Therefore, the five criteria for good comprehensive factors are:
1. The factor has been tested for a long time, spanning multiple market cycles;
2. Factors are confirmed in multiple markets and in a variety of asset targets;
3. The reliability of the factor is good, and both traditional finance and behavioral finance can explain its existence;
4. It can be applied in practice;
5. It can bring excess returns.
Value factor and momentum factor are indeed two very excellent factors: they have experienced different market, target, and cycle tests, and there are also very long data to verify; In addition, they can have the theoretical support of traditional finance and behavioral finance; There are related fund products in the market for more than 20 years, which can indeed bring excess returns.
Replacing indexes in stocks with factors
According to the above data and analysis, stock selection according to factor strategy in stocks can obtain long-term returns and earn excess returns, especially the value factor and momentum factor. So how do we apply these factors to asset allocation models?
Value factor and momentum factor are stock selection strategies, and the simplest and most effective way is to replace the stock position in the asset allocation model with the value factor and momentum factor. Among the nine models above, the stock positions in the risk parity portfolio, Arnault portfolio, and Erian portfolio are too small, and the portfolio itself is more complex (there are more than seven assets), coupled with the performance is not very prominent (the average annual return is 8%), so in the future analysis, I excluded these three models.
The historical return of the asset allocation model after enhanced stock selection
What happened? Will the performance of the model after stock selection enhancement be due to passive investment using the index? The results are still very excellent: after stock selection enhancement, the annualized yield of all asset allocation models has increased by an average of 4%, and all of them have outperformed the market.
Especially for asset allocation models such as 60 / 40, Toby, and Bernstein (stock positions are more than 50%), the increase in annual returns is more pronounced. After risk adjustment, the quick ratio of all models has also increased significantly, and the lowest portfolio is 0.7, which is much higher than 0.43 of the S & P 500.
The soothing ratio based on downside risk has also increased significantly, with the lowest portfolio of 0.78, which is much higher than S & P's 0.57. A higher sothino ratio can be understood as a strategy with higher excess returns when assuming the same downside risk.
If you don't have an intuitive feeling about the 4% increase in annualized earnings, I will replace the annualized revenues with a net gain of 100 yuan. After 45 years of compound interest, coupled with the increase in annual returns after stock selection, the value-added effect of wealth is noticeable.
Well, what you should pay attention to is that you should be aware of the factors which will benefit you the most, and you should avoid something that makes you get fewer profits.
