Investors in traditional index funds are buying the entire market.
Capturing its returns.
But data shows that investors who expose their portfolio to specific factors can (and do) beat the market over the long term.
Enter factor-based investing.
So, what are ‘factors’?
According to Larry Swedroe, author of What Wall Street doesn't want you to know, factors are nothing more than a characteristic, a trade or a style of investing that can be expressed even across asset classes.
One example is value.
Buying what’s cheap.
The problem for investors today is that over 600 factors have been discovered.
So which are worth investing in and which should be ignored?
This is a big and complex subject.
But academia has highlighted the most important factors.
One final word of caution.
Yes, factor-based investing does tend to lead to outperformance over the long-term.
But factor investors can go for many years without seeing any benefit over and above traditional indexing.
You’ll need to be patient.