Large Value tilt?

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Jerry_lee
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Re: Large Value tilt?

Post by Jerry_lee »

abuss368 wrote:
Default User BR wrote:
abuss368 wrote:Jack Bogle had a small but interesting write up in his book "The Little Book of Common Sense Investing".

You can tilt to large and small, but if you invest in the Total Stock Market fund for the long term, there is no need to add the complexity and headaches.
As usual, you seem to imply that there will be no difference in return for the two strategies. This is very likely incorrect.

The headaches for this "complexity" are not really of any significance.


Brian
Hi Default User BR,

Total Market investing has been called the efficient frontier of investing. Taylor Larimore has provided and excellent link to research that discusses this. I recommend that anyone take some time and read this.

Mr. Bogle and David Swensen, who know more about investing than anyone will in their lifetime, have also discussed this matter in depth in their many excellent books, articles, and video interviews available on line. The way I look at it, anyone who can create a company like Vanguard, and another individual who has grown the Yale endowment from just under $1 BILLION to over $20 BILLION, are so successful and knowledgable, that no one else can even come close.

Warren Buffett has stated many times that investors would be best off owning a Total Market Index fund that is low cost.

I understand the slice and dice/tilt folks have a hard time acccepting this, and that is ok. Eventually they will see the many benefits of total market investing.

The experts at Vanguard design nearly all of their fund of funds (i.e. Life Strategy and Target Retirement series) with the Total Stock, Total International, and Total Bond (i.e. the later funds near the target retirement date include Inflation Bonds and a Money Market). Their research on their website also point to the overwhelming facts.

We all think we are smarter than the next guy. We have a "leg up" on the competition. We just "know" more. In some respects it is human nature. Me? I choose to follow the lead of Jack Bogle, David Swensen, and Warren Buffett. I just listen to them.

More funds result more headaches, more rebalancing issues, more concerns for heirs, more administration, more tax considerations, more paperwork, etc. with no benefits.

Another benefit, and one that another forum member "craigr" also highlighted a week or two ago. It is incredible at my firm during tax season how we compare and contrast the Total Market folks and the Slice and Dice crowd with their many funds. We review investment statements, returns, tax implications, and the actual tax return. For the Slice and Dice folks, the trading, rebalancing, fees, etc. all add up and detract from returns. These clients pay much more in tax, have more concerns, and the overall return is that much less. Not to mention we charge them more to record all the activity. We meet with the clients, review the results and tax return, point this out, with most clients admitting a more simple portfolio is that much more effective. For our Total Market Index clients, they pay so much less in tax, less fees, minimal rebalancing, their spouses are so thankful for the simplicity and are more confident should something happen to their spouse. Every year the results note how the Total Market folks just lead the race year in and year out. It stinks for the slice and dice folks and some have a hard time accepting it. Can it really be this easy? Can I stop pretending to do all this "extra".

I would try a simple Total Market portfolio such as the Three Fund as noted by Taylor Larimore and Vanguard or even the Core-4 as recommended by Rick Ferri. Who knows, you might like it. If after some time, add a fund or two if you want. You might do better, but you can do a lot worse.

Let us know your thoughts and concerns. There are many knowledgable folks on the forum that can explain in further detail.

Hopefully that explains things a little better.

Kind regards.
Abuss368,

I pretty much disagree with everything you say above.

1. TSM may be on the "efficient frontier" in a one-factor (beta) world where a stock's expected return is soley a function of its covariance with the market, but we obviously don't live in that world. Fama has said that the CAPM is an elegant model, except its wrong. We live in a 3 factor world, whereby the market portfolio is just one allocation among many that are appropriate across a spectrum of size and value possibilities. So this claim is wrong.

2. Multifactor investors (what you call "slice and dice" investors) appreciate the market portfolio...as a LG oriented component in a multi-asset class portfolio. I have shown many times that TSM or S&P 500 (there really isn't much difference between the two) are a worthwhile component in a LG/LV/SV portfolio. It is TSMers who refute any additional diversification across equity dimensions, although apparently REITs (an "industry") are an exception?

3. I am not so sure a multi-asset class portfolio has any of the additional headaches you list. I looked at a tax-managed US large growth, large value, small value mix (30/30/40) for the last 10 years and found it shed 0.4% of its return to taxes. Vanguard'd TSM fund lost 0.3%. So that is just a rounding error. To the extent that sometimes SV loses money when LG is positive (and vice versa), you have more tax-loss harvesting opportunities. And finally, lets not forget, because a multi-asset class portfolio earns its returns from multiple risk/return sources with less than perfect correlation, we should also expect a smoother long term outcome--with the expectation of higher returns over the LG heavy TSM portfolio. Not sure what heirs would find complicated about this? Unless you mean 'mo money, 'mo problems?

