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zalzel

. Isn't it ironic... that in the final chapter of your tilting story (not that I don't expect sequels), in which the dramatic conclusion is that you have abandoned your S/V tilt, the word "capitulation" was not mentioned a single time? An investor must strive for a capitulation risk of zer...

zalzel

. My portfolio has been an open book and I see no reason to close it now. Furthermore, opening one's self up to ridicule is a community service... After believing that I had come to an understanding of the unique risks of S/V tilting early in May, I proceeded to S/V tilt my portfolio (rather than in...

zalzel

. Who should tilt to SV? Everyone who has the discipline to stick to a non-market allocation and ... Note: underlining added. The capitulation risk due to negative tracking error regret can ... lead one to the sell-low/buy high cycle of panic, capitulation, and loss. ... perhaps the major issue. .....

zalzel

. Who should tilt to SV? Everyone who has the discipline to stick to a non-market allocation and can do so at a reasonable cost (including tax costs). Note: underlining added. Hi Alex. You make that sound so easy. Tracking error (relative to TSM) is part and parcel of a non-market allocation. The c...

zalzel

. As an aside, my investment behavior is similar to zalzel in that I am generally feel bull markets will not last so I tend to move equity to fixed income when the market is exurberant. Hi Norm. We agree on so much these days! However, I do not necessrily agree with the market timing approach you h...

zalzel

. Who should tilt away from the Market portfolio? My wife and I should tilt. (snip) Why we ultimately don't tilt: (snip). Hi AC. Your post is perfect, except for the first line. You have, as every wise investor might do, considered S/V (and L/G) tilting, and with the cogent analysis you outlined ha...

zalzel

. A quick poll of people on this site would give far less than 50% LG tilters. I'll admit it is a slightly biased sample . Underlining added. Hi wearathefall. You might find the following interesting. I certainly do. Google search: 'site:diehards.org "search phrase"' "small value"...

zalzel

Hi Rod.

Rodc wrote:
Of the remainder, 50% are expected to tilt to Large/Growth, and 50% to Small/Value.
I think what you mean to say is half the money must be tilted one way, half the other, as the tilts must cancel out ...

That is an important, and correct, distinction.

Tx.

Z.

zalzel

. Who should tilt away from the Market portfolio? It is the rare individual who will match up exactly with the, hypothetical, average market participant. Thus, the vast majority of individuals would do well to consider tilting away from the market portfolio . After further reflection, including atte...

zalzel

Hi Trebor. Repeat after me. There is no free lunch. There is no free lunch. There is no free lunch. There is no free lunch. There is no free lunch. There is no free lunch. Yeah! That works for me also. :wink: You can lose your shirt in the short and the long run. I trust that it is not only I who mi...

zalzel

Hi All. Is my new 45% global equities, tilted portfolio riskier than my previous 45% global equities, TSM portfolio? No. I believe that I understand myself, my goals, and my portfolio well enough such that my capitulation risk is zero, the same as what it was before I tilted. That is what one must s...

zalzel

. Hi James and Richard. One risk you might be taking is the possibility that risk premiums exist because you can lose your shirt over the honest-to-god-long-run period of time. The possibility that risk premiums exist because you can lose your shirt over the honest-to-god-long-run period of time is ...

zalzel

. Hi Eric. That's a very good, and important, observation on your part. I, myself, have gotten into the lazy habit of writing "tilt" when I am referring specifically to "S/V tilt". Build a portfolio of US and non-US stocks, tilt to small/value if you like, and diversify into ST h...

zalzel

.

Once again I find myself in disagreement with my good friend, SmallHi.

SmallHi wrote:90% of this game is having the discipline to stay with the choices you've made when they don't work as well as the simulations would have suggested.

I think its 92%.

Truce?

Z.

zalzel

. I (foolishly) presented the following in a serperate thread. It may help to provide a fuller understanding than what the OP of this thread, alone, offers. A financial portfolio intended to provide for a given consumption expectation, has a risk equal to the probability of it reaching zero value (o...

zalzel

Well, the OP did not give a formal definition of capitulation, but it's clear that it means selling out over a short time period due to panic or illiquidity. The risk of a shortfall and having to go back to work is something different. "shortfall risk" if you will. You are correct. The OP...

zalzel

Hi Paul.

pkcrafter wrote:
tadamsmar wrote:You could have low risk tolerance and have no capitulation risk if your AA was very conservative.
I agree.

