-and-bust periods.  High Dividend Yield stocks are those with well above average dividend yields.  Minimum Volatility stocks are the ones that fluctuate least during periods of market weakness and strength.  And Multi-Factor stocks are those that would qualify for more than one of these labels.

The factor that turned in the best performance over the last 15 years was Momentum, which ended up in first place five times with average annual returns of 11.8%, but as one might suspect, this group has been next to last for the first six months of this year.  What’s more, Momentum dropped from the top to the bottom three times in the years following its first-place finish.

Next best were Value stocks, coming in first place four times.  Here, too, the follow-up was problematic.  In 2013 and 2014, Value stocks led the pack.  Then in two of the next four years Value stocks were at the bottom.

Quality stocks were just behind with yearly returns of 11.5%, though they too were among the worst performers through midyear.  In most years, they were somewhere near the middle.

What was the best performing group this year? Defensive stocks, which lost only 3.2%, but that’s after four out of 15 years in which this group was the weakest performer. And in five other years, the returns from these stocks were well below average.

When trying to identify a group of stocks or funds with real advantages over time, it’s essential to concentrate on the consistency and rate of forward progress, financial health, and an economic environment that favors the goods and services they provide.


N. Russell Wayne, CFP®

Any questions?  Please contact me at nrwayne@soundasset.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: February 21, 2024

800-000-0000 That’s 800-000-0000 Again, 800-000-0000 That’s the typical closing for the hard sell commercials that are increasingly polluting media airwaves.   These are the commercials for products or services you rarely need or most definitely should avoid. A substantial number are on behalf of groups of attorneys who would have you believe that you and many others may be entitled to cash compensation for having used or being exposed to some evil item or substance some time in the last few decades.   The pitch always includes a comment that there’s no cost to you unless there is a settlement in your favor. Much of this is rubbish, but when the appeal suggests that there’s nothing to lose, why not take a shot.   And, as you would expect, “advisors” are standing by 24/7 to take your call and help get the process in motion.   What kind of advisor would be available at 3 a.m.? One version of this approach pops up every year between October 15 th and Decemb...
Post a Comment
Read more

Sound Advice: September 21, 2022

The Professional Approach To Stock Selection There are various approaches to stock selection, but the two that predominate are fundamental analysis and technical analysis.  Fundamental analysis is a numbers-based method that evaluates key factors such as income and financial health, including the past, present, and future.  Technical analysis emphasizes movements and formations of stock prices. Fundamental analysis is based on factors that over time have proved to have a meaningful impact on stock price movements.  The optimal picture of corporate profitability is steady growth, both in the past and, prospectively, in the coming years.  Steady growth is rewarded by higher valuations of underlying earning power than those accorded companies with erratic progress. When professionals screen (filter) the data of the broad universe of stocks, they look for companies that move ahead every year, regardless of the prevailing economic conditions.  Although high pas...
Post a Comment
Read more

Sound Advice: July 26, 2023

Is Day Trading a Good Idea? Day trading can be both exciting and potentially profitable, but it also comes with significant risks and challenges. Whether it's a good idea depends on several factors, including your financial situation, risk tolerance, time commitment, and knowledge of the markets. Here are some considerations to keep in mind: Risk and volatility: Day trading involves buying and selling securities within a short time frame, often within the same day. This exposes you to the inherent volatility and risks of the market. Prices can fluctuate rapidly, and unexpected events can have a significant impact on stock prices, making it challenging to consistently make profits. Time commitment: Day trading requires a substantial time commitment. It involves closely monitoring market movements, conducting research, and executing trades. It can be stressful and demanding, as you need to be actively engaged in the market during t...
Post a Comment
Read more