4. I find your personal tax firm example unconvincing, as my experience comes to the opposite conclusion. First, I doubt you have a sample of investors large enough to gauge the relative implementation and management complexity of a TSM vs. asset class based approach on all the issues you mention over a sufficiently long period of time. And I am not sure you are accurately representing "slice and dice" investing (or as I call it, asset class investing). Are you including everyone in this S&D group who holds multiple funds (index or otherwise)? If you are, that is a pretty big tent that covers a lot of problematic approaches--active investing,tactical management, etc.. If we instead take asset class investing to be a TSM (or S&P 500)/LV/SV, ILV/ISV/EMV portfolio, I simply do not believe there is any meaningful added complexity, tax insensitivity, or general problems that a basic knowledge of spreadsheets can't solve. TM portfolios and ETFs exist in most of these asset classes, so the tax issues are moot. Rebalancing with cash in/outflows or dividend distributions succeed at keeping a multi-asset class portfolio in line without excessive buys/sells. Finally, asset class investors have of course earned higher returns over market portfolios, so I can't imagine anyone taking issue with that? Also, it is not necessary to hold multiple asset class portfolios to tilt the market away from its natural LG heavy weights. Using DFAs Core Equity portfolios, and TA US and World exUS Core in particular, an investor can achieve the same simplicity and tax sensitivity as a Total Market approach with higher expected returns from modest tilts to small and value. ETF investors can do something similar with TILT.

5. As to the conversion of many investors (S&D or asset class?) to a TSM approach, I don't think so. As the old saying goes: fool me once, shame on you...fool me twice, shame on me. And unfortunately for TSM investors, they've now been "fooled" twice in the last 40 years into thinking the LG heavy index was all they needed. 1965-1981 and 2000-2012 are two excessively long periods where TSM had 0% real returns, yet size and value premiums (expectedly, due to their unique risks and low correlations with the market factor) had above average payoffs, lifting a titled market portfolio well above a TSM allocation and the subsistence level in general. Of course, you see many TSMers throwing in the towel in very subtle ways already -- adding REITs (and "industry") to TSM/TISM is just one widespread example.

No, when you really look at it from all angles, the case for "TSM-only under all circumstances" point-of-view is far from ideal, and won't work for most investors. The pro-TSM arguments don't hold up under even modest levels of scrutiny.
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Trev H
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Re: Large Value tilt?

Post by Trev H »

In 4 Pillars - wbern suggested that Sheltered Sam hold the US Equities like this...

38% Large Value
31% Large Market
23% Small Value
08% Small Market

PS - Had to round those off a little.
He actually suggested a US and International Mix and included a slice of REIT.

But if you convert his US equity S&D suggestion to US only % you get above.

The X=Ray for his US Equity suggestions is...

28-19-10
09-06-03
12-09-04

I have done many (MANY) backtest on different equity mixes, and Sheltered Sam is a sweet mix.

It does not work for me though - since I prefer equally weighted, significantly different slices in my mix.

Trev H
steve_14
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Re: Large Value tilt?

Post by steve_14 »

Year to date returns:

Vanguard Growth Index Fund: 16.08%
Vanguard Value Index Fund: 11.02%

Can you guess which half, or third, of the market will outperform going forward? I sure can't.
Jerry_lee
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Re: Large Value tilt?

Post by Jerry_lee »

steve_14 wrote:Year to date returns:

Vanguard Growth Index Fund: 16.08%
Vanguard Value Index Fund: 11.02%

Can you guess which half, or third, of the market will outperform going forward? I sure can't.
Steve,

You can appreciate why absolutely no one finds ~7 month returns a compelling argument for what our expectations should be over long periods of time? I am thinking that if you wish to refute the validity of the value premium, you may want to explain to us why this study is wrong: http://robinswoodfinancial.com/document ... d98678.pdf.

Looking forward to your responses!
The most disciplined investor in the world.
GammaPoint
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Re: Large Value tilt?

Post by GammaPoint »

I have a separate large value allocation, although I tilt to small value more.
steve_14
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Re: Large Value tilt?

Post by steve_14 »

Jerry_lee wrote:
steve_14 wrote:Year to date returns:

Vanguard Growth Index Fund: 16.08%
Vanguard Value Index Fund: 11.02%

Can you guess which half, or third, of the market will outperform going forward? I sure can't.
Steve,

You can appreciate why absolutely no one finds ~7 month returns a compelling argument for what our expectations should be over long periods of time? I am thinking that if you wish to refute the validity of the value premium, you may want to explain to us why this study is wrong: http://robinswoodfinancial.com/document ... d98678.pdf.

Looking forward to your responses!
I'm saying that I personally can't guess whether certain stocks, or industries, or countries or styles will outperform an a relative basis over any time period, especially on a risk adjusted basis.

Australia or Germany? Couldn't tell ya. GE or Google? No idea. Consumer or Financial? Ditto. "Growth" or "value" (in any of the many ways those are defined) - not a clue. Not over seven months, or seven centuries.

If you've got the gift, more power to you. Short one, go long the other, use options, make some quick millions.

Edit: I took at the paper you linked to, it appears to be authored by the guys who "created", and have made a lot of money off of, the "value premium". It also appears to use a unique data set that shows a value premium, where in fact there is none in real world fund returns, see my recent post here: http://www.bogleheads.org/forum/viewtop ... st=1472829 . It also covers a time period before any premium was discovered, and would thus be traded away out of sameple. So I can't say it has much real world value to an investor.
Jerry_lee
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Re: Large Value tilt?

Post by Jerry_lee »

steve_14 wrote:
Jerry_lee wrote:
steve_14 wrote:Year to date returns:

Vanguard Growth Index Fund: 16.08%
Vanguard Value Index Fund: 11.02%

Can you guess which half, or third, of the market will outperform going forward? I sure can't.
Steve,

You can appreciate why absolutely no one finds ~7 month returns a compelling argument for what our expectations should be over long periods of time? I am thinking that if you wish to refute the validity of the value premium, you may want to explain to us why this study is wrong: http://robinswoodfinancial.com/document ... d98678.pdf.

