Image Credit: Alex Nabaum
In one of the sharpest swings in years, cheap “value” stocks outperformed fast-moving “momentum” shares by up to 8 percentage points in a single day this week. That move could, just possibly, foretell the long-awaited resurrection of value stocks—but it definitely highlights the risks of betting big on any particular investing style.
Investors and financial advisers have been flocking to bundles of stocks, bonds and other assets that share certain characteristics of risk and return. Such portfolios, often called “factor” or “smart-beta” funds, have boomed to $1.07 trillion in assets as of this Aug. 31 from $690 billion at the end of 2016, says Ben Johnson, a research director at investment-research firm Morningstar.
The granddaddy of all factors is value investing: buying stocks that are cheap in relation to their earnings, net worth or other yardsticks. Value funds buy low and hope to sell high.…
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This article was originally published on The Wall Street Journal.
Further reading
Benjamin Graham, The Intelligent Investor
Jason Zweig, The Devil’s Financial Dictionary
Jason Zweig, Your Money and Your Brain
Jason Zweig, The Little Book of Safe Money
“Factor-Based Investing: The Basics” (Vanguard)
“What Is Factor Investing?” (BlackRock)
“Value: Don’t Call It a Comeback, It’s Been Here for Years” (Alpha Architect)
“How Painful Can Factor Investing Get?” (Nicolas Rabener, Enterprising Investor)
“Momentum Crashes” (Journal of Financial Economics)
“The Three Mistakes Factor Investors Make” (Cam Harvey)
“Smart Beta Interactive” (online tool from Research Affiliates)
“Global Investment Returns Yearbook: 2019” (Credit Suisse)
“Relevance of Long-Run Historical Data Today: Case of Price Momentum Crashes” (Two Centuries Investments)