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December 24, 2011

Do you know what factors to consider in picking stocks, mutual funds or Exchange Traded Funds?

You will not be surprised that my answer to the above question is “it depends”.  “Here’s What’s Really Driving Your Returns”, an article in today’s Wall Street Journal Weekend Investor, touts the advantages of “factor investing”.  This concept has been around for a long time.  My preference is to call it “fundamental” investing.  It is selecting the data points to consider and how to weight hem.  
There are an infinite number of data points that can be considered.  If you are familiar with Morningstar, you have probably noticed that they are constantly adding data points for investors to consider.  They include alpha, assets, beta, book value, concentration,  dividends, earnings, debt, growth, liquidity, price, profits, risk,  sales, size, style,  turnover, weighting, Oh My!  Some of these data points are compared to other data points.  Be sure to understand the data points that you watch and how they should be compared to other data points.  
If you are selecting individual stocks you need to determine what criteria you are using.  If you are using mutual funds you need to determine how the manager is weighting these dat points.  If you are using an index fund or an Exchange Traded Fund you need to know how the various factors are weighted.  Do your research, be consistent, and consider costs.
When constructing you investment portfolio, understand the factors that are important to your unique situation.  To do this you must know (at a minimum) what your financial goals are, the time when the goals are to be realized, and your risk level.  How sensitivity to the ups and downs of the market and likelihood of loss are you?  Design a benchmark to measure the performance of your portfolio.  Monitor you progress.  If you think you need to monitor your progress daily, your portfolio is probably too risky.
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