Looking forward to your responses!
I'm saying that I personally can't guess whether certain stocks, or industries, or countries or styles will outperform an a relative basis over any time period, especially on a risk adjusted basis.

Australia or Germany? Couldn't tell ya. GE or Google? No idea. Consumer or Financial? Ditto. "Growth" or "value" (in any of the many ways those are defined) - not a clue. Not over seven months, or seven centuries.

If you've got the gift, more power to you. Short one, go long the other, use options, make some quick millions.
No, of course, you have resorted to the classic TSM "cop out" -- that investors who diversify across asset classes according to the state-of-the-art FF asset pricing model are claiming clairvoyance or an ability to "predict the future".

I'm assuming you are not familiar with the research, so I'll spell it out: financial research has uncovered the existence of three distinct risk/return dimensions in the equity market: overall stock/bond mix, small/large split, and value/growth allocation. Stocks are riskier than bonds, just as small is riskier than large and value is riskier than growth. In each case, higher assumed risk comes with the expectation of a higher return. And because we need all 3 of these risks to adequately explain returns (just stocks/bonds, or beta, is woefully inadequate in describing stock returns), they are unique amongst themselves, and developing a portfolio that is diversified across all risk factors has expected returns well above a beta-based portfolio or any one-factor allocation, yet the total portfolio risks are less than each of the standalone uncertainties by themselves -- simple Modern Portfoliio Theory applied to risk/return dimensions instead of individual securities.

So multi-factor investors logically and intentionally allocate according to the well documented risk/return relationships in the market according to their goals and objectives. We have as much data, confidence, and estimation ability to determine what to expect from size/value as we do stock/bond, so we aren't guessing about future outcomes anymore than you are guessing about the future equity premium. We simply want exposure to multiple sources of expected return, realizing that when one "factor" disappoints (as the equity/beta factor has since 2000 and did from 1965-1981), our entire risk budget isn't tied up in a negative returning return dimension. If you want to bet everything on the reliability of the equity premium and nothing else, then you can roll the dice accordingly.

You'll understand if more enlightened investors aren't as confident in that level of concentration.

Finally, you've referenced the returns of German vs. Australian stocks and equated them to the value/growth decision. GER and AUS are both developed countries with similar overall costs of capital (all developed markets have similar expected returns, but will undoubtedly have different realized returns) and risks and therefore expected returns. So you are of course confusing a risk/return dimension (value vs. growth) with a regional equity breakdown, where the only meaningful difference in risk and return exists between developed and emerging stocks.

This is all pretty basic stuff, I pointed it out in my post about a month ago "This is Why You Diversify" that you commented on (with similar misunderstandings). Just curious, are you really interested in understanding this stuff better, or just putting forth the same well worn and refuted points?
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Jerry_lee
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Re: Large Value tilt?

Post by Jerry_lee »

You slipped this one in after my previous post:
Edit: I took at the paper you linked to, it appears to be authored by the guys who "created", and have made a lot of money off of, the "value premium". It also appears to use a unique data set that shows a value premium, where in fact there is none in real world fund returns, see my recent post here: viewtopic.php?f=10&t=101568&newpost=1472829 . It also covers a time period before any premium was discovered, and would thus be traded away out of sameple. So I can't say it has much real world value to an investor.
So while I was correcting your previous comments, figured I would continue with your latest efforts.

1. The paper I linked from FF was done independently of DFA (they are academics and these efforts are part of their responsibilities at the University of Chicago and the University of Dartmouth). At the time, Fama had worked with DFA on their fixed income funds (but not on equities), and French had no affiliation with DFA. DFA reads all the academic research and asked FF to consult with them to create value strategies based on their research. Incidentally, they do this with other academics as well, working with Joseph Keim (an expert on REITS), Robert Merting (an expert on DC services), etc. In essence, financial academics are their research department. Traditional Wall Street mutual fund firms (including Vanguard) instead farm out portfolio management decisions to active managers and 3rd party index providers with less than optimal results.

How has the theoretical premiums evident in the FF indexes manifested in the live (net of fee) DFA funds vs. Russell indexes (the only index fund family with a non backtested/backfilled and uninterrupted return series over the last 20 years)?

7/1926 - 3/1993
FF LG Index = +9.7%
FF LV Index = +11.7%
FF SG Index = +9.6%
FF SV Index = +14.1%

4/1993 (incept of DFA live funds) - 7/2012
Russell 1000 Growth = +7.2%
DFA US Large Value Fund = +8.7%
Russell 2000 Growth = +6.1%
DFA US Small Value Fund = +11.3%

Using the convention of calculating the "value premium" = (1/2LV+1/2SV) minus (1/2LG minus 1/2SG), we see that the annualized return was +3.3% in the simulated period and +3.4% in the live period. That kinda turns your theory on its head, no?

Instead of dismissing state-of-the-art research with extensive theoretical and practical support, I would urge you to actually take the time to review this stuff, the odds are high you will find your previous conclusions invalidated.
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ks289
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Re: Large Value tilt?

Post by ks289 »

Jerry,
Thanks again for the great analysis.

I noticed your mention of specific factor loadings of 0.2 size and 0.2 value. There have been threads on this before, but what is your opinion of reasonable goals for size and value loadings for U.S. and International? Do you have a preferred way to calculate the factor loads? I have used methods described on prior threads on this board.

http://www.bogleheads.org/forum/viewtop ... 1261448089

I also have noticed many different ways to attempt to design a portfolio with specific factor loadings, including extremely cool and simple ones by Trev H. How do you feel about using the Morningstar X-ray analysis in this way?
garlandwhizzer
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Re: Large Value tilt?

