- 1Factor timing sounds logical but typically destroys value
- 2AQR's Cliff Asness: "Timing factors is every bit as hard as timing the market"
- 3Even sophisticated institutional investors struggle to time factors
- 4Static, diversified factor exposure has the best risk-adjusted returns
#The Temptation to Time
It seems so logical:
- When volatility is high, increase low-volatility exposure
- When value is "cheap," load up on value stocks
- When momentum is working, add momentum exposure
If factors have cycles, shouldn't we ride those cycles?
The research says no.
#What the Research Shows
Asness (2016): "The Siren Song of Factor Timing"
Cliff Asness, co-founder of AQR Capital Management, wrote a landmark paper on factor timing. His conclusion:
"Timing [factor] exposures is every bit as hard as timing the market. Perhaps even harder."
The paper showed that factor timing strategies: - Require predicting which factors will outperform - Suffer from transaction costs when switching - Often mean selling after underperformance (buying high, selling low) - Have weak historical evidence despite appearing obvious in hindsight
Arnott et al. (2016): "Timing 'Smart Beta' Strategies"
Research Affiliates tested whether you can time factors based on their valuations. Findings:
- Factor valuations do predict returns—but only over 5-10 year horizons
- Shorter-term timing signals are too noisy to be useful
- Transaction costs and tracking error overwhelm any timing benefit
#Why Factor Timing Fails
1. Factors Don't Follow Predictable Cycles
Market regimes aren't like seasons. You can't reliably predict when value will beat growth, or when momentum will crash.
2. The Data Problem
To know that "value works better in recoveries," you need many market cycles. But we've only had a handful of recessions since modern data begins.
Sample size: maybe 6-8 complete cycles. That's not enough to draw reliable conclusions.
3. Transaction Costs Eat Returns
Every factor reallocation costs money: bid-ask spreads, market impact, tax consequences. Even if you could time perfectly, frequent reallocation erodes returns.
4. Behavioral Errors
After a factor crashes (when you should buy): You're scared. You've just watched momentum or value lose 30%. Buying feels insane.
After a factor rallies (when you should reduce): You're greedy. The factor is working! Why stop now?
Human psychology makes disciplined timing nearly impossible.
#What We Do Instead
Static, Evidence-Based Weights
Our factor weights are fixed:
| Factor | Weight | Why |
|---|---|---|
| Profitability | 30% | Most consistent across regimes |
| Momentum | 25% | Strong returns, diversifies value |
| Value | 15% | Long-term premium, quality overlap |
| Low Volatility | 10% | Risk reduction |
| Investment | 10% | Moderate but consistent |
| Short Interest | 10% | When data available |
These weights reflect the long-term evidence, not current conditions.
Diversification Across Factors
Instead of betting on which factor will work next quarter, we own all six.
- When value struggles, momentum often helps
- When momentum crashes, quality provides stability
- Diversification across factors reduces the severity of any single factor's drawdown
This is how institutions like Dimensional and AQR operate.
#The Bottom Line
Factor timing is one of finance's great temptations. It seems logical. It feels sophisticated. It fails.
The evidence is clear: consistent, diversified factor exposure beats tactical timing.
That's why our weights don't change. Not because we're lazy. Because the research says that's what works.
#Academic Sources
- Asness, C. S. (2016). "The Siren Song of Factor Timing." Journal of Portfolio Management
- Arnott, R., Beck, N., & Kalesnik, V. (2016). "Timing 'Smart Beta' Strategies? Of Course! Buy Low, Sell High!" Research Affiliates
- Asness, C. S., Chandra, S., Ilmanen, A., & Israel, R. (2017). "Contrarian Factor Timing is Deceptively Difficult." Journal of Portfolio Management
Last updated: February 1, 2026