Factor Investing For Dummies

Systematically secure your financial future—Dummies makes it easy

Factor Investing For Dummies helps you go beyond the investment basics, with proven techniques for making informed and sophisticated investment decisions. Using factor investing, you’ll select stocks based on some predetermined, well, factors. Momentum, value, interest rates, economic growth, credit risk, liquidity—all these things can help you identify killer stocks and improve your returns. This book explains it all, and helps you implement a strategic factor investing plan, so you can boost your portfolio’s performance, reduce volatility, and enhance diversification. You’ll also learn what not to do, with coverage of the factors that have failed to deliver consistent returns over time. We explore factor-based ETFS and loads of other ideas for injecting some factors into your investment game.

• Learn what factor investing is and how you can use it to level up your portfolio
• Understand the various types of factors and how to use them to select winning stocks
• Choose from a bunch of factor investing strategies, or build one of your own
• Generate wealth in a more sophisticated, more effective way

This is the perfect Dummies guide for beginner to seasoned investors who want to explore more consistent outperformance potential. Factor Investing For Dummies can also help portfolio managers, consultants, academics, and students who want to understand more about the science of factor investing.

James Maendel, BFA, AAMS, AIF, DACFP, founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. Paul Mladjenovic is a national speaker, educator, author of Stock Investing For Dummies, Currency Trading For Dummies and other Dummies titles and runs RavingCapitalist.com.

