You did your research on a stock, commodity, ETF, or mutual fund.
You bought it… and then watched it go down.
Meanwhile, something you didn't buy went up.
Your thesis on what you bought could be entirely correct. Yet you may lose money for reasons that are totally out of your control.
It happens. But if it happens a lot, the reason could be that you are investing in the wrong "factors."
When most people buy stocks, for example, they find cheap ones and wonder why their trades don't work.
That's because they have no idea that the market is broken down into a bunch of factors—groups of stocks with the same characteristics.
Growth and value are factors. So is momentum. Low volatility is also a factor.
When you pick stocks, you have to get the factors right. Once you do that, you will start to see your stocks go up—even if the market goes down.
You have to look at the market on a top-down basis. That means you have to invest thematically.
I look at the world in a top-down fashion. Most of you know that I was an ETF trader, so I was trading sectors and styles and countries.
I still like to invest with ETFs. If this is something that interests you, check out my ETF 2020 advisory.
I also like to find stocks with big upside potential. And one factor that has been working very well this year is value investing.
Investing in the right factors matters for mutual funds, too. For example, if you invest in a growth fund instead of value, or value instead of growth, you could see a 20%, 30%, even a 40%+ difference in your performance.
I don't recommend that anyone make concentrated bets unless they know what they are doing. Diversification is better if you don't.
Diversification keeps you from blowing yourself up. But it also keeps you from making supernormal returns.
Now, I pick on index funds a lot. But you get the market's average return, and the average return is pretty good. If you don't know what you are doing, just reach for the index fund and get your 8%.
If you also want to go for some of those supernormal returns with individual stock positions, you have to get the factors right. And when those factors change, be ready to change your strategy, too.
Jared Dillian