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Professors Kenneth French and Eugene Fama analyzed decades of data and proved (with high statistical confidence) that three risk/premium factors dominate expected long term market return.
They wanted to answer their intellectual curiosity:
Can an investor find risk factors that are "guaranteed" to be rewarded?
Fortunately for us and our clients, their academic research delivers a prudent way to intelligently increase investment returns.
Some day you may hear about Fama/French receiving a Nobel Prize for the 3-factor model. If you've enjoyed the 3 factors in your investing - send them a thank you card! (We have.)
French and Fama are among the academic leaders including Economic Nobel Laureate Prize Winners of Dimensional Fund Advisors (DFA). Our firm uses the building blocks of DFA in the portfolios we design and manage for our clients.
By intelligently exposing your investment assets to these factors (risks) over time, you will receive the "premiums" these risks offer.
These factors are statistically proven to exist globally: USA, non-USA developed and emerging market countries.
What are these 3 factors and the associated premiums in USA (83 years of data, 1927-2010)?
Market Premium (stocks vs. bonds in USA)
Average Annual Benefit: +8.04%
Value Premium (in USA)
(Stocks with higher Book-to-Market ratios vs. lower) Average Annual Benefit: +4.90%
Size Premium (in USA)
(small stocks vs. large)
Average Annual Benefit: +3.75%
Should you place 100% of your investments in "small, value" stocks? No. Diversification is important within asset classes, regions and across asset classes, regions. Should you "tilt" your highly diversified portfolio away from an overall average market position to one whose overall position is slightly small and value? Yes.
Are these premiums present at all times? No. Like most aspects of the market, they come & go in cycles. (We can show you those cycles.)
Note that timing the market is not among the risks that are rewarded - for obvious reasons - you can't consistently predict market movements. Note also that it takes a minimum of 35 years of data to make statistically valid conclusions about the market.
We have oodles of data and information on the 3-factor model and would be pleased to share more about it with you.
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What to Do Next
We'll analyze your current investment strategy with nothing expected in return. We look at: - Overall Performance (compared to benchmarks & our model portfolios)
- Portfolio Design
- Diversification
- Fees & Expenses
Give us a call. You are your own fiduciary - and getting an objective review of how your precious assets are being invested is a wise move to protect yourself & your loved ones. 760-804-0910 |
