Farstorps investing

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But there are a few important drivers that can help explain returns across asset classes. These FACTORS are broad, persistent drivers of return that are critical to helping investors seek a range of goals from generating returns, reducing risk, to improving diversification. Today, new technologies and expanding data sources are allowing investors to access factors with ease. Factors are the foundation of investing, just as nutrients are the foundations of the food we eat.

We need carbohydrates and protein to power through the day, which we can find in different foods like bread, milk, and fruit. Similarly, knowing the factors that drive returns in your portfolio can help you to choose the right mix of assets and strategies for your needs. There are two main types of factors that drive returns.

Macro factors like the pace of economic growth and the rate of inflation can help to explain returns across asset classes like equity or bond markets. Style factors can help explain returns within those asset classes. For example, Value stocks — those that have low prices relative to fundamentals — have historically generated returns greater than the broad market.

Factors can help us build portfolios that better suit individual needs; just as knowing the nutrients in your food can help your body perform. Similarly, investors looking for downside protection in a volatile market environment might add exposure to minimum volatility strategies to seek reduced risk, while Investors who are comfortable accepting increased risk might look to more return-seeking strategies like momentum. Now — why do factors work? Extensive research, including that of Nobel prize winners, has proven that certain factors have driven returns for decades.

Some factors earn additional returns because they involve bearing additional risk, and may underperform in certain market regimes. Some factors arise from structural impediments, those investment restrictions or market rules that make certain investments off-limits for some investors, creating opportunities for others who can invest without those constraints. And finally, some factors capture investor behavior, that is, actions of the average investor that are not always perfectly rational.

Rather than look at complex attributes, such as momentum, beginners to factor investing can focus on simpler elements, such as style growth vs. These attributes are readily available for most securities and are listed on popular stock research websites.

This is commonly tracked by price to book, price to earnings, dividends, and free cash flow. Size Historically, portfolios consisting of small-cap stocks exhibit greater returns than portfolios with just large-cap stocks. Investors can capture size by looking at the market capitalization of a stock. Momentum Stocks that have outperformed in the past tend to exhibit strong returns going forward.

A momentum strategy is grounded in relative returns from three months to a one-year time frame. Quality Quality is defined by low debt, stable earnings, consistent asset growth, and strong corporate governance. Investors can identify quality stocks by using common financial metrics like a return to equity, debt to equity and earnings variability.

Volatility Empirical research suggests that stocks with low volatility earn greater risk-adjusted returns than highly volatile assets. Measuring standard deviation from a one- to three-year time frame is a common method of capturing beta. Built by economists Eugene Fama and Kenneth French, the Fama and French model utilizes three factors: size of firms, book-to-market values, and excess return on the market.

In the model's terminology, the three factors used are SMB small minus big , HML high minus low and the portfolio's return less the risk free rate of return. SMB accounts for publicly traded companies with small market caps that generate higher returns, while HML accounts for value stocks with high book-to-market ratios that generate higher returns in comparison to the market.

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Similarly, investors looking for downside protection in a volatile market environment might add exposure to minimum volatility strategies to seek reduced risk, while Investors who are comfortable accepting increased risk might look to more return-seeking strategies like momentum. Now — why do factors work? Extensive research, including that of Nobel prize winners, has proven that certain factors have driven returns for decades.

Some factors earn additional returns because they involve bearing additional risk, and may underperform in certain market regimes. Some factors arise from structural impediments, those investment restrictions or market rules that make certain investments off-limits for some investors, creating opportunities for others who can invest without those constraints.

And finally, some factors capture investor behavior, that is, actions of the average investor that are not always perfectly rational. Sometimes people want French fries instead of salad even if they are watching their cholesterol.

These behavioral biases can give rise to investment opportunities for those who can take on a contrarian view. Advancements in technology and data allow investors to take advantage of these time-tested ideas in new ways, from smart beta to enhanced factor strategies. Smart beta strategies target factors using a rules-based approach, usually with the goal of outperforming a market-cap weighted benchmark.

Smart beta strategies are now widely available in ETFs and mutual funds, making factor strategies affordable and accessible to every investor. Enhanced strategies use factors in more advanced ways - trading across multiple asset classes, sometimes investing both long and short. Investors use these enhanced factor strategies to seek absolute returns or to complement hedge fund and traditional active strategies.

Factors can help to power your investments and can help to achieve your goals. BlackRock is a leader in factor investing, launching the first factor fund in and driving innovation in the category for over 40 years. Types of factors There are two main types of factors that have driven returns: macroeconomic factors , which capture broad risks across asset classes; and style factors , which help to explain returns and risk within asset classes. Macroeconomic factors Exposure to the business cycle Real rates The risk of interest-rate movements Inflation Exposure to changes in prices Credit Default risk from lending to companies Emerging markets.

Understanding Factor Investing Factor investing, from a theoretical standpoint, is designed to enhance diversification, generate above-market returns and manage risk. Portfolio diversification has long been a popular safety tactic, but the gains of diversification are lost if the chosen securities move in lockstep with the broader market. For example, an investor may choose a mixture of stocks and bonds that all decline in value when certain market conditions arise.

The good news is factor investing can offset potential risks by targeting broad, persistent, and long recognized drivers of returns. Rather than look at complex attributes, such as momentum, beginners to factor investing can focus on simpler elements, such as style growth vs. These attributes are readily available for most securities and are listed on popular stock research websites. This is commonly tracked by price to book, price to earnings, dividends, and free cash flow.

Size Historically, portfolios consisting of small-cap stocks exhibit greater returns than portfolios with just large-cap stocks. Investors can capture size by looking at the market capitalization of a stock. Momentum Stocks that have outperformed in the past tend to exhibit strong returns going forward. A momentum strategy is grounded in relative returns from three months to a one-year time frame. Quality Quality is defined by low debt, stable earnings, consistent asset growth, and strong corporate governance.

Investors can identify quality stocks by using common financial metrics like a return to equity, debt to equity and earnings variability. Volatility Empirical research suggests that stocks with low volatility earn greater risk-adjusted returns than highly volatile assets.