Introduction 1

About This Book 1

Foolish Assumptions 2

Icons Used in This Book 2

Where to Go from Here 3

Part 1: Starting with Factor Investing Basics 5

Chapter 1: Counting on Factor Investing 7

The Essentials of Factor Investing 7

Introducing the Factor Groups 8

Style factors 8

Macroeconomic factors 11

An Example of a Factor-Based Portfolio 13

The Upside and Downside of Factor Investing 13

Factor Investing through ETFs and Mutual Funds 14

Chapter 2: Why Use Factors? 15

Following a Systematic Approach 15

Leveraging the power of a persistent strategy 16

Following a disciplined core strategy 18

Considering Reasons to Use Factors 20

Keeping more of what you earn 20

Used by professional money managers 21

Using the Two Models of Factor Investing 22

Capital Asset Pricing Model 22

Fama and French 3-Factor Model 23

Chapter 3: Knowing Which Factors Are Worth Your Time 25

Putting You in Charge of Your Factor Investing Strategy 26

Navigating the Factor Jungle 27

Avoiding the Factor Zoo 28

Avoiding supercomputer factors 28

Finding investable factors 29

Chapter 4: Beating the Market without Timing It 33

Looking at the Indexes that Make Up the Market 34

The original index and its famous sister 34

The most popular index today 35

Planning Your Market Strategy 36

Beating the Market with Factors 38

Part 2: Going Deep with Factor Strategies 41

Chapter 5: Making Room for the Growth Factor 43

Seeking Profitability 44

Looking for Stable Earnings 46

Staying Vigilant for Non-Quality Growth Stocks 48

Employing a Low Turnover Strategy 50

Chapter 6: Value Investing with Factors 51

Paying for Value 51

Stock versus company 52

Exceeding — or not — expectations 52

Analyzing the Fundamentals 53

Understanding different types of value 54

Looking at the important numbers 55

Chapter 7: Banking on Momentum with Winners and Losers 59

Defining Momentum 60

The psychology of the momentum factor 60

Types of momentum 61

Exploring different momentum strategies 61

Looking at a momentum example 62

Making Money by Short-Selling Downtrends 64

Profiting from stocks with downward momentum 65

How short-selling works 65

The risks of short-selling 65

Minding the costs of short-selling 67

Knowing the Potential Limitations of the Momentum Factor 68

Expecting higher volatility 68

Paying higher fees and taxes 69

Choosing a Momentum Approach 69

Chapter 8: Sizing Up a Stock’s Size 71

Defining the Size Factor 71

Timing with the size factor 72

Exploring the Cons of the Size Factor 74

Deficiencies in the database 74

Tossing out the small-cap growth stocks 74

Considering the timing 76

Dealing with sensitive bull and bear markets 76

Using Size Factor with Funds 77

Chapter 9: Dividend Income Using Factors 79

Getting Started with Dividends 79

Gaining dividend benefits 80

Using value factors for dividends 80

Understanding the Difference Between Dividend Amount and Dividend Yield 81

Knowing the Dividend Payout Ratio 82

Checking Dividend Growth 83

Getting Paid by Your Dividends 83

Reinvesting Your Dividends 84

Dividend reinvestment through your broker 84

Using dividend reinvestment plans 85

Projecting Dividend Income 85

Where to find good dividend payers 86

Part 3: Using Factor Investing in Your Portfolio 89

Chapter 10: Using Brokerage Orders with Factor Investing 91

Understanding the Types of Brokerage Orders 92

Condition-related orders 92

Time-related orders 96

Using Margin 97

Margin trading scenarios 97

Maintaining balance requirements 98

Striving for success on margin 99

Factor investing and margin 100

Chapter 11: Using Macro Factors 101

Exploring the Main Macro Factors 102

Gross Domestic Product (GDP) 102

Inflation 104

Interest rates 108

Checking Out Other Economic Indicators: Leading, Lagging, and Coincident 110

Leading economic indicators 110

Lagging economic indicators 111

Coincident economic indicators 111

Watching Macro Factors and Trends 112

Chapter 12: Combining Multiple Factors for a Powerhouse Portfolio 113

Creating a Combination of the Right Factors 114

Taking an Optimal Approach with ETFs and Funds 115

Using the Optimal Approaches for Factor Investing 116

Creating diversification 117

Dollar cost averaging 118

Taking Advantage of the Professionals 119

Working with portfolio managers 119

Taking a core and explore approach 120

Chapter 13: Going Global with Factor Investing 121

Exploring Why You Should Invest Globally 122

Global economies are always shifting 122

New technologies lead to new asset classes 123

Good ideas are everywhere 123

Diversity is the key to investing 124

Investing in Environment, Social, and Governance 125

Chapter 14: Performing Technical Analysis for Factor Investing 129

Tracking a Stock’s Relative Strength Index (RSI) 130

The RSI parameters 130

RSI drawbacks 131

Checking a Stock’s Technical Charts 132

Head and shoulders charts 133

Reverse head and shoulders 134

Adding Up Moving Averages 135

Simple moving averages (SMA) 136

