Last time we looked at the different risk factors that drive investment returns. Generally speaking, markets reward investors for risk and, the more risk you take, the greater the reward you are likely to receive over the long term.
Of course, if you want to, you can simply choose to expose your portfolio to market risk, by investing in market-cap weighted index funds that invest in the whole market. If, however, you’re willing to accept greater risk in the hope of achieving higher returns, you can tilt your portfolio towards specific risk factors such as size, value and profitability.
Remember, you are not guaranteed higher returns for taking more risk, and it may take several years for a particular risk factor to deliver the outperformance expected of it. But, as long as you’re patient and disciplined, you should see the rewards over time.
So, how do the returns of a portfolio that is tilted towards the different risk factors compare to those of a broad market index? This video that we’ve produced for Independence Advisors explains the sort of pattern you can expect.
Again, our thanks go to Charles Boinske, the President of Independence, for commissioning this two-part series and for assisting in their production. Thank you, as well, to Dimensional Fund Advisors, on whose research the data in these videos is based.
If you missed Part 1, you can watch it here:
NOTE TO ADVISERS
Advisory firms may like to know that Independence Advisors has agreed to license its four-part video series Evidence-Based Investing Insights to selected firms that share its investment policy and its fiduciary status.
If you’re interested in having your own branded version of the series, please contact Sam Willet at firstname.lastname@example.org or on +44 121 285 2585. The videos are also available in Dutch and in German.