Yale School of Management

Factor Investing for Retirement

Overview:

John Powell is 32 years old and works as an analyst for an economic consulting firm. The firm has a 401(k) savings plan that allows him to save part of his pre-tax compensation each year and the firm will match these contributions with up to 3% of his salary. The firm has a large menu of choices of funds in which to invest. These include stock, bond and money market funds, as well as pre-set asset allocation funds designed for targeted retirement dates. 

John’s personal strategy is to invest 100% of his retirement assets in stocks. He is a firm believer in the equity risk premium, and believes that, over a 30 to 40 year horizon stocks provide the best opportunity for asset growth in excess of inflation. He is comfortable with the risk of equities – he survived the crash of 2007-2008 and experienced the gains in the ensuing five years. His goal is to create a portfolio that has the highest probability of beating the US S&P 500 benchmark while taking on only a little more risk.

His plan currently offers a menu of funds via Great West Retirement Services very similar to the plan offered to employees of TD Ameritrade.

John has read about factor investing. He would like to create a portfolio of factor funds that meets his goals.  He is considering a request to the plan sponsor to include a selection of equity factor mutual funds and/or exchange-traded funds in the 401(k) plan.

Format:
Raw, online
Case Access:
Teaching Note:
No
Suggested Citation:

Jean Rosenthal, Jaan Elias and William Goetzmann, "Factor Investing for Retirement," Yale SOM Case 16-010, January 19, 2016

Perspectives:
  • Asset Management
  • Investor/Finance