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Hedge funds often seek out exotic assets to increase their variety of holdings. It works because asset performance is volatile; no asset consistently beats the market.</p>\n<p>The table below shows the top five performance asset classes over five years. Note how much the rankings change.</p>\n<table>\n<tbody>\n<tr>\n<td width=\"106\"><strong>2017</strong></td>\n<td width=\"106\"><strong>2018</strong></td>\n<td width=\"106\"><strong>2019</strong></td>\n<td width=\"106\"><strong>2020</strong></td>\n<td width=\"106\"><strong>2021</strong></td>\n</tr>\n<tr>\n<td width=\"106\">Emerging Markets Equity</td>\n<td width=\"106\">Cash and Equivalents</td>\n<td width=\"106\">Large Cap US Equity</td>\n<td width=\"106\">Small Cap US Equity</td>\n<td width=\"106\">Large Cap US Equity</td>\n</tr>\n<tr>\n<td width=\"106\">Developed Markets (ex US) Equity</td>\n<td width=\"106\">US Fixed Income</td>\n<td width=\"106\">Small Cap US Equity</td>\n<td width=\"106\">Large Cap US Equity</td>\n<td width=\"106\">Real Estate</td>\n</tr>\n<tr>\n<td width=\"106\">Large Cap US Equity</td>\n<td width=\"106\">High Yield Bonds</td>\n<td width=\"106\">Developed Markets (ex US) Equity</td>\n<td width=\"106\">Emerging Markets Equity</td>\n<td width=\"106\">Small Cap US Equity</td>\n</tr>\n<tr>\n<td width=\"106\">Small Cap US Equity</td>\n<td width=\"106\">Global Markets (ex US) Bonds</td>\n<td width=\"106\">Real Estate</td>\n<td width=\"106\">Global Markets (ex US) Bonds</td>\n<td width=\"106\">Developed Markets (ex US) Equity</td>\n</tr>\n<tr>\n<td width=\"106\">Global Markets (ex US) Bonds</td>\n<td width=\"106\">Large Cap US Equity</td>\n<td width=\"106\">Emerging Markets Equity</td>\n<td width=\"106\">Developed Markets (ex US) Equity</td>\n<td width=\"106\">High Yield Bonds</td>\n</tr>\n</tbody>\n</table>\n"},{"title":"Tools for hedging","thumb":null,"image":null,"content":"<p>Hedge fund managers have many techniques to maximize return for a given level of risk. Most fund managers use a combination of the tools I present in the following list,  so keep the list handy when interviewing a potential fund manager:</p>\n<ul>\n<li><strong>Derivatives — </strong>options, futures, and other investments that can help a fund decrease or increase its exposure to certain parts of the economy like interest rates, commodity prices, or stock market index values</li>\n<li><strong>Diversification</strong> <strong>— </strong>investing in a wide range of assets so that if one part of a portfolio isn’t doing well, another part can pick up the slack, and the overall return of the portfolio will be more consistent</li>\n<li><strong>Leverage — </strong>borrowing money to make an investment. This increases the potential return but also boosts the risk. The loan has to be repaid regardless of what happens.</li>\n<li><strong>Macro investing</strong> <strong>— </strong>betting on global trends, usually in interest rates, currencies, and economic changes</li>\n<li><strong>Short-selling — </strong>selling a security (often something that you don’t own)<strong> </strong>because you expect the price to go down. You borrow the security, sell it, and then buy it back (hopefully at a lower price) to repay the loan.</li>\n</ul>\n"},{"title":"Questions to ask a hedge fund manager","thumb":null,"image":null,"content":"<p>Below are a few important questions to ask a hedge fund manager when researching a particular fund to help you understand what it does and how its managers work:</p>\n<ul>\n<li>What’s your investment strategy? How do you plan to achieve alpha?</li>\n<li>Who works on the fund? What is their education and experience? How much money do they have invested in the fund?</li>\n<li>Who’s your prime broker? Your administrative services firm? Your auditor?</li>\n<li>What’s your value at risk? How much of your borrowing is overnight? What are your fund’s sources of risk?</li>\n</ul>\n"},{"title":"Knowing the modern Greeks","thumb":null,"image":null,"content":"<p>Mathematical explanations for the world mark modern finance, and wherever math is, you’re bound to see symbols and variables.</p>\n<p>You don’t need to know all of the equations that shape financial theory, but you’ll have a leg up if you know the Greek letters used to describe different sources of risk and return. Keep this list handy when investigating hedge funds:</p>\n<p><strong>Alpha:</strong> Investment return that’s different than you’d expect, given an investment’s beta, which is its exposure to market risk and return. In the hedge-fund world, alpha is used to describe the value that the fund manager adds and the extra return generated for the amount of risk that the fund takes.</p>\n<p>But remember, alpha can be negative, meaning that the fund manager subtracts value from the fund. Some researchers aren’t sure that alpha exists at all.</p>\n<p><strong>Beta:</strong> The amount of risk in the overall market portfolio. The market beta is 1, so an investment with a beta of more than 1 is riskier than the market as a whole. You’d expect the investment to return more than the market in an up year and less than the market in a down year.</p>\n<p>If beta is less than 1, the investment is less risky than the market, and if beta is negative, the investment moves in the opposite direction.</p>\n<p><strong>Delta: </strong>The percentage change in an investment. Delta is often used to describe how much an option changes in price when its underlying security changes in price.</p>\n<p><strong>Gamma: </strong>The rate of change in delta. Gamma is exposure to any change in price, positive or negative.</p>\n<p><strong>Sigma: </strong>Represents standard deviation, or the likelihood that any one number in a series — like a series of investment returns — will be different from the return that you expect. 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Harmon. </b> ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/34784"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;real-estate&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781394152841&quot;]}]\" id=\"du-slot-6397968e91144\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;real-estate&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781394152841&quot;]}]\" id=\"du-slot-6397968e91b23\"></div></div>"},"articleType":{"articleType":"Cheat Sheet","articleList":[{"articleId":0,"title":"","slug":null,"categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/"}}],"content":[{"title":"A few questions to ask before you invest in real estate","thumb":null,"image":null,"content":"<p>Most people can succeed at investing in real estate if they’re willing to do their homework. Following, are several important questions to help you decide whether you have what it takes to succeed and be happy with real estate investments that involve managing property.</p>\n<h3><strong>Do you have sufficient time?</strong></h3>\n<p>Purchasing and owning investment real estate and being a landlord are time consuming. The same way an uninformed owner can sell property for less than it’s worth, if you fail to do your homework before purchasing property, you can end up overpaying or buying real estate with a slew of problems.</p>\n<p>Finding competent and ethical real estate professionals takes time. Investigating communities, neighborhoods, and zoning also soaks up plenty of hours, as does examining tenant issues with potential properties.</p>\n<p>As for managing a property, you can hire a property manager to interview tenants, collect the rent, and solve problems such as leaky faucets and broken appliances, but doing so costs money and still requires some of your time.</p>\n<p>Of course, if you hire a competent and experienced property manager, you will be rewarded with less time required for oversight.</p>\n<h3><strong>Can you deal with problems?</strong></h3>\n<p>Challenges and problems inevitably occur when you try to buy a property. Purchase negotiations can be stressful and frustrating. You can also count on some problems coming up when you own and manage investment real estate.</p>\n<p>Most tenants won’t care for a property the way property owners do. If every little problem causes you distress, at a minimum, you should only own rental property with the assistance of a property manager.</p>\n<h3><strong>Does real estate interest you?</strong></h3>\n<p>Some of the best real estate investors have a curiosity and interest in real estate. If you don’t already possess it, such an interest and curiosity <em>can</em> be cultivated. On the other hand, some people simply aren’t comfortable investing in rental property. For example, if you’ve had experience and success with stock market investing, you may be uncomfortable venturing into real estate investments.</p>\n<h3><strong>Can you handle market downturns?</strong></h3>\n<p>Real estate investing isn’t for the faint of heart. Buying and holding real estate is a whole lot of fun when prices and rents are rising. But market downturns happen, and they test you emotionally as well as financially.</p>\n<p>No one has a crystal ball, so don’t expect to be able to buy at the precise bottom of prices and sell at an exact peak of your local market. Even if you make a smart buy now, you’ll inevitably end up holding some of your investment property during a difficult market (recessions where you have trouble finding and retaining quality tenants, where rents and property values may fall rather than rise).</p>\n<p>Do you have the financial (and emotional) wherewithal to handle such a downturn? How have you handled other investments when their values have fallen?</p>\n"},{"title":"Different ways to invest in residential real estate","thumb":null,"image":null,"content":"<p>The first (and one of the best) real estate investments for many people is a home in which to live. Following, are some investment possibilities inherent in buying a home for your own use, including potential profit to be had from converting your home to a rental or fixing it up and selling it.</p>\n<h3><strong>Buy a place of your own</strong></h3>\n<p>Unless you expect to move within the next few years, buying a place may make good long-term financial sense. (Even if you need to relocate, you may decide to continue owning the property and use it as a rental property.)</p>\n<p>In most real estate markets, owning usually costs less than renting over the long haul and allows you to build <em>equity</em> (the dollar difference between market value and the current balance of the mortgage loans against the property) in an asset.</p>\n<h3><strong>Convert your home to a rental</strong></h3>\n<p>Turning your current home into a rental property when you move is a simple way to buy and own more properties. You can do this multiple times (as you move out of homes you own over the years), and you can do this strategy of acquiring rental properties not only with a house, but also with a duplex or another small multi-unit rental property where you reside in one of the units.</p>\n<p>This approach is an option if you’re already considering investing in real estate (either now or in the future), and you can afford to own two or more properties.</p>\n<p>Holding onto your current home when you’re buying a new one is more advisable if you’re moving within the same area so that you’re close by to manage the property.</p>\n<h3><strong>Invest and live in well-situated fixer-uppers</strong></h3>\n<p><em>Serial home selling</em> is a variation on the tried-and-true real estate investment strategy of investing in well-located fixer-upper homes where you can invest your time, sweat equity, and materials to make improvements that add more value than they cost.</p>\n<p>The only catch is that you must actually move into the fixer-upper for at least 24 months to earn the full homeowner’s capital gains exemption of up to $250,000 for single taxpayers and $500,000 for married couples filing jointly.</p>\n<p>Be sure to buy a home in need of that special TLC in a great neighborhood where you’re willing to live for 24 months or more.</p>\n<h3><strong>Purchase a vacation home</strong></h3>\n<p>Many people of means expand their real estate holdings by purchasing a <em>vacation home</em> — a home in an area where they enjoy taking pleasure trips. For most people, buying a vacation home is more of a consumption decision than it is an investment decision. That’s not to say that you can’t make a profit from owning a second home. However, potential investment returns shouldn’t be the main reason you buy a second home.</p>\n<p>Before you buy a second home, weigh all the pros and cons. If you have a partner with whom you’re buying the property, have a candid discussion. Also consult with your tax advisor for other tax-saving strategies for your second home or vacation home.</p>\n"},{"title":"Your real estate investment team","thumb":null,"image":null,"content":"<p>For most people, real estate investing is hands-on and complicated enough to require the services and knowledge of a team of professionals.</p>\n<p>The following is a list of different real estate professionals and service providers you should consider teaming up with as you search for real estate investment opportunities and proceed with the purchase of property:</p>\n<ul>\n<li><strong>Tax advisor:</strong> A good tax advisor can highlight potential benefits and pitfalls of different real estate investment strategies. Make sure that your tax person has experience with real estate investing and understands your needs and specific goals in regard to your property investments.</li>\n<li><strong>Financial advisor:</strong> If you’ve worked with or can locate a financial advisor who sells their time and nothing else, consider hiring them. A true financial advisor can help you understand how real estate investment property purchases fit with your overall financial situation and goals.</li>\n<li><strong>Lender or mortgage broker:</strong> Postpone making an appointment to look at investment properties until after you examine the loans available. You have two resources to consult:\n<ul>\n<li>A lender is any firm, public or private, that directly loans you the cash you need to purchase your property. This type of lender is often referred to as a <em>direct lender.</em> Most often, your list of possible lenders includes banks, credit unions, and private lenders (including property sellers). Lenders tend to specialize in certain types of loans.</li>\n<li>A mortgage broker is a service provider who presents your request for a loan to a variety of different lenders in order to find the best financing for your particular needs. Just like real estate or insurance brokers, a good mortgage broker can be a real asset to your team.</li>\n</ul>\n</li>\n<li><strong>Broker or agent:</strong> Your investment team should include a sharp and energetic real estate broker or agent. All real estate brokers and agents are licensed by the state in which they perform their services.A real estate <em>broker</em> is the highest level of licensed real estate professional, and a licensed real estate sales <em>agent</em> is qualified to handle real estate listings and transactions under the supervision of a broker. The vast majority of real estate licensees are sales agents.</li>\n<li><strong>Appraiser:</strong> An appraiser can be an effective team member if your real estate investment strategy involves buying and selling properties with somewhat-hidden opportunities to add value. Appraisers see many properties over their career and thus often possess insight into real estate opportunities that others miss.</li>\n<li><strong>Attorney:</strong> If you live in an area where attorneys aren’t usually involved in real estate transactions, an attorney may not be necessary. In some states, having an attorney is essential to handle the transaction and closing.In any case, you should consult with an experienced real estate attorney as your investments increase in size and complexity. With more complicated transactions, have the attorney review the documents — even in states where the title or escrow company handles the paperwork and serves as the independent intermediary or closing agent.A good real estate attorney can help you structure proposed transactions. Particularly if you’re looking into a large transaction where you assume loans or you’re attempting to secure special financing, a competent real estate attorney can be invaluable.</li>\n</ul>\n"}],"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Five years","lifeExpectancySetFrom":"2022-12-08T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":296220},{"headers":{"creationTime":"2022-12-07T20:44:30+00:00","modifiedTime":"2022-12-08T16:52:27+00:00","timestamp":"2022-12-09T18:01:02+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"General Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"},"slug":"general-investing","categoryId":34300}],"title":"DeFi For Dummies Cheat Sheet","strippedTitle":"defi for dummies cheat sheet","slug":"defi-for-dummies-cheat-sheet","canonicalUrl":"","seo":{"metaDescription":"This Cheat Sheet includes tips for navigating the world of decentralized finance, including what you need to get started, and much more.","noIndex":0,"noFollow":0},"content":"The nascent world of modern <em>decentralized finance</em> (DeFi) has grown rapidly since the advent of Bitcoin in 2009. Read on for helpful tips on how to navigate this exciting new realm.","description":"The nascent world of modern <em>decentralized finance</em> (DeFi) has grown rapidly since the advent of Bitcoin in 2009. Read on for helpful tips on how to navigate this exciting new realm.","blurb":"","authors":[{"authorId":34644,"name":"Seoyoung Kim","slug":"seoyoung-kim","description":" <p><b>Kiana Danial</b> is an investment trainer and consultant as well as the author of <i>Cryptocurrency Investing For Dummies.</i></p> <p><b>Peter Kent</b> is a veteran technology author. <b>Tyler Bain </b>is a Certified Bitcoin Professional. Peter and Tyler are co-authors of <i>Cryptocurrency Mining For Dummies</i>. <b>Tiana Laurence </b>heads her own venture capital firm and is author of <i>Blockchain For Dummies</i>, 2nd Edition. <b>Michael G. Solomon, PhD,</b> is a professor of Computer Information Sciences as well as author of <i>Ethereum For Dummies</i>.</p>","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/34644"}}],"primaryCategoryTaxonomy":{"categoryId":34300,"title":"General Investing","slug":"general-investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[],"fromCategory":[{"articleId":295944,"title":"How Factor Investing Puts You in Charge","slug":"how-factor-investing-puts-you-in-charge","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295944"}},{"articleId":295921,"title":"The Advantages of Factor Investing","slug":"the-advantages-of-factor-investing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295921"}},{"articleId":295850,"title":"What Is Factor Investing?","slug":"what-is-factor-investing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295850"}},{"articleId":295683,"title":"Factor Investing For Dummies Cheat Sheet","slug":"factor-investing-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295683"}},{"articleId":294706,"title":"Trading Psychology For Dummies Cheat Sheet","slug":"trading-psychology-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/294706"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":296130,"slug":"defi-for-dummies","isbn":"9781119906803","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"amazon":{"default":"https://www.amazon.com/gp/product/1119906806/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1119906806/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1119906806-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1119906806/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1119906806/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/defi-for-dummies-cover-9781119906803-170x255.jpg","width":170,"height":255},"title":"DeFi For Dummies","testBankPinActivationLink":"","bookOutOfPrint":true,"authorsInfo":"<p><b>Kiana Danial</b> is an investment trainer and consultant as well as the author of <i>Cryptocurrency Investing For Dummies.</i></p> <p><b>Peter Kent</b> is a veteran technology author. <b>Tyler Bain </b>is a Certified Bitcoin Professional. Peter and Tyler are co-authors of <i>Cryptocurrency Mining For Dummies</i>. <b>Tiana Laurence </b>heads her own venture capital firm and is author of <i>Blockchain For Dummies</i>, 2nd Edition. <b>Michael G. Solomon, PhD,</b> is a professor of Computer Information Sciences as well as author of <i>Ethereum For Dummies</i>.</p>","authors":[{"authorId":34644,"name":"Seoyoung Kim","slug":"seoyoung-kim","description":" <p><b>Kiana Danial</b> is an investment trainer and consultant as well as the author of <i>Cryptocurrency Investing For Dummies.</i></p> <p><b>Peter Kent</b> is a veteran technology author. <b>Tyler Bain </b>is a Certified Bitcoin Professional. Peter and Tyler are co-authors of <i>Cryptocurrency Mining For Dummies</i>. <b>Tiana Laurence </b>heads her own venture capital firm and is author of <i>Blockchain For Dummies</i>, 2nd Edition. <b>Michael G. Solomon, PhD,</b> is a professor of Computer Information Sciences as well as author of <i>Ethereum For Dummies</i>.</p>","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/34644"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;general-investing&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119906803&quot;]}]\" id=\"du-slot-639377ded42de\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;general-investing&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119906803&quot;]}]\" id=\"du-slot-639377ded4b3d\"></div></div>"},"articleType":{"articleType":"Cheat Sheet","articleList":[{"articleId":0,"title":"","slug":null,"categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/"}}],"content":[{"title":"What you need to get started with DeFi","thumb":null,"image":null,"content":"<p>Whether you simply want to dabble around DeFi protocols or plan to code and deploy a customized smart contract (or even full-blown dApp) of your own, you’ll need two key items:</p>\n<ul>\n<li>The <a href=\"https://metamask.io/\" target=\"_blank\" rel=\"noopener\">MetaMask browser extension</a>, which you can download from its website</li>\n<li>Ether (ETH), which you can obtain from popular crypto exchanges, such as <a href=\"https://www.coinbase.com/\" target=\"_blank\" rel=\"noopener\">Coinbase</a>, or some test ETH for the test network of your choice, which you can obtain from a test faucet. For instance, if you are using the Goerli Testnet, type <strong>Goerli test faucet</strong> in the Google search bar.</li>\n</ul>\n"},{"title":"10 DeFi terms to know","thumb":null,"image":null,"content":"<p>Modern DeFi is full of new and esoteric terms that make it difficult for newcomers to join the conversation. Here is some key terminology to get you started:</p>\n<ul>\n<li><strong>Blockchain:</strong> A public blockchain is a permissionless recordkeeping system that organizes transaction records into blocks that are cryptographically linked. Bitcoin and Ethereum are examples of public blockchains.</li>\n<li><strong>Cryptocurrency (or, simply, crypto):</strong> A fungible token whose ownership and transaction records are secured on a public blockchain. Fungible tokens are like dollar bills (you don’t care which specific bills you receive as long as you receive the correct quantity). In contrast, an NFT is a non-fungible token.