Post by garlandwhizzer »

I pose some questions for those who slice and dice with a heavy exposure to small value.

First of all let us assume that the small and value premiums are real and have worked in past according to the F&F model. Second, let us also assume, as most SV stalwarts argue, that DFS does a better job of capturing these premiums because they take heavy exposure to the smallest stocks and to the deepest value stocks, micro-cap deep value stocks. Clearly a fund which has little microcap exposure and moderate exposure to value and small size, a fund like Vanguard's VISVX doesn't capture it. VISVX has underperformed VISGX YTD, 5YR, 10 YR, and since inception 14 YR ago. Both these funds have essentially the same size exposure and so the underperformance difference implies that over that time period as measured by the Vanguard, a sophisticated index constructor, value was a negative factor relative to growth, which is supposed to be the black hole of investing dollars.

Perhaps this is due to the periodic shifts in outperformance from value to growth styles and back, but 14 years is a long time to wait for a payoff and there's always the possibility that you had to sell some of your SV position to make expenses during that time period, cashing out your relative underperformance.

Now, SV adherents might argue that during that same time period DFSVX outperformed both VISVX and VISGX, demonstrating that DFA in fact captured the premium while Vanguard failed. In other words, the premium exists but not everyone who tries to capture it, even very intelligent well-intentioned market students like Vanguard has, can capture it with their models. The question I pose here is that if a value factor is real and pervasive, it should show up consistently over long periods of time in direct proportion to its exposure in a portfolio and we have here a clear demonstration that it shows up only at its most extreme, deep value microcap stocks. If the value premium is real and pervasive, there should be a gradual distribution of excess return from the most extreme situation to the least extreme and we don't see that in the Vanguard example at least. Clearly VISGX has a negative value exposure and VISVX has a positive one and if DFSVX captured it why didn't VISVX get at some of it and why did VISGX with none of it outperform?

One final point. Microcap stocks comprise 2.44% of the US stock market according to Morningstar. Let us assume that Microcap value stocks comprise one third of that, .79% of the market, and that DEEP value comprises the lower half of the value spectrum, 0.395% of the US stock market. The problem with investing in this tiny market segment is that success eventually breeds failure, just as it does eventually with all successful actively managed funds. As more and more investment dollars pour into such a small slice of the market, these relatively illiquid stocks get their prices bid up and suddenly what used to be deep value is now shallow value or core and the premium may be lost, just as it apparently is with many funds that attempt to capture it. If you are a true believer in DFSVX and you wish to maximize your future gains, you may not want to toot its horn too loudly on this forum.

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stevewolfe
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Re: Large Value tilt?

Post by stevewolfe »

14 years isn't that long of a time actually. And I disagree on DFSVX - you can shout it from the mountain tops and it won't matter because the vast majority of investors don't have access to this fund.

You make some very valid points about trying to construct a mouse trap to capture the small and value premiums. Some of the very nature of indexing goes against this in my opinion - and Vanguard's too as they changed their small value index in 2003 to add buffer zones so they won't have to sell as quickly when a stock moves out of the value / small band.

At the end of the day, there are some drawbacks to formulaic approaches to managing sub-segments of the market. You have to accept those trade offs for a fund like Vanguard Small Value vs. other funds like DFSVX (and even T. Rowe Price Small Cap Value - which shows as a blend because, while they buy with value discipline they do not necessarily sell based on stocks moving out of small / value bands or expiring in a buffer zone - this is also why that fund has a consistently lower turnover than the Vanguard fund).
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abuss368
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Re: Large Value tilt?

Post by abuss368 »

steve_14 wrote:
Jerry_lee wrote:
steve_14 wrote:Year to date returns:

Vanguard Growth Index Fund: 16.08%
Vanguard Value Index Fund: 11.02%

Can you guess which half, or third, of the market will outperform going forward? I sure can't.
Steve,

You can appreciate why absolutely no one finds ~7 month returns a compelling argument for what our expectations should be over long periods of time? I am thinking that if you wish to refute the validity of the value premium, you may want to explain to us why this study is wrong: http://robinswoodfinancial.com/document ... d98678.pdf.

Looking forward to your responses!
I'm saying that I personally can't guess whether certain stocks, or industries, or countries or styles will outperform an a relative basis over any time period, especially on a risk adjusted basis.

Australia or Germany? Couldn't tell ya. GE or Google? No idea. Consumer or Financial? Ditto. "Growth" or "value" (in any of the many ways those are defined) - not a clue. Not over seven months, or seven centuries.

If you've got the gift, more power to you. Short one, go long the other, use options, make some quick millions.
M
Edit: I took at the paper you linked to, it appears to be authored by the guys who "created", and have made a lot of money off of, the "value premium". It also appears to use a unique data set that shows a value premium, where in fact there is none in real world fund returns, see my recent post here: http://www.bogleheads.org/forum/viewtop ... st=1472829 . It also covers a time period before any premium was discovered, and would thus be traded away out of sameple. So I can't say it has much real world value to an investor.
Hi steve_14,

I tried to explain the total market approach and my first hand experience compared to the slice and dice to certain folks above in a very simple manner. Unfortunately some folks just don't understand. I would not worry about it. The total market portfolios will come out ahead anyway.

Kind regards.
John C. Bogle: “Simplicity is the master key to financial success."
Default User BR
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Re: Large Value tilt?

