In last month’s blog, “Factors That Figure in Your Evidence-Based Portfolio,” we discussed key factors that are used in constructing evidence-based investment portfolios. Now let’s look at a few additional ones—and why incorporating them into a portfolio can be tricky.
First, a quick reminder that the three well-established stock market factors are equity, value and small-cap. For bonds, the key factors are term and credit. These factors have formed the backbone of evidence-based portfolio construction, helping investors strike the most effective balance between return and risk.
Continued research has found additional market factors that provide the potential for additional premiums. As with the earlier factors, these premiums seem to result from accepting added market risk, avoiding ill-advised investor behaviors or both. In academic circles, the most prominent among these are considered to be profitability and momentum.