</li>\n<li><strong>DAO: </strong>A decentralized autonomous organization. The Bitcoin and Ethereum networks are examples of DAOs.</li>\n<li><strong>dApp:</strong> A decentralized application that uses a public blockchain for data storage and combines a front-end user interface with back-end smart contracts for app logic.</li>\n<li><strong>DeFi/CeFi</strong>: DeFi, of course, refers to decentralized finance, whereas CeFi refers to centralized finance.</li>\n<li><strong>DEX/CEX:</strong> A DEX is a decentralized exchange, whereas a CEX is a centralized exchange. Uniswap is an example of a DEX, and Coinbase in an example of a CEX.</li>\n<li><strong>Flash loan:</strong> An uncollateralized, short-term loan that must be repaid within the same block it’s issued.</li>\n<li><strong>Smart contract:</strong> A set of code and data stored on a public blockchain.</li>\n<li><strong>TVL: </strong>Stands for total value locked, which provides a measure of the extent of DeFi activity on a given network or specific application.</li>\n<li><strong>Web3:</strong> Refers to a vision for a decentralized web built on blockchain technology and token-based economics.</li>\n</ul>\n"},{"title":"10 popular DeFi applications","thumb":null,"image":null,"content":"<p>To get an idea of the burgeoning DeFi landscape, check out these widely used protocols:</p>\n<ul>\n<li><strong><a href=\"https://oasis.app/#earn\" target=\"_blank\" rel=\"noopener\">Maker (MKR)</a>:</strong> A collateralized lending protocol that allows users to lock collateral in a Maker Vault to borrow funds in the form of DAI, an algorithmic stablecoin.</li>\n<li><a href=\"https://stake.lido.fi/\" target=\"_blank\" rel=\"noopener\"><strong>Lido (LIDO):</strong></a>A liquid staking protocol that provides tokens for staked claims that users can, in turn, re-stake for additional yields.</li>\n<li><strong><a href=\"https://app.aave.com/\" target=\"_blank\" rel=\"noopener\">Aave (AAVE)</a>:</strong>A lending protocol that was the first to implement uncollateralized flash loans.</li>\n<li><strong><a href=\"https://app.uniswap.org/#/swap\" target=\"_blank\" rel=\"noopener\">Uniswap (UNI)</a>:</strong> An automated market maker that allows users to swap tokens for a fee or to lock up tokens to provide liquidity.</li>\n<li><strong><a href=\"https://curve.fi/#/ethereum/swap\" target=\"_blank\" rel=\"noopener\">Curve (CRV)</a>:</strong> An automated market maker that specializes in stablecoins. (https://curve.fi/)</li>\n<li><strong><a href=\"https://www.convexfinance.com/stake\" target=\"_blank\" rel=\"noopener\">Convex Finance (CVX)</a>: </strong>A staking protocol focused on CRV and Curve LP tokens.</li>\n<li><strong><a href=\"https://app.justlend.org/#/home\" target=\"_blank\" rel=\"noopener\">JustLend (JST)</a>: </strong>A collateralized lending protocol that allows users to lend tokens and borrow against their staked collateral.</li>\n<li><strong><a href=\"https://pancakeswap.finance/\" target=\"_blank\" rel=\"noopener\">Pancake Swap (CAKE)</a>: </strong>Another automated market maker that allows users to swap tokens for a fee or to lock up tokens to provide liquidity.</li>\n<li><strong><a href=\"https://app.compound.finance/\" target=\"_blank\" rel=\"noopener\">Compound (COMP)</a>: </strong>Another collateralized lending protocol that allows users to lend tokens and borrow against their staked collateral.</li>\n<li><strong><a href=\"https://defi.instadapp.io/\" target=\"_blank\" rel=\"noopener\">Instadapp (INST)</a>:</strong> Provides an integrated interface for users to track their positions across different dApps, such as MakerDAO, Compound, Aave, and Uniswap.</li>\n</ul>\n"},{"title":"Deploying a smart contract, in a nutshell","thumb":null,"image":null,"content":"<p>Follow these steps to deploy a smart contract on Ethereum (or any other Ethereum virtual machine (EVM)-compatible network):</p>\n<ol>\n<li>Log in to your MetaMask wallet by clicking the fox icon in your browser’s toolbar, and make sure you’ve selected the correct account and network (use only Ethereum Mainnet, or the mainnet of any other EVM-compatible network, when you’re ready to spend actual tokens to deploy your contract).</li>\n<li>Go to <a href=\"https://remix.ethereum.org/#optimize=false&amp;runs=200&amp;evmVersion=null&amp;version=soljson-v0.8.7+commit.e28d00a7.js\" target=\"_blank\" rel=\"noopener\">https://remix.ethereum.org</a>.</li>\n<li>Create and name a new file for your Solidity code.</li>\n<li>Open this new file, and copy/paste the sample code provided at <a href=\"https://www.seoyoungkim.com/DeFiFD/MyFirstContract.sol\" target=\"_blank\" rel=\"noopener\">https://www.seoyoungkim.com/DeFiFD/MyFirstContract.sol</a>.</li>\n<li>Navigate to the Solidity Compiler browser pane, and compile your code.</li>\n<li>Navigate to the Deploy &amp; Run Transactions browser pane, and select Injected Web3 from the Environment drop-down menu.</li>\n<li>Make sure you’re now connected to the appropriate network and account, and deploy your compiled contract.</li>\n</ol>\n"}],"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Two years","lifeExpectancySetFrom":"2022-12-07T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":296168},{"headers":{"creationTime":"2022-12-01T16:41:18+00:00","modifiedTime":"2022-12-02T14:21:38+00:00","timestamp":"2022-12-02T15:01:02+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"General Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"},"slug":"general-investing","categoryId":34300}],"title":"How Factor Investing Puts You in Charge","strippedTitle":"how factor investing puts you in charge","slug":"how-factor-investing-puts-you-in-charge","canonicalUrl":"","seo":{"metaDescription":"Learn how factor investing allows you to become the expert by giving you the same tools professional money managers have used for a long time.","noIndex":0,"noFollow":0},"content":"It may not be obvious to many people how disruptive and game-changing factor investing is to the long legacy of hot shot money managers that are to Wall Street what celebrities are to Hollywood.\r\n\r\nYou see, by isolating and identifying key characteristics that define outperforming investments, <a href=\"https://www.dummies.com/article/business-careers-money/personal-finance/investing/investment-vehicles/stocks/what-is-factor-investing-295850/\" target=\"_blank\" rel=\"noopener\">factor investing</a> puts you on the same elevation as the professional money manager, giving access to a selection process once attributed to managers’ exclusive stock-picking prowess.\r\n\r\nThis holds out the promise of market-beating returns without having to pay high fund manager fees. The entire field of factor research has been a giant pain in the backside for overpriced money managers, even ones who have had market beating runs.\r\n\r\nIn previous decades, a successful fund manager was simply assumed to be performing due to his stock-picking expertise, and many assumed almost god-like status. Bookish academics have inadvertently undermined these market legends by demonstrating that, with very few exceptions, winning stocks shared key factors in common and these factors could be used in advance to pick a winning portfolio.\r\n\r\nIn fact: Currently, factor models can explain up to 95 percent of the differences between active managers, an attribute formerly ascribed mostly to manager skill. Factor investing offers the potential to achieve market beating returns without high manager fees, saving you money!\r\n<p class=\"article-tips remember\">Factor investing put the exclusive tools of professional money managers at your fingertips, but to work, you need to use them efficiently and with discipline.</p>\r\nFactor-based (or smart beta) strategies are gaining popularity and market share, competing with index funds (passive returns), and traditional manager (active) returns, as shown in the figure below.\r\n\r\n[caption id=\"attachment_295946\" align=\"alignnone\" width=\"630\"]<img class=\"wp-image-295946 size-full\" src=\"https://www.dummies.com/wp-content/uploads/factor-investing-strategies.jpg\" alt=\"graphic showing different types of factor strategies during the 1960s, 1980s, and 2000s\" width=\"630\" height=\"333\" /> ©John Wiley & Sons, Inc.[/caption]\r\n<h2 id=\"tab1\" >Navigating the Factor Jungle</h2>\r\nMore than 300 factors have been discovered in recent years, but not all pass the feasibility test. Here’s how you define a good factor:\r\n<ul>\r\n \t<li>Did it outperform (make money!) in the past?</li>\r\n \t<li>Will it make money (net of costs) in the future?</li>\r\n \t<li>Why does it work? (The answer to why helps you answer whether it will make you money, and also whether the effect might be already duplicated by another factor that already contains the elements of another factor.)</li>\r\n</ul>\r\nAs factor investing gains popularity, it becomes even more important to do your own research and answer these three questions. You would think the academic spotlight now aimed at this field would make things clearer and better defined, and in many ways it is.\r\n\r\nWhat surprises new investors is what John Cochrane of the University of Chicago warned is becoming a zoo of factors. Factors are becoming so numerous and exotic that investors are confused by the sheer proliferation of discoveries (one hedge fund claims to use over 80 different factors in its stock pickings!)\r\n<p class=\"article-tips tip\">Keep your strategy simple and focus on the proven factors, and the stocks, mutual funds, and exchange-traded funds (ETFs) that incorporate them.</p>\r\n\r\n<h2 id=\"tab2\" >Avoiding the Factor Zoo</h2>\r\nSo why are there so many factors to choose from?\r\n\r\nThere are many reasons, but most of them break down to one of the following: A newly discovered factor works because of attributes that are already integral parts of an existing factor. Or, the factor is really a phantom result of poor statistical analysis and/or outdated or incomplete historical stock price databases.\r\n\r\nAnswering the three questions above helps you determine whether a factor includes the right attributes.\r\n<h2 id=\"tab3\" >Avoiding supercomputer factors</h2>\r\nSupercomputers crunching numbers can be both a blessing and a curse. The details are beyond the scope of this book, but if you're interested it's worth reading more of what professor Cochrane has written about this.\r\n\r\nIn short, the dangers of data mining and selection bias can cause very smart people to come up with powerful factors that aren't very profitable:\r\n<ul>\r\n \t<li><strong>Data mining:</strong> The process of analyzing dense volumes of data to find patterns, discover trends, and gain insight into how that data can be used.</li>\r\n \t<li><strong>Selection bias/survivorship bias:</strong> Caused by choosing non-random data for statistical analysis; for instance, back testing a factor's historical performance against the pool of all existing small capitalization stocks inadvertently eliminates just as many stocks that are no longer trading as they've gone bankrupt or merged.</li>\r\n</ul>\r\nFor example, the chart below shows what percentage of stocks that were trading in the past are now delisted versus what percentage are still actively trading. Clearly, any factor would have to have outperformed in the real world that included these defunct stocks and not just when run against a database of currently existing stocks.\r\n\r\nSeems obvious in retrospect, but many factor discoveries have proven to be based on incomplete or biased databases.\r\n\r\n[caption id=\"attachment_295947\" align=\"alignnone\" width=\"630\"]<img class=\"wp-image-295947 size-full\" src=\"https://www.dummies.com/wp-content/uploads/active_and_delisted_stocks.jpg\" alt=\"chart showing percentages of active vs. delisted stocks during the past 13 years\" width=\"630\" height=\"382\" /> ©John Wiley & Sons, Inc.[/caption]\r\n\r\nComputers are only as good as the data you feed them. A huge number of factors that seem to work on historical data models do not pan out in the real world for various reasons.\r\n\r\nThese factors are the product of powerful computers searching through enough data to find a situation where a new factor looks good by sheer accident and randomness. Of course, you want to avoid these factors because they don’t have the predictive power for the future and won’t bring you success in the future.\r\n<p class=\"article-tips warning\">The risk of using a factor from the factor zoo isn’t just underperformance, but also the trading and management fees it costs you to carry it out. In addition, there's the opportunity cost to you had you done something more effective with your money!</p>\r\n\r\n<h2 id=\"tab4\" >Finding investable factors</h2>\r\nLiterally hundreds of factors have been discovered and analyzed in recent years (see the sidebar for some examples). Many of these factors work on paper, but to be useful for you in your investment strategy, factors need to clear a much higher bar.\r\n\r\nSome factors only work in certain decades, or with a specific sector of the stock market. If a factor can’t duplicate its outperformance in other decades and over long periods of time, it's not really investable.\r\n\r\nAn <em>investable</em> factor also needs to yield enough expected outperformance that it outearns the amounts you pay in costs, fees, and taxes:\r\n<ul>\r\n \t<li>All portfolios, no matter how efficiently run, have trading and operating expenses, and all investments have a buy/ask spread, meaning that you lose a little money simply transacting a buy or sell when it's needed to follow the rules of any particular factor.</li>\r\n \t<li>Unless you’re holding your portfolio in a tax-sheltered account such as an IRA or a 401(k) (many now offer the ability to trade individual funds and stocks), there are potential tax costs for executing any strategy.</li>\r\n</ul>\r\n<p class=\"article-tips remember\">You especially need to account for taxes if you’re using a high turnover factor strategy where gains are likely to be taxed at the less favorable short-term capital gains tax rate than the more favorable long-term capital gains rate.</p>\r\nWhen we distill these ingredients to their essentials, some basic rules emerge. These three things make a factor attractive:\r\n<ul>\r\n \t<li><strong>Doggedness:</strong> The factor must show up through different time periods and not just one random decade or period. No one-trick ponies here. You want factors that persist for any investing period, given enough time.</li>\r\n \t<li><strong>Prevalence:</strong> The factor must demonstrate an advantage with various different countries and market sectors.</li>\r\n \t<li><strong>Investability (actionable):</strong> The factor must be able to be deployed cost effectively (costs include trading fees, taxes, and potentially time/research efficiency for more esoteric factors).</li>\r\n</ul>\r\nFactor outperformance is cyclical, yet hard to time. One factor is always leading the pack and your odds of guessing which one is negligible. Morningstar, a leading investment analytics company, has studied factor investing extensively and concluded that factor investing offers the promise of:\r\n<ul>\r\n \t<li>Improved absolute returns (more gains!)</li>\r\n \t<li>Improved risk-adjusted returns (gains with less risk and a smoother ride than other approaches!)</li>\r\n \t<li>Extended periods of outperformance followed by <em>droughts</em> (long periods of underperformance relative to whatever cap-weighted index you’re trying to beat)</li>\r\n</ul>\r\nWhen using factors, you must stick with your strategy to earn the rewards! There will be times when you feel like bailing! It’s best to wait for the historical outperformance of solid factors to materialize. Any attempt to time a factor approach requires skill and probably adds additional headwinds of trading costs and tax inefficiency (unless you're doing it in an IRA or tax-favored account).\r\n\r\nEven the best factors experience periods when they underperform the market, and these are hard to predict. You need patience to let a factor work for you. You need to stay in it to win it! The key is, of course, to diversify factors in your portfolio.","description":"It may not be obvious to many people how disruptive and game-changing factor investing is to the long legacy of hot shot money managers that are to Wall Street what celebrities are to Hollywood.\r\n\r\nYou see, by isolating and identifying key characteristics that define outperforming investments, <a href=\"https://www.dummies.com/article/business-careers-money/personal-finance/investing/investment-vehicles/stocks/what-is-factor-investing-295850/\" target=\"_blank\" rel=\"noopener\">factor investing</a> puts you on the same elevation as the professional money manager, giving access to a selection process once attributed to managers’ exclusive stock-picking prowess.\r\n\r\nThis holds out the promise of market-beating returns without having to pay high fund manager fees. The entire field of factor research has been a giant pain in the backside for overpriced money managers, even ones who have had market beating runs.\r\n\r\nIn previous decades, a successful fund manager was simply assumed to be performing due to his stock-picking expertise, and many assumed almost god-like status. Bookish academics have inadvertently undermined these market legends by demonstrating that, with very few exceptions, winning stocks shared key factors in common and these factors could be used in advance to pick a winning portfolio.\r\n\r\nIn fact: Currently, factor models can explain up to 95 percent of the differences between active managers, an attribute formerly ascribed mostly to manager skill. Factor investing offers the potential to achieve market beating returns without high manager fees, saving you money!\r\n<p class=\"article-tips remember\">Factor investing put the exclusive tools of professional money managers at your fingertips, but to work, you need to use them efficiently and with discipline.</p>\r\nFactor-based (or smart beta) strategies are gaining popularity and market share, competing with index funds (passive returns), and traditional manager (active) returns, as shown in the figure below.\r\n\r\n[caption id=\"attachment_295946\" align=\"alignnone\" width=\"630\"]<img class=\"wp-image-295946 size-full\" src=\"https://www.dummies.com/wp-content/uploads/factor-investing-strategies.jpg\" alt=\"graphic showing different types of factor strategies during the 1960s, 1980s, and 2000s\" width=\"630\" height=\"333\" /> ©John Wiley & Sons, Inc.[/caption]\r\n<h2 id=\"tab1\" >Navigating the Factor Jungle</h2>\r\nMore than 300 factors have been discovered in recent years, but not all pass the feasibility test. Here’s how you define a good factor:\r\n<ul>\r\n \t<li>Did it outperform (make money!) in the past?</li>\r\n \t<li>Will it make money (net of costs) in the future?</li>\r\n \t<li>Why does it work? (The answer to why helps you answer whether it will make you money, and also whether the effect might be already duplicated by another factor that already contains the elements of another factor.)</li>\r\n</ul>\r\nAs factor investing gains popularity, it becomes even more important to do your own research and answer these three questions. You would think the academic spotlight now aimed at this field would make things clearer and better defined, and in many ways it is.\r\n\r\nWhat surprises new investors is what John Cochrane of the University of Chicago warned is becoming a zoo of factors. Factors are becoming so numerous and exotic that investors are confused by the sheer proliferation of discoveries (one hedge fund claims to use over 80 different factors in its stock pickings!)\r\n<p class=\"article-tips tip\">Keep your strategy simple and focus on the proven factors, and the stocks, mutual funds, and exchange-traded funds (ETFs) that incorporate them.</p>\r\n\r\n<h2 id=\"tab2\" >Avoiding the Factor Zoo</h2>\r\nSo why are there so many factors to choose from?\r\n\r\nThere are many reasons, but most of them break down to one of the following: A newly discovered factor works because of attributes that are already integral parts of an existing factor. Or, the factor is really a phantom result of poor statistical analysis and/or outdated or incomplete historical stock price databases.\r\n\r\nAnswering the three questions above helps you determine whether a factor includes the right attributes.\r\n<h2 id=\"tab3\" >Avoiding supercomputer factors</h2>\r\nSupercomputers crunching numbers can be both a blessing and a curse. The details are beyond the scope of this book, but if you're interested it's worth reading more of what professor Cochrane has written about this.\r\n\r\nIn short, the dangers of data mining and selection bias can cause very smart people to come up with powerful factors that aren't very profitable:\r\n<ul>\r\n \t<li><strong>Data mining:</strong> The process of analyzing dense volumes of data to find patterns, discover trends, and gain insight into how that data can be used.</li>\r\n \t<li><strong>Selection bias/survivorship bias:</strong> Caused by choosing non-random data for statistical analysis; for instance, back testing a factor's historical performance against the pool of all existing small capitalization stocks inadvertently eliminates just as many stocks that are no longer trading as they've gone bankrupt or merged.</li>\r\n</ul>\r\nFor example, the chart below shows what percentage of stocks that were trading in the past are now delisted versus what percentage are still actively trading. Clearly, any factor would have to have outperformed in the real world that included these defunct stocks and not just when run against a database of currently existing stocks.\r\n\r\nSeems obvious in retrospect, but many factor discoveries have proven to be based on incomplete or biased databases.\r\n\r\n[caption id=\"attachment_295947\" align=\"alignnone\" width=\"630\"]<img class=\"wp-image-295947 size-full\" src=\"https://www.dummies.com/wp-content/uploads/active_and_delisted_stocks.jpg\" alt=\"chart showing percentages of active vs. delisted stocks during the past 13 years\" width=\"630\" height=\"382\" /> ©John Wiley & Sons, Inc.[/caption]\r\n\r\nComputers are only as good as the data you feed them. A huge number of factors that seem to work on historical data models do not pan out in the real world for various reasons.\r\n\r\nThese factors are the product of powerful computers searching through enough data to find a situation where a new factor looks good by sheer accident and randomness. Of course, you want to avoid these factors because they don’t have the predictive power for the future and won’t bring you success in the future.\r\n<p class=\"article-tips warning\">The risk of using a factor from the factor zoo isn’t just underperformance, but also the trading and management fees it costs you to carry it out. In addition, there's the opportunity cost to you had you done something more effective with your money!</p>\r\n\r\n<h2 id=\"tab4\" >Finding investable factors</h2>\r\nLiterally hundreds of factors have been discovered and analyzed in recent years (see the sidebar for some examples). Many of these factors work on paper, but to be useful for you in your investment strategy, factors need to clear a much higher bar.