Post by Default User BR »

abuss368 wrote:I tried to explain the total market approach and my first hand experience compared to the slice and dice to certain folks above in a very simple manner. Unfortunately some folks just don't understand.
There's a big difference between not understanding and not agreeing.


Brian
Default User BR
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Re: Large Value tilt?

Post by Default User BR »

abuss368 wrote:I understand the slice and dice/tilt folks have a hard time acccepting this, and that is ok. Eventually they will see the many benefits of total market investing.
This is nonsense. The academic research is clear.
abuss368 wrote:For the Slice and Dice folks, the trading, rebalancing, fees, etc. all add up and detract from returns. These clients pay much more in tax, have more concerns, and the overall return is that much less.
More nonsense. I have not had to rebalance except with new contributions for almost two years. I have no trading costs because I choose my custodian carefully. I have no tax drag because no only have I not had any realized gains, but have banked considerable losses from the 2008 downturn that I use to reduce ordinary income tax.


Brian
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abuss368
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Re: Large Value tilt?

Post by abuss368 »

Default User BR wrote:
abuss368 wrote:I understand the slice and dice/tilt folks have a hard time acccepting this, and that is ok. Eventually they will see the many benefits of total market investing.
This is nonsense. The academic research is clear.
abuss368 wrote:For the Slice and Dice folks, the trading, rebalancing, fees, etc. all add up and detract from returns. These clients pay much more in tax, have more concerns, and the overall return is that much less.
More nonsense. I have not had to rebalance except with new contributions for almost two years. I have no trading costs because I choose my custodian carefully. I have no tax drag because no only have I not had any realized gains, but have banked considerable losses from the 2008 downturn that I use to reduce ordinary income tax.


Brian
Hi Default User BR,

Your posts makes no logical sense. David Swensen, who knows more about investing than both you and I ever will, is pretty clear about investing in the 5 asset classes. There is no value or small cap tilt. Mr. Swensen does not feel this is necessary. Trust me, he was standing 5 feet in front of me.

Let's agree to disagree.

Best.
John C. Bogle: “Simplicity is the master key to financial success."
Default User BR
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Re: Large Value tilt?

Post by Default User BR »

abuss368 wrote:Your posts makes no logical sense. David Swensen, who knows more about investing than both you and I ever will, is pretty clear about investing in the 5 asset classes. There is no value or small cap tilt.
And I would care because . . . ?
Let's agree to disagree.
As long as you understand that when you tell people that your three-fund portfolio will give better returns or that added funds are a headache or cause more taxes I WILL disagree with you.


Brian
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Taylor Larimore
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Tilting away from the Total Stock Market ?

Post by Taylor Larimore »

Abuss:

You wrote:
David Swensen, who knows more about investing than both you and I ever will, is pretty clear about investing in the 5 asset classes. There is no value or small cap tilt. Mr. Swensen does not feel this is necessary..
I am inclined to agree with Mr. Swensen (and Mr. Bogle) about "tilt." This is Morningstar category returns for the 15-year period ending 6-30-00:

Style.......1 Yr.....3 Yr......5Yr....10 Yr....15 Yr.
LCG......27.19...27.04...24.98..17.85...17.15
LCB........8.93...17.29....20.35...15.60....15.23
LCV.......-5.21.....8.74....15.16..13.36....13.45

MCG.....57.24....31.09...24.81...18.14....16.82
MCB.....11.87....12.36...16.09...14.12....14.23
MCV.....-2.56......7.23...13.20...12.77....12.64

SCG......55.14...24.42...20.86...17.12....15.64
SCB......17.77...10.08...15.30...13.03....12.02
SCV......3.29.....3.55...12.58..11.80...11.34

Tilting can be risky.

Three Proofs that TSM is Efficient

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
steve_14
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Re: Large Value tilt?

Post by steve_14 »

Default User BR wrote:
abuss368 wrote:I understand the slice and dice/tilt folks have a hard time acccepting this, and that is ok. Eventually they will see the many benefits of total market investing.
This is nonsense. The academic research is clear.
Would this be the same academic research that showed small value clearly outperforming small growth over the past decade? Because from a dollars-in-my-pocket standpoint, quite the opposite occurred. And I can't spend academic research at the grocery store.
steve_14
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Re: Tilting away from the Total Stock Market ?

Post by steve_14 »

Taylor Larimore wrote:Abuss:

You wrote:
David Swensen, who knows more about investing than both you and I ever will, is pretty clear about investing in the 5 asset classes. There is no value or small cap tilt. Mr. Swensen does not feel this is necessary..
I am inclined to agree with Mr. Swensen (and Mr. Bogle) about "tilt." This is Morningstar category returns for the 15-year period ending 6-30-00:
Yes, reading this board, I'm continually amazed at how people have chosen to follow the "teachings" of a certain fund family and its affiliates, and ignored the many voices, like David Swensen, with no conflict of interest or proft motive whatsoever.

Can someone provide a clue as to what's going on here? I own The Bogleheads Guide To Investing, and it doesn't fall into this trap at all.
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Re: Large Value tilt?

Post by ks289 »

steve_14 wrote:
Default User BR wrote:
abuss368 wrote:I understand the slice and dice/tilt folks have a hard time acccepting this, and that is ok. Eventually they will see the many benefits of total market investing.
This is nonsense. The academic research is clear.
Would this be the same academic research that showed small value clearly outperforming small growth over the past decade? Because from a dollars-in-my-pocket standpoint, quite the opposite occurred. And I can't spend academic research at the grocery store.
Steve,
It sounds like you've got a great strategy working for you, but why bring up recent performance to try to debunk this alternative approach? Moreover, of course nobody knows if these premiums will persist or not or whether individual funds will adequately capture them.

