Rather than looking at geography and sector, factor investment involves looking at styles of investing that can be added to your portfolio. Mostly the scientific argumentation making a certain factor interesting to invest in, is considered.
What do these factors involve?
Most relevant factors
- Momentum: shares recently performing well on the market, usually perform better than other shares in the subsequent period as well. One of the explanations for this behaviour is called “anchoring”, namely adhering to well-known values and thus buying the same shares repeatedly.
- Value: here mainly shares with a low valuation regarding price/earnings ratio are selected. These shares are hence regarded as undervalued. The danger here is that shares having a low value due to problems, the so-called “distressed securities”, are bought.
- Low volatility: this factor invests in companies with low volatility. Scientific research revealed that these companies get better returns than companies with high volatility. In 1972, this anomaly has been demonstrated by Robert Haugen, financial economist and pioneer in quantitative investing.
Research revealed that these factors explain 80 percent of the return out of a combined investment portfolio. However not all factors are interesting at the same moment. Nevertheless, it has been proven that investing based on one or more factors adds value.
Of course factor investment involves risks as well. Short- or medium-term, one or more factors can stay behind on the market. Looking at the factor value for example, there are periods where the return stays behind on the worldwide index.
Read more about investing here:
BNT Diamonds guides candidate-investors to the best investment in diamonds.