\r\n\r\nSome factors only work in certain decades, or with a specific sector of the stock market. If a factor can’t duplicate its outperformance in other decades and over long periods of time, it's not really investable.\r\n\r\nAn <em>investable</em> factor also needs to yield enough expected outperformance that it outearns the amounts you pay in costs, fees, and taxes:\r\n<ul>\r\n \t<li>All portfolios, no matter how efficiently run, have trading and operating expenses, and all investments have a buy/ask spread, meaning that you lose a little money simply transacting a buy or sell when it's needed to follow the rules of any particular factor.</li>\r\n \t<li>Unless you’re holding your portfolio in a tax-sheltered account such as an IRA or a 401(k) (many now offer the ability to trade individual funds and stocks), there are potential tax costs for executing any strategy.</li>\r\n</ul>\r\n<p class=\"article-tips remember\">You especially need to account for taxes if you’re using a high turnover factor strategy where gains are likely to be taxed at the less favorable short-term capital gains tax rate than the more favorable long-term capital gains rate.</p>\r\nWhen we distill these ingredients to their essentials, some basic rules emerge. These three things make a factor attractive:\r\n<ul>\r\n \t<li><strong>Doggedness:</strong> The factor must show up through different time periods and not just one random decade or period. No one-trick ponies here. You want factors that persist for any investing period, given enough time.</li>\r\n \t<li><strong>Prevalence:</strong> The factor must demonstrate an advantage with various different countries and market sectors.</li>\r\n \t<li><strong>Investability (actionable):</strong> The factor must be able to be deployed cost effectively (costs include trading fees, taxes, and potentially time/research efficiency for more esoteric factors).</li>\r\n</ul>\r\nFactor outperformance is cyclical, yet hard to time. One factor is always leading the pack and your odds of guessing which one is negligible. Morningstar, a leading investment analytics company, has studied factor investing extensively and concluded that factor investing offers the promise of:\r\n<ul>\r\n \t<li>Improved absolute returns (more gains!)</li>\r\n \t<li>Improved risk-adjusted returns (gains with less risk and a smoother ride than other approaches!)</li>\r\n \t<li>Extended periods of outperformance followed by <em>droughts</em> (long periods of underperformance relative to whatever cap-weighted index you’re trying to beat)</li>\r\n</ul>\r\nWhen using factors, you must stick with your strategy to earn the rewards! There will be times when you feel like bailing! It’s best to wait for the historical outperformance of solid factors to materialize. Any attempt to time a factor approach requires skill and probably adds additional headwinds of trading costs and tax inefficiency (unless you're doing it in an IRA or tax-favored account).\r\n\r\nEven the best factors experience periods when they underperform the market, and these are hard to predict. You need patience to let a factor work for you. You need to stay in it to win it! The key is, of course, to diversify factors in your portfolio.","blurb":"","authors":[{"authorId":35208,"name":"James Maendel","slug":"james-maendel","description":" <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/35208"}},{"authorId":9001,"name":"Paul Mladjenovic","slug":"paul-mladjenovic","description":" <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9001"}}],"primaryCategoryTaxonomy":{"categoryId":34300,"title":"General Investing","slug":"general-investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"}},"secondaryCategoryTaxonomy":{"categoryId":34298,"title":"Stocks","slug":"stocks","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34298"}},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[{"label":"Navigating the Factor Jungle","target":"#tab1"},{"label":"Avoiding the Factor Zoo","target":"#tab2"},{"label":"Avoiding supercomputer factors","target":"#tab3"},{"label":"Finding investable factors","target":"#tab4"}],"relatedArticles":{"fromBook":[{"articleId":295921,"title":"The Advantages of Factor Investing","slug":"the-advantages-of-factor-investing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295921"}},{"articleId":295850,"title":"What Is Factor Investing?","slug":"what-is-factor-investing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295850"}},{"articleId":295683,"title":"Factor Investing For Dummies Cheat Sheet","slug":"factor-investing-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295683"}}],"fromCategory":[{"articleId":295921,"title":"The Advantages of Factor Investing","slug":"the-advantages-of-factor-investing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295921"}},{"articleId":295850,"title":"What Is Factor Investing?","slug":"what-is-factor-investing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295850"}},{"articleId":295683,"title":"Factor Investing For Dummies Cheat Sheet","slug":"factor-investing-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295683"}},{"articleId":294706,"title":"Trading Psychology For Dummies Cheat Sheet","slug":"trading-psychology-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/294706"}},{"articleId":287556,"title":"Options Trading For Dummies Cheat Sheet","slug":"options-trading-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/287556"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":295572,"slug":"factor-investing-for-dummies","isbn":"9781119906742","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"amazon":{"default":"https://www.amazon.com/gp/product/1119906741/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1119906741/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1119906741-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1119906741/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1119906741/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/factor-investing-for-dummies-cover-9781119906742-203x255.jpg","width":203,"height":255},"title":"Factor Investing For Dummies","testBankPinActivationLink":"","bookOutOfPrint":true,"authorsInfo":"<p><p><b><b data-author-id=\"35208\">James Maendel</b>, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b><b data-author-id=\"9001\">Paul Mladjenovic</b></b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com.</p>","authors":[{"authorId":35208,"name":"James Maendel","slug":"james-maendel","description":" <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/35208"}},{"authorId":9001,"name":"Paul Mladjenovic","slug":"paul-mladjenovic","description":" <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9001"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;general-investing&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119906742&quot;]}]\" id=\"du-slot-638a132e8aab7\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;general-investing&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119906742&quot;]}]\" id=\"du-slot-638a132e8b182\"></div></div>"},"articleType":{"articleType":"Articles","articleList":null,"content":null,"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Five years","lifeExpectancySetFrom":"2022-12-01T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":295944},{"headers":{"creationTime":"2022-11-30T17:28:09+00:00","modifiedTime":"2022-12-02T14:21:27+00:00","timestamp":"2022-12-02T15:01:02+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"General Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"},"slug":"general-investing","categoryId":34300}],"title":"The Advantages of Factor Investing","strippedTitle":"the advantages of factor investing","slug":"the-advantages-of-factor-investing","canonicalUrl":"","seo":{"metaDescription":"Learn about the advantages of factor investing, including saving time, and helping you avoid emotional decisions.","noIndex":0,"noFollow":0},"content":"<a href=\"https://www.dummies.com/article/business-careers-money/personal-finance/investing/general-investing/what-is-factor-investing-295850/\" target=\"_blank\" rel=\"noopener\">Factor investing</a> can help you build a portfolio designed for your unique risk tolerance, investment time horizon, and financial goals using characteristics that history shows lead to consistent outperformance.\r\n\r\n[caption id=\"attachment_295929\" align=\"alignnone\" width=\"630\"]<img class=\"size-full wp-image-295929\" src=\"https://www.dummies.com/wp-content/uploads/stock-reports-on-computer-adobestock_116436492.jpg\" alt=\"\" width=\"630\" height=\"420\" /> ©Adobe Stock[/caption]\r\n\r\nAn <em>investment time period</em> is the timeframe you expect to hold an investment, usually short (less than five years), intermediate (five to ten years), or long term (more than 10 years).\r\n\r\nFactor investing provides a building block that gives you the best odds of reaching retirement and income goals successfully. It helps improve portfolio results and reduces volatility. <a href=\"https://www.dummies.com/article/business-careers-money/personal-finance/investing/general-investing/factor-investing-for-dummies-cheat-sheet-295683/\" target=\"_blank\" rel=\"noopener\">Factor investing</a>, done right, enhances diversification in a way that lowers risk without sacrificing returns, by placing your investment eggs in many baskets to help ensure positive results!\r\n<h2 id=\"tab1\" ><strong>Following a systematic approach</strong></h2>\r\nIn a nutshell, factor investing is about defining and following a set of proven guard rails that keep your portfolio on track. Using a factor strategy not only gives you better returns, but delivers them more consistently while also protecting you from the dangerous pitfalls and mistakes that get other investors in trouble.\r\n<h3><strong>Leveraging the power of a persistent strategy</strong></h3>\r\nInvestors worldwide have always sought the secrets that would help them invest right alongside legendary investors like John Templeton, Warren Buffett, Jesse Livermore, Benjamin Graham, and John “Jack” Bogle.\r\n\r\nInvesting systems and rules have come and gone over the years, because it turns out many of them worked only in specific markets and just for a few years. These strategies picked up on short-lived trends and rules in stocks that were true only for a limited time due to certain conditions unlikely to repeat.\r\n\r\nWhen you’re investing based on factors, you’re interested in a <em>persistent strategy</em> — one that can deliver results in the future.\r\n\r\nBy figuring out the themes, characteristics, and properties common to winning investment, or <em>factors,</em> you can discover a set of rules to create higher-performing portfolios.\r\n\r\nBut how do you even try to comb through the mountains of market data over the last 100-plus years to find what works?\r\n\r\nWell, it turns out that you’re in luck! In the last few years, financial academics have been hard at work doing just that — distilling these factors into useful sets of rules that you can put to work in your portfolios today.\r\n<p class=\"article-tips remember\">Though nothing works 100 percent of the time, especially over shorter periods, factors are most effective when combined with other factors in a master strategy. This has the effect of loading the dice in your favor.</p>\r\n\r\n<h2 id=\"tab2\" ><strong>Saving time with factor investing</strong></h2>\r\nTime is money, the old saying goes, and investors since the ancient Chinese rice traders have always looked for ways to save time by streamlining and systematizing their trading and investing decision processes.\r\n\r\nWe all have busy lives, jobs to get to, kids to take to after school sports, and a million other things. A factor investing strategy can help improve your life by helping you make best use of your time and energy.\r\n\r\nJames used factor investing to save time during the COVID-19 market bottom in March of 2020. He needed an approach that identified resilient stocks and funds most likely to benefit from a market rebound, while also giving clients confidence in the historical reliability of these stocks to survive and thrive the unprecedented economic and market downturn everyone was experiencing as the world rapidly went into social distancing, quarantines, and government-mandated shutdowns.\r\n\r\nHe came up with a multifactor portfolio for new clients using the same principles in this book that was both sophisticated and easy to understand. This strategy gave them the confidence to enter the depressed stock market and stay on board for what turned out to be a profitable 18 months for investing, with many portfolios doubling in value.\r\n<h2 id=\"tab3\" ><strong>Using modern advances</strong></h2>\r\nAs investors, you always want to look for ways to take advantage of advances and breakthroughs in the investment field. Two trends that have come together to move investing forward have been computers and history; specifically, better methods of market data analysis and greatly expanded historical datasets to feed those computers.\r\n\r\nModern computers and new ways of crunching market data are at the forefront of the growing interest and advances in factor investing. Just as important is the expanding dataset as researchers and archivists have combed through old ticker tapes, micro-fiche and ledgers to complete the historical dataset of stock prices and company data; in some cases, right back to the Buttonwood Agreement that pre-dated Wall Street.\r\n\r\nWhat is the Buttonwood Agreement? It’s a single-page document that started the New York Stock Exchange 230 years ago on May 17, 1792, when 24 merchants and brokers met under a buttonwood tree and put their signatures to a set of rules and safeguards for trading. The meeting was necessary to re-establish public confidence in markets after the infamous Financial Panic of 1792 that had caused mayhem earlier that spring.\r\n\r\nInvesting options were limited back then. The only stock available was in the Bank of New York, The First Bank of the United States, some insurance companies, and Revolutionary War Bonds issued by Alexander Hamilton to help pay off the War of Independence from British rule.\r\n\r\nToday, you can also take advantage of databases, services, and perhaps even pre-packaged investment products such as funds and ETFs that attempt to apply factor methodology in a practical way to select investments based on current stock and bond metrics.\r\n\r\nLuckily, technology has made factor investing far easier and more cost effective than ever, as we detail in later chapters.\r\n\r\nThis enhanced dataset provides a richer and more complete testing ground to ferret out meaningful factors and to test existing assumptions more fully. This is an advance that you can benefit from!\r\n<h2 id=\"tab4\" ><strong>Following proven guidelines that work</strong></h2>\r\nEven a broken clock is right twice a day, and, like a coin toss, any system can come up with a winner or two from time to time. As an extreme example, a rules-based system (factor) that consisted of “sell all U.S. stocks and buy bonds” may have worked very well as a factor from September 1929 until July 1932, but this was only due to the stock market crash that kicked off the Great Depression.\r\n\r\nUsing this factor after 1932 would have been a recipe for disaster and decades of underperformance! The point here is that you’re looking for guidelines that provide a more universal advantage, and are not dependent on a specific set of historical circumstances.\r\n\r\nThe best factors you’re interested in work in many different markets, countries, and decades. They aren't just one-trick ponies that have shown results once or twice in history, perhaps by chance or due to unique circumstances. You want rules that operate more broadly and dependably.\r\n<h2 id=\"tab5\" ><strong>Following a disciplined core strategy</strong></h2>\r\nThe most successful investors have a disciplined strategy driving their success. Incorporating factors into your investing adds not just a methodology for investment selection but also discipline to portfolio activity as it helps you determine what to buy, sell, or hold, and gives you the confidence needed to participate in the long term.\r\n<h3><strong>Protecting against emotional investing</strong></h3>\r\nThe emerging field of behavioral finance says that regardless of how you design your portfolio, the major reason for your success or failure is your emotion-driven actions. In other words, if you want to be successful at investing, you have to protect against emotional investing, which results in buying high and selling low, repeatedly.\r\n\r\nThe long-running DALBAR study, which has been updated annually since the inception of the 401(k) over four decades ago, proves that this problem is widespread and damaging to wealth building. Investors lack discipline (of course it's not you, just other investors).\r\n\r\nWhat is <a href=\"https://www.dalbar.com/\" target=\"_blank\" rel=\"noopener\">DALBAR</a>? Located in Boston, DALBAR is one of the nation's leading independent research firms committed to raising the standards of excellence in the financial services industry. It compiles and analyzes mountains of data on mutual funds, life insurance, and banking products and practices. It has also been behind the nation's leading study on investor behavior for the past 28 years.\r\n\r\nOne of its most followed publications is the annual Quantitative Analysis of Investor Behavior (QUIB) Report, which measures how investors have performed with their actual investment portfolios versus how the funds they hold have performed during the same periods.\r\n\r\nYou might think that investor performance and fund performance are the same thing, but DALBAR consistently demonstrates a devastating investor performance gap due to investors shifting money among their investments (for example, from stock into more conservative bonds or cashing out at exactly the wrong times).\r\n\r\nCompounded over the years, this performance gap is devastating, costing many investors literally hundreds of thousands — or even more — in retirement dollars they could have enjoyed.\r\n\r\nFor example, <a href=\"https://www.dalbar.com/catalog/product\" target=\"_blank\" rel=\"noopener\">its 2021 study</a> shows that this performance gap jumped to a shocking 1032 basis points for 2021. 100 basis points equals one percent, so this represents a lag of 10 percent for investors versus the performance of the average fund they were investing in.\r\n\r\nObviously, despite the recovery from the 2020 COVID-19 market lows, many investors bailed (perhaps believing the recovery was too good to be true) and then got back in at higher prices in the fall, only to experience a downtrend and realize they had once again bought high without benefiting from the previous gains.\r\n\r\nIn short, DALBAR's extensive research shows that investors are their own worst enemies. The results, as shown in the chart below, are sobering and hard to dismiss as the researchers used real-time data from millions of investor-directed 401(k) accounts. DALBAR has concluded that as much as two-thirds of the market return investors should have enjoyed were squandered to emotional investing — selling into fear after downturns, and buying into euphoria after upturns.\r\n\r\n[caption id=\"attachment_295920\" align=\"alignnone\" width=\"630\"]<img class=\"size-full wp-image-295920\" src=\"https://www.dummies.com/wp-content/uploads/annualized-returns-factor-investing.jpg\" alt=\"Chart by DALBAR showing 20-year annualized returns by asset class (2001-2020)\" width=\"630\" height=\"176\" /> ©DALBAR / Source: <a href=\"https://www.maendelwealth.com/blog/rising-rates-let-the-game-come-to-you\" target=\"_blank\" rel=\"noopener\">https://www.maendelwealth.com/blog/rising-rates-let-the-game-come-to-you</a>[/caption]\r\n\r\nThe problem, of course, is that investors end up bailing near the bottom, when they've had enough pain, and buying again near the top of the market cycle, when they can't stand to miss out anymore. These mistakes get compounded over the years, and become even more damaging.\r\n\r\nThe results are similar in every annual update of the DALBAR study. In short, it turns out that most investors are doing exactly the opposite of what they need to do to build wealth. They are buying high and selling low.\r\n\r\nA factor-based approach helps you avoid becoming an emotional investor. A portfolio strategy based on factors (ideally a diversified combination of multiple factors) can provide discipline, and powerful protection against emotional investing by offering a portfolio with which an investor can feel confident riding through inevitable downturns on the way to new highs.\r\n\r\nOnly historically persistent factors can provide this sort of assurance, enabling investors to achieve their financial goals and helping to make sure their emotions don't cause them to outlive their assets.","description":"<a href=\"https://www.dummies.com/article/business-careers-money/personal-finance/investing/general-investing/what-is-factor-investing-295850/\" target=\"_blank\" rel=\"noopener\">Factor investing</a> can help you build a portfolio designed for your unique risk tolerance, investment time horizon, and financial goals using characteristics that history shows lead to consistent outperformance.\r\n\r\n[caption id=\"attachment_295929\" align=\"alignnone\" width=\"630\"]<img class=\"size-full wp-image-295929\" src=\"https://www.dummies.com/wp-content/uploads/stock-reports-on-computer-adobestock_116436492.jpg\" alt=\"\" width=\"630\" height=\"420\" /> ©Adobe Stock[/caption]\r\n\r\nAn <em>investment time period</em> is the timeframe you expect to hold an investment, usually short (less than five years), intermediate (five to ten years), or long term (more than 10 years).\r\n\r\nFactor investing provides a building block that gives you the best odds of reaching retirement and income goals successfully. It helps improve portfolio results and reduces volatility. <a href=\"https://www.dummies.com/article/business-careers-money/personal-finance/investing/general-investing/factor-investing-for-dummies-cheat-sheet-295683/\" target=\"_blank\" rel=\"noopener\">Factor investing</a>, done right, enhances diversification in a way that lowers risk without sacrificing returns, by placing your investment eggs in many baskets to help ensure positive results!\r\n<h2 id=\"tab1\" ><strong>Following a systematic approach</strong></h2>\r\nIn a nutshell, factor investing is about defining and following a set of proven guard rails that keep your portfolio on track. Using a factor strategy not only gives you better returns, but delivers them more consistently while also protecting you from the dangerous pitfalls and mistakes that get other investors in trouble.\r\n<h3><strong>Leveraging the power of a persistent strategy</strong></h3>\r\nInvestors worldwide have always sought the secrets that would help them invest right alongside legendary investors like John Templeton, Warren Buffett, Jesse Livermore, Benjamin Graham, and John “Jack” Bogle.\r\n\r\nInvesting systems and rules have come and gone over the years, because it turns out many of them worked only in specific markets and just for a few years. These strategies picked up on short-lived trends and rules in stocks that were true only for a limited time due to certain conditions unlikely to repeat.