Bogleheads.org

Bradley Okay on the costs issue but the point remains the same and you should acknowledge it--live funds can easily outperform and have done so, just as the CRSP 6-10 beat the R2K by about 1.6% a year. DFA estimates that the roll costs are at least that much in terms of avoiding the roll dates. So t...

Bradley First re the Vanguard fund you cite, it's only a matter of degree re HY, it's HY, just not junk. And if you agree with French then you would not own the fund because would only recommend A) investment grade which the fund is not B) no bonds which have calls--which the fund does own So I repe...

Bradley First re the Vanguard fund you cite, it's only a matter of degree re HY, it's HY, just not junk. And if you agree with French then you would not own the fund because would only recommend A) investment grade which the fund is not B) no bonds which have calls--which the fund does own So I repe...

There is so much about this that is wrong. Most academic works ignore the cost of implementation of theory. No e/r's, no trading costs and no investment advisory fees. Since most properly constructed portfolios have sufficient exposure to to commodities through the companies that grow, mine and prod...

Bradley I have already answered that question many times. Even presented the evidence many times. I am working now on a paper to expose seven of the criticisms as either patently wrong or irrelevant--which btw includes French's comments. Note I was present when French made his original presentation....

Some shocking data, at least to me, and another example of the dangers of active management--style drift

http://www.cbsnews.com/8301-505123_162-57589658/how-much-of-your-bond-fund-is-actually-in-stocks/

Best wishes
Larry

Richard
I understand the skepticism which is always healthy but FF looked at the data and found strong statistical significance that profitability persists out for about 7 years if memory serves.
Larry

dave
everything would depend on the amount of tilt you added.
Infinite number of possibilities.
But what the data shows clearly is that by diversifying across risk factors you create more efficient portfolios--with less tail risks

Larry

Dave I don't think it contradicts him. Remember it's still a value stock, just not quite as valuey--so you get less of the value premium but pick up the profitability premium and the net impact is significant. Same thing btw with MOM, add MOM and you get more growthy for obvious reasons--so you lose...

for those actually interested in the literature (vs just opinions and quotations without context)-here is a list of papers from my chapter on commodities in The Only Guide to Alternative Investments You'll Ever Need Paul D. Kaplan and Scott L. Lummer, “An Update: GSCI Collateralized Futures As a Hed...

Electron
check the Fed chart on Merrill Lynch's index on spreads--5% appears to be about the long term average--though with weaker convenants that the same thing as a lower spread--not being compensated for the risks
Larry

Richard Re earnings-the BIG contribution by Novy Marx was to move up the income statement, not looking at NET INCOME but gross profitability instead, avoiding many of the problems of manipulation of income--like the well known accrual problem BTW-it turns out that highly profitability companies are ...

Iorek The issue is that we cannot know the future--we can at best estimate the mean expected return and then avoid making the mistake of treating that mean as what will actually happen as opposed to that it's only a mean with a wide potential dispersion The problem arises if the left tail risk shows...

iorek The point is not to predict what you might do in 15 years but to see what if any options you have that you would actually be prepared to EXERCISE to prevent the plan from failing (if the left tail risks appears). If you don't have options that you could exercise then you should change the base...

also depends on which way rates move
Remember corporates have calls creating asymmetric risks--they don't rally like Treasuries do in falling rates

Larry

electron That certainly is true. It used to be that only companies that could put up significant collateral could issue such debt. Typically value companies, borrowing in effect against their assets. Then came the 90s and growth companies like telecom started to be able to issue HY, and convenants l...

http://www.cbsnews.com/8301-505123_162-57589635/trust-models-over-instincts/

This is why passive investing is the winning strategy

Larry

nisiprius There are several reasons why you might see divergences and you only have to look back to 2008 to see that. You can have flights to quality and/or liquidity which can cause correlations to change rapidly. Just another example of why you need to understand that correlations of most asset cl...

As you know,there has been a debate about the relative value of HY in a portfolio. Some things, as I have pointed out are just a matter of opinion. Such as Rick thinks that HY has enough unique risk to justify an allocation and I don't. That's opinion. Rick believes you should ignore the historical ...

Rick I already explained that HY tends to LEAD, which is part of the reason the correlations drift. As I explained, while the stock market is more impacted by emotional retail investors and their cash flows, bonds are more dominated by institutional players--in fact almost all bond trading is done b...

Brad
Just one comment, the purpose of the high tilt low beta portfolio is to cut tail risk, reduce volatility.
Adding LT bonds to a low beta portfolio increases the tail risks/sd. So IMO it defeats the purpose
Best wishes
Larry

Rick That's right, every single paper is wrong. Each and everyone that come to the same conclusion is wrong. None of them know what they are talking about. That is what you are telling us. Your arguments simply make no sense as I have shown. It's not relevant that one cannot predict what the exact m...

, Larry's "correlation drift" explanation of why high yield outperformed both stocks and bonds is a backward way of saying his hybrid model does not work in the real world. Saying this doesn't make it true. In fact it's sheer nonsense. As Rick notes in his own book, correlations drift, th...

One more insight from the chart If you look at it for the period just before the 10 years, the three before you see that HY spread doubled from 5 to 10 at exactly the wrong time--when the risks to stocks showed up. Another perfect illustration of the dangers of HY and how it increases tail risks and...

