As 2025 gets underway, the financial industry is doing exactly what research shows none of us should ever do – focusing on the short-term. Amidst questions about tariffs, inflation, AI innovation, Mag7 valuation and geopolitical risk, a long-term oriented investor might be tempted to ask,
“Does it matter and is there a better way?”
Two years ago, the team at AQR published a paper that touched on this topic by taking a nearly 100-year view (1926 to 2022). They focused on academic investment principles and asked if you could tune out the noise by rigorously applying the principles of factor investing. To do this, they focused on four time-tested factors:
- Value – is it cheap?
- Momentum – is it trending up?
- Carry – does it pay more?
- Defense/Quality – is it safer?
They then analyzed the return per unit of risk taken (also known as the Sharpe Ratio). Their findings below should give long-term investors hope.
The first key finding is that long-term results for all 4 factors and multi-factor portfolios combining them were positive across all major asset classes. In other words, if an investor consistently owned cheaper, positively trending, higher paying and safer stocks, they would eventually achieve returns greater than the risk taken.
Second, despite short-term volatility, the returns from such an approach were asymmetric. Any given 3-year period could see losses, but on average they were smaller than the gains. For example, a US stock portfolio tilted to value, momentum and defensive stocks can have a Sharpe Ratio as high as 3.8 over 3 years, or as low as -1.3, with the average just north of 1.
The punchline is simple: diversification across cheaper, positively trending, higher paying and safer stocks pays off in the long-run. But it takes effort and a systematic approach. And the key words are “in the long-run”, which means looking past the noise and sticking to these well-tested principles. If you’re interested in how we seek to do this in your portfolios, please do not hesitate to reach out our way.
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