\r\n\r\nWhen you’re investing based on factors, you’re interested in a <em>persistent strategy</em> — one that can deliver results in the future.\r\n\r\nBy figuring out the themes, characteristics, and properties common to winning investment, or <em>factors,</em> you can discover a set of rules to create higher-performing portfolios.\r\n\r\nBut how do you even try to comb through the mountains of market data over the last 100-plus years to find what works?\r\n\r\nWell, it turns out that you’re in luck! In the last few years, financial academics have been hard at work doing just that — distilling these factors into useful sets of rules that you can put to work in your portfolios today.\r\n<p class=\"article-tips remember\">Though nothing works 100 percent of the time, especially over shorter periods, factors are most effective when combined with other factors in a master strategy. This has the effect of loading the dice in your favor.</p>\r\n\r\n<h2 id=\"tab2\" ><strong>Saving time with factor investing</strong></h2>\r\nTime is money, the old saying goes, and investors since the ancient Chinese rice traders have always looked for ways to save time by streamlining and systematizing their trading and investing decision processes.\r\n\r\nWe all have busy lives, jobs to get to, kids to take to after school sports, and a million other things. A factor investing strategy can help improve your life by helping you make best use of your time and energy.\r\n\r\nJames used factor investing to save time during the COVID-19 market bottom in March of 2020. He needed an approach that identified resilient stocks and funds most likely to benefit from a market rebound, while also giving clients confidence in the historical reliability of these stocks to survive and thrive the unprecedented economic and market downturn everyone was experiencing as the world rapidly went into social distancing, quarantines, and government-mandated shutdowns.\r\n\r\nHe came up with a multifactor portfolio for new clients using the same principles in this book that was both sophisticated and easy to understand. This strategy gave them the confidence to enter the depressed stock market and stay on board for what turned out to be a profitable 18 months for investing, with many portfolios doubling in value.\r\n<h2 id=\"tab3\" ><strong>Using modern advances</strong></h2>\r\nAs investors, you always want to look for ways to take advantage of advances and breakthroughs in the investment field. Two trends that have come together to move investing forward have been computers and history; specifically, better methods of market data analysis and greatly expanded historical datasets to feed those computers.\r\n\r\nModern computers and new ways of crunching market data are at the forefront of the growing interest and advances in factor investing. Just as important is the expanding dataset as researchers and archivists have combed through old ticker tapes, micro-fiche and ledgers to complete the historical dataset of stock prices and company data; in some cases, right back to the Buttonwood Agreement that pre-dated Wall Street.\r\n\r\nWhat is the Buttonwood Agreement? It’s a single-page document that started the New York Stock Exchange 230 years ago on May 17, 1792, when 24 merchants and brokers met under a buttonwood tree and put their signatures to a set of rules and safeguards for trading. The meeting was necessary to re-establish public confidence in markets after the infamous Financial Panic of 1792 that had caused mayhem earlier that spring.\r\n\r\nInvesting options were limited back then. The only stock available was in the Bank of New York, The First Bank of the United States, some insurance companies, and Revolutionary War Bonds issued by Alexander Hamilton to help pay off the War of Independence from British rule.\r\n\r\nToday, you can also take advantage of databases, services, and perhaps even pre-packaged investment products such as funds and ETFs that attempt to apply factor methodology in a practical way to select investments based on current stock and bond metrics.\r\n\r\nLuckily, technology has made factor investing far easier and more cost effective than ever, as we detail in later chapters.\r\n\r\nThis enhanced dataset provides a richer and more complete testing ground to ferret out meaningful factors and to test existing assumptions more fully. This is an advance that you can benefit from!\r\n<h2 id=\"tab4\" ><strong>Following proven guidelines that work</strong></h2>\r\nEven a broken clock is right twice a day, and, like a coin toss, any system can come up with a winner or two from time to time. As an extreme example, a rules-based system (factor) that consisted of “sell all U.S. stocks and buy bonds” may have worked very well as a factor from September 1929 until July 1932, but this was only due to the stock market crash that kicked off the Great Depression.\r\n\r\nUsing this factor after 1932 would have been a recipe for disaster and decades of underperformance! The point here is that you’re looking for guidelines that provide a more universal advantage, and are not dependent on a specific set of historical circumstances.\r\n\r\nThe best factors you’re interested in work in many different markets, countries, and decades. They aren't just one-trick ponies that have shown results once or twice in history, perhaps by chance or due to unique circumstances. You want rules that operate more broadly and dependably.\r\n<h2 id=\"tab5\" ><strong>Following a disciplined core strategy</strong></h2>\r\nThe most successful investors have a disciplined strategy driving their success. Incorporating factors into your investing adds not just a methodology for investment selection but also discipline to portfolio activity as it helps you determine what to buy, sell, or hold, and gives you the confidence needed to participate in the long term.\r\n<h3><strong>Protecting against emotional investing</strong></h3>\r\nThe emerging field of behavioral finance says that regardless of how you design your portfolio, the major reason for your success or failure is your emotion-driven actions. In other words, if you want to be successful at investing, you have to protect against emotional investing, which results in buying high and selling low, repeatedly.\r\n\r\nThe long-running DALBAR study, which has been updated annually since the inception of the 401(k) over four decades ago, proves that this problem is widespread and damaging to wealth building. Investors lack discipline (of course it's not you, just other investors).\r\n\r\nWhat is <a href=\"https://www.dalbar.com/\" target=\"_blank\" rel=\"noopener\">DALBAR</a>? Located in Boston, DALBAR is one of the nation's leading independent research firms committed to raising the standards of excellence in the financial services industry. It compiles and analyzes mountains of data on mutual funds, life insurance, and banking products and practices. It has also been behind the nation's leading study on investor behavior for the past 28 years.\r\n\r\nOne of its most followed publications is the annual Quantitative Analysis of Investor Behavior (QUIB) Report, which measures how investors have performed with their actual investment portfolios versus how the funds they hold have performed during the same periods.\r\n\r\nYou might think that investor performance and fund performance are the same thing, but DALBAR consistently demonstrates a devastating investor performance gap due to investors shifting money among their investments (for example, from stock into more conservative bonds or cashing out at exactly the wrong times).\r\n\r\nCompounded over the years, this performance gap is devastating, costing many investors literally hundreds of thousands — or even more — in retirement dollars they could have enjoyed.\r\n\r\nFor example, <a href=\"https://www.dalbar.com/catalog/product\" target=\"_blank\" rel=\"noopener\">its 2021 study</a> shows that this performance gap jumped to a shocking 1032 basis points for 2021. 100 basis points equals one percent, so this represents a lag of 10 percent for investors versus the performance of the average fund they were investing in.\r\n\r\nObviously, despite the recovery from the 2020 COVID-19 market lows, many investors bailed (perhaps believing the recovery was too good to be true) and then got back in at higher prices in the fall, only to experience a downtrend and realize they had once again bought high without benefiting from the previous gains.\r\n\r\nIn short, DALBAR's extensive research shows that investors are their own worst enemies. The results, as shown in the chart below, are sobering and hard to dismiss as the researchers used real-time data from millions of investor-directed 401(k) accounts. DALBAR has concluded that as much as two-thirds of the market return investors should have enjoyed were squandered to emotional investing — selling into fear after downturns, and buying into euphoria after upturns.\r\n\r\n[caption id=\"attachment_295920\" align=\"alignnone\" width=\"630\"]<img class=\"size-full wp-image-295920\" src=\"https://www.dummies.com/wp-content/uploads/annualized-returns-factor-investing.jpg\" alt=\"Chart by DALBAR showing 20-year annualized returns by asset class (2001-2020)\" width=\"630\" height=\"176\" /> ©DALBAR / Source: <a href=\"https://www.maendelwealth.com/blog/rising-rates-let-the-game-come-to-you\" target=\"_blank\" rel=\"noopener\">https://www.maendelwealth.com/blog/rising-rates-let-the-game-come-to-you</a>[/caption]\r\n\r\nThe problem, of course, is that investors end up bailing near the bottom, when they've had enough pain, and buying again near the top of the market cycle, when they can't stand to miss out anymore. These mistakes get compounded over the years, and become even more damaging.\r\n\r\nThe results are similar in every annual update of the DALBAR study. In short, it turns out that most investors are doing exactly the opposite of what they need to do to build wealth. They are buying high and selling low.\r\n\r\nA factor-based approach helps you avoid becoming an emotional investor. A portfolio strategy based on factors (ideally a diversified combination of multiple factors) can provide discipline, and powerful protection against emotional investing by offering a portfolio with which an investor can feel confident riding through inevitable downturns on the way to new highs.\r\n\r\nOnly historically persistent factors can provide this sort of assurance, enabling investors to achieve their financial goals and helping to make sure their emotions don't cause them to outlive their assets.","blurb":"","authors":[{"authorId":35208,"name":"James Maendel","slug":"james-maendel","description":" <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/35208"}},{"authorId":9001,"name":"Paul Mladjenovic","slug":"paul-mladjenovic","description":" <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9001"}}],"primaryCategoryTaxonomy":{"categoryId":34300,"title":"General Investing","slug":"general-investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[{"label":"Following a systematic approach","target":"#tab1"},{"label":"Saving time with factor investing","target":"#tab2"},{"label":"Using modern advances","target":"#tab3"},{"label":"Following proven guidelines that work","target":"#tab4"},{"label":"Following a disciplined core strategy","target":"#tab5"}],"relatedArticles":{"fromBook":[{"articleId":295944,"title":"How Factor Investing Puts You in Charge","slug":"how-factor-investing-puts-you-in-charge","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295944"}},{"articleId":295850,"title":"What Is Factor Investing?","slug":"what-is-factor-investing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295850"}},{"articleId":295683,"title":"Factor Investing For Dummies Cheat Sheet","slug":"factor-investing-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295683"}}],"fromCategory":[{"articleId":295944,"title":"How Factor Investing Puts You in Charge","slug":"how-factor-investing-puts-you-in-charge","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295944"}},{"articleId":295850,"title":"What Is Factor Investing?","slug":"what-is-factor-investing","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295850"}},{"articleId":295683,"title":"Factor Investing For Dummies Cheat Sheet","slug":"factor-investing-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/295683"}},{"articleId":294706,"title":"Trading Psychology For Dummies Cheat Sheet","slug":"trading-psychology-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/294706"}},{"articleId":287556,"title":"Options Trading For Dummies Cheat Sheet","slug":"options-trading-for-dummies-cheat-sheet","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/287556"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":295572,"slug":"factor-investing-for-dummies","isbn":"9781119906742","categoryList":["business-careers-money","personal-finance","investing","general-investing"],"amazon":{"default":"https://www.amazon.com/gp/product/1119906741/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1119906741/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1119906741-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1119906741/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1119906741/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/factor-investing-for-dummies-cover-9781119906742-203x255.jpg","width":203,"height":255},"title":"Factor Investing For Dummies","testBankPinActivationLink":"","bookOutOfPrint":true,"authorsInfo":"<p><p><b><b data-author-id=\"35208\">James Maendel</b>, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b><b data-author-id=\"9001\">Paul Mladjenovic</b></b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com.</p>","authors":[{"authorId":35208,"name":"James Maendel","slug":"james-maendel","description":" <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/35208"}},{"authorId":9001,"name":"Paul Mladjenovic","slug":"paul-mladjenovic","description":" <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9001"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;general-investing&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119906742&quot;]}]\" id=\"du-slot-638a132e83602\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;general-investing&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119906742&quot;]}]\" id=\"du-slot-638a132e83cba\"></div></div>"},"articleType":{"articleType":"Articles","articleList":null,"content":null,"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Five years","lifeExpectancySetFrom":"2022-11-30T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":295921},{"headers":{"creationTime":"2022-11-21T20:23:12+00:00","modifiedTime":"2022-12-02T14:21:11+00:00","timestamp":"2022-12-02T15:01:02+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"General Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"},"slug":"general-investing","categoryId":34300}],"title":"What Is Factor Investing?","strippedTitle":"what is factor investing?","slug":"what-is-factor-investing","canonicalUrl":"","seo":{"metaDescription":"Learn about the strategy of factor investing in stocks, its advantages, and how you can do it to make profitable decisions.","noIndex":0,"noFollow":0},"content":"Factor investing is an <a href=\"https://www.dummies.com/article/business-careers-money/personal-finance/investing/investment-vehicles/stocks/the-advantages-of-factor-investing-295921/\" target=\"_blank\" rel=\"noopener\">investment portfolio general strategy</a> that favors a systematic approach using factors or “shared characteristics” of individual stocks (and other assets, such as bonds) that have a historical record of superior risk and return performance.\r\n\r\nThese factors can range from individual characteristics, such as the company’s sales (revenue indicated on the company’s income statement) or debt (total liabilities indicated on their balance sheet), to their performance in macro environments, such as inflation or economic growth.\r\n\r\nA <em>factor</em> is a trait or characteristic that can explain the performance of a given group of stocks during various market conditions.\r\n\r\nThere are two main categories of factors: style factors and macroeconomic factors.\r\n<h2 id=\"tab1\" >Style factors</h2>\r\nStyle factors take into account characteristics of the individual asset, such as its market size, value and industry/sector, volatility, and growth versus value stocks. Style factors help to explain or identify characteristics that drive that asset’s price performance in the marketplace.\r\n\r\nThese factors are also referred to as microeconomic because they are an individual security or asset that drives its performance as a singular member or participant of the overall market and economy. Style factors include value, size, quality, dividend, growth, volatility, and momentum. We'll go over a few of these here:\r\n<h3>Value factors</h3>\r\nLooking at value means typically looking at the company’s fundamentals. The <em>fundamentals</em> are the most important financial data of the company, like the company’s sales and net profits, balance sheet (assets and liabilities), and important ratios, like the price-earnings (P/E) ratio.\r\n\r\nLooking at public companies (as through their common stock) through the lens of value factors is one of the most important factors because value investing has survived and thrived ever since they were initially codified by the work of Benjamin Graham during the Great Depression years.\r\n\r\nOne of the most important reasons to embrace value as a primary factor (especially for beginning investors) is the emphasis on stocks that are undervalued, which makes them safer than other stocks.\r\n\r\n<em>Undervalued</em> means that all the key fundamental financial aspects of the company (like book value or the price-earnings ratio) generally indicate that the price of the stock is not overpriced, meaning that you will not pay an excessive stock price versus the value of the underlying company and its intrinsic worth. The reason becomes obvious in market data; overpriced stocks are more apt to decline more sharply in a correction or bear market versus reasonably priced stocks.\r\n\r\nThe bottom line is the fundamentals of a stock mean a safer bet and a better chance at long-term price appreciation.\r\n<h3>Size factor</h3>\r\nThe size of the asset, in this case, public company, is a reference to its market size based on <em>market cap</em> or <em>capitalization</em> (total number of shares outstanding times the price per share). The most common cap sizes used are small cap and large cap. If you’re seeking growth, lean toward the small-cap factor.\r\n\r\nLarge-cap assets may be safer but typically don’t exhibit the same growth or price appreciation relative to the small-cap stocks. The historical data generally bears this out.\r\n<h3>Growth factor</h3>\r\nThe growth factor highlights the measure of change in sales and earnings by the company in relation to its group (like in individual industries or sectors). Is the stock growing better than its peers? If so, this factor should be considered.\r\n\r\nAs the historical market data suggests, companies with growing sales and revenue show stronger relative stock price appreciation, since investors notice the growth and buy up the stock.\r\n<h3>Volatility factor</h3>\r\nMarket research over an extended period of time suggests that low-volatility stocks tend to earn a better return over the long term compared to high-volatility stocks. Given that, this factor will be beneficial.\r\n<p class=\"article-tips tip\">A useful indicator to look at is beta, which is listed at many popular financial websites for a given stock. The <em>beta</em> indicates how much more (or less) a given stock is volatile versus the general market (based on recent market trading data).</p>\r\nFor beta, the stock market itself is assigned a value of 1. A stock with a beta that is less than 1 is less volatile than the general stock market, while a stock with a beta greater than 1 is more volatile than the general stock market.\r\n\r\nA stock with a beta of 1.2, for example, is considered 20 percent more volatile than the general stock market. A stock with a beta of, say, .9 is 10 percent less volatile than the general stock market.\r\n\r\nA good example of a stock that has low volatility would be a large-cap public utilities company. A good example of a high-volatility stock would be a small-cap technology firm. If you’re a retiree, you would most likely benefit from this factor to ensure getting low-volatility stocks.\r\n<h2 id=\"tab2\" >Macroeconomic factors</h2>\r\nYou could compare stocks and the stock market/economy to fish in a pond. You can analyze the fish and choose great fish (using, for example, style/microeconomic factors). But you should also analyze the pond (macroeconomic factors). You could choose the greatest fish in the pond, but what if the pond is polluted? Then even the great fish will underperform (putting it mildly). Shrewd investors will find a different pond.\r\n\r\nFor investors, the U.S. economy and stock market represent the “biggest pond” on the global financial scene. So if you’re going to participate, you should understand the good, the bad, and ugly of this marketplace.\r\n<h3>Economic growth factor</h3>\r\nGross domestic product (GDP) is one of the most watched economic indicators by investors and non-investors alike. It’s a broad measure of the <em>economic output</em> (value of products and services) in a given timeframe (typically a calendar quarter or year) by a nation’s economy.\r\n\r\nWhen GDP is growing, companies (and their stocks) are doing well. In fact, when the economy is growing and doing well, the stock market tends to outperform other markets (such as the bond market). Factors tied to economy growth such as GDP offer profitable guidance for investors.\r\n\r\nGiven that, the major investing sites regularly report this and related economic data so that this factor helps investors optimize the returns in their portfolio.\r\n<h3>Inflation factor</h3>\r\nInflation is a key factor. Most folks look at <em>price inflation</em> (the rising price of consumer goods and services). However, price inflation is not a problem. It’s a symptom. Many people don’t understand the cause of inflation (including many government officials and economic policy makers unfortunately).\r\n\r\nThe cause is <em>monetary inflation</em> (the overproduction of a nation’s currency supply) that precedes the price inflation. When too much money is created and when that supply of money is chasing a finite basket of goods and services, then the price of these goods and services will rise. The goods and services didn’t become more valuable the <em>currency</em> lost value (due to overproduction).\r\n\r\nA complicating factor is the supply shortage issues during late 2021 to 2022 that augurs in cost-push inflation. When shortages occur (supply issues) and consumers contain to purchase the products in question (demand), the price inflation is further exacerbated.\r\n\r\nIn early 2021, when the federal government and the Federal Reserve were increasing the money supply (by spending trillions of dollars), this was the cue for alert investors to consider the inflation factor. This factor would have guided portfolio managers toward securities that would have outperformed in an unfolding inflationary environment.