What is the best investment? Part Three: Factors

Diego was beginning to think that his streaming subscription was as much a waste of his money as his time. Ever since he finished all seven seasons of his favorite TV show last month, for the second time, he has not been able to find a show that caught his attention. That is probably because all hit TV shows are a creative variation of a tested formula.

Investing is similar.

Of the 630,000 stocks available on the global market, some are blatantly unwise investments, and others, by virtue of their class of the stock market, are mediocre. Academic investing is about carving off every unwise and mediocre choice from the portfolio, while leaving in everything else.

A bit like TV shows, all good portfolios are a creative variation of a tested formula. Stocks that are neither bad nor mediocre can be identified by applying at least three qualifications, called factors. They comprise the Three Factor Model.

Market: stocks are better than bonds.

Capitalization: small companies are better than large companies.

Value: companies in low demand are better than companies in high demand.

Of course, you already knew, from Part One, why all of those are true. In fact, you can explain them yourself: each of those factors denotes an increase in risk.

Ugly truth: unlike TV shows, you cannot have dependable success by falling in love with one, two, or even five stocks. See Part Two.

Beautiful truth: this is not an ad for a day-trading app. You do not need to decide which stocks are best in order to invest prudently. What you need is coaching.

Simon Joshua is a licensed investment advisor representative at Cornerstone Wealth Partners in Michigan. He has structured his practice around investor coaching and committed himself to leading communities in establishing a legacy of fulfillment.

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