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

Is it worth the effort to invest in factors? The answer is "probaby yes" if your end goal is to increase your average returns over a 20-30 year time period and are willing to introduce a small amount of additional complexity. I highly recommend Berkin & Swedroe's "Your Complete Guide to Factor Investing" if you want to evaluate the evidence for a factor-based approach.

Based on your question, Ben Felix's paper "Factor Investing With ETFs" is where I would start if you haven't checked it out already. It provides a good, quick summary of the benefits of factor investing and a Couch Potato-style model portfolio with couple of added factor ETFs. The downside is that these funds are US-based, which means you have to convert to US dollars through your brokerage (they usually charge a 2% fee) or do a fancier maneuver called "Norbert's Gambit". I personally found it worthwhile to learn how to do Norbert's Gambit because once you do it once, you can do it as often as you'd like in the future.... and you'll save yourself lots in fees, too!


If you don't want to convert currencies, then Vanguard's Canadian-listed factor funds like VMO or VVL might work for you. Blackrock also has multifactor ETFs like XFC, XFS, and XFI that may work. Personally, I prefer US-listed ETFs like the ones listed in Ben's paper because they have a longer history and are cheaper to hold.

> What are the other allocations aside from CCP that are often recommended?

For passive investing, the CPM Model ETF Portfolios. For something more active, probably factor investing. Larry Swedroe has written a great book on this, which you can find on the Library Genesis. The main problem with this approach though is a lack of Canadian ETFs which capture the factor premiums effectively, so you have to do your own research here.

> Also here is WS allocations. What do you think of the assets below? Should I copy it at Questrade?

Seems solid to me. Captures all the main asset classes - US, Canada, International Developed, Emerging Markets, and Fixed-Income. Don't see the point of 5.5% in cash though. Also, this will be harder to rebalance on Questrade (I assume WS does the rebalancing for you?) as you pay a fee of at least $4.95 for selling ETFs. To help with that, consider going with 5 ETFs - one for each of Canadian aggregate bond index, Canadian equities, US equities, International developed equities, and emerging market equities.

Another option would be to use WS Trade, as they charge no commission for buying/selling stocks/ETFs. But if you want to hold US-listed ETFs, they do charge a currency exchange fee, which you can avoid on Questrade using something called "Norbert's Gambit". Holding US-listed ETFs is best in an RRSP though (which WS Trade currently does not let you open), as you avoid the 15% withholding tax on dividends imposed by the US government. But I still think WS Trade is the best option for TFSA accounts.

The reason why the Fama-French 3 factor and Carhart 4 factor are so prevalent is because people generally agree on these factors. Without going into history too much, the number of factors have grown over time from CAPM (1 factor) to Fama French (3 factor), to Carhart (4 factor). There are even more, but at some point, it starts looking like a "factor zoo".

After the success of Fama-French, and quantitative investment firms that use the approach like DFA and AQR, almost every finance program teaches this type of approach. This has influenced a lot of finance students, who themselves started to look for new factors. Some of the new studies try to find further nuances in existing factors, while others go off all new tangents, a fun one that comes to mind is a paper that tries to create a factor out of moon cycles.

We have so many factors now that academics are writing meta-papers describing the problem of there being too many factors to choose from.

If you want a nice summary of some pretty widely accepted factors, I would recommend a very accessible book called Your Complete Guide to Factor-Based Investing

There are roughly 5 components in the practical CAPM model: (i) market risk (ii) value (iii) size (iii) momentum (iv) profitability.

The market risk beta was developed in the 60's and captured around 60% of volatility.

Adding the value beta and size beta - developed by French and Fama - brought the tally up to 90%.

The momentum beta then bumped up volatility capture to 95%.

So... if you have a single factor CAPM - the traditional market risk measure - you are still leaving around 40% of volatility unexplained.

In short: Add factors! Even if (European) CAPM traditionalists frown upon this.

Edit: This is a great book on the topic, and covers all recent academic publications!

https://www.amazon.com/Your-Complete-Guide-Factor-Based-Investing/dp/0692783652/ref=sr_1_1?ie=UTF8&qid=1486570140&sr=8-1&keywords=complete+guide+to+factor+based+investing

It is basically a valid approach but there are a lot of details you have to get precisely right. And you will have significant periods of underperformance.

The book "complete guide to factor based investing" has a good discussion of the magic formula and its limits.

https://www.amazon.com/Your-Complete-Guide-Factor-Based-Investing/dp/0692783652