Risks Worth Considering

The risks associated with investing in stocks and overweighting small company and value stocks potentially include increased volatility and loss of principal. According to academic research by Professors Eugene Fama and Ken French, there are three ‘factors’ or sources of potentially higher returns with higher corresponding risks

Consider Stocks

Investors with time horizons of less than five years should consider minimizing or avoiding investing in common stocks. Although the Fama/French research findings indentified three risks worth taking that does not necessarily mean these are the only risks worth taking.

*Cross section of Expected Stock Returns, Eugene F. Fama and Kenneth R. French, Journal of Finance 47 (1992)

Example used as illustration only, not indicative of any particular investment, actual results will vary. Assumes reinvestment of dividends with no consequence of fees or taxes. Past performance is not a guarantee of future results

 Small Companies and Value Stocks

Many economists believe small capital and value stocks have the potential to outperform because the market rationally discounts their prices to reflect underlying risk. The lower prices give investors the potential for greater returns as compensation for bearing this risk.

Small capital and value stocks are available around the world. These securities generally have higher risk and greater expected returns than larger capital and higher-priced growth stocks.

Exposure to these risk factors accounts for over 96% of the variation in portfolio returns, the greater the risk exposure, the greater the expected long-term return.*

Managing risks successfully also means reducing avoidable risks that do not generate returns such as holding too few securities, focusing on a particular country or industry, and putting faith in market predictions.

Asset class investing carries greater risk and is subject to greater fluctuations than the overall market. Investments are subject to financial, business, and economic factors in addition to substantial price fluctuations over short periods of time that may be affected by unpredicted international monetary, political policies, and other currency fluctuations. Investment decisions should be based on one’s risk tolerance, time horizon, and other pertinent factors.

*Dimensional Fund Advisors study (2002) of 44 institutional equity penson plans with $452 billion total assets. Factor analysis run over various time periods, averaging nine years. Total assets based on total plan dollar amounts as of year end 2001.