Market analysis and investment perspectives.
Factor investing has exploded in popularity as academic research identified persistent return premiums associated with value, momentum, size, quality, and low volatility. But there's a crucial gap between backtest returns and live portfolio performance that many investors discover painfully. Transaction costs, capacity constraints, factor crowding, and regime changes all erode the premiums that look so compelling in historical data. Successful factor investing requires careful implementation — managing turnover, diversifying across factors with low correlation, adjusting for changing market conditions, and maintaining the discipline to hold through inevitable periods of underperformance when your factors are out of favor. The premiums are real, but harvesting them consistently requires more sophistication than simply buying a factor ETF.
The average investor dramatically underperforms the indices they benchmark against. DALBAR's annual studies consistently show a 3-5 percentage point annual gap between index returns and actual investor returns. The reason isn't fees or bad stock picks — it's behavior. Investors buy after prices rise (chasing performance) and sell after prices fall (panic selling), systematically buying high and selling low. They concentrate in familiar names, check portfolios too frequently, and make emotional decisions that override rational analysis. The solution isn't more information or better stock picking — it's a disciplined investment process that removes emotion from the equation. Systematic rebalancing, predetermined entry and exit criteria, and long-term strategic allocation consistently beat discretionary decision-making over time.