Table of Contents
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 75
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