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If you want to give factor investing a go, here are the best strategies…

by , 10 November 2015

There are a whole host of different investment strategies to try out. Over recent years, factor investing has grown in popularity.

Factor investing involves picking stocks using different metrics such as value and momentum.

So which factor investment strategies perform the best?

Let's take a closer look…


What is factor investing?

 
The basis of factor investing comes down to honing in an investment strategy around factors that tend to be associated with outperformance.
 
The research into the performance of following such a strategy shows that there aren’t that many factors that will outperform over the years. But here are the ones that have some evidence backing up their performance, Cris Sholto Heaton in Money Week explains…
 

Factor investing factor 1: Value

 
Value investing is well-known thanks to the likes of Warren Buffett. Value investing has a track record of working well in many markets around the globe. 
 
To find undervalued stocks, investors use the price to book ratio. This is a company’s share price divided by its assets minus its liabilities. Some investors also look at a company’s dividend yield to find undervalued stocks.
 

Factor investing factor 2: Momentum

 
Momentum investing also has a good track record. This involves investing in the stocks that are doing well and outperforming the general market.
 

Factor investing factor 3: Small-caps

 
The basis of this factor is that smaller companies tend to outperform larger ones. 
 
But research shows that it may not work well in all markets. There is also a chance that outperformance comes from a few good performers rather than small companies in general.
 

Factor investing factor 4: Low volatility

 
This investment strategy focuses on investing in stocks that have a less volatile share price than the average, which apparently leads to outperformance.
 
This factor appears to work well in markets around the world.
 
So there you have it. The best strategies to follow if you want to give factor investing a go.
 
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