If you wish to speak of dollars in your pocket, the fact that vanguard small cap growth outperformed small cap value should be marginally relevant to you anyway if you are holding TSM or a target fund. The fact that small caps have outperformed TSM/large caps would be more relevant, but again hardly an indictment of the TSM approach.
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Re: Large Value tilt?

Post by steve_14 »

ks289 wrote:
steve_14 wrote:
Default User BR wrote:
abuss368 wrote:I understand the slice and dice/tilt folks have a hard time acccepting this, and that is ok. Eventually they will see the many benefits of total market investing.
This is nonsense. The academic research is clear.
Would this be the same academic research that showed small value clearly outperforming small growth over the past decade? Because from a dollars-in-my-pocket standpoint, quite the opposite occurred. And I can't spend academic research at the grocery store.
Steve,
It sounds like you've got a great strategy working for you, but why bring up recent performance to try to debunk this alternative approach? Moreover, of course nobody knows if these premiums will persist or not or whether individual funds will adequately capture them.

If you wish to speak of dollars in your pocket, the fact that vanguard small cap growth outperformed small cap value should be marginally relevant to you anyway if you are holding TSM or a target fund. The fact that small caps have outperformed TSM/large caps would be more relevant, but again hardly an indictment of the TSM approach.
Well if you want to see if a premium in a manufactured, historical dataset is worth investing in, you'd want to know a) How it works out of sample, and b) If it's capturable in the real world. That limits us, in the case of the value premium, to the last 15-20 years.

The other two factors in the three factor model have been around over a much longer period. DFA's first small cap fund, according to their website, goes back over 30 years. You'd have to risk adjust with any comparison there to TSM over that period.

While you might be right about small value vs growth from a practical sense, from a do-you-believe-in-this model sense, it's hugely important. Small growth is supposed to underperform everything, not just small value. See the second chart here, for example: http://www.efficientfrontier.com/ef/701/sg.htm , which concluded 10 years ago that "There is no question that indexing small-growth stocks is a bad idea".
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Re: Large Value tilt?

Post by abuss368 »

Default User BR wrote:
And I would care because . . . ?

As long as you understand that when you tell people that your three-fund portfolio will give better returns or that added funds are a headache or cause more taxes I WILL disagree with you.


Brian

Hi Brian,

I would like to thank you for your very professional response. When you met Dr. Swensen, did you raise these same points, pound the table, insist you are correct, and that Dr. Swensen has clearly been doing something wrong over the last 25 years? Clearly your responses are based on more fact, intelligence, and results, than David Swensen knows or has acheived. In addition, Mr. Bogle must be wrong as well. His many excellent books including "The Little Book on Common Sense Investing" discusses tilting.

The Three Fund, Core-4, and David Swensen's portfolio from Unconventional Success can not be beat. "Tilting" can be risky. Check the Lazy Portfolio's at Marketwatch. The Yale Portfolio leads the pack (with no "tilting" to value or small).

This will be my last response to your (and another poster above) unprofessional, biased and irrelevant posts.

As such, we will agree to disagree.

Kind regards.
Last edited by abuss368 on Sun Aug 26, 2012 1:43 pm, edited 3 times in total.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Large Value tilt?

Post by ks289 »

Small growth is supposed to underperform everything, not just small value. See the second chart here, for example: http://www.efficientfrontier.com/ef/701/sg.htm , which concluded 10 years ago that "There is no question that indexing small-growth stocks is a bad idea".
Thanks for the link. I appreciate the expertise of Dr. Bernstein.

I am puzzled though how this comparison of active funds crushing index funds in the small growth category is relevant. This is certainly the basis for the conclusion that indexing small growth stocks is a bad idea for the long term. Those who wish to over-weight small growth I guess should be going active funds then. Didn't know that!

It does not say small growth is always going to underperform other categories.
Just like the Mets sometimes win ball games (long suffering Mets fan). :happy
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Re: Tilting away from the Total Stock Market ?

Post by Khanmots »

steve_14 wrote:Yes, reading this board, I'm continually amazed at how people have chosen to follow the "teachings" of a certain fund family and its affiliates, and ignored the many voices, like David Swensen, with no conflict of interest or proft motive whatsoever.

Can someone provide a clue as to what's going on here?
There are many INTPs on this board.
All opinions must get filtered through an analysis procedure to test for viability. No title or claim of being an "expert" carries any weight with an INTP. All people, big or small, are subject to an identical scrutiny.
In other words, we'll gladly accept facts and information; but opinions... those we form for ourselves. Mr. Swensen claiming that tilts are unnecessary (and note this is a far cry from claiming that tilts provide no benefit) is opinion. If he wishes to convince INTPs, he'll need to provide the facts and reasoning behind it for us to consider.


That said, I've got Taylor's 3 proofs link open right now. I find its argument regarding a 3-factor model unconvincing as I believe it has an erroneous assumption as a basis.
A portfolio A is "less risky" than a portfolio B if all three of the risk betas for A are less than or equal to the corresponding risk betas of B, and at least one of A's risk betas is strictly less than the corresponding risk beta of B.
I believe that this is an overly restrictive definition of "less risky" and erroneously excludes portfolio's that have a minor increase in one risk factor for a large decrease in another. For an example consider a portfolio with large increase in overall beta risk at the cost of an increase in size and value risk in order to obtain the same return. The overall risk of this portfolio may well be less than the comparison portfolio. This is a situation that this paper excludes from consideration without explanation.

