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Factor Investing with Don Calcagni Q&A – Part 2


In this special bonus episode of the Science of Economic Freedom podcast, “A Factor Investing Q&A,” I provide a general overview of Factor Investing, and I answer many of the great questions from my recent presentation in Boston, MA, to the American Association of Individual Investors (AAII).

Some of the topics covered in this episode include:

  • How Factor Investing can be applied to fixed-income portfolios
  • What type of investment vehicles are best for Factor Investing
  • The research supporting the efficacy of Factor Investing
  • Sector rotation vs. Factor Investing
  • How you can begin implementing Factor Investing on your own
  • Plus, much more…

We have talked in detail about Factor Investing on this podcast, specifically in Episodes 6, 14 and Bonus Episode 10.

So, why are we talking about Factor Investing so much? Well, because it works! And, it also provides you with a level of confidence that allows you to sleep well at night. If you want more insight into this investment strategy, then this bonus podcast episode is for you.


Doug Fabian: Why does factor investing work? How do you use fixed income with factor investing? In today’s episode of The Science of Economic Freedom, we’re going to answer your questions about factor investing and much more.

Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment perspectives carefully before making any changes to your investment portfolio.

This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc is the parent company of Mercer Global Advisors Inc and is not involved with investment services.



Doug: Welcome to the Science of Economic Freedom. I’m your host, Doug Fabian. This podcast is all about helping you achieve your financial dreams. We call that economic freedom. This program is about your journey to achieve economic freedom for yourself and your loved ones. Today, we want to help you identify your next step on that journey.

This is bonus episode number 11, about factor investing Q and A recorded in August of 2018. Now, just a reminder – we have bonus episodes when we’re talking about news events and current information in the market. I just returned from an American Association of Individual Investors presentation on factor investing in Boston, Massachusetts. It was a great crowd. I presented the science behind factor investing, why it works, and how to implement factor investing using exchange traded funds. This podcast will be an overview of factor investing and the Q and A portion of my presentation, which was quite interesting.

We have talked in detail about factor investing on this podcast. In episode six, we talk about the science of investing in general. In episode 14, we go into detail about factor investing with chief investment officer for Mercer Advisors, Don Calcagni. We had Don back on the show on bonus episode number ten when we talked about factory investing and how it’s done so far in 2018. And now here we are, bonus episode number 11, factor investing Q and A.


Factor investing part two

We’re talking about it so much because it works. It provides you with a level of confidence that you can sleep at night in any market environment.

Now, in contrast, investors without a strategy subject themselves to the swings of the market and their emotional reaction to those swings. One of the things that I talked about with the American Association of Investors crowd was the reason why investors underperform. Many investors end up selling winners too soon, holding losers too long, generating unnecessary tax consequences. Having too many concentrated positions in their portfolio, meaning they lack diversification. Many investors buy high and sell low. And then lastly, many investors have their focus disrupted by the media, the internet, and family and friends with investment ideas.


Why factor investing is important

Factor investing has been able to achieve a rate of return above the market. Factor investing, multi-factor investing beats the S&P 500. It does so with less risk, and it allows you to sleep well at night. It is for these reasons why we want to continue to talk about factor investing. There is true science behind multifactor investing strategies. The reason why you need multi-factors instead of one factor or two factor is because market cycles change. The reason why you need international exposure, as well as US exposure using factor investing is because the US market is not always going to be the top performing market in the world. And the reason why we add fixed income to our factor investing strategies is to customize the risk to the user. Or in the case of Mercer Advisors, clients to our client’s risk level. Now, I want to go through the questions that I’ve received on factor investing. And if you have more questions, I want to invite you to send me your questions. The email address is


Can factor investing be applied to fixed income?

Absolutely. There are certain factors that make a difference in fixed income investing. The first factor that is important with fixed income is the duration, the length of the bond, the term of the bond. The second factor that matters is quality. And quality relates to credit quality. So, those two factors, if you deploy them in shorter duration with high quality, you can remove much of the interest rate risk and credit risk out of your portfolio. Now, let me talk for a moment about why we add fixed income into a factor investing strategy. The factor investing strategy with fixed income smooths out the ride. If you have a 60/40 portfolio, 60% stocks or factor investing focused vehicles, and it’s 40% bonds, you’re not fully exposed to the market. And when we go through difficult market cycles, that’s the time when quality, shorter intermediate term duration bonds, perform well.

Many times during recessions or bear markets, the fed is inclined to lower interest rates. A declining interest rate environment is a positive interest rate environment for quality, key word there – quality – short intermediate duration bonds. So, fixed income absolutely is key to managing risk in a factor portfolio. Now, you can be 100% invested in the stock market using factors, but it is going to be a more volatile ride than a ride that you would have if you have some fixed income in the portfolio.


How to implement factor investing in my own portfolio?

I take into account where the market is today. The market is near all time highs. So, how should you go about doing this? Well, first of all, when I was talking to this very sophisticated audience, I told everyone, “I’m not expecting that everybody is going to flip 100% of their portfolio to factor investing on one presentation from Doug Fabian. That’s just not going to happen.”

But if you do the research, and you believe as I do that factor investing could add value into your portfolio then you take a single account that you’re managing, and you begin to implement factor investing. Now, the important thing is that you don’t want to just apply one factor to your portfolio. You want to invest in all factors.

So, therefore you should take a dollar cost averaging approach to applying factor investing to your portfolio. And you can say, “Okay, I have a single account that’s $100,000. I’m going to take a six-month timeframe to get fully invested.” And you get $100,000 by six, and you would invest that amount each month for six months. Or for 12 months. And that’s how you start to implement factor investing in your own portfolio today.


