Value and Growth Investors: Don’t Get Fooled By The Norse god, Loki

If you are an investor who owns an all-in-one portfolio ETF, stick to it. If you are an investor who owns a global stock ETF and a global bond ETF, stick to that strategy. If you are an investor who has broken down your ETFs into individual geographic sectors (a U.S. stock ETF, a first world home country stock ETF, a developed international market ETF, an emerging market ETF and a bond ETF) stick to that.

If, however, you have focused your portfolio on past performance, then you might have a high component of “growth ETFs.” A “growth ETF” is filled with companies that have recorded high business growth. Such an ETF will include high exposure to the FANMAG stocks, like Facebook, Apple, Netflix, Microsoft, Amazon and Google (Alphabet), among several other tech firms.

Over the past 10 years, such an ETF has destroyed the returns of the S&P 500. Even after yesterday’s market drop, U.S. growth stock ETFs averaged about 15.48 percent per year, measured in USD, over the past 10 years. That would have turned a $10,000 investment into $42,176.

If you are investing in a growth stock ETF, you are trying to take advantage of something called, “Factor-based investing.” Growth stocks represent a “Factor.” But here’s the risk. If you insist on investing with Factor based strategies, and you’ve been seduced by a growth stock ETF, economic Nobel Prize winner, Eugene Fama, will suggest you’re betting on the wrong horse. The opposite of the “Growth Factor” is the “Value Factor.” It represents cheap, underrated stocks.

If you insist on Factor-based investing, don’t chase past performance.

And if you have built a portfolio based on Eugene Fama’s Nobel Prize winning research (with a tilt towards the Value-Factor) don’t give up on that. I explain why you shouldn’t, here.  https://assetbuilder.com/knowledge-center/articles/value-investors-and-dimensional-investors-dont-get-fooled-by-the-norse-god-loki

Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School and Millionaire Expat: How To Build Wealth Living Overseas. My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions.

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