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Money: Video – Subsectors of the Market, or Risk Factors, that outperform their opposites as a group, over time

12 Dec 2019

In Part 7 of this award-winning British video series, we hear how passive investment funds can be further broken down into subsectors of risk, sometimes called risk factors. These are subsectors of the whole market that have some common characteristic. They are more risky or volatile than their opposites, but they produce more return as a result. An example of a risk factor is ‘small companies’. Small companies as a group out-perform their opposite larger companies on average, over time.

To get this result one must hold all the small companies in the universe as one does not know which small companies are producing the outperformance. The result can only be assured if the entire market is held so diversification using the whole market is still the name of the game here. We are not picking winner companies; we are picking a winning subsector of the market.

The academic community has been asking the question of which subsectors are the ones to hold for many years and at this stage there are considered to be at least four factors that have been identified and are expected to produce excess returns: small companies, value companies, highly profitable companies and low reinvestment companies.

This series of short videos (6 to 7 minutes each) describes how many investors are involved in a ‘loser’s game’ where the real winners are the active funds management industry, not the investor.

Of course, there is a better way to invest, an alternative that has become vastly more popular since this video was made in 2014. It is a story about turning the loser’s game into a winning game for all those investors that care to listen to the evidence, and act.

View Part 7 of How to Win the Loser’s Game video here

Keep asking great questions …

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