November 16, 2013 Admin | November 16, 2013 Fama and French identified the 3 factor model. What is it and how can you apply it to your investments?
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Fama and French taught us that there are three risk factors to consider when investing in stocks (the market, the size of the company, and value). Finley taught us that we can apply what Fama and French taught us by selecting a small-cap index fund (small companies) and a large-cap value fund (large companies) to add to our portfolio that includes a total market index fund (the entire U.S. stock market, which includes small, mid, and large companies). This will overweight our portfolio towards small cap and large value. Over long periods of time, this could cause you to see a 2-3% higher return on your entire portfolio. This could equate to thousands of dollars!
That was a beautiful answer, Katherine. I have little to add. You can learn more about this idea by reading two wonderful books written by William Bernstein, The Four Pillars of Investing or the condensed version, The Investor’s Manifesto. They will further your understanding of this very important research. Great job, Katherine!