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If you ask most baseball fans what makes a great fastball, the first answer you’ll hear is speed. And for a long time, that was the only answer. A fastball was great if it looked fast, if it sounded fast, if hitters swung through it with that late, helpless flinch that told scouts everything they needed to know. Before technology entered the game, velocity wasn’t measured so much as admired. Scouts sat behind home plate, squinted, and declared a pitch “explosive,” “heavy,” or “rising.” And that was the extent of the analysis.
That approach seemed to work well enough—when scouts’ intuition turned out incorrect, it was usually chalked up to a player not living up to their potential.
Then radar guns arrived, and the sport gained its first real measure of truth. Suddenly teams knew whether a pitcher threw 89 or 94, and the entire scouting landscape reorganized around that one number. Velocity became the defining metric of a fastball’s quality. If you could throw hard, you were a prospect. If you couldn’t, you weren’t. The radar gun reduced years of mythmaking into something simple and objective.
But the story didn’t end there. In fact, radar guns ended up being only the beginning. Eventually teams discovered that velocity alone couldn’t explain why some fastballs dominated while others got hammered by hitters. Innovations in advanced tracking systems like PITCHf/x, Statcast, and high-speed motion capture offered new data that revealed hidden dimensions of the pitch.
For example, a high spin rate could make a fastball “stay up” longer than hitters expected, creating the illusion of rise. Measuring vertical break explained why some fastballs seemed to hop above barrels. Measuring horizontal movement separated straight four-seamers from two-seam sinkers. Organizations also measure a player’s pitch axis and seam-shifted wake to see how small differences in finger pressure or wrist angle make the air around the ball behave in surprising ways.
In other words, more data has taught us that a great fastball isn’t just about speed. It’s about characteristics, or measurable traits that, once identified, can be optimized. Teams no longer need to rely on what looks good or sounds good. They rely on evidence and build systems around it.
And investing went through the exact same evolution.
For decades, investors made decisions the way scouts used to evaluate fastballs—through instinct, stories, and the appeal of the moment. People bought stocks that felt promising or popular. They sold when markets “looked tired.” The language was subjective, emotional, and often misleading.
Then academics created indexes to measure the market’s performance. For the first time, investing had its radar gun. And just like velocity transformed scouting, indexing transformed portfolio management.
Eventually those academic indexes—originally created just to measure performance—became investable through index funds, giving investors a simple, objective way to participate in the market without forecasting.
But just as baseball didn’t stop with radar guns, investing didn’t stop with indexing.
Researchers began studying different characteristics of stocks—and why some earned higher returns than others, even when they carried similar market risks. They identified persistent traits like value, size, profitability, and momentum. These weren’t guesses. They were measurable patterns supported by decades of global data. They were the investing equivalent of spin rate and pitch movement: hidden dimensions that explained why certain stocks behaved differently.
So with that parallel in mind, let’s move from the mound back to the markets and talk about what distinguishes plain index investing from factor investing—and why both approaches matter.
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Why Indexing Works
Every investor owns a portfolio. Put them all together and you get the market portfolio—the combined holdings of everyone who participates in the market. Index funds are simply a low-cost, transparent way of owning that portfolio.
Before costs, we all earn the market return. After costs, the average investor earns less.
That’s the entire case for indexing. Keep fees low, eliminate the need for forecasting, and remove the emotional swings that come with stock-picking.
I think people sometimes point to the Efficient Market Hypothesis as the reason to choose indexing, but that’s not quite right. Jack Bogle framed it as the Cost Matters Hypothesis: because all investors are the market, everyone collectively earns the market return before fees. Once you subtract fees, the average investor falls behind—so keeping costs low is one of the few guaranteed ways to tilt the odds in your favor.
It’s mathematically elegant, but it can also be behaviorally liberating.
You no longer need to worry about headlines or earnings calls or whatever the markets obsess over this week. The market is the sum of millions of decisions; your goal is simply to capture that return at the lowest possible cost.
For many investors, that’s not just a good starting point. It’s the entire journey.
Indexing’s Built-In Trade Offs
But those built‑in choices do raise an important question: if the average investor owns the market, and a total market equity index is our best representation of “the market,” how are you different from that average investor?
For many of the clients we work with at Plancorp, the biggest difference is structural. Their spending needs are small relative to their portfolio, so their investment horizon often extends beyond their own lifetimes. In a very real sense, part of their portfolio is invested on behalf of their heirs.
That combination—a long time horizon and modest liquidity needs—gives them more capacity to live with the extra volatility and tracking error that come with factor tilts. The third ingredient is behavioral: being comfortable with returns that look different from broad market indices for years at a time. If those three things are true for you, then you may have room to take the next step: small, intentional tilts toward characteristics that have historically enhanced returns. That’s where factor investing comes in.
What Factor Investing Is
Factor investing starts with the same philosophy as indexing—rules govern the selection and weighting of securities, not forecasts. But instead of allocating purely by company size, factor strategies tilt toward traits that research has repeatedly linked to higher expected returns.
The most widely recognized factors are:
- Value – companies trading at lower prices relative to fundamentals
- Size – smaller companies with higher expected long-term returns
- Profitability / Quality – businesses that generate strong, efficient earnings
- Momentum – stocks with strong recent performance over the intermediate term
None of these are stock picks. They’re rules. They apply the same way to thousands of securities with no story attached.
Why might these traits outperform?
Two reasons: risk and human behavior.
Value stocks often face real business challenges. Smaller companies face volatility and financing constraints. Momentum investors live with abrupt reversals. Profitability comes with concentration risk. These risks justify higher returns.
And on the behavioral side, investors overreact, under react, chase trends, and ignore boring but durable businesses. Those patterns create persistent pricing gaps.
Factor investing doesn’t exploit secrets. It exploits discipline.
Most investors can’t stick with these traits long enough to benefit from them.
How Factor Portfolios Behave
This is where experience diverges sharply from plain indexing.
No factor leads consistently. Value can lag for years. Momentum can crash. Small caps can trail during periods of fear or tightening financial conditions. Profitability can look dull during speculative rallies.
If you tilt toward factors, you must expect stretches where you look wrong.
That divergence from the market is called tracking error—and it is the psychological price of trying to outperform.
This is also why combining multiple factors matters. Diversifying across value, size, profitability, and momentum smooths some of the ride. When one trait falters, another often steps up.
Think of it like a pitcher who doesn’t rely on a single fastball. Different pitches succeed in different counts and against different hitters. A diversified arsenal creates more consistent results.
A diversified factor strategy aims for the same thing.
Deciding Between Indexing and Factor Investing
The question isn’t which approach is superior. It’s which one you can live with.
Here are four questions that help you choose:
- Do you buy the economic and behavioral logic behind factors?
- Are you willing to judge performance over decades, not quarters?
- Can you tolerate periods where you lag the S&P 500 by several percentage points?
- Does the added complexity fit your temperament and your plan?
If your answer is “no” to any of those: indexing alone is an excellent, evidence-backed option.
If your answer is “yes”: an index core with disciplined factor tilts can be a meaningful enhancement.
Both approaches rely on rules instead of hunches, and either can form the backbone of a long‑term portfolio. The key is knowing which set of rules you’re best equipped to follow.
Resources:
The Long Term Investor audio is edited by the team at The Podcast Consultant
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Disclosure: This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Plancorp LLC employees providing such comments, and should not be regarded the views of Plancorp LLC. or its respective affiliates or as a description of advisory services provided by Plancorp LLC or performance returns of any Plancorp LLC client.
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