Does rebalancing every 90 days affect a taxable account to a great degree?

Well, this is a very good point. But a key part of successful investing strategies over a 5-year, 10-year, 15-year, 20-year period of time is the concept of rebalancing.


The momentum factor

And let me just take one factor, one of the factors that we have talked about, is the momentum factor. The momentum factor is a type of factor that is represented by stocks that are showing strong momentum in the current market environment. These would be growth stocks. We have been in a momentum market the last couple of years. This means that there are certain stocks that are performing much better than the market as a whole.

The FANG stocks would be an example of this. A stock like Netflix, or Amazon, or Google, or Apple. These stocks have performed very well over the last three, four, or five years. These are momentum stocks. And if you have a portion of your portfolio invested in momentum stocks, and it’s outperforming the rest of your portfolio every year for three years in a row, after that three-year period of time of over-performance, that portion of your portfolio is going to be bigger than the other portions of your portfolio that did not perform as well. Now, we’re going to go through a period of time at some point in time in the future where momentum underperforms.


Tax-deferred accounts

So, what we want to do is we want to rebalance our portfolio on a quarterly basis in our tax-deferred accounts. In our taxable accounts, we could take the approach that we rebalance once a year. But the key is rebalancing, and rebalancing on a systematic basis. So, you’re keeping your portfolio aligned. This is important when we go through periods of time when e-stocks underperform, and bonds outperform. Now, the bond portion of your portfolio is getting larger because it’s increasing in size, and the stock portion of your portfolio is getting smaller. So, there comes a time when you want to sell down a portion of your bonds and reinvest it in stocks. You’re most likely reinvesting in stocks at a lower price. And this is how you keep your portfolio balanced.


Investment vehicles for implementing factor investing

One of the great things about factor investing is it is vehicle agnostic. You can use mutual funds. You can use exchange-traded funds. And for larger accounts, you can use individual stocks through a vehicle called a separately managed account. So, in this particular presentation that I made at the American Association of Individual Investors, I did talk in detail about implementing factor investing with exchange traded funds. And I did highlight the iShares funds because these are the funds that we’ve done deep research on relative to the factors that we like. The value factor, the size factor, momentum, and quality. And there is an iShares ETF that has an expense ratio of only 15 basis points as a management fee on an annual basis. 15 basis points for the cost of the underlying investments for a full year. That is very cost affective.


Are you fully invested all the time with a factor investing strategy?

The answer is yes. The way that we manage risk in a factor investing strategy is with asset allocation. We talked about our fixed income allocation, but you need to sit still with a factor investing strategy.

One of the stories I told at the American Association of Individual Investor is I talked about successful real estate investors. And most, not all…most successful real estate investors are successful because they sit on a property for long periods of time. That’s how you make money in real estate. And the same thing is true with stocks and with the factor investing strategy. You want to implement your strategy, hold your strategy, stick with your strategy for long periods of time. We call it sitting still.


What research supports your bullishness on international factor investing?

And a little bit more color and detail around this question – the member of the audience was talking to me about the underperformance of the international markets of late. The answer to my question was as follows – markets move in cycles. Not only do they move in an economic cycle, but they move in a global economic cycle, which has a currency cycle within it. So, international stocks are not all going to be going up and down at the same time. There is going to be periods of time when the us market underperforms. But in the research…

And again, I want to remind everyone, out at, we have a special report on factor investing evidence that outlines the performance of different factors over different timeframes. In the United States, we have much more detailed history, and we have 88 years of historical data on factor investing. In the developed markets, we have 45 years of data. And in the emerging markets, we have about 30 years of data. And the data proves out that factor investing over time beats a standard market index strategy.


Can you implement factor investing with ETFs and have an international focus?

Absolutely. I did a quick Google search before I came onto the podcast today, factor investing exchange traded funds, and again, the iShares group. We have no relationship or money exchange with iShares and Blackrock. But this is a firm that is offering to the public at reasonable prices domestic and international factor investing exchange traded funds.


Sector rotation versus factor investing

The gentleman, I could tell, was a sophisticated investor, and he was asking me about how one would implement or is the factor strategy similar to a sector rotation strategy. A sector rotation strategy looks at the market cycles, the economic cycles. And at the beginning of an economic cycle, you’re going to invest in certain sectors. As you get late in the economic cycle, you want to own other sectors. And there may or may not be rules for moving from one sector to another during a market cycle.

As I explained to the gentleman, factor investing is very different. One of the challenges with sector investing and sector rotation strategies is human emotion and implementation. One of the beauties about a factor investing strategy is you’re able to sit still. And the fact that you have to rotate in a sector strategy causes problems. People have to make judgements. There are human emotions involved. And many times, this throws people off track. So, ladies and gentlemen, there you have it. Eight questions on factor investing, some discussion on why it works.

And I really want to encourage you if you have not started to implement factor investing that you should investigate it. You should download the special report. You should listen to the podcasts that we have recorded on factor investing and go over those again. That is podcast number 6 and podcast number 14, as well as bonus episode number 10, and now this bonus episode as well. Now, I have made the same offer that I’m going to make to you to the attendees at the American Association of Individual Investors. If you would like to have a wealth strategy session with me to talk one on one on how to implement factor investing, please send me an email. My email address is



This is Doug Fabian. Thank you for listening.

Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio.

This program is sponsored by Mercer Advisors. Mercer Global Advisors, Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors, Inc. is the parent company of Mercer Global Advisors, Inc., and is not involved with investment services.

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