Please see my response to tadamsmar above.

Tx,

Z.

zalzel

Hi tadasmar. I appreciate your post. Your thought on the implications of 'time dimension' are spot on. The P.S., I think, is wrong. How about a person who put all their money in CDs because they are afraid of stocks and bonds. They have a very low risk tolerance but their capitulation risk is pretty...

zalzel

I don't see how giving up on tilting, so called "capitulation risk" is any different from your two recent 180's, from tilter, to non-tilter, back to being a tilter. It would seem like you are extremely vulnerable to "capitulation risk" and should go back to TSM immediately. I kn...

zalzel

.

I forgot, in the OP, to thank a person who has been a consistent source of strength, wisdom, good humor and support for me.

Thank you very much Taylor. You rock, dude! 8)

Z.

zalzel

:shock: Didn't you once suggest that tracking error might be less an issue for tilters because they knew couldn't compare to the publicized "Market"? No. From the perspective of tracking a Total Market Index, tilters are, by definition, routinely subjected to tracking error. This can be a...

zalzel

Hi Taylor. Great list. It is so easy to lose sight of the fundamentals. How about these? "Underestimating one's likelihood to panic at a time of market stress is the first step on the sell-low/buy-high cycle of fear, capitulation and loss." "The investor who carefully considers his ca...

zalzel

. I can imagine your disappointment Dave. As I alluded to above, the past few days have been thrilling. Have you had periods when new thoughts and ideas come rushing in? It doesn't get better than that. I do think I may have come up with an original and highly useful framework for all this. But now ...

zalzel

. It's been quite a ride. Some Bogleheads are familiar with the history of my skepticism regarding the purported future benefits of tilting an investment portfolio of equities away from a Total Stock Market Index (e.g. U.S., EAFE, EM) to one that is over represented with shares of Small and Value co...

zalzel

. Those Bogleheads who have been kind enough to make the effort to understand what I have been struggling to say in my most recent postings on this board, might well have suspected that I have been in a state of ferment this past week. I have been, and it has been a blast! I had an 'aha'! experience...

zalzel

. Hi Otto. ... the concept you are proposing is not 'risk aversion/tolerance', as you say, rather, it is more in common with the concept of 'loss aversion'. As I said, capitulation risk is a far larger concept than that of 'risk tolerance'. I personally do prefer 'loss aversion' to 'risk tolerance'....

zalzel

. An investor selecting a portfolio must balance three considerations. 1) How are the monies in the portfolio ultimately to be used? That is, what is the intended consumption (withdrawal, if you prefer) plan? As one example of such a plan, consider: 4%/yr initial withdrawal, increasing yearly to ref...

zalzel

. The following was Posted: Sun May 04, 2008 9:33 pm (cdt). Four hours later, having re-found my voice, I have added the P.S. (left everything else unchanged) and will repost. I feel it important to set the record straight on this. Call me compulsive in seeking out, and describing as best I can, wha...

zalzel

The O.P. has been emended.

zalzel

. A financial portfolio intended to provide for a given consumption expectation, has a risk equal to the probability of it reaching zero value (or a specified minimal value) before that consumption expectation is met. The investor, when selecting a portfolio, must balance all three of: consumption e...

zalzel

. Directly below is revision 1 of the original presentation. It incorporates feedback provided by petrico and leonard. I am grateful for their input. Emendations are highlighted in italics. My thanks to dave.d for his kind words. The original presentation can be found, without emendation, between th...

zalzel

Rodc wrote:

Norm wrote: 8)

________

,

Z.