\r\n<h3>Interest rates factor</h3>\r\nIn early 2022, the Federal Reserve (America’s central bank) is (and likely will be) raising interest rates. Interest rates are essentially the price of borrowed money, and a factor on interest rates is key to making more optimal choices in your portfolio.\r\n\r\nIn general (and all things being equal), low interest rates are good for the economy while high (or rising) interest rates tend to be negative. Because so much economic activity (both business and consumer activity) is tied to credit (business loans, credit cards, home mortgages, and so on), rising interest rates tend to dampen or diminish economic activity while low or decreasing rates tend to do the opposite.\r\n\r\nGiven that, factors tied to interest rates can help you avoid stocks (and bonds) that would be harmed by rising interest rates so that your portfolio can continue to perform satisfactorily.","description":"Factor investing is an <a href=\"https://www.dummies.com/article/business-careers-money/personal-finance/investing/investment-vehicles/stocks/the-advantages-of-factor-investing-295921/\" target=\"_blank\" rel=\"noopener\">investment portfolio general strategy</a> that favors a systematic approach using factors or “shared characteristics” of individual stocks (and other assets, such as bonds) that have a historical record of superior risk and return performance.\r\n\r\nThese factors can range from individual characteristics, such as the company’s sales (revenue indicated on the company’s income statement) or debt (total liabilities indicated on their balance sheet), to their performance in macro environments, such as inflation or economic growth.\r\n\r\nA <em>factor</em> is a trait or characteristic that can explain the performance of a given group of stocks during various market conditions.\r\n\r\nThere are two main categories of factors: style factors and macroeconomic factors.\r\n<h2 id=\"tab1\" >Style factors</h2>\r\nStyle factors take into account characteristics of the individual asset, such as its market size, value and industry/sector, volatility, and growth versus value stocks. Style factors help to explain or identify characteristics that drive that asset’s price performance in the marketplace.\r\n\r\nThese factors are also referred to as microeconomic because they are an individual security or asset that drives its performance as a singular member or participant of the overall market and economy. Style factors include value, size, quality, dividend, growth, volatility, and momentum. We'll go over a few of these here:\r\n<h3>Value factors</h3>\r\nLooking at value means typically looking at the company’s fundamentals. The <em>fundamentals</em> are the most important financial data of the company, like the company’s sales and net profits, balance sheet (assets and liabilities), and important ratios, like the price-earnings (P/E) ratio.\r\n\r\nLooking at public companies (as through their common stock) through the lens of value factors is one of the most important factors because value investing has survived and thrived ever since they were initially codified by the work of Benjamin Graham during the Great Depression years.\r\n\r\nOne of the most important reasons to embrace value as a primary factor (especially for beginning investors) is the emphasis on stocks that are undervalued, which makes them safer than other stocks.\r\n\r\n<em>Undervalued</em> means that all the key fundamental financial aspects of the company (like book value or the price-earnings ratio) generally indicate that the price of the stock is not overpriced, meaning that you will not pay an excessive stock price versus the value of the underlying company and its intrinsic worth. The reason becomes obvious in market data; overpriced stocks are more apt to decline more sharply in a correction or bear market versus reasonably priced stocks.\r\n\r\nThe bottom line is the fundamentals of a stock mean a safer bet and a better chance at long-term price appreciation.\r\n<h3>Size factor</h3>\r\nThe size of the asset, in this case, public company, is a reference to its market size based on <em>market cap</em> or <em>capitalization</em> (total number of shares outstanding times the price per share). The most common cap sizes used are small cap and large cap. If you’re seeking growth, lean toward the small-cap factor.\r\n\r\nLarge-cap assets may be safer but typically don’t exhibit the same growth or price appreciation relative to the small-cap stocks. The historical data generally bears this out.\r\n<h3>Growth factor</h3>\r\nThe growth factor highlights the measure of change in sales and earnings by the company in relation to its group (like in individual industries or sectors). Is the stock growing better than its peers? If so, this factor should be considered.\r\n\r\nAs the historical market data suggests, companies with growing sales and revenue show stronger relative stock price appreciation, since investors notice the growth and buy up the stock.\r\n<h3>Volatility factor</h3>\r\nMarket research over an extended period of time suggests that low-volatility stocks tend to earn a better return over the long term compared to high-volatility stocks. Given that, this factor will be beneficial.\r\n<p class=\"article-tips tip\">A useful indicator to look at is beta, which is listed at many popular financial websites for a given stock. The <em>beta</em> indicates how much more (or less) a given stock is volatile versus the general market (based on recent market trading data).</p>\r\nFor beta, the stock market itself is assigned a value of 1. A stock with a beta that is less than 1 is less volatile than the general stock market, while a stock with a beta greater than 1 is more volatile than the general stock market.\r\n\r\nA stock with a beta of 1.2, for example, is considered 20 percent more volatile than the general stock market. A stock with a beta of, say, .9 is 10 percent less volatile than the general stock market.\r\n\r\nA good example of a stock that has low volatility would be a large-cap public utilities company. A good example of a high-volatility stock would be a small-cap technology firm. If you’re a retiree, you would most likely benefit from this factor to ensure getting low-volatility stocks.\r\n<h2 id=\"tab2\" >Macroeconomic factors</h2>\r\nYou could compare stocks and the stock market/economy to fish in a pond. You can analyze the fish and choose great fish (using, for example, style/microeconomic factors). But you should also analyze the pond (macroeconomic factors). You could choose the greatest fish in the pond, but what if the pond is polluted? Then even the great fish will underperform (putting it mildly). Shrewd investors will find a different pond.\r\n\r\nFor investors, the U.S. economy and stock market represent the “biggest pond” on the global financial scene. So if you’re going to participate, you should understand the good, the bad, and ugly of this marketplace.\r\n<h3>Economic growth factor</h3>\r\nGross domestic product (GDP) is one of the most watched economic indicators by investors and non-investors alike. It’s a broad measure of the <em>economic output</em> (value of products and services) in a given timeframe (typically a calendar quarter or year) by a nation’s economy.\r\n\r\nWhen GDP is growing, companies (and their stocks) are doing well. In fact, when the economy is growing and doing well, the stock market tends to outperform other markets (such as the bond market). Factors tied to economy growth such as GDP offer profitable guidance for investors.\r\n\r\nGiven that, the major investing sites regularly report this and related economic data so that this factor helps investors optimize the returns in their portfolio.\r\n<h3>Inflation factor</h3>\r\nInflation is a key factor. Most folks look at <em>price inflation</em> (the rising price of consumer goods and services). However, price inflation is not a problem. It’s a symptom. Many people don’t understand the cause of inflation (including many government officials and economic policy makers unfortunately).\r\n\r\nThe cause is <em>monetary inflation</em> (the overproduction of a nation’s currency supply) that precedes the price inflation. When too much money is created and when that supply of money is chasing a finite basket of goods and services, then the price of these goods and services will rise. The goods and services didn’t become more valuable the <em>currency</em> lost value (due to overproduction).\r\n\r\nA complicating factor is the supply shortage issues during late 2021 to 2022 that augurs in cost-push inflation. When shortages occur (supply issues) and consumers contain to purchase the products in question (demand), the price inflation is further exacerbated.\r\n\r\nIn early 2021, when the federal government and the Federal Reserve were increasing the money supply (by spending trillions of dollars), this was the cue for alert investors to consider the inflation factor. This factor would have guided portfolio managers toward securities that would have outperformed in an unfolding inflationary environment.\r\n<h3>Interest rates factor</h3>\r\nIn early 2022, the Federal Reserve (America’s central bank) is (and likely will be) raising interest rates. Interest rates are essentially the price of borrowed money, and a factor on interest rates is key to making more optimal choices in your portfolio.\r\n\r\nIn general (and all things being equal), low interest rates are good for the economy while high (or rising) interest rates tend to be negative. Because so much economic activity (both business and consumer activity) is tied to credit (business loans, credit cards, home mortgages, and so on), rising interest rates tend to dampen or diminish economic activity while low or decreasing rates tend to do the opposite.\r\n\r\nGiven that, factors tied to interest rates can help you avoid stocks (and bonds) that would be harmed by rising interest rates so that your portfolio can continue to perform satisfactorily.","blurb":"","authors":[{"authorId":35208,"name":"James Maendel","slug":"james-maendel","description":" <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/35208"}},{"authorId":9001,"name":"Paul Mladjenovic","slug":"paul-mladjenovic","description":" <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. 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He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/35208"}},{"authorId":9001,"name":"Paul Mladjenovic","slug":"paul-mladjenovic","description":" <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9001"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;general-investing&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119906742&quot;]}]\" id=\"du-slot-636d90bf1d992\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;general-investing&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119906742&quot;]}]\" id=\"du-slot-636d90bf1e7e2\"></div></div>"},"articleType":{"articleType":"Cheat Sheet","articleList":[{"articleId":0,"title":"","slug":null,"categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/"}}],"content":[{"title":"Knowing your adversary","thumb":null,"image":null,"content":"<p>The single most important factor that will determine your portfolio returns and success as an investor is between your ears. It&#8217;s your temperament!</p>\n<p>If your past investing ventures felt like living in the movie &#8220;Groundhog Day,&#8221; where, despite your best efforts, things just keep repeating themselves, it&#8217;s likely that your number one obstacle to success is you, and more specifically, your brain.</p>\n<p>So why do so many smart investors shoot themselves in the foot repeatedly?</p>\n<p>An <em>amygdala hijack</em> refers to the flight-or-fight response that takes place when you are faced with a perceived threat. It&#8217;s the &#8220;cave-dweller&#8221; part of our brains controlling our response, cycle after market cycle.</p>\n<p>One of the fundamental assumptions in modern portfolio theory is that investors are rational in their decision making. Asset allocation, used by most modern advisors, is based on modern portfolio theory.</p>\n<p>However, what we know now is that the assumption of rationality underlying the theory is not valid: People are not rational in their decision making.</p>\n<p>What this means is that there will always be mispricings in the market, and that a lot of market movement is and will continue to be irrational.</p>\n<p>Panicking on market drops is for amateurs. Your time is better spent creating and sticking with a good factor portfolio.</p>\n"},{"title":"Get professional help if you need it","thumb":null,"image":null,"content":"<p>Behavioral investing is part of behavioral finance and one of the most important developments of the last decade or so.</p>\n<p>The emerging behavioral finance field is based on the recognition that investor behavior is perhaps more important than portfolio design and most other metrics. After all, the best portfolio in the world cannot perform if investors insist on selling (in fear) every time it dips, and buying more (greed) every time it goes up.</p>\n<p>Behavioral finance recognizes that saving and investing behavior accounts for the lion&#8217;s share (87 percent) of portfolio growth (the other 13 percent of portfolio growth is market timing, asset allocation, and investment selection) and equips advisors with a systematic, sophisticated, approach to help clients manage their emotions and their decision making and investing behavior.</p>\n<p>The BFA professional designation shown in the figure equips advisors with a systematic, sophisticated approach to help clients manage their emotions, decision making, and investor behavior to achieve improved outcomes.</p>\n<p class=\"article-tips remember\">Mastering your emotions is a key part of investing success. If you need help, consider hiring a good financial advisor who also carries the BFA professional designation.</p>\n"},{"title":"Automating your investing","thumb":null,"image":null,"content":"<p>One powerful and often overlooked way to control negative investment behavior is to take advantage of features that allow you to put things on autopilot.</p>\n<p>Once you&#8217;ve decided on a portfolio (using your factor knowledge), you can automate your additions.</p>\n<p>Most brokerage platforms offer the ability to sweep an amount of money (say $500 per month) in from your checking account and to automatically purchase the exchange-traded funds (ETFs) or funds you&#8217;ve chosen, in the proportion you&#8217;ve decided on.</p>\n<p>Soon, adding to your wealth becomes a good habit for you, just like paying your bills on time, and you’re taking advantage of dollar cost averaging as well to obtain better prices over time.</p>\n<p>Another subtle, but very powerful, aspect of automatic contributions is that you train yourself to pay yourself first. You make wealth building a part of life that comes before travel, new toys, and all the other things you might be tempted to spend your money on. You never think of that money as discretionary income because it is already spoken for.</p>\n<p>Here are a few of the online brokerage platforms that offer automated contributions:</p>\n<ul>\n<li>Ameritrade</li>\n<li>Etrade</li>\n<li>IBKR (Interactive Brokers)</li>\n<li>Fidelity</li>\n<li>TradeStation</li>\n<li>Ally</li>\n<li>SoFi</li>\n<li>Robin Hood</li>\n<li>Charles Schwab</li>\n<li>Webull</li>\n<li>Firstrade</li>\n</ul>\n<p>As always, be sure to do your own due diligence to inquire about any fees or minimums that may exist.</p>\n"},{"title":"Investor behavior reminders from great investors","thumb":null,"image":null,"content":"<p>Legendary investors over the last century have all identified behavioral investing as absolutely crucial to their success.</p>\n<p>Studies show that many of them were using their own versions of factor investing, but regardless of which methodology they were using, all of them had mental reminders to help keep them on the path to success.</p>\n<p>These pithy sayings or aphorisms are easy to remember and contain essential truths about investor success and behavior.</p>\n<p>Below are a few of them from Warren Buffett. You can easily find other sayings from famous investors, like John Templeton and John &#8220;Jack&#8221; Bogle, on the Internet.</p>\n<p>Famous quotes from Warren Buffet:</p>\n<ul>\n<li>&#8220;I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.&#8221;</li>\n<li>&#8220;Success in investing doesn&#8217;t correlate with IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people in trouble investing.&#8221;</li>\n<li>&#8220;The New York Stock Exchange is the only store in the world where consumers sell stuff when it goes on sale.&#8221;</li>\n</ul>\n"}],"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Five years","lifeExpectancySetFrom":"2022-11-10T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":295683},{"headers":{"creationTime":"2016-03-27T16:50:17+00:00","modifiedTime":"2022-11-08T17:38:04+00:00","timestamp":"2022-11-08T18:01:03+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"Investment Vehicles","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34290"},"slug":"investment-vehicles","categoryId":34290},{"name":"Stocks","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34298"},"slug":"stocks","categoryId":34298}],"title":"Stock Investing For Dummies Cheat Sheet","strippedTitle":"stock investing for dummies cheat sheet","slug":"stock-investing-for-dummies-cheat-sheet","canonicalUrl":"","seo":{"metaDescription":"Make confident stock investments, familiarize yourself with online resources to help evaluate stocks, and find ways to protect your money.","noIndex":0,"noFollow":0},"content":"<figure style=\"margin: 0;\"><figcaption style=\"margin-bottom: 10px;\">Listen to the article:</figcaption><audio src=\"/wp-content/uploads/stock-investing-for-dummies-cheat-sheet.mp3\" controls=\"controls\"><a href=\"/wp-content/uploads/stock-investing-for-dummies-cheat-sheet.mp3\">Download audio</a></audio></figure>\r\n\r\n\r\nYou're investing in stocks — good for you! To make the most of your money and your choices, educate yourself on how to make stock investments confidently and intelligently, familiarize yourself with the online resources available to help you evaluate stocks, and find ways to protect the money you earn. Also, be sure to do your homework before you invest in any <a href=\"https://www.dummies.com/personal-finance/investing/stocks-trading/company-data-every-stock-investor-should-examine/\" target=\"_blank\" rel=\"noopener\">company's stock</a>.\r\n\r\n[caption id=\"attachment_270029\" align=\"alignnone\" width=\"556\"]<img class=\"size-full wp-image-270029\" src=\"https://www.dummies.com/wp-content/uploads/stock-investing.jpg\" alt=\"stock investing\" width=\"556\" height=\"418\" /> © shutter_o/Shutterstock.com[/caption]","description":"<figure style=\"margin: 0;\"><figcaption style=\"margin-bottom: 10px;\">Listen to the article:</figcaption><audio src=\"/wp-content/uploads/stock-investing-for-dummies-cheat-sheet.mp3\" controls=\"controls\"><a href=\"/wp-content/uploads/stock-investing-for-dummies-cheat-sheet.mp3\">Download audio</a></audio></figure>\r\n\r\n\r\nYou're investing in stocks — good for you! To make the most of your money and your choices, educate yourself on how to make stock investments confidently and intelligently, familiarize yourself with the online resources available to help you evaluate stocks, and find ways to protect the money you earn. Also, be sure to do your homework before you invest in any <a href=\"https://www.dummies.com/personal-finance/investing/stocks-trading/company-data-every-stock-investor-should-examine/\" target=\"_blank\" rel=\"noopener\">company's stock</a>.\r\n\r\n[caption id=\"attachment_270029\" align=\"alignnone\" width=\"556\"]<img class=\"size-full wp-image-270029\" src=\"https://www.dummies.com/wp-content/uploads/stock-investing.jpg\" alt=\"stock investing\" width=\"556\" height=\"418\" /> © shutter_o/Shutterstock.com[/caption]","blurb":"","authors":[{"authorId":9001,"name":"Paul Mladjenovic","slug":"paul-mladjenovic","description":" <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9001"}}],"primaryCategoryTaxonomy":{"categoryId":34298,"title":"Stocks","slug":"stocks","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34298"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[{"articleId":270748,"title":"The Tax Treatment of Different Investments","slug":"the-tax-treatment-of-different-investments","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/270748"}},{"articleId":270740,"title":"10 Investing Pitfalls and Challenges for 2020–2030","slug":"10-investing-pitfalls-and-challenges-for-2020-2030","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/270740"}},{"articleId":270718,"title":"The Yahoo! Finance Stock Screening Tool","slug":"the-yahoo-finance-stock-screening-tool","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/270718"}},{"articleId":221015,"title":"10 Ways to Profit in a Bear Market","slug":"10-ways-profit-bear-market","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/221015"}},{"articleId":220996,"title":"How to Use an ETF Screening Tool","slug":"use-etf-screening-tool","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/220996"}}],"fromCategory":[{"articleId":283116,"title":"10 Reasons Not to Invest in Marijuana Stocks","slug":"10-reasons-not-to-invest-in-marijuana-stocks","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283116"}},{"articleId":283111,"title":"11 Criteria for Choosing a Cannabis Investment","slug":"11-criteria-for-choosing-a-cannabis-investment","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283111"}},{"articleId":283105,"title":"Cannabis Investments: Risks Inherent in Momentum Investing","slug":"cannabis-investments-risks-inherent-in-momentum-investing","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283105"}},{"articleId":283098,"title":"Investing in Cannabis: Spotting Opportunities to Buy or Sell","slug":"investing-in-cannabis-spotting-opportunities-to-buy-or-sell","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283098"}},{"articleId":283089,"title":"Investing in Cannabis: The Bid-Ask Spread","slug":"investing-in-cannabis-the-bid-ask-spread","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/283089"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":282608,"slug":"stock-investing-for-dummies-6th-edition","isbn":"9781119660767","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"amazon":{"default":"https://www.amazon.com/gp/product/1119660769/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1119660769/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1119660769-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1119660769/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1119660769/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/stock-investing-for-dummies-6th-edition-cover-9781119660767-203x255.jpg","width":203,"height":255},"title":"Stock Investing For Dummies","testBankPinActivationLink":"","bookOutOfPrint":true,"authorsInfo":"<p><p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b><b data-author-id=\"9001\">Paul Mladjenovic</b></b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com.</p>","authors":[{"authorId":9001,"name":"Paul Mladjenovic","slug":"paul-mladjenovic","description":" <p><b>James Maendel, BFA, AAMS, AIF, DACFP, </b>founded Maendel Wealth, an investment advisory firm. He has won the Five Star Wealth Management award for multiple years. <b>Paul Mladjenovic</b> is a national speaker, educator, author of <i>Stock Investing For Dummies, Currency Trading For Dummies</i> and other Dummies titles and runs RavingCapitalist.com. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9001"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;,&quot;stocks&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119660767&quot;]}]\" id=\"du-slot-636a995f179e9\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{&quot;key&quot;:&quot;cat&quot;,&quot;values&quot;:[&quot;business-careers-money&quot;,&quot;personal-finance&quot;,&quot;investing&quot;,&quot;investment-vehicles&quot;,&quot;stocks&quot;]},{&quot;key&quot;:&quot;isbn&quot;,&quot;values&quot;:[&quot;9781119660767&quot;]}]\" id=\"du-slot-636a995f1818d\"></div></div>"},"articleType":{"articleType":"Cheat Sheet","articleList":[{"articleId":170841,"title":"The 10 Most Important Points about Stock Investing","slug":"the-10-most-important-points-about-stock-investing","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/170841"}},{"articleId":170852,"title":"Checking Important Company Fundamentals before Investing in a Stock","slug":"checking-important-company-fundamentals-before-investing-in-a-stock","categoryList":["business-careers-money","personal-finance","investing","investment-vehicles","stocks"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/170852"}},{"articleId":170851,"title":"Financial Measures to Consider before Investing in a Stock","slug":"financial-measures-to-consider-before-investing-in-a-stock","categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/170851"}},{"articleId":170850,"title":"A Mandatory Reading List for Stock Investors","slug":"a-mandatory-reading-list-for-stock-investors","categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/170850"}},{"articleId":170845,"title":"Internet Resources for Stock Investing","slug":"internet-resources-for-stock-investing","categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/170845"}},{"articleId":170842,"title":"Reassuring Points for Nervous Stock Investors","slug":"reassuring-points-for-nervous-stock-investors","categoryList":[],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/170842"}}],"content":[{"title":"The 10 most important points about stock investing","thumb":null,"image":null,"content":"<p>If you&#8217;re committed to investing in stocks, keep the following points in mind as you make your choices and reap your rewards. After all, stock investing is fun and frightening, sane and crazy-making, complicated and simple — and you may need reminders to stay focused.</p>\n<ol class=\"level-one\">\n<li>\n<p class=\"first-para\">You&#8217;re not buying a stock; you&#8217;re buying a company.</p>\n</li>\n<li>\n<p class=\"first-para\">The primary reason you invest in a stock is because the company is making a profit and you want to participate in its long-term success.</p>\n</li>\n<li>\n<p class=\"first-para\">If you buy a stock when the company isn&#8217;t making a profit, you&#8217;re not investing — you&#8217;re <a href=\"https://www.dummies.com/article/business-careers-money/personal-finance/investing/investment-vehicles/stocks/the-differences-between-investing-trading-and-speculating-in-stock-168303/\" target=\"_blank\" rel=\"noopener\">speculating</a>.</p>\n</li>\n<li>\n<p class=\"first-para\">A stock (or stocks in general) should never be 100 percent of your assets.</p>\n</li>\n<li>\n<p class=\"first-para\">In some cases (such as a severe bear market, also known as a market with prolonged price declines), stocks aren&#8217;t a good investment at all. A bear market, however, may offer buying opportunities for profitable companies.</p>\n</li>\n<li>\n<p class=\"first-para\">A stock&#8217;s price is dependent on the company, which in turn is dependent on its environment, which includes its customer base, its industry, the general economy, and the political climate.</p>\n</li>\n<li>\n<p class=\"first-para\">Your common sense and logic can be just as important in choosing a good stock as the advice of any investment expert.</p>\n</li>\n<li>\n<p class=\"first-para\">Always have well-reasoned answers to questions such as &#8220;Why are you investing in stocks?&#8221; and &#8220;Why are you investing in a particular stock?&#8221;</p>\n</li>\n<li>\n<p class=\"first-para\">If you have no idea about the prospects of a company (and sometimes even if you think you do), use stop-loss orders or <a href=\"https://www.dummies.com/article/business-careers-money/personal-finance/investing/investment-vehicles/stocks/when-to-use-trailing-stops-for-your-investments-in-the-stock-market-168715/\" target=\"_blank\" rel=\"noopener\">trailing stops</a>.</p>\n</li>\n<li>\n<p class=\"first-para\">Even if your philosophy is to buy and hold stocks for the long term, continue to monitor your stocks and consider selling them if they&#8217;re not appreciating or if general economic conditions have changed.</p>\n</li>\n</ol>\n"},{"title":"Checking important company fundamentals before investing in a stock","thumb":null,"image":null,"content":"<p>Don&#8217;t underestimate the importance of a little detective work! Before you buy stocks, do some research on the companies you&#8217;re thinking of investing in. Pay attention to the following key components when you look at a company&#8217;s main financial statements (the <a href=\"https://www.dummies.com/article/business-careers-money/personal-finance/investing/investment-vehicles/stocks/introduction-to-income-statements-for-stock-investors-168795/\" target=\"_blank\" rel=\"noopener\">income statement</a> and the <a href=\"https://www.dummies.com/article/business-careers-money/personal-finance/investing/investment-vehicles/stocks/introduction-to-balance-sheets-for-stock-investors-168754/\" target=\"_blank\" rel=\"noopener\">balance sheet</a>):</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Earnings:</b> This number should be at least 10 percent higher than the year before.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Sales:</b> This number should be higher than the year before.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Debt: </b>This number should be lower than or about the same as the year before. It should also be lower than the company&#8217;s assets.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Equity:</b> This number should be higher than the year before.</p>\n</li>\n</ul>\n"},{"title":"Financial measures to consider before investing in a stock","thumb":null,"image":null,"content":"<p>You&#8217;re thinking of buying stock in a company, but before you invest your hard-earned money in hopes of a profitable return, check out some financial ratios that can help indicate whether the company is on sound financial footing. Here are key measures to consider:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><b>Price-to-earnings ratio (P/E):</b> For large cap stocks, the ratio should be under 20. For all stocks (including growth, small cap, and speculative issues), it shouldn&#8217;t exceed 40.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Price-to-sales ratio (PSR):</b> The PSR should be as close to 1 as possible.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Return on equity (ROE):</b> ROE should be going up by at least 10 percent per year.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Earnings growth:</b> Earnings should be at least 10 percent higher than the year before. This rate should be maintained over several years.</p>\n</li>\n<li>\n<p class=\"first-para\"><b>Debt-to-asset ratio:</b> Debt should be half of assets or less.</p>\n</li>\n</ul>\n"},{"title":"A mandatory reading list for stock investors","thumb":null,"image":null,"content":"<p>Before buying stock in a company, you need to do a little light — or not-so-light — reading. Investing in stock without checking out the company beforehand is a recipe for disaster. So before you plunk down your money, be sure to read the following:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\">The company&#8217;s annual report</p>\n</li>\n<li>\n<p class=\"first-para\">The 10K and 10Q reports that the company files with the SEC</p>\n</li>\n<li>\n<p class=\"first-para\"><i>Standard &amp; Poor&#8217;</i><i>s Stock Reports</i></p>\n</li>\n<li>\n<p class=\"first-para\"><i>Value Line Investment Survey</i></p>\n</li>\n<li>\n<p class=\"first-para\"><i>The Wall Street Journal</i> and/or <i>Investor&#8217;</i><i>s Business Daily</i></p>\n</li>\n<li>\n<p class=\"first-para\">Reputable stock investing websites</p>\n</li>\n</ul>\n"},{"title":"Internet resources for stock investing","thumb":null,"image":null,"content":"<p>With the tools available on the internet, you have no excuse for not researching any and every potential stock investment. The following list of resources links you to some of the best financial websites around. Look at what they have to say about a company or an investment before you take the plunge.</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\"><a href=\"http://www.bloomberg.com\" target=\"_blank\" rel=\"noopener\">Bloomberg</a></p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.financialsense.com\" target=\"_blank\" rel=\"noopener\">Financial Sense</a></p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.forbes.com\" target=\"_blank\" rel=\"noopener\">Forbes</a></p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.kingworldnews.com\" target=\"_blank\" rel=\"noopener\">King World News</a></p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.marketwatch.com\" target=\"_blank\" rel=\"noopener\">MarketWatch</a></p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.mises.org\" target=\"_blank\" rel=\"noopener\">The Ludwig von Mises Institute</a></p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.nasdaq.com\" target=\"_blank\" rel=\"noopener\">Nasdaq</a></p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.sec.gov\" target=\"_blank\" rel=\"noopener\">The U.S. Securities and Exchange Commission</a></p>\n</li>\n<li>\n<p class=\"first-para\"><a href=\"http://www.finance.yahoo.com\" target=\"_blank\" rel=\"noopener\">Yahoo! Finance</a></p>\n</li>\n</ul>\n"},{"title":"Reassuring points for nervous stock investors","thumb":null,"image":null,"content":"<p>With how crazy and volatile the world looks sometimes, it&#8217;s important to note that prudent investing isn&#8217;t just about what you invest <em>in</em> but also <em>how</em> you invest. If you want to build long-term wealth through stock investing and still be able to sleep at night, consider these points:</p>\n<ul class=\"level-one\">\n<li>\n<p class=\"first-para\">Invest in stocks of profitable companies that sell goods and services that a growing number of people want. Your stocks will zigzag upward.</p>\n</li>\n<li>\n<p class=\"first-para\">As long as you invest in stocks and exchange-traded funds (ETFs) with human &#8220;needs&#8221; (rather than &#8220;wants&#8221;) in mind, your long-term investing success will be more assured.</p>\n</li>\n<li>\n<p class=\"first-para\">If you keep your money diversified broadly across stocks, ETFs, mutual funds, and hard assets (such as real estate and precious metals) and keep adequate cash in the bank, you&#8217;ll be much safer in the long run.</p>\n</li>\n<li>\n<p class=\"first-para\">Keeping informed every day about your portfolio, the financial markets, and the general economy will keep you from the fear and anxiety that come from the unknown and the surprises that are inevitable.</p>\n</li>\n<li>\n<p class=\"first-para\">Being aware of investing tools and using them regularly (such as stop-loss orders and put options) gives you more control against the downside and more peace of mind.</p>\n</li>\n<li>\n<p class=\"first-para\">Keep a tight control on your debt and finances. In turn, this practice will ease the pressure to invest aggressively with a short-term focus and help you focus more on the longer term instead.</p>\n</li>\n</ul>\n"}],"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Six months","lifeExpectancySetFrom":"2021-06-29T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":208092},{"headers":{"creationTime":"2022-08-15T20:10:19+00:00","modifiedTime":"2022-10-21T15:54:25+00:00","timestamp":"2022-10-21T18:01:03+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"General Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34300"},"slug":"general-investing","categoryId":34300}],"title":"Trading Psychology For Dummies Cheat Sheet","strippedTitle":"trading psychology for dummies cheat sheet","slug":"trading-psychology-for-dummies-cheat-sheet","canonicalUrl":"","seo":{"metaDescription":"Are you surprised that it's so hard to consistently earn money on the stock exchange? The explanation is as simple as it is sobering: It's because we are all hu","noIndex":0,"noFollow":0},"content":"Are you surprised that it's so hard to consistently earn money on the stock exchange? The explanation is as simple as it is sobering: It's because we are all human beings, with all the associated genetic dispositions that come with that fact.\r\n\r\nThe neural structure of the human brain is the result of our evolutionary development. Your thought and behavior patterns, such as the deep-seated fight-or-flight response, continue to influence your decisions today on the financial markets.\r\n\r\nYour nature is not particularly well-suited to trading, but you can learn to do it. The human brain is capable of change and development. You can learn the mental prerequisites for brain-compatible trading. With the right mindset, you can recognize and avoid errors before they occur.\r\n\r\nThe innovative discoveries of modern neurofinance research will lead the way to success factors for brain-compatible and, therefore, successful trading.","description":"Are you surprised that it's so hard to consistently earn money on the stock exchange? The explanation is as simple as it is sobering: It's because we are all human beings, with all the associated genetic dispositions that come with that fact.\r\n\r\nThe neural structure of the human brain is the result of our evolutionary development. Your thought and behavior patterns, such as the deep-seated fight-or-flight response, continue to influence your decisions today on the financial markets.\r\n\r\nYour nature is not particularly well-suited to trading, but you can learn to do it. The human brain is capable of change and development. You can learn the mental prerequisites for brain-compatible trading. With the right mindset, you can recognize and avoid errors before they occur.\r\n\r\nThe innovative discoveries of modern neurofinance research will lead the way to success factors for brain-compatible and, therefore, successful trading.","blurb":"","authors":[{"authorId":35166,"name":"Roland Ullrich","slug":"roland-ullrich","description":" <p><b>Roland Ullrich </b>has worked for 20 years at investment banks in Frankfurt, London, and New York, including five years on Wall Street. For twelve years now, he has been coaching professional and private traders. 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A demo account makes it easier for you to test your strategies. With paper trading, you can train the sequences and processes you&#8217;ve come up with until you can automatically recall them.</p>\n<p>The advantages of having smooth trading processes and fixed rules in trading are clear; they prevent poor decision making caused by emotional responses. Along the way, you&#8217;ll learn pattern identification techniques. On the one hand, there are market and price patterns to learn; on the other hand, there are emotional thought and behavior patterns you need to identify.</p>\n<p>Some goals to shoot for:</p>\n<ul>\n<li>You&#8217;ve learned to improve your opportunities for profit while limiting your risks of loss.</li>\n<li>You&#8217;ve set up your trading processes and systematized your trading. You act solely according to your tested and proven strategies.</li>\n<li>You focus on the profits and goals you want to achieve and have defined a profit target for each trade.</li>\n<li>You&#8217;ve truly accepted losses and see them as a learning opportunity. You consistently limit your losses with protective stops.</li>\n</ul>\n"},{"title":"Your trader personality","thumb":null,"image":null,"content":"<p>You have many exercises and techniques available to you that you can use to develop your personality as a trader as well as help you act on the markets in an emotionally sovereign, strong-minded way.</p>\n<p>One important technical and psychological component of this process is keeping a trading journal. It’s the key to your personal development. You&#8217;ll learn to recognize and solve psychological patterns. With all this knowledge, you&#8217;ll find a trading style that suits your personality.</p>\n<p>A further important component involves self-coaching techniques. All these exercises have as their goal the desire to provide you with mental strategies to deal with losses, stress, and fear in a healthier way. Goals to shoot for:</p>\n<ul>\n<li>You have a good idea what your character traits are and where your skills lie. You have also used simulations to determine a trading style appropriate for you.</li>\n<li>You use your trading journal to analyze mistakes, to engage in some self-reflection, and for personal and professional development.</li>\n<li>You only trade when you are in an emotionally balanced state.</li>\n</ul>\n"},{"title":"Decision-making processes in trading","thumb":null,"image":null,"content":"<p>It is not easy to make clever and well thought-out decisions when trading. It is important that you learn how to deal with unconscious decision-making processes and figure out how you could better manage how susceptible you are to failure.</p>\n<p>When you have understood the evolutionary development of your brain, you can avoid irrational thought and behavior patterns at an early stage. Experience shows that most traders inherently act irrationally and in a biased way.</p>\n<p>Behavioral finance research provides some exciting discoveries in this field. Systematic misjudgments, biases, and a pronounced herd mentality are some of the grave consequences of submitting to such patterns.</p>\n"}],"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":"","sponsorEbookTitle":"","sponsorEbookLink":"","sponsorEbookImage":{"src":null,"width":0,"height":0}},"primaryLearningPath":"Advance","lifeExpectancy":"Two years","lifeExpectancySetFrom":"2022-08-15T00:00:00+00:00","dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":294706},{"headers":{"creationTime":"2016-03-26T07:23:52+00:00","modifiedTime":"2022-10-06T15:48:23+00:00","timestamp":"2022-10-06T18:01:03+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Personal Finance","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34273"},"slug":"personal-finance","categoryId":34273},{"name":"Investing","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34288"},"slug":"investing","categoryId":34288},{"name":"Investment Vehicles","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34290"},"slug":"investment-vehicles","categoryId":34290},{"name":"Commodities","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34292"},"slug":"commodities","categoryId":34292}],"title":"A Brief History of the Chicago Mercantile Exchange","strippedTitle":"a brief history of the chicago mercantile exchange","slug":"introducing-two-major-commodities-exchanges-chicago-board-of-trade-and-chicago-mercantile-exchange","canonicalUrl":"","seo":{"metaDescription":"Learn about the history of the Chicago Mercantile Exchange, including its merger with the Chicago Board of Trade in 2007.","noIndex":0,"noFollow":0},"content":"Established in 1848, the Chicago Board of Trade (CBOT) used to be the oldest commodity exchange in the world. The CBOT was the go-to exchange for grains and other agricultural products, such as oats, ethanol, and rice. The exchange also offered several metals contracts targeted at individual investors, including the mini gold and mini silver contracts.\r\n\r\nIn 2007, the Chicago Mercantile Exchange (CME) merged with the CBOT as part of a great consolidation wave. CME rolled up the CBOT's popular grain contracts and now offers them on its electronic platform. Many traders still refer to some of these contracts as CBOT grains.\r\n\r\nCME is the largest and most liquid futures exchange in the world. The CME has the heaviest trading activity — and open interest — of any exchange, partly because of the depth of its products offerings. Besides agricultural commodities, it trades economic derivatives (contracts that track economic data such as U.S. quarterly GDP and nonfarm payrolls), foreign currencies (it offers a broad currency selection, ranging from the Hungarian forint to the South Korean won), interest rates (including the London Inter Bank Offered Rate, the LIBOR), and even weather derivatives (contracts that track weather patterns in various regions of the world).\r\n<p class=\"Remember\">Because of its broad products listing, the CME is perhaps the most versatile of the commodity exchanges. In addition, the CME was one of the first exchanges to launch an electronic trading platform, the CME Globex, which became an instant hit with traders. It now accounts for more than 60 percent of the exchange's total volume. In 2006, the New York Mercantile Exchange (NYMEX) entered into an agreement with the CME to trade its marquee energy and metals contracts on <a href=\"https://www.cmegroup.com/globex.html\" target=\"_blank\" rel=\"noopener\">Globex</a>, an electronic trading system.</p>\r\nIn 2008, the CME went on a series of acquisitions and purchased the NYMEX and COMEX. The CME is also the first exchange to go public. Investors greeted the initial public offering with enthusiasm, raising the stock from $40 in 2003 to more than $500 in 2006. For more on the CME, check out its <a href=\"https://www.cmegroup.com/\" target=\"_blank\" rel=\"noopener\">website</a>, which also includes helpful tutorials on all its products.","description":"Established in 1848, the Chicago Board of Trade (CBOT) used to be the oldest commodity exchange in the world. The CBOT was the go-to exchange for grains and other agricultural products, such as oats, ethanol, and rice. 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He helped launch a year&#45;round Arabic department at Middlebury College in Vermont, expanding upon the pre&#45;existing, well&#45;regarded Arabic Summer Program. He also designs, structures, and teaches beginner, intermediate, and advanced courses through the ABC Language Exchange Program in New York. 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A world-renowned market commentator, he has appeared on media in the US, the UK, France, the United Arab Emirates, and Brazil. </p>","authors":[{"authorId":9022,"name":"Amine Bouchentouf","slug":"amine-bouchentouf","description":" <p><b>Amine Bouchentouf</b> is a native Arabic speaker from Morocco. He helped launch a year&#45;round Arabic department at Middlebury College in Vermont, expanding upon the pre&#45;existing, well&#45;regarded Arabic Summer Program. He also designs, structures, and teaches beginner, intermediate, and advanced courses through the ABC Language Exchange Program in New York. 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1,558 results
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Funds Hedge Funds For Dummies Cheat Sheet

