Retirement can be a time when you kick up your feet and live off the fruits of your labor while avoiding risky money maneuvers that could put your nest egg in jeopardy. So when it comes to factor investing, how did retirees respond—quite favorably as a matter of fact.
Global investment company Northern Trust Asset Management asked about 1,200 workers and retirees what their thoughts were when it came to factor investing.
“When asked whether they found the idea of factor-based strategies appealing, 60% of both retirees and workers said they either found them ‘very’ or ‘somewhat’ appealing,” wrote Susan Czochara in a 401K Specialist article. “We think this is based on the idea of efficient risk-taking when investing, discussed above. Factor-based strategies are based on understanding how different types of investments (big companies vs. small or high quality vs. low quality) have performed in different market conditions.”
With respect to factor investing, retirees obviously don’t have the time horizon to make risky portfolio moves, so it was no surprise that a majority of them chose low volatility investments. Additionally, the quality of investments was another big factor when it came to allocating their capital.
“They invest in the types of investment factors that have shown to generate consistent long-term investment returns over time, with the idea of delivering higher returns while maintaining and in some cases reducing risk,” the post said further. “Exhibit 1 might help as an illustration. The Sharpe ratio in the graphic represents a combination of risk and return, showing the amount of return per unit of risk. The common factors used in factor-based strategies all rate higher than the broad stock market (MSCI World Index). This is what efficiency is about. Even if more risk is taken, higher returns compensate for the additional risk.”
Another way for investors to get factor exposure is via a multi-strategy approach. One way investors can get multiple factor exposure, as well as international diversification, is via the Principal International Multi-Factor Core Index ETF (PDEV).
PDEV seeks to provide investment results that closely correspond to the performance of the Nasdaq Developed Select Leaders Core Index. Under normal circumstances, the fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies that compose the index at the time of purchase.
Furthermore, the index uses a quantitative model designed to identify equity securities of companies in the Nasdaq Developed Market Ex-US Ex-Korea Large Mid Cap Index that exhibit potential for high degrees of sustainable shareholder value, growth, and strong momentum.
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