Invest Like the Best
- Nate Skelly
- Jun 11
- 4 min read
If you’ve ever tried to figure out how to invest your money, you know how overwhelming it can feel. There are literally thousands of stocks in the U.S. market alone, and tens of thousands of mutual funds and ETFs to choose from! It’s like standing in the cereal aisle at the grocery store... if the cereal aisle were 4 miles long.
So how do you decide what stocks or funds to invest in?
Today I want to make the case for something called factor-based investing (also known as evidence-based investing). It’s a strategy that sits in between the two big camps of stock investing: active and passive. But before we jump into what makes factor investing unique, let’s lay a little groundwork.
Quick disclaimer: This article is for informational purposes only and is not investment advice. Please talk to a professional before making financial decisions. All investments carry risk.
Active Investing
Active investing is what most people think of when they imagine stock picking or mutual funds. Because investing can be complicated, most people tend to outsource it to a professional. It’s like hiring a gourmet chef to cook a special meal for you. You’re paying for their expertise and expecting them to whip up a better meal than you could yourself.
An active fund manager is doing the same with your investments. They research companies, analyze market trends, and try to pick the stocks they believe will outperform the market average. For example, if they invest primarily in large US stocks, they would want to beat S&P 500 average (which measures the performance of 500 of the largest stocks in the US).
But here’s the catch: you don’t need them to just beat the market, you need them to beat the market by enough to cover the fees they charge for running the fund. And sometimes those fees can be pretty steep.

You can picture active investing like a fishing competition. The active investor is constantly moving around the lake trying to find the best spot and switching between fancy bait and advanced gear. Though they exert a lot more money and effort in the process, sometimes
they hit the jackpot. Other times… they come home empty-handed. But in the long run, most active managers don’t win the competition. In fact, ~90% of active managers underperform their benchmark over the long run!
Passive Investing
Passive investing, on the other hand, is like picking a well-stocked fishing spot and just staying put. You’re not trying to outsmart the lake. You trust that if you stay in a good spot long enough, you’ll catch what you need.

This is the idea behind index funds or index ETFs. They simply own exactly the same companies that are in the market. If you own an S&P 500 index fund, your return will mirror the performance of those 500 companies. The great benefit is that you spread your money across many companies, and most passive funds have low fees and historically solid returns. Plus, you don’t have to deal with all the stress and complexity of active investing.
In fact, passive investing has consistently outperformed active strategies for most investors, especially after you factor in costs. That’s not to say there aren’t downsides with a passive investing approach.
An obvious downside is that you can never outperform the market because your return is always mirroring the market returns. And if you are holding all the stocks in the market there are bound to be some great ones but there are also bound to be some terrible ones too.
Is there a Middle Ground?
This is where factor-based investing comes in.
Think of it like this: instead of blindly staying in one fishing spot (passive) or frantically racing around the lake (active), you use scientific data to pick smarter spots. You still stay disciplined, but with a more strategic twist.
Factor investing looks at specific characteristics that have been shown in research to drive long-term investment returns. Some of the most common factors include:
Value – Stocks that are cheap compared to their fundamentals
Size – Smaller companies that tend to grow faster
Profitability – Companies with strong earnings
Momentum – Stocks that have performed well recently
Low Volatility – Stocks that have steadier price movements
Instead of owning everything in an index, factor-based funds increase their investment in companies with these traits (and decrease their investment in companies that don’t). It’s still rules-based (like passive investing), but it’s more refined and selective.
For example, rather than owning Apple and Amazon just because they’re in the S&P 500, a factor-based fund might reduce or increase how much of those stocks you own based on their current value, profitability, and momentum.
Why Use Factor Investing?
The goal is to improve returns over time without the high fees and emotional rollercoaster of active investing. And while it’s not a silver bullet (no strategy is), factor investing has historically stacked up well against traditional index investing over the long run if you stick with it.
Of course, there are challenges too like complexity, higher turnover, or periods of underperformance. But much of the success comes down to patience and discipline - two things most investors struggle with.
Bottom Line
Factor-based investing blends the best parts of both worlds. You get the low-cost, hands-off simplicity of passive investing plus the performance-focused strategy of active investing grounded in real, time-tested research.
If you’re curious whether factor investing might be a good fit for your portfolio, you can schedule an intro call and learn how we approach investing at Financial Pathway.
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