You’ve looked at the performance of your investments before making your choices. And you’ve taken into account their risk. You’ve done the research. But your outcomes aren’t quite what you expected and you’re not sure why. Have you factored in everything?
Whether you’re aware of them or not, factors are a part of your investments. So what is a factor? Well, it’s a characteristic of an investment that can be measured and tracked, to help explain its performance. This goes deeper than traditional categories such as sector or region. (Visit our Factors FAQ for more answers to frequently asked factor questions.)
To understand, think of your morning coffee.
Every day you drink a cup of coffee, and 30 minutes later you feel awake and alert.
But one day you drink your coffee, and 30 minutes later you still feel tired and have a headache coming on. Why didn’t you get your expected outcome? Because the barista accidentally gave you a decaf. Whether you were aware of it or not, caffeine was the factor that gave you your morning energy. Some coffees have it, and others don’t — and you can’t tell just by glancing at the cup.
While investing is more complex than sipping coffee, of course, this analogy can help you understand factors. They’re the underlying traits that can help influence an investment’s performance.