TL;DR
Fama and French's five-factor model (2015) explains roughly 90% of the variation in diversified-portfolio returns using market, size (SMB), value (HML), profitability (RMW) and investment (CMA). Their published US data 1963–2023 puts the four non-market premiums at 2–3% annualised each.
From CAPM to five factors
The original Capital Asset Pricing Model (1964) said one thing matters: how much a stock moves with the overall market. Beta. Period.
That was elegant and almost entirely wrong. By the 1980s, researchers had found persistent return patterns the CAPM couldn't explain. In 1992 Eugene Fama and Kenneth French published a three-factor model that added size and value to market beta. In 2015 they added profitability and investment to get the five-factor model that's still the academic baseline today.
The five factors:
- Market (MKT-RF) — equities over the risk-free rate.
- Size (SMB) — Small Minus Big. Long small caps, short large caps.
- Value (HML) — High Minus Low book-to-market. Long cheap, short expensive.
- Profitability (RMW) — Robust Minus Weak operating profitability. Long profitable, short unprofitable.
- Investment (CMA) — Conservative Minus Aggressive asset growth. Long firms that grow assets slowly, short firms that grow assets fast.
The numbers
Annualised premiums in the US, 1963–2023, from the Ken French Data Library (the academic source of truth):
- Market premium: ~6–7% per year
- SMB: ~2% per year
- HML: ~3% per year
- RMW: ~3% per year
- CMA: ~3% per year
These are gross of fund costs and trading frictions. A real-world DFA or Avantis-style factor fund probably captures 60–80% of the raw premium after costs.
Why those particular five?
Each factor is a story about either risk you're being compensated for taking, or a behavioural error other investors are making:
- Value stocks are statistically distressed. You're paid a risk premium for holding companies the market is anxious about.
- Small-cap firms have less analyst coverage, less liquidity, and more idiosyncratic risk. The premium is your compensation.
- Profitability flips the value story: among similarly cheap stocks, the more profitable ones outperform. It captures "quality value" rather than "junk value".
- Investment is the surprise. Firms that aggressively grow their balance sheet — through capex, M&A, or share issuance — tend to underperform conservative firms. The textbook explanation is that aggressive investment destroys returns on capital.
What it doesn't include
Notably absent: momentum. Fama and French acknowledged momentum exists but excluded it because it doesn't fit their risk-based story. Most practitioners add a sixth momentum factor anyway, especially for shorter horizons.
Also missing: low-volatility, quality (in the broader sense), and various technical factors that work in academic data but aren't always implementable.
Putting it in a FIRE plan
You don't have to construct factor portfolios yourself. Modern ETF providers — Avantis (US), Dimensional (UK/global), iShares Factor, Vanguard Factor — package multi-factor exposure into a single ticker for 0.15–0.40% per year.
In a FIRE simulation, the difference between a market-cap index and a five-factor tilt over a 25-year accumulation can be 2–4 years of working time, even after costs. That's the lever most planners don't realise they have.
Run the comparison yourself in our simulator — toggle the factor strategy and watch the FI date move.
Frequently asked questions
- Does the five-factor model work outside the US?
- Mostly yes. Fama and French re-ran the model on European, Japanese, and emerging-market data and found similar premiums for value, profitability and investment. The size premium is weaker outside the US.
- Is momentum part of the Fama-French model?
- No. Momentum is well documented (Carhart added it as a fourth factor in 1997) but Fama and French left it out of their 2015 paper because it lacks a clean risk-based explanation. Most modern factor funds include it anyway.
- How long do I need to hold a factor tilt before I see the premium?
- Plan for at least 15–20 years. Even strong factors like value have spent decades underwater on a rolling basis. Factor investing is a multi-decade commitment, not a 5-year trade.
Stress-test your own FIRE plan
FIRE Wealth OS runs your savings rate and expenses against every historical market starting point since 1871. Free to use, no card required.