ITA Wealth Management

Fama & French’s value risk factor is at the heart of their paper, in my opinion. The FF study demonstrates that value stocks have had higher returns than the broad market. Value is determined in the FF study by the Price/Book ratio. Cheap stocks outperform expensive stocks, and by cheap we mean stocks with a low P/B ratio.

Ferri writes, “Like the size factor, the value factor cannot be diversified away by adding more value stocks; hence, value has its own unique risk factor.”

Once more, to enhance the performance of the portfolio, increase the percentage of stocks in the mid and small value asset classes, thus capturing both the size and value factors. The data I have going back to 1989 supports this thesis.  One of the reasons all six portfolios tracked over on the Premium Content side of ITA Wealth Management are performing better than the VTSMX index is due to the Fama-French Value Factor.  The portfolios are tilted toward value as well as diversified into smaller cap size.  For additional diversification, we include REITs, emerging markets, and REITs.

We need to keep in mind that the strategic portfolio plan accounts, on average, for 100% of the portfolio return. Pay close attention to the importance of “on average.”

Note: As mentioned before, if something worked 20 years ago, will it still be working 20 years from now?  That is the question we face as we build portfolios for the next decade.  We do have tools to aid in the construction and management of portfolios.  However, good judgment never seems to go out of style.

Lowell Herr

Photograph:  Sculpture on Main Sacred Way to Ming Tombs

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