In this episode, we speak with Northern Trust’s Peter Mladina. Peter has published extensive research in the areas of both financial planning and factor investing. We discuss his work in both areas and brought in our friend and co-host of our The Education of a Financial Planner podcast Matt Zeigler to help us with the questions on the planning side. We cover goals-based planning, modeling human capital, how to think about alpha in a post CAPM world, the future of the 60-40 portfolio and a lot more.

02:55 – What Peter has learned from his experience teaching at UCLA
06:48 – What is goals-based planning?
09:11 – How to frame competing purposes in financial planning
12:07 – Building sub-portfolios for individual purposes
18:44 – How to model human capital
23:44 – What makes for a good investing factor?
30:22 – Using factors in a long-only world when they were tested long-short
33:05 – How alpha changes as risk-factor models expand beyond CAPM
35:47 – Is alpha more difficult to generate using a 3 factor model?
40:23 – Key things to look at when evaluating active managers
47:46 – The future of the 60-40 portfolio
54:17 – How Peter looks at rebalancing
59:12 – Active life management

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Bridging the gap between financial planning and factor investing can be challenging, but Northern Trust’s Peter Mladina believes that it is possible. As the Head of Quantitative Research and Solutions at Northern Trust Asset Management, Mladina has spent years researching and developing factor-based investment strategies. His insights into how these strategies can be used to enhance financial planning can provide valuable guidance to investors looking to improve their portfolios.

At its core, financial planning is about setting goals and creating a roadmap to achieve those goals. This often involves assessing an investor’s risk tolerance, determining their investment timeline, and identifying the appropriate asset allocation. Factor investing, on the other hand, is a strategy that focuses on selecting stocks based on specific characteristics or factors that are known to drive long-term returns. These factors might include things like low volatility, high dividend yields, or strong momentum.

While these two approaches might seem to have little in common, Mladina sees significant potential for them to work together. By incorporating factor-based strategies into financial planning, investors can create portfolios that are more efficient, more diversified, and better aligned with their long-term goals.

One of the primary benefits of factor investing is that it allows investors to achieve a level of diversification that is difficult to achieve with a traditional asset allocation approach. Because each factor has its own unique risk and return profile, investors can build a portfolio that is well-diversified across a range of metrics. This can help to reduce the overall risk of the portfolio while still providing attractive returns.

Factor investing can also be used to target specific investment goals, such as income generation or downside protection. For example, investors looking for income might focus on high dividend yield stocks, while those seeking protection in a down market might prioritize low volatility stocks. By tailoring their factor exposure to their personal financial goals, investors can build more customized portfolios that are better aligned with their objectives.

Another advantage of factor investing is that it can help to reduce costs and increase efficiency. Because factor-based strategies are typically rules-based and systematic, they require less active management than traditional active strategies. This can lead to lower fees and expenses, which can boost returns over the long-term.

But despite these advantages, factor investing is not without its challenges. One of the most significant issues is that there is no “silver bullet” factor that works consistently in all market conditions. The efficacy of a given factor can also shift over time, as market conditions change or new information becomes available. This makes it essential for investors to remain disciplined and patient when implementing factor-based strategies.

Ultimately, successful factor investing requires a deep understanding of not only the factors themselves but also the broader economic and market conditions that drive their performance. As Mladina notes, “you need to be able to read the market and adjust your factor exposures accordingly.” This requires a commitment to ongoing research and analysis to ensure that your portfolio remains optimized for changing market conditions.

But for investors willing to put in the work, the potential rewards can be significant. By bridging the gap between financial planning and factor investing, investors can build portfolios that are better aligned with their goals, more efficient, and more diversified. With the guidance of experts like Mladina, investors can leverage the power of factor investing to achieve greater success in their financial planning journey.