Your Complete Guide to Factor-Based Investing: The Way Smart Money Invests Today

Andrew Berkin and Larry Swedroe's, Your Complete Guide to Factor-based Investing, is an excellent and timely book for anyone who wants to learn about investable factors that influence returns and who desires to design a diversified portfolio that will attempt to capture them. As I write this review the mutual fund industry is well underway in a secular shift from high cost active to low cost index/passive (and active) funds. For the retail investor this shift has opened up many opportunities for low(er) cost factor based investing. This book will help its reader understand the literature and support for such strategies.The book begins with a thoughtful forward by AQR Co-Founder and Managing Principal Cliff Asness (a treat in itself). Then, in short order Berkin and Swedroe address the current factor zoo in the literature and define those factors that are deemed worthy of investment (have provided a premium) and that also meet the requirements of being persistent, pervasive, robust, investable and intuitive. This book is a treasure trove for both the retail investor and the advisor who wishes to understand in greater detail the factors that influence portfolio performance (from an evidence-based perspective). While Antti Ilmanen’s Expected Returns is a definitive tome on the subject, Berkin and Swedroe accomplish similar results with much greater readability (and many fewer pages)- particularly for the lay person. The book begins with a straight-forward discussion of the CAPM model (which explains ~70% of portfolio returns), and its flaws. It then moves on discuss Fama and French’s famous work on the three factor model (market beta, size and value). Adding to these factors that now explain most (>90%) of portfolio returns they address other useful factors: Mark Carhart’s work on momentum, as well as profitability, quality, term and carry. If you recognize these terms but don’t know what they mean, this is the book for you. If you’re already familiar with these terms and concepts the book will still teach you something, such as why anomalies persist and the limits to arbitrage.For those wishing to adopt a (multi)factor strategy the book also discusses tracking error regret and it evokes the work of Nassim Taleb to point out the flaws of misunderstanding the difference between strategy and outcome. The authors go out of their way to say the best strategy to pursue is the one you can stick with.The appendices in the back are particularly useful. Some selected topics include: the truth about smart beta, dividends are not a factor, time series momentum, and the marginal utility of incremental factors in fund returns. There’s even a discussion of sports betting and asset pricing (sure to get your attention).But the real meat and potatoes appendix for those converts to passive (rules based) factor investing are the tables for implementing these strategies with mutual funds and ETFs. Of course, the usual suspects will appear (the low cost providers of market beta (Vanguard, iShares, Fidelity, and increasingly Schwab), as well as the biggest bang for your buck factor exposure providers, Bridgeway, DFA and AQR). However, for those investors who choose to go it alone (without an RIA) there are also options listed for exposure to market beta, size, large/value, small/value, mom, profitability/quality, term, carry and multi-style funds from other fund families.In summary this is a very approachable and readable book for anyone interested in learning more about markets and the risk factors that influence returns. It’s well worth your time to read it and you’ll find yourself referencing it from time to time. In my opinion it’s Swedroe’s best book and that’s saying something.

This is an outstanding addition to anyone's investing library. It is a must read for any individual investor or financial advisor interested in understanding modern investing. Over the last two decades there has been a huge shift in popular investing from active management to passive index funds. Modern investing has now moved beyond a single market factor world though. Market beta explains perhaps 60-70% of a portfolio's returns. Fama and French introduced the size and value factors, and the three factor model explained greater than 90% of a portfolio's returns. Now there are about five or six factors that explain about 95% of a portfolio's performance. These few factors stand out among the hundreds of factors that have been described in the literature.Larry and Andrew explain these factors and the data supporting them. They describe five criteria that a potential factor must meet to be real and meaningful. The equity factors described are the market factor, size, value, momentum, profitability/quality. Although learning these factors is important and potentially profitable to the investor, there is an even bigger and more important lesson in the book. The authors teach us how to evaluate any new potential factor or potential portfolio addition. They describe the five criteria that we can apply to these five equity factors and any potential factor we may come across in the future: persistent over time, pervasive across markets, robust to different definitions, intuitive to common sense, and investable at reasonable access and expense to us common folks. Understanding these criteria are vitally important to the investor. They emphasize that an investment plan is worthless if an investor can't stick to his plan. All factors will underperform for long periods. Understanding and believing the criteria will give the investor the fortitude to stick to his well thought out plan. Moreover, by looking at correlations, they build a powerful case for diversifying across factors.The book is very readable, but it is meant for the highly interested do it yourself investor or advisor, who already understands concepts of efficient markets, asset allocation, diversification. A serious investor will read this book and place it on his investment shelf. He will return to it periodically over the years to look at a few of the tables and some of the data as the various factors perform and underperform over the years.An important question arises. When these factors become well known, especially the behavioral (as opposed to risk based) factors, are they still worthy of investment? The authors address this in one of the last chapters. I strongly recommend this book for anyone interested in a serious look at modern investing in language someone without a finance degree can understand.

Investors interested in breaking away from building portfolios using the Strategic Asset Allocation model will find this is an excellent look at Factor Investing. Berkin and Swedroe extract eight critical factors from hundreds of market anomalies and they are: beta, size, value, momentum, profitability, quality, term, and carry. Obviously, some of these factors are more important than others. Further, it is easier to implement some, particularly if using ETFs to construct the portfolio.At the end of the book, the authors include mutual funds and ETFs to use to construct Factor Based portfolios. The list could have been more complete, particularly when it comes to ETFs. Far too many of the recommendations are DFA funds which require the investor to go through a paid or approved advisor.Warning: The book does not include an index. Why any publisher releases an investment book without an index is baffling. This is a Factor Investing research book and therefore should include an index.

As a practitioner rooted in traditional investing, I found The Complete Guide to Factor Investing invaluable. This book efficiently introduces factor investing concepts and provides a comprehensive, accessible guide for those looking to get up to speed. The authors ability to demystify complex ideas made it easy to understand how different factors work together and how they might enhance a traditional portfolio approach. A must-read for any investor interested in broadening their toolkit without feeling overwhelmed by technical jargon.