There's additional assumptions being made in the paper that I likewise see as mis-founded resulting in poorly drawn conclusions. Personally I find myself wondering if this paper has survived a rigorous peer review.
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Re: Large Value tilt?

Post by baw703916 »

khanmots,

I also had issues with this paper. Here's what I posted on another thread, which for some reason got completely ignored...

My major criticism of the "proof" is that it is restricted to U.S. equities. In other words, if an investor has a portfolio which is 100% U.S. equities, then holding all publicly-traded companies in proportion to their market cap is indeed a good strategy. But few people would consider a 100% U.S. equity portfolio reasonable. When additional asset classes are considered, the situation becomes a lot less clear. Foreign equities aren't equivalent to U.S. equities, because of different tax treatment, currency risk, and the economic and political situations in the companies' country of domicile. Nearly every U.S.-based investor departs from the market weights of U.S. vs. foreign equities.

Bonds are even more problematic: "Total Bond Market" isn't--it excludes tax-exempt bonds, inflation-protected bonds, international bonds, and high-yield corporate bonds. There are good arguments for not including these classes in VBMFX, but once again, few people actually hold the market portfolio. Furthermore, unlike equities, for which the market decides on a valuation, with bonds it is based on how much debt an issuer takes on.

My takeaway is that because nobody is going to hold all investible assets worldwide in market weights, it's important to look at how the assets you do hold tend to perform relative to one another under different sets of conditions.
Most of my posts assume no behavioral errors.
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Re: Large Value tilt?

Post by abuss368 »

I love Mr. Bogle's comment: "You simply do not need 8 mutual funds!"

In fact, it is at the bottom of all my forum posts.

Thank you Mr. Bogle!
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Large Value tilt?

Post by stevewolfe »

abuss368 wrote:I love Mr. Bogle's comment: "You simply do not need 8 mutual funds!"

In fact, it is at the bottom of all my forum posts.

Thank you Mr. Bogle!
Yes, the more I spend thinking about this, the more sense it makes. Particularly when my wife isn't nearly as interested in keeping up with things as I'd like. The virtue of simplicity rings more true over time.
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Re: Large Value tilt?

Post by Default User BR »

steve_14 wrote:Would this be the same academic research that showed small value clearly outperforming small growth over the past decade?
I don't recall any such research. What are you talking about? Clearly small growth has prospered. But so have bonds. Are you dumping all equities? It's call "risk" not "guarantee".


Brian
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Re: Large Value tilt?

Post by Khanmots »

baw703916 wrote:khanmots,

I also had issues with this paper. Here's what I posted on another thread, which for some reason got completely ignored...

My major criticism of the "proof" is that it is restricted to U.S. equities. In other words, if an investor has a portfolio which is 100% U.S. equities, then holding all publicly-traded companies in proportion to their market cap is indeed a good strategy. But few people would consider a 100% U.S. equity portfolio reasonable. When additional asset classes are considered, the situation becomes a lot less clear. Foreign equities aren't equivalent to U.S. equities, because of different tax treatment, currency risk, and the economic and political situations in the companies' country of domicile. Nearly every U.S.-based investor departs from the market weights of U.S. vs. foreign equities.

Bonds are even more problematic: "Total Bond Market" isn't--it excludes tax-exempt bonds, inflation-protected bonds, international bonds, and high-yield corporate bonds. There are good arguments for not including these classes in VBMFX, but once again, few people actually hold the market portfolio. Furthermore, unlike equities, for which the market decides on a valuation, with bonds it is based on how much debt an issuer takes on.

My takeaway is that because nobody is going to hold all investible assets worldwide in market weights, it's important to look at how the assets you do hold tend to perform relative to one another under different sets of conditions.
baw, hate to disagree with you, but IMO this isn't a valid criticism of the paper. The paper's purpose is to explore efficiency of the US equities market; as such it intentionally makes no claims regarding the need to add or abstain from international equities nor if their inclusion would improve efficiency or not.

That said, the more I look at this paper the more concerns I have with it and the more I research about the author the more I think it likely that I'm correct that there's serious flaws.
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Re: Large Value tilt?

Post by baw703916 »

Khanmots,

You're right, the consideration of a portfolio beyond a single equities market is beyond the scope of the paper. However, it has sometimes been presented on this board as giving proof that tilting can't improve risk-adjusted returns (except by luck). But since any real-life portfolio will (or should) go beyond a single equity market, the conclusion that an investor shouldn't tilt doesn't necessarily follow--in addition to the point you make about the interplay of risk factors.
Most of my posts assume no behavioral errors.
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Re: Large Value tilt?

Post by steve_14 »

Default User BR wrote:
steve_14 wrote:Would this be the same academic research that showed small value clearly outperforming small growth over the past decade?
I don't recall any such research. What are you talking about? Clearly small growth has prospered. But so have bonds. Are you dumping all equities? It's call "risk" not "guarantee".
I was referring to the Fama/French data, which shows SV outperforming SG over the past decade.
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Re: Large Value tilt?

