March 23, 2013
What did Fama and French teach us about risk factors and investing options?
What did Fama and French teach us about risk factors and investing options?
Fama and French taught us that there are three main risks to think about when investing. You should consider market, size, and value. The size matters because small companies will have a 3% higher return after a long time. Value is important because a company that is cheap may provide a 5% higher return than other companies over a long time. To take advantage of this you must be able to wait a long time to get a return on small companies and value stocks.
Outstanding, Thomas! Thomas stated the point directly with minimal words. Well done. Now what?
We can apply what Fama and French identified by selecting a small-cap index fund (small companies) and a large-cap value fund (large companies that are cheap and not so healthy) to add to our portfolio that should include a total market index fund (the entire U.S. stock market which includes large, mid, and small companies). This will overweight our portfolio towards small cap and large value. Over long periods of time you you could very well see a 2% to 3% higher return on your entire portfolio. That could equate to many thousands of dollars over long stretches of time. Knowledge is POWER!!!!
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