Exponential moving average (EMA) 136

Chapter 15: Using Stock-Screening Tools in Your Factor Investing 139

Finding Investments with a Screening Tool 140

Choosing a category 141

Choosing screening filters 142

Entering search settings 144

Using a Screening Tool to Find Factor Stocks 144

Growth stock approach 144

Value stock approach 145

Dividend income stock approach 145

Speculating with a bearish screening approach 145

Finding ETFs with Screening Tools 146

Part 4: Applying More Complex Investment Tactics 149

Chapter 16: Outsourcing with ETFs and Mutual Funds 151

Comparing ETFs to Other Investments 152

ETFs versus mutual funds 152

ETFs and stocks 153

ETFs and other investments 154

Diving into the Broad Market of Exchange-Traded Products 154

Exchange-traded notes (ETNs) 154

Exchange-traded commodities (ETCs) 155

Factor-specific ETFs 155

Combining Sectors with Macro Factors 156

The economy is expanding 156

The economy is contracting or flat 156

Categories of sector ETFs 157

Exploring Factor Mutual Funds 158

Chapter 17: Bonds and Factor Investing 161

Defining Bonds 161

Using Factors with Bonds 162

Duration 163

Momentum 163

Quality 163

Value 163

Taking into Account the Key Issues with Bonds 164

Quality factor 164

Adjustability 165

Duration factor and bond terms 165

Understanding the Elements of Bonds 165

Principal and interest 165

The bond market 166

Bond yields 167

Discount or premium? 168

Bond pricing versus market interest rates 168

Bond ratings 169

Looking at Savings Bonds 170

EE bonds 170

I bonds 170

Investing in Multifactor Bond Exchange-Traded Funds 171

Chapter 18: Using Options with Factor Investing 173

Writing Call Options 174

The call option buyer 174

The call option writer 175

Benefits and pitfalls of covered call writing 176

Selling the Put Options 176

The put buyer 177

The put writer 177

Benefits and pitfalls of writing puts 178

Being Strategic with Your Options 179

Covered call option strategy 180

Put option writing strategy 180

Chapter 19: Watching the Factors that Lead to Major Market Moves 183

Tracking the Early Warning Signals 184

Tax factor 184

Regulation factor 185

Government spending factor 185

The Fed factor 186

Navigating Volatile Periods 187

Investing in Commodities 188

Chapter 20: Considering Taxes 191

Understanding the Tax Treatment of Different Investments 192

Understanding capital gains and investment income 192

Capital gains example 194

Minimizing capital gains taxes 195

Cutting taxes with capital losses 196

Evaluating gain and loss scenarios 197

Sharing with the IRS 197

Tax forms 198

The wash-sale rule 199

Taking Advantage of Tax Deductions 199

Investment interest 200

Foreign taxes on investments 201

Miscellaneous expenses 201

Donating securities 201

Non-deductible items 202

Investing in a Retirement Account 202

IRAs 202

401(k) plans 204

Keeping Up on Tax Resources 204

IRS publications to get 204

Tax sites 205

Tax software 205

Financial sites with tax info 205

Part 5: The Part of Tens 207

Chapter 21: Ten Do-It-Yourself Factors 209

Profit 209

Sales 210

Consistency 210

Debt 211

Price-Earning Ratios 211

Dividend Income 212

Human Need 213

Optionable 213

Industry Top 20% 213

Political and Economic 214

Chapter 22: Ten Ways to Mess Up Your Investment Plan 215

Breakevenitis 216

This Time It’s Different 216

Cutting Winners Short and Letting Losers Stay 217

Letting Fear and Greed Lead 218

Buying the Hype 218

Using Leverage 219

Buying or Selling Everything at Once 220

Getting Impatient with Positions That Aren’t Working 220

Borrowing or Going into Debt to Invest 221

Micromanaging Your Portfolio 222

Chapter 23: Ten Non-Factor Strategies and Considerations 223

Pay Off Debt 224

Save an Emergency Fund 224

Plan for Taxes 225

Consider Insurance 225

Plan Your Estate 225

Watch the News 226

Monitor the Companies 226

Know How the Federal Reserve Works 227

Maintain Your Career 227

Practice Diversification 227

Chapter 24: Ten Financial Problems You Can Navigate with Factor Investing 229

Recessions 230

Subprime Lending Crisis 231

High Inflation 231

Market Crashes 232

Pandemics 233

Government Overreach 234

Hyperinflation 235

Tight Labor Market/Talent Shortage 236

Black Swan Events 236

Market Shutdowns 237

Part 6: Appendixes 239

Appendix A: Resources for Factor Investors 241

Factor Investing Books 241

Other Valuable Books for Factor Investors 243

Periodicals and Magazines 244

Resources on the Big Picture for Factor Investors 245

Investing Websites 246

General investing websites 246

Micro-factor resources 247

Other blogs that are useful for stock investors 248

Fee-Based Investment Sources 248

Exchange-Traded Funds 249

Sources for Analysis 250

Earnings and earnings estimates 250

Sector and industry analysis 251

Macro-factor resources 251

Government Information 252

Appendix B: Factor-Based ETFs 253

Index 269

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