Cheat Sheet / Updated 01-06-2023

Hedge funds use pooled funds to focus on high-risk, high-return investments, often with a focus on shorting — so you can earn profit even when stocks fall.

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Real Estate Real Estate Investing All-in-One For Dummies Cheat Sheet

Cheat Sheet / Updated 12-12-2022

Successful real estate investing requires smart decisions. To start investing in real estate quickly and easily, ask a few important questions, discover different ways to invest in residential property, and build an effective real estate team.

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General Investing DeFi For Dummies Cheat Sheet

Cheat Sheet / Updated 12-08-2022

The nascent world of modern decentralized finance (DeFi) has grown rapidly since the advent of Bitcoin in 2009. Read on for helpful tips on how to navigate this exciting new realm.

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General Investing How Factor Investing Puts You in Charge

Article / Updated 12-02-2022

It may not be obvious to many people how disruptive and game-changing factor investing is to the long legacy of hot shot money managers that are to Wall Street what celebrities are to Hollywood. You see, by isolating and identifying key characteristics that define outperforming investments, factor investing puts you on the same elevation as the professional money manager, giving access to a selection process once attributed to managers’ exclusive stock-picking prowess. This holds out the promise of market-beating returns without having to pay high fund manager fees. The entire field of factor research has been a giant pain in the backside for overpriced money managers, even ones who have had market beating runs. In previous decades, a successful fund manager was simply assumed to be performing due to his stock-picking expertise, and many assumed almost god-like status. Bookish academics have inadvertently undermined these market legends by demonstrating that, with very few exceptions, winning stocks shared key factors in common and these factors could be used in advance to pick a winning portfolio. In fact: Currently, factor models can explain up to 95 percent of the differences between active managers, an attribute formerly ascribed mostly to manager skill. Factor investing offers the potential to achieve market beating returns without high manager fees, saving you money! Factor investing put the exclusive tools of professional money managers at your fingertips, but to work, you need to use them efficiently and with discipline. Factor-based (or smart beta) strategies are gaining popularity and market share, competing with index funds (passive returns), and traditional manager (active) returns, as shown in the figure below. Navigating the Factor Jungle More than 300 factors have been discovered in recent years, but not all pass the feasibility test. Here’s how you define a good factor: Did it outperform (make money!) in the past? Will it make money (net of costs) in the future? Why does it work? (The answer to why helps you answer whether it will make you money, and also whether the effect might be already duplicated by another factor that already contains the elements of another factor.) As factor investing gains popularity, it becomes even more important to do your own research and answer these three questions. You would think the academic spotlight now aimed at this field would make things clearer and better defined, and in many ways it is. What surprises new investors is what John Cochrane of the University of Chicago warned is becoming a zoo of factors. Factors are becoming so numerous and exotic that investors are confused by the sheer proliferation of discoveries (one hedge fund claims to use over 80 different factors in its stock pickings!) Keep your strategy simple and focus on the proven factors, and the stocks, mutual funds, and exchange-traded funds (ETFs) that incorporate them. Avoiding the Factor Zoo So why are there so many factors to choose from? There are many reasons, but most of them break down to one of the following: A newly discovered factor works because of attributes that are already integral parts of an existing factor. Or, the factor is really a phantom result of poor statistical analysis and/or outdated or incomplete historical stock price databases. Answering the three questions above helps you determine whether a factor includes the right attributes. Avoiding supercomputer factors Supercomputers crunching numbers can be both a blessing and a curse. The details are beyond the scope of this book, but if you're interested it's worth reading more of what professor Cochrane has written about this. In short, the dangers of data mining and selection bias can cause very smart people to come up with powerful factors that aren't very profitable: Data mining: The process of analyzing dense volumes of data to find patterns, discover trends, and gain insight into how that data can be used. Selection bias/survivorship bias: Caused by choosing non-random data for statistical analysis; for instance, back testing a factor's historical performance against the pool of all existing small capitalization stocks inadvertently eliminates just as many stocks that are no longer trading as they've gone bankrupt or merged. For example, the chart below shows what percentage of stocks that were trading in the past are now delisted versus what percentage are still actively trading. Clearly, any factor would have to have outperformed in the real world that included these defunct stocks and not just when run against a database of currently existing stocks. Seems obvious in retrospect, but many factor discoveries have proven to be based on incomplete or biased databases. Computers are only as good as the data you feed them. A huge number of factors that seem to work on historical data models do not pan out in the real world for various reasons. These factors are the product of powerful computers searching through enough data to find a situation where a new factor looks good by sheer accident and randomness. Of course, you want to avoid these factors because they don’t have the predictive power for the future and won’t bring you success in the future. The risk of using a factor from the factor zoo isn’t just underperformance, but also the trading and management fees it costs you to carry it out. In addition, there's the opportunity cost to you had you done something more effective with your money! Finding investable factors Literally hundreds of factors have been discovered and analyzed in recent years (see the sidebar for some examples). Many of these factors work on paper, but to be useful for you in your investment strategy, factors need to clear a much higher bar. Some factors only work in certain decades, or with a specific sector of the stock market. If a factor can’t duplicate its outperformance in other decades and over long periods of time, it's not really investable. An investable factor also needs to yield enough expected outperformance that it outearns the amounts you pay in costs, fees, and taxes: All portfolios, no matter how efficiently run, have trading and operating expenses, and all investments have a buy/ask spread, meaning that you lose a little money simply transacting a buy or sell when it's needed to follow the rules of any particular factor. Unless you’re holding your portfolio in a tax-sheltered account such as an IRA or a 401(k) (many now offer the ability to trade individual funds and stocks), there are potential tax costs for executing any strategy. You especially need to account for taxes if you’re using a high turnover factor strategy where gains are likely to be taxed at the less favorable short-term capital gains tax rate than the more favorable long-term capital gains rate. When we distill these ingredients to their essentials, some basic rules emerge. These three things make a factor attractive: Doggedness: The factor must show up through different time periods and not just one random decade or period. No one-trick ponies here. You want factors that persist for any investing period, given enough time. Prevalence: The factor must demonstrate an advantage with various different countries and market sectors. Investability (actionable): The factor must be able to be deployed cost effectively (costs include trading fees, taxes, and potentially time/research efficiency for more esoteric factors). Factor outperformance is cyclical, yet hard to time. One factor is always leading the pack and your odds of guessing which one is negligible. Morningstar, a leading investment analytics company, has studied factor investing extensively and concluded that factor investing offers the promise of: Improved absolute returns (more gains!) Improved risk-adjusted returns (gains with less risk and a smoother ride than other approaches!) Extended periods of outperformance followed by droughts (long periods of underperformance relative to whatever cap-weighted index you’re trying to beat) When using factors, you must stick with your strategy to earn the rewards! There will be times when you feel like bailing! It’s best to wait for the historical outperformance of solid factors to materialize. Any attempt to time a factor approach requires skill and probably adds additional headwinds of trading costs and tax inefficiency (unless you're doing it in an IRA or tax-favored account). Even the best factors experience periods when they underperform the market, and these are hard to predict. You need patience to let a factor work for you. You need to stay in it to win it! The key is, of course, to diversify factors in your portfolio.