Frengo Of course it applies to high cost funds Your last example is like the one I use, the guy who owes money to Tony Soprano who thus wants a fat tail distribution and prays for the right side--he's dead anyway so might as well go for it. Everyone else should prefer the thin tail distribution--and...

jmk
If it was possible to give you a formula I would have.
For better or worse AA is just as much art, if not more, than science.
They key is to understand the issues so that you can decide for yourself the right AA for you. Have to know the questions to ask
Larry

Valuations matter and they matter a great deal. Low valuations predict high returns (though not guaranteed) and vice versa. The beginning of the 10 year period just happens to coincide with the beginning of the big rally in HY from point when the spread was then very high, in fact I believe it was t...

CDs certainly can be attractive and we use a lot of them for variety of reasons No credit risk if stay within limits of FDIC insurance Lost of dumb banks out there who misprice optionality (undervalue the early redemption feature--the marketing guys design these products often, not the finance guys)...

Given the debate on whether HY is a hybrid security of some type or not thought those interested in the actual literature would find these of interest The first is a fairly recent paper from the Journal of Applied Corporate Finance • Volume 21 Number 3,with some highlights on the specific issue http...

Frengo I disagree with your premise on whether investors drive up the price of these structured notes and similar products. Yes it's true the prices are set by the product purveyors, but they set them at very high prices because the demand (excessive) is there. If investors were not willing to overp...

Frengo The issue on insurance is that with investment products like structured notes they vastly overpay and it makes no sense whatsover because the same objective can be achieved with much lower cost The lottery ticket effect is simply suboptimal unless you are a real risk lover with a very high ma...

Frengo
That is exactly what a preference is about, it's what leads to skewness preferences.
Larry

Disco Wow. IMO your comments are way off base, First, if you have a plan it's based on assumptions about your ability, willingness and need to take risk. If the underlying assumptions have change one clearly should change the plan because the original assumptions are in effect what would be called &...

Rick has made the following claim repeatedly High yield outperformed stocks and bonds following the financial crisis. That could not have happened under this "hybrid" theory of HY being put foward. It doesn't matter how many old and incomplete acedemics studies of HY are mentioned in an at...

Valuethinker There is a difference here I would point out First, as you note valuations matter. And high yield debt was at enormous record spreads in 2009, compensating for the enormous risk to the economy. That of course meant high expected returns. But as I have pointed out to Bill Bernstein at th...

gmoney
Yep, unfortunately for many if not the vast majority of investors emotions take over not rational economic thinking and that leads to the triumph of hope and greed and envy over wisdom, experience and data
Larry

Frengo The answer has two parts If you pay more than the expected value you are clearly overpaying relative to the fair value. However, if you have a preference for skewness you are saying I am willing to pay above fair value because I value the small possibility more than is economically the case. ...

Rick You might think twice about such comments as not only do I believe that to be true every academic I have discussed this was does and there are peer reviewed papers on the subject. Perhaps you are the one that should think seriously about the issue. As I said, it is not only my thesis, it's you ...

Frengo The preference to avoid negative skewness and the like of positive skewness leads clearly to two things A) People overpaying in general for insurance products like guaranteed minimum return products B) People overpaying for lottery type distributions, so you get lousy returns on IPOs, small g...

FWIW
generally there are three categories used
Investment Grade AAA/AA/A/BBB
High Yield BB/B
Junk-all else

Larry

Nisprius Yes it's unfortunate but it's the way it is because of SEC rules. So fund families have to make the prospectuses so broad that they can often become meaningless in telling you want the fund really does. Otherwise they might be forced into expensive actions to address unique market situation...

[From a duplicate thread, which I've merged into here. See below --admin LadyGeek] It's all about skewness, their dislike of negative skewness causes them to buy insurance and their love of positive skewness causes them to overpay for investments with that trait (small growth, IPOs, etc) http://www...

baw Few thoughts First, the Larry portfolio would not own REITS at all, low expected returns, especially at today's valuations Second, the Larry portfolio is designed to be low beta and high tilt. You don't really have either, with your only tilt being to SV in the US and EM small (though I prefer E...

Mill First, IMO everyone needs one. It's a great reminder to yourself in times of stress about why you chose your allocations, as it should be laid out in the IPS.My experience is that writing and SIGNING it increases the likelihood you'll stick to it. Second, if you are married and you are the one ...

nisiprius As I have explained in the past the prospectuses are written to give the fund great flexibility, typically far more than expected to be used by a passive fund. The reason this is the case is that they don't want to have to get permission to do something if an unusual market condition occur...

Lady Geek First high yield refers to the riskiest credits within a broader asset class like corporates and munis (as pointed out) Second, while all corporate bonds have their returns to some degree explained by equity returns (that is what is meant by a hybrid security, the returns are explained by ...

They hate negative skewness (which is why there is a big ERP) and love positive skewness (which is why SG stocks and IPOs and penny stocks and stocks in bankruptcy all due poorly) http://www.indexuniverse.com/sections/features/18969-swedroe-the-skinny-on-skewness.html Hope this is of interest Larry

Thought I would add just this one of many reasons for my above statement--as I explained to one Boglehead who PM'd me on the subject Five years ago the spread on HY was about it's all time high--so looking at returns from that as your start point is like looking at stock relative to bond returns whe...

AFan Yes I agree you cannot predict relative return, but that isn't the issue. The issue is simply: is the strategy design likely to under or outperform the benchmark index? If it outperforms and is clear then you should be glad. There is nothing special about matching an index. What most indexers f...

The PIMCO fund is run as what is called a FULLY COLLATERALIZED fund, just as the DFA fund is
Larry