August 30th, 2018 | The Journal of Wealth Management
Gerstein Fisher research suggests matching factor allocations to life-cycle and investment goals, in Journal of Wealth Management
Gerstein Fisher’s research paper, “Factor Allocation and Asset Allocation,” by Gregg S. Fisher and Michael B. McDonald, was published in The Journal of Wealth Management, Vol. 21, Issue 2 (Fall 2018).
The paper enhances the understanding of factor investing by challenging the received wisdom “that there is a single optimal factor-based portfolio that investors should adopt.” Rather, we argue, certain factors—particularly small company size and attractive stock valuation—have been associated with high levels of return, while other factors—particularly high company quality—have reduced long-term risk relative to the market.
These relationships suggest that investors at earlier stages in their lives or comfortable with higher levels of risk might should tilt their portfolios toward return-oriented factors, and older or more conservative investors might tilt toward risk-reducing factors. Further, investors can gradually shift from one set of factors to the other as their needs and personal profiles change over time. This approach determines allocations based on individual investor goals, not ill-fated attempts to time the markets.
Factor strategies won’t beat the market all the time, but our research suggests superior, more consistent results over time from factor-tilted portfolios.