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General Investing The Advantages of Factor Investing

Article / Updated 12-02-2022

Factor investing can help you build a portfolio designed for your unique risk tolerance, investment time horizon, and financial goals using characteristics that history shows lead to consistent outperformance. An investment time period is the timeframe you expect to hold an investment, usually short (less than five years), intermediate (five to ten years), or long term (more than 10 years). Factor investing provides a building block that gives you the best odds of reaching retirement and income goals successfully. It helps improve portfolio results and reduces volatility. Factor investing, done right, enhances diversification in a way that lowers risk without sacrificing returns, by placing your investment eggs in many baskets to help ensure positive results! Following a systematic approach In a nutshell, factor investing is about defining and following a set of proven guard rails that keep your portfolio on track. Using a factor strategy not only gives you better returns, but delivers them more consistently while also protecting you from the dangerous pitfalls and mistakes that get other investors in trouble. Leveraging the power of a persistent strategy Investors worldwide have always sought the secrets that would help them invest right alongside legendary investors like John Templeton, Warren Buffett, Jesse Livermore, Benjamin Graham, and John “Jack” Bogle. Investing systems and rules have come and gone over the years, because it turns out many of them worked only in specific markets and just for a few years. These strategies picked up on short-lived trends and rules in stocks that were true only for a limited time due to certain conditions unlikely to repeat. When you’re investing based on factors, you’re interested in a persistent strategy — one that can deliver results in the future. By figuring out the themes, characteristics, and properties common to winning investment, or factors, you can discover a set of rules to create higher-performing portfolios. But how do you even try to comb through the mountains of market data over the last 100-plus years to find what works? Well, it turns out that you’re in luck! In the last few years, financial academics have been hard at work doing just that — distilling these factors into useful sets of rules that you can put to work in your portfolios today. Though nothing works 100 percent of the time, especially over shorter periods, factors are most effective when combined with other factors in a master strategy. This has the effect of loading the dice in your favor. Saving time with factor investing Time is money, the old saying goes, and investors since the ancient Chinese rice traders have always looked for ways to save time by streamlining and systematizing their trading and investing decision processes. We all have busy lives, jobs to get to, kids to take to after school sports, and a million other things. A factor investing strategy can help improve your life by helping you make best use of your time and energy. James used factor investing to save time during the COVID-19 market bottom in March of 2020. He needed an approach that identified resilient stocks and funds most likely to benefit from a market rebound, while also giving clients confidence in the historical reliability of these stocks to survive and thrive the unprecedented economic and market downturn everyone was experiencing as the world rapidly went into social distancing, quarantines, and government-mandated shutdowns. He came up with a multifactor portfolio for new clients using the same principles in this book that was both sophisticated and easy to understand. This strategy gave them the confidence to enter the depressed stock market and stay on board for what turned out to be a profitable 18 months for investing, with many portfolios doubling in value. Using modern advances As investors, you always want to look for ways to take advantage of advances and breakthroughs in the investment field. Two trends that have come together to move investing forward have been computers and history; specifically, better methods of market data analysis and greatly expanded historical datasets to feed those computers. Modern computers and new ways of crunching market data are at the forefront of the growing interest and advances in factor investing. Just as important is the expanding dataset as researchers and archivists have combed through old ticker tapes, micro-fiche and ledgers to complete the historical dataset of stock prices and company data; in some cases, right back to the Buttonwood Agreement that pre-dated Wall Street. What is the Buttonwood Agreement? It’s a single-page document that started the New York Stock Exchange 230 years ago on May 17, 1792, when 24 merchants and brokers met under a buttonwood tree and put their signatures to a set of rules and safeguards for trading. The meeting was necessary to re-establish public confidence in markets after the infamous Financial Panic of 1792 that had caused mayhem earlier that spring. Investing options were limited back then. The only stock available was in the Bank of New York, The First Bank of the United States, some insurance companies, and Revolutionary War Bonds issued by Alexander Hamilton to help pay off the War of Independence from British rule. Today, you can also take advantage of databases, services, and perhaps even pre-packaged investment products such as funds and ETFs that attempt to apply factor methodology in a practical way to select investments based on current stock and bond metrics. Luckily, technology has made factor investing far easier and more cost effective than ever, as we detail in later chapters. This enhanced dataset provides a richer and more complete testing ground to ferret out meaningful factors and to test existing assumptions more fully. This is an advance that you can benefit from! Following proven guidelines that work Even a broken clock is right twice a day, and, like a coin toss, any system can come up with a winner or two from time to time. As an extreme example, a rules-based system (factor) that consisted of “sell all U.S. stocks and buy bonds” may have worked very well as a factor from September 1929 until July 1932, but this was only due to the stock market crash that kicked off the Great Depression. Using this factor after 1932 would have been a recipe for disaster and decades of underperformance! The point here is that you’re looking for guidelines that provide a more universal advantage, and are not dependent on a specific set of historical circumstances. The best factors you’re interested in work in many different markets, countries, and decades. They aren't just one-trick ponies that have shown results once or twice in history, perhaps by chance or due to unique circumstances. You want rules that operate more broadly and dependably. Following a disciplined core strategy The most successful investors have a disciplined strategy driving their success. Incorporating factors into your investing adds not just a methodology for investment selection but also discipline to portfolio activity as it helps you determine what to buy, sell, or hold, and gives you the confidence needed to participate in the long term. Protecting against emotional investing The emerging field of behavioral finance says that regardless of how you design your portfolio, the major reason for your success or failure is your emotion-driven actions. In other words, if you want to be successful at investing, you have to protect against emotional investing, which results in buying high and selling low, repeatedly. The long-running DALBAR study, which has been updated annually since the inception of the 401(k) over four decades ago, proves that this problem is widespread and damaging to wealth building. Investors lack discipline (of course it's not you, just other investors). What is DALBAR? Located in Boston, DALBAR is one of the nation's leading independent research firms committed to raising the standards of excellence in the financial services industry. It compiles and analyzes mountains of data on mutual funds, life insurance, and banking products and practices. It has also been behind the nation's leading study on investor behavior for the past 28 years. One of its most followed publications is the annual Quantitative Analysis of Investor Behavior (QUIB) Report, which measures how investors have performed with their actual investment portfolios versus how the funds they hold have performed during the same periods. You might think that investor performance and fund performance are the same thing, but DALBAR consistently demonstrates a devastating investor performance gap due to investors shifting money among their investments (for example, from stock into more conservative bonds or cashing out at exactly the wrong times). Compounded over the years, this performance gap is devastating, costing many investors literally hundreds of thousands — or even more — in retirement dollars they could have enjoyed. For example, its 2021 study shows that this performance gap jumped to a shocking 1032 basis points for 2021. 100 basis points equals one percent, so this represents a lag of 10 percent for investors versus the performance of the average fund they were investing in. Obviously, despite the recovery from the 2020 COVID-19 market lows, many investors bailed (perhaps believing the recovery was too good to be true) and then got back in at higher prices in the fall, only to experience a downtrend and realize they had once again bought high without benefiting from the previous gains. In short, DALBAR's extensive research shows that investors are their own worst enemies. The results, as shown in the chart below, are sobering and hard to dismiss as the researchers used real-time data from millions of investor-directed 401(k) accounts. DALBAR has concluded that as much as two-thirds of the market return investors should have enjoyed were squandered to emotional investing — selling into fear after downturns, and buying into euphoria after upturns. The problem, of course, is that investors end up bailing near the bottom, when they've had enough pain, and buying again near the top of the market cycle, when they can't stand to miss out anymore. These mistakes get compounded over the years, and become even more damaging. The results are similar in every annual update of the DALBAR study. In short, it turns out that most investors are doing exactly the opposite of what they need to do to build wealth. They are buying high and selling low. A factor-based approach helps you avoid becoming an emotional investor. A portfolio strategy based on factors (ideally a diversified combination of multiple factors) can provide discipline, and powerful protection against emotional investing by offering a portfolio with which an investor can feel confident riding through inevitable downturns on the way to new highs. Only historically persistent factors can provide this sort of assurance, enabling investors to achieve their financial goals and helping to make sure their emotions don't cause them to outlive their assets.

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General Investing What Is Factor Investing?

Article / Updated 12-02-2022

Factor investing is an investment portfolio general strategy that favors a systematic approach using factors or “shared characteristics” of individual stocks (and other assets, such as bonds) that have a historical record of superior risk and return performance. These factors can range from individual characteristics, such as the company’s sales (revenue indicated on the company’s income statement) or debt (total liabilities indicated on their balance sheet), to their performance in macro environments, such as inflation or economic growth. A factor is a trait or characteristic that can explain the performance of a given group of stocks during various market conditions. There are two main categories of factors: style factors and macroeconomic factors. Style factors Style factors take into account characteristics of the individual asset, such as its market size, value and industry/sector, volatility, and growth versus value stocks. Style factors help to explain or identify characteristics that drive that asset’s price performance in the marketplace. These factors are also referred to as microeconomic because they are an individual security or asset that drives its performance as a singular member or participant of the overall market and economy. Style factors include value, size, quality, dividend, growth, volatility, and momentum. We'll go over a few of these here: Value factors Looking at value means typically looking at the company’s fundamentals. The fundamentals are the most important financial data of the company, like the company’s sales and net profits, balance sheet (assets and liabilities), and important ratios, like the price-earnings (P/E) ratio. Looking at public companies (as through their common stock) through the lens of value factors is one of the most important factors because value investing has survived and thrived ever since they were initially codified by the work of Benjamin Graham during the Great Depression years. One of the most important reasons to embrace value as a primary factor (especially for beginning investors) is the emphasis on stocks that are undervalued, which makes them safer than other stocks. Undervalued means that all the key fundamental financial aspects of the company (like book value or the price-earnings ratio) generally indicate that the price of the stock is not overpriced, meaning that you will not pay an excessive stock price versus the value of the underlying company and its intrinsic worth. The reason becomes obvious in market data; overpriced stocks are more apt to decline more sharply in a correction or bear market versus reasonably priced stocks. The bottom line is the fundamentals of a stock mean a safer bet and a better chance at long-term price appreciation. Size factor The size of the asset, in this case, public company, is a reference to its market size based on market cap or capitalization (total number of shares outstanding times the price per share). The most common cap sizes used are small cap and large cap. If you’re seeking growth, lean toward the small-cap factor. Large-cap assets may be safer but typically don’t exhibit the same growth or price appreciation relative to the small-cap stocks. The historical data generally bears this out. Growth factor The growth factor highlights the measure of change in sales and earnings by the company in relation to its group (like in individual industries or sectors). Is the stock growing better than its peers? If so, this factor should be considered. As the historical market data suggests, companies with growing sales and revenue show stronger relative stock price appreciation, since investors notice the growth and buy up the stock. Volatility factor Market research over an extended period of time suggests that low-volatility stocks tend to earn a better return over the long term compared to high-volatility stocks. Given that, this factor will be beneficial. A useful indicator to look at is beta, which is listed at many popular financial websites for a given stock. The beta indicates how much more (or less) a given stock is volatile versus the general market (based on recent market trading data). For beta, the stock market itself is assigned a value of 1. A stock with a beta that is less than 1 is less volatile than the general stock market, while a stock with a beta greater than 1 is more volatile than the general stock market. A stock with a beta of 1.2, for example, is considered 20 percent more volatile than the general stock market. A stock with a beta of, say, .9 is 10 percent less volatile than the general stock market. A good example of a stock that has low volatility would be a large-cap public utilities company. A good example of a high-volatility stock would be a small-cap technology firm. If you’re a retiree, you would most likely benefit from this factor to ensure getting low-volatility stocks. Macroeconomic factors You could compare stocks and the stock market/economy to fish in a pond. You can analyze the fish and choose great fish (using, for example, style/microeconomic factors). But you should also analyze the pond (macroeconomic factors). You could choose the greatest fish in the pond, but what if the pond is polluted? Then even the great fish will underperform (putting it mildly). Shrewd investors will find a different pond. For investors, the U.S. economy and stock market represent the “biggest pond” on the global financial scene. So if you’re going to participate, you should understand the good, the bad, and ugly of this marketplace. Economic growth factor Gross domestic product (GDP) is one of the most watched economic indicators by investors and non-investors alike. It’s a broad measure of the economic output (value of products and services) in a given timeframe (typically a calendar quarter or year) by a nation’s economy. When GDP is growing, companies (and their stocks) are doing well. In fact, when the economy is growing and doing well, the stock market tends to outperform other markets (such as the bond market). Factors tied to economy growth such as GDP offer profitable guidance for investors. Given that, the major investing sites regularly report this and related economic data so that this factor helps investors optimize the returns in their portfolio. Inflation factor Inflation is a key factor. Most folks look at price inflation (the rising price of consumer goods and services). However, price inflation is not a problem. It’s a symptom. Many people don’t understand the cause of inflation (including many government officials and economic policy makers unfortunately). The cause is monetary inflation (the overproduction of a nation’s currency supply) that precedes the price inflation. When too much money is created and when that supply of money is chasing a finite basket of goods and services, then the price of these goods and services will rise. The goods and services didn’t become more valuable the currency lost value (due to overproduction). A complicating factor is the supply shortage issues during late 2021 to 2022 that augurs in cost-push inflation. When shortages occur (supply issues) and consumers contain to purchase the products in question (demand), the price inflation is further exacerbated. In early 2021, when the federal government and the Federal Reserve were increasing the money supply (by spending trillions of dollars), this was the cue for alert investors to consider the inflation factor. This factor would have guided portfolio managers toward securities that would have outperformed in an unfolding inflationary environment. Interest rates factor In early 2022, the Federal Reserve (America’s central bank) is (and likely will be) raising interest rates. Interest rates are essentially the price of borrowed money, and a factor on interest rates is key to making more optimal choices in your portfolio. In general (and all things being equal), low interest rates are good for the economy while high (or rising) interest rates tend to be negative. Because so much economic activity (both business and consumer activity) is tied to credit (business loans, credit cards, home mortgages, and so on), rising interest rates tend to dampen or diminish economic activity while low or decreasing rates tend to do the opposite. Given that, factors tied to interest rates can help you avoid stocks (and bonds) that would be harmed by rising interest rates so that your portfolio can continue to perform satisfactorily.

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General Investing Factor Investing For Dummies Cheat Sheet

Cheat Sheet / Updated 11-10-2022

Factor investing helps maximize your odds of being a successful investor in many ways, including helping you control and avoid self-defeating investor behaviors. Understanding the behavioral finance aspect of factor investing, as well as how great investors have dealt with it in the past, can make you an even better investor.

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Stocks Stock Investing For Dummies Cheat Sheet

Cheat Sheet / Updated 11-08-2022

Listen to the article:Download audio You're investing in stocks — good for you! To make the most of your money and your choices, educate yourself on how to make stock investments confidently and intelligently, familiarize yourself with the online resources available to help you evaluate stocks, and find ways to protect the money you earn. Also, be sure to do your homework before you invest in any company's stock.

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General Investing Trading Psychology For Dummies Cheat Sheet

Cheat Sheet / Updated 10-21-2022

Are you surprised that it's so hard to consistently earn money on the stock exchange? The explanation is as simple as it is sobering: It's because we are all human beings, with all the associated genetic dispositions that come with that fact. The neural structure of the human brain is the result of our evolutionary development. Your thought and behavior patterns, such as the deep-seated fight-or-flight response, continue to influence your decisions today on the financial markets. Your nature is not particularly well-suited to trading, but you can learn to do it. The human brain is capable of change and development. You can learn the mental prerequisites for brain-compatible trading. With the right mindset, you can recognize and avoid errors before they occur. The innovative discoveries of modern neurofinance research will lead the way to success factors for brain-compatible and, therefore, successful trading.

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Commodities A Brief History of the Chicago Mercantile Exchange

Article / Updated 10-06-2022

Established in 1848, the Chicago Board of Trade (CBOT) used to be the oldest commodity exchange in the world. The CBOT was the go-to exchange for grains and other agricultural products, such as oats, ethanol, and rice. The exchange also offered several metals contracts targeted at individual investors, including the mini gold and mini silver contracts. In 2007, the Chicago Mercantile Exchange (CME) merged with the CBOT as part of a great consolidation wave. CME rolled up the CBOT's popular grain contracts and now offers them on its electronic platform. Many traders still refer to some of these contracts as CBOT grains. CME is the largest and most liquid futures exchange in the world. The CME has the heaviest trading activity — and open interest — of any exchange, partly because of the depth of its products offerings. Besides agricultural commodities, it trades economic derivatives (contracts that track economic data such as U.S. quarterly GDP and nonfarm payrolls), foreign currencies (it offers a broad currency selection, ranging from the Hungarian forint to the South Korean won), interest rates (including the London Inter Bank Offered Rate, the LIBOR), and even weather derivatives (contracts that track weather patterns in various regions of the world). Because of its broad products listing, the CME is perhaps the most versatile of the commodity exchanges. In addition, the CME was one of the first exchanges to launch an electronic trading platform, the CME Globex, which became an instant hit with traders. It now accounts for more than 60 percent of the exchange's total volume. In 2006, the New York Mercantile Exchange (NYMEX) entered into an agreement with the CME to trade its marquee energy and metals contracts on Globex, an electronic trading system. In 2008, the CME went on a series of acquisitions and purchased the NYMEX and COMEX. The CME is also the first exchange to go public. Investors greeted the initial public offering with enthusiasm, raising the stock from $40 in 2003 to more than $500 in 2006. For more on the CME, check out its website, which also includes helpful tutorials on all its products.

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