Investing is one piece of your financial plan, which falls into the saving category when it comes to the six money decisions.
As advisors to physicians and dentists, we encourage our clients to look beyond the scope of basic savings when planning for their financial success. The three essential considerations when determining suitable investment options are: understanding your goals, having a time horizon and recognizing your tolerance for risk.
While it’s important to first establish an emergency fund and make maximum contributions to your retirement plan, the next crucial step is to have your money work for you – and this is where investing comes in.
According to Stephen Schaefer, a Professor of Finance at the London Business School, “The term factor investing may be relatively new, but the ideas that underpin it have been around in different forms for quite a while now.” Factor investing is one of many types of investing.
David Belinkie, CFP® is a Financial Planner here at Spaugh Dameron Tenny and got the chance to interview two leaders at Symmetry Partners. Dana D’Auria, Managing Director and Pat Sweeny, partner and co-founder. Check out each interview in the videos below.
More about Dana D’Auria:
Ms. D’Auria is a managing director of Symmetry Partners and Apella Capital and a portfolio manager for the Symmetry Panoramic Mutual Funds. She is directly responsible for overseeing Symmetry Partners’ Research, which includes Investments and Investment Communications, Operations and Product Strategy Departments. Prior to joining Symmetry, she worked in public relations and as a financial journalist.
Dana shares her expertise in explaining factor investing. Here is what she had to say:
Factor investing, in the form that we practice, is an approach to markets that utilizes the insights gleaned by academics from decades of research. Academics studying the equity markets have looked for variables that can explain why some stocks or groups of stocks tend to have higher returns than other stocks or groups of stocks. A factor is a variable they’ve identified that seems to explain part of the out performance we observe in certain stocks. It can therefore be thought of simply as a driver of returns. Factor investing seeks to take advantage of these known factors to outperform the market benchmark.
The factors we are talking about are identified basically by testing different metrics in reams of capital market return data until you find one that seems to reliably explain returns. But if you find a promising pattern, how do you know it’s actually a true driver of returns and not just a random occurrence that doesn’t really mean anything? Generally academics and money managers will apply a series of hurdles that the factor needs to jump to be deemed valid. The factor should have some sort of economic rationale for why it would explain returns. It should be evident both in and out of sample. This means other researchers should be able to duplicate the original findings and when the idea is applied to a different time frame or a different set of market returns, it should hold up. It should also keep working even after it has been publicized. There is some debate on what constitutes a factor, but the industry has largely coalesced around certain variables that have stood the test of time. These include market (or beta), value, momentum, size, quality and low volatility.
For investors, factor investing represents a way to put their assets to work in a disciplined and reliable strategy that minimizes the individual decision making of the manager and instead features a systematic approach that takes the emotion out of investing. We believe that investors are well served to leverage the findings of academics. But factor investing requires patience and diligence. Any one factor can underperform for a long period of time. If it was simple, everyone would do it and the factors wouldn’t work anymore.
You can have as much or as little diversification in your factor portfolio as you like. Some managers really concentrate their factor portfolios – really betting the farm so to speak on the factors working. The problem with that approach is that investor time frames can be shorter than it takes for the factors to bear out. It’s also problematic sometimes to expect investors to stay disciplined when they are watching their own portfolios significantly underperforming. We advocate for a strategy that first diversifies amongst the stocks within and outside the factors, but also, amongst industries, sectors, and geographies. Our portfolios own thousands of stocks and then overweight the ones that exhibit the factor exposures we are looking for.
As with any strategy, it’s really difficult to judge by one period of underperformance. Factor investing in particular requires a long-term strategic view. If you do not feel comfortable sitting through the inevitable ups and downs, factor investing may not be the best approach. But in fairness, the same can be said of stock market investing in general. Equity markets can underperform bonds for long periods of time, just as factors can underperform for long periods of time. Remember that volatility is the price we pay for the potential for long term higher returns. The financial planner plays a crucial role in making sure the client is in the right model for his or her risk tolerance and then keeping that client disciplined.
Learn the importance of a diversified portfolio from Pat Sweeny, partner and co-founder at Symmetry Partners.
More about Pat Sweeny:
Mr. Sweeny spent a number of years on Wall Street with Weeden & Company and Dean Witter Reynolds in institutional trading and sales in both the equity and fixed income markets. Additionally, he was a member of the Commodities Exchange as a floor trader with Paine Webber.
If we look the past several years, that’s been a great place to be. However, investors sometimes have short memories. If we look the preceding 10 year period, 200-2009, the S&P actually had a negative return, cumulatively. Whereas a diversified portfolio, depending on your asset allocation, a simple globally diversified portfolio had a 6-7% return over that same time frame. Diversification is clearly a benefit for long-term investors. In the short-term, there’s all kinds of noise in returns that can cause investors to make bad decisions. Spaugh Dameron Tenny focuses on long-term results rather than short-term returns in the markets.
CRN202101-241994 | CRN202012-240594
As the Director of Financial Planning for Spaugh Dameron Tenny, Jordan applies his academic and practical experience in the creation and maintenance of the firm’s financial plans, as well as coordinating research efforts for products and strategies that may benefit clients. Originally from Canada, Jordan came to Charlotte on a golf scholarship where he attended Queens University of Charlotte. In addition, Jordan has a Master’s degree in Wealth and Trust Management.
