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Noah Smith

‘Smart Beta’ Might Not Be So Smart After All

Research suggests that factor investing’s success will be fleeting.

Some risks are real.

Some risks are real.

Photographer: Ezra Shaw/Getty Images

Money managers are constantly searching for a sort of Holy Grail: Some formula to offer investors superior returns while minimizing risk. Their latest effort, known as factor investing or smart beta, could be no less fleeting than its predecessors.

As any professional knows, diversification is key to reaching the best balance of risk and reward. When you invest in multiple stocks, their random ups and downs tend to cancel out, earning you the same expected return with fewer fluctuations. But there’s always some part of risk that can’t be diversified away -- for example, when the market crashes like it did in 2008, even a large portfolio won’t be safe.