Ivanna Hampton hosts Investing Insights, a series designed to help investors navigate the volatile market environment of 2025. Morningstar strategist Dan Lefkovitz shares research on factor investing—an approach focusing on groups of stocks with shared characteristics, such as value, size, yield, low volatility, quality, and momentum.
In 2025, the US stock market has experienced significant volatility, particularly after tariff announcements in March and April. During this downturn, low-volatility stocks significantly outperformed the broader market by maintaining steadier prices. Companies like Berkshire Hathaway, Coca-Cola, Mastercard, and Marsh & McLennan demonstrated resilience in this environment, helping investors limit losses.
While low-volatility stocks excel in down markets by offering better risk-adjusted returns, they tend to lag during strong bull markets, such as those driven by AI enthusiasm in 2023 and 2024. Conversely, factors like quality and momentum, which performed well in previous years, underperformed in 2025, as highly valued tech stocks like Nvidia, Arista Networks, and Alphabet faced sharper declines.
Long-term trends show that factor investing has been less prominent in recent years due to the strong overall market. Quality and momentum are the only factors that have outperformed the market over the past decade, largely due to a handful of highly profitable tech companies.
Investors new to factor investing should consider diversification across multiple factors rather than concentrating on just one. Patience and a long-term perspective are essential since factor performance fluctuates annually. Attempting to time these shifts can lead to poor investment decisions.
Looking ahead, valuation may provide a guide for positioning portfolios, with some underperforming factors like value and size potentially offering opportunities. However, timing remains challenging, and maintaining a diversified, patient approach is advised for navigating future market rotations.
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