Factors Can Increase Expected Return

by | | Investing

In our previous article and video, What is Evidence-Based Investing?, we summarized three principles of Evidence-Based Investing. Those principles include:

  1. Passive > Active
  2. Global diversification
  3. Factors can increase expected return

This article goes into more detail on the third principle – factors can increase expected return. More specifically, small company stocks historically have outperformed large company stocks, and value stocks have outperformed growth stocks. Having a slightly higher allocation to small and value stocks can increase your portfolio’s long term expected return.

Watch this short video to dive into the academic evidence that supports tilting portfolios to small and value stocks.

 

Summary and Key Points

  • The longer the time period, the higher percentage of time small and value outperform large and growth.
  • Small and value will not outperform every year and can underperform for long periods of time.

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