Retirement Planning Math: Stop Using Nominal Returns for Your Portfolio

Описание: Is the small-cap premium still real, or has factor investing been completely arbitraged away? In this video, I break down the famous Fama-French three-factor model and explain how investing in small-cap stocks—specifically small-cap value stocks—has historically outperformed the S&P 500 and the broader stock market.

Many investors think beating the market requires finding hidden information, but financial theory shows that the small-cap premium is actually compensation for taking on specific market risks. If you want to understand factor investing in practice, how factor decay impacts modern returns, and whether a small-cap value tilt belongs in your investment portfolio, you are in the exact right place. We will look at historical data from 1926 to today, analyze why small companies face higher volatility, and look at the real-world trading costs and expense ratios that index fund investors face when trying to capture this extra alpha.

Hey, my name is Eddy! I spend way too much time studying investing research and analyzing the massive gap between academic financial theory and what actually happens in real portfolios.

If you are a long-horizon investor trying to maximize your compound interest over the next 20 to 30 years, adding a modest tilt toward small-cap value could improve your long-run expected returns. However, it requires a high tolerance for tracking error and the mental discipline to stay the course when your portfolio underperforms the total market for years at a time.

Let's dive into the data behind Eugene Fama and Kenneth French's groundbreaking 1992 paper, compare it to the traditional Capital Asset Pricing Model (CAPM), and determine if this strategy is right for your psychological risk tolerance.

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