Post by ScottW »

abuss368 wrote:When you met Dr. Swensen, did you raise these same points, pound the table, insist you are correct, and that Dr. Swensen has clearly been doing something wrong over the last 25 years? Clearly your responses are based on more fact, intelligence, and results, than David Swensen knows or has achieved.
I was unaware that David Swensen's outstanding results over the past 25 years were the result of him investing in a handful of blend index funds.
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Re: Large Value tilt?

Post by Cruncher »

... Particularly when my wife isn't nearly as interested in keeping up with things as I'd like.
In my wife's 401k, I have her in 1 fund, Vanguard Tgt Dated Retirement Fund (TDRF).
In our rIRAs & my 401k, I have 12 funds / ETFs (LB, LV, MB, MV, SB, SV, REIT, LG/Med Intl B, EM, ISV, ISB, TIPS & Total Bond). I started this thread to see if I could simplify my plan without negatively affecting my portfolio. Personally, I don't mind managing it, I actually like to do so. With MS Excel set up, it's pretty easy. That being said, my better half has absolutely no inclination to follow how we invest (she even rolls her eyes when I explain the SINGLE fund in her 401k :oops: ) - yet she has a Master's Degree in Acoustical Engineering.

With my will is a simple letter telling her to convert everything in our rIRAs & my 401k into a TDRF. Come to think of it, I should probably explain what to do with "my" 401k (since our IRAs are with Vanguard, it should be a simple request to direct it to a tIRA).

Thanks again for all the dialogue.

Cruncher
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Re: Large Value tilt?

Post by abuss368 »

Cruncher wrote:
... Particularly when my wife isn't nearly as interested in keeping up with things as I'd like.
In my wife's 401k, I have her in 1 fund, Vanguard Tgt Dated Retirement Fund (TDRF).
In our rIRAs & my 401k, I have 12 funds / ETFs (LB, LV, MB, MV, SB, SV, REIT, LG/Med Intl B, EM, ISV, ISB, TIPS & Total Bond). I started this thread to see if I could simplify my plan without negatively affecting my portfolio. Personally, I don't mind managing it, I actually like to do so. With MS Excel set up, it's pretty easy. That being said, my better half has absolutely no inclination to follow how we invest (she even rolls her eyes when I explain the SINGLE fund in her 401k :oops: ) - yet she has a Master's Degree in Acoustical Engineering.

With my will is a simple letter telling her to convert everything in our rIRAs & my 401k into a TDRF. Come to think of it, I should probably explain what to do with "my" 401k (since our IRAs are with Vanguard, it should be a simple request to direct it to a tIRA).

Thanks again for all the dialogue.

Cruncher
Hi Cruncher,

This too was another HUGE benefit of the Core-4 (and also Taylor Larimore's/Vanguard's Three Fund Portfolio). I also wrote a few pages of "advice" that is with the will. I always wrestle with Core-4 or Three Fund here in this letter. My spouse is aware of everything, but not involved with the investing.

I know my wife will not be rebalancing, following, or messing around with TIPS, international real estate, small caps, value, or any other "tilts".

Besides, she would need "income" to live from.

Thank you Mr. Bogle for providing us with total market passive indexes and simplicity.

Hearing that you also wrote a letter with your will provides some comfort. Now I don't feel "alone".

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Large Value tilt?

Post by William4u »

Cruncher wrote:With my will is a simple letter telling her to convert everything in our rIRAs & my 401k into a TDRF.
I have thought about the same issues, since I'll probably go long before my spouse. My spouse does not know much about retirement investing either, and she has no interest in it.

I'd convert to TDRF (a Vanguard Target Date Retirement Fund) long before you pass on. It will likely make little difference to the returns of your portfolio, and it has the huge advantage of making things simple for a grieving spouse who is not well versed in retirement investing.
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Re: Large Value tilt?

Post by Cruncher »

William,

I agree. My bride is a bit older than me, not by much (couple months), but I still remind her on occasion :mrgreen: . If I knew my time was up, yea I'd convert it all. But if I go in a giant ball of flames, well guidance is there too. As a former Marine, we had a little saying, no matter how difficult whatever we were doing was, we were above ground. A corollary to this was, every day you woke, you were one day closer to your day. Thanks for your advice though.

Abuss,

Good words, peace.

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Marine ?

Post by Taylor Larimore »

Cruncher:
As a former Marine . . .
Mel told me: "Once a Marine, always a Marine?"

Thank you for your service.

Best wishes
Taylor
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Re: Large Value tilt?

Post by Mel Lindauer »

Cruncher wrote:William,

I agree. My bride is a bit older than me, not by much (couple months), but I still remind her on occasion :mrgreen: . If I knew my time was up, yea I'd convert it all. But if I go in a giant ball of flames, well guidance is there too. As a former Marine, we had a little saying, no matter how difficult whatever we were doing was, we were above ground. A corollary to this was, every day you woke, you were one day closer to your day. Thanks for your advice though.

Abuss,

Good words, peace.

Cruncher
Thank you for your service. Semper Fi, brother!
Best Regards - Mel | | Semper Fi
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Re: Large Value tilt?

Post by Cruncher »

Taylor,

Very true. There are few ex-Marines. Once a Marine, Always a Marine.

Mel,

Semper Fi to you my brother!

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Re: Large Value tilt?

Post by Taylor Larimore »

Cruncher/Mel:

Never forget: Paratroopers landed first to clear your way. :wink:

Best wishes
Taylor
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Re: Large Value tilt?

Post by abuss368 »

Thank you Taylor, Mel and others for your military service.
John C. Bogle: “Simplicity is the master key to financial success."
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