The 10th and Final Rule of Factor Based Investing®
The 10th and final rule of Factor Based Investing® is that discipline beats greed. Let me tell you a story to explain.
A couple years back, the S&P 500 was the No. 1 performing asset class. I had a client with more than $1 million with us, but he had a 401(k) through his job in an S&P 500 fund that had about $10,000. He was comparing the $1 million—which was designed for his entire portfolio—to the $10,000, since it was in the No. 1 performing asset class.
The problem was that we set up the entire portfolio based on his wishes and desires. A third of the money was in cash because he wanted to buy a new house, and yet he was comparing a third of the money that was in cash. When looking at the entire portfolio, more than half was actually in cash or bonds, and he was comparing it to an S&P 500 fund.
Obviously, he was getting greedy and not being disciplined.
Secondly, he wanted to have this one asset class, so I asked him if he realized that over the last 25 years, the S&P 500 had only been the top-performing asset twice before. Would you want me to put your entire portfolio in an asset class that has just a 10% chance of being the winner any given year? The answer is, of course, no, but retroactively, that’s what you think I should have done. This is just ridiculous.
When you see an asset class or stock that over-performs, stay disciplined and don’t get greedy. What has already happened already happened—you can’t capture last year’s returns! Don’t start chasing returns because if you’re chasing returns, you’re always behind. Stay disciplined, stay the course, design the portfolios using the rules of Factor Based Investing®, and you’ll be fine.
If you have any questions about the rules of factor-based investing, give me a call or send me an email. I’d love to speak with you!