Another consideration when building a portfolio using factors is the objective of the investor, the panelists said. Factor investing works well when an investor has a strong belief in a macro trend or something that will have a big impact on markets, Morillo said.

“You need to know why you want to make the investment and what is your conviction [to the idea],” Morillo said. “[You need to ask], why should the factor work in the future? It’s just like selecting a manager.”

When using factors as an investment thesis, it’s good to use more than one to “smooth out the cycles,” Huemmer said. Some common factor combinations are value and momentum or value and quality.

Value and momentum, for example, complement each other because of the negative correlation, which provides diversification, Koeing said, adding that diversification is one of the main benefits of using factor investing.

Huemmer suggested using quality and value factors together to “avoid the value trap” of buying a company just because it’s cheap. “It helps to eliminate the bottom 20 percent [of investable equities],” he said.

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