P.S. The concept of 'capitulation risk' is expanded upon in http://www.diehards.org/forum/viewtopic.php?t=17349

Edited to add P.S.

zalzel

The problem is; why might it be possible that after 16 years, the postulated SmB and HmL risks (consequent to 'unidentified state variables') remain undefined and unquantified? SmB and HmL risks ... have been identified ... (and these are reflected in the return variance of these individual factors...

zalzel

Hi Robert. Your good post raises more questions (in my mind) than it answers. That, of course, is a stimulating, not a bad, thing. I must now hunt down the papers you referenced. ...”a comprehensive 'market portfolio' that in principle can include not just traded financial assets, but also consumer ...

zalzel

Meeting two of UTRSG. Item 1: 'Capitulation Risk' it is! Item 2: Item 1 having been brought to conclusion, UTRSG is now disbanding. Please rest assured that all funds in transit to UTRSG will be used to meet liquidation, and other, costs. Your contribution, of course, is fully deductible.* Z. *From ...

zalzel

And thus, even if one believes the Market Portfolio is optimal, it is almost certainly true that any one part is not optimal. (snip). So, TSM is not optimal, period. Surely one who is interested to do so could start with that theory, and work out some estimate of just how 'sub-optimal' 'TSM' might ...

zalzel

Hi Robert. Note: I have replaced what I actually wrote, for what you apparently felt was an accurate contraction of it. Crucial as one's individual human capital is for their lives (Total Individual Portfolio) it is not listed on any exchange. Thus, one's individual human capital matters not a whit ...

zalzel

Historical U.S. Market returns reveal that, as compared with a general market investor, one who was tilted to S/V was faced with periods of significant underperformance. Some of those occurred at times of general economic anxiety, and were thus particularly inopportune and potentially panic inducin...

zalzel

Surely one who is interested to do so could start with that theory, and work out some estimate of just how 'sub-optimal' 'TSM' might be. IMO this is what Fama-French did. Their two additional risk factors ‘proxy’ the additional set of ‘risk assets’ not included in TSM ... (snip). On first encounter...

zalzel

What is the Total Market? I would, as a first go at it, suppose that it might be the set of all investible assets traded in transparent and liquid markets throughout the globe. IMO investors don’t base their asset allocation decisions only on investible financial assets, but also on how these covar...

zalzel

----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Historical U.S. Market returns reveal that, as compared with a general market investor, one who was tilted to S/V was faced with pe...

zalzel

Hi Rod. I have no problem whatsoever with the raw FF return data. Interestingly, one of the links you provided is one I refer to often. Indeed, I was looking at it earlier today! My interest in joining this thread is the hope that I might come away with a (much) better perspective on how considerabl...

zalzel

The problem as I see it is that the Market Portfolio is optimally weighted in total (supposedly), not in parts (you do not in general get a global optimal solution by optimizing parts and putting them together. That means that once you have a global optimum, each part in isolation is suboptimal. Hi...

zalzel

O.K. It looks as if everybody needed to get a few more things out there. With that, I want to make a second (and probably last) attempt (in this thread, anyway) to see if there is any consensus among the discussants. I have revamped the statement for consideration. Without further ado: -------------...

zalzel

The irony in this whole thread is that the OPer, Zalzel, tactically allocated out of SV last year for fear that it would not keep up with the market going forward and may be primed for a major decline! The OP who questions the risk acted on the risk himself! For that reason alone, these threads are...

zalzel

Hi All. Reviewing the above conversation, it appears to me that this group is dangerously close to consensus on the nature of the (unique) risk(s) presented S/V tilters such that these investers can demand/expect a higher return than can the general market investor. First, a few quotes: "Even '...

zalzel

Hi All. The table below will look familiar as it has appeared in a few guises previously in this thread. While an increase in Sharpe Ratio of tilted portfolios was fully expected, and demonstrated, I must say that I was a bit surprised that the increment wasn't more impressive appearing. Just now as...

zalzel

... I do find him (SmallHi) a credible advocate for tilting one's portfolio towards small and value as long as one understands the risks and are able to stay the course . Of course you do. Easily demonstrated higher risk adjusted returns (or, lower volatility per unit of return) and greater portfol...

zalzel

asses that are expected to decline by 40% to 50% This typo is crying out for a joke, but I can't think of one I can get away with. What do you want to keep your head out from under? :P Z. P.S. I found your latest post quite interesting (and particularly well written/organized). Bravo! (That is not ...

zalzel

pkcrafter wrote: You might have missed it since you and I posted at the same time.

Hi Paul. I think you will get a kick out of the 'P.S.' at: http://www.diehards.org/forum/viewtopic ... 235#201235.

Thanks (again),

Z.

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