Search found 738 matches

by Park
Sun Dec 24, 2023 7:40 pm
Forum: Investing - Theory, News & General
Topic: Replace Bonds With International Stocks?
Replies: 210
Views: 25031

Re: Replace Bonds With International Stocks?

TheTimeLord wrote: Sun Dec 24, 2023 11:28 am
Park wrote: Sun Dec 24, 2023 9:08 am The use of inflation indexed bonds - instead of international stocks - to diversify the long term risk of domestic equities has been brought up.

The following states the obvious, but I still would like to mention it. In a tax free account, I'd agree that inflation indexed bonds can be a good option. In a taxable account, less so. And in a tax deferred account, where taxes will eventually have to be paid, also less so.
Disagree. In a tax deferred account you are investing pre-tax funds so the portion that will be used to pay taxes in the future is also receiving an inflation protected return. So what am I missing?
I"m missing the obvious :happy . I stand corrrected.
by Park
Sun Dec 24, 2023 9:08 am
Forum: Investing - Theory, News & General
Topic: Replace Bonds With International Stocks?
Replies: 210
Views: 25031

Re: Replace Bonds With International Stocks?

The use of inflation indexed bonds - instead of international stocks - to diversify the long term risk of domestic equities has been brought up.

The following states the obvious, but I still would like to mention it. In a tax free account, I'd agree that inflation indexed bonds can be a good option. In a taxable account, less so. And in a tax deferred account, where taxes will eventually have to be paid, also less so.
by Park
Fri Dec 22, 2023 10:35 am
Forum: Investing - Theory, News & General
Topic: Replace Bonds With International Stocks?
Replies: 210
Views: 25031

Re: Replace Bonds With International Stocks?

Lots of people not listening to this at all before chiming in with snarky confirmation bias comments 100% stocks split 50/50 across US/exUS had the least chance of failure. A target date fund or 100% single country stocks was more than twice as likely to fail Bonds have no mean reversion effect; permanent real losses occur, while stocks do offer mean reversion at long horizons In the short term, stocks and bonds aren’t correlated but become 50% correlated at long horizons; opposite is true for US stocks vs ExUS stocks - high short term correlation, low long term correlation. He is arguing that long term horizons are what matters the most, and we should diversify for those in order to minimize failure scenarios. This all assumes that one is...
by Park
Thu Nov 17, 2022 2:12 am
Forum: Personal Investments
Topic: 2024 Savings Goal: Where To Park Money
Replies: 14
Views: 3025

Re: 2024 Savings Goal: Where To Park Money

Where would you park the money? I could use my local CC or my online bank, but the rates are, obviously, unimpressive. Easier would be at Vanguard in my brokerage? Any tax implications? Something like iShares iBonds Dec 2024 Term Corp ETF (IBDP) seems like a natural fit for a 2024 financial goal. Please correct me if I'm wrong. It sounds like you think it's worth trying the get the credit risk premium, when it comes to asset liability matching for a goal 2.5 years from now? I've seen the data you've presented on default rates for investment grade bonds, and it is low. For shorter-term goals, the particular type of bond makes much less difference than it does for longer-term bonds. So for shorter goals, where you wouldn't typically be able ...
by Park
Wed Nov 16, 2022 9:23 am
Forum: Personal Investments
Topic: 2024 Savings Goal: Where To Park Money
Replies: 14
Views: 3025

Re: 2024 Savings Goal: Where To Park Money

vineviz wrote: Thu Jul 28, 2022 6:52 am
bluerafters wrote: Wed Jul 27, 2022 6:11 pm
Where would you park the money? I could use my local CC or my online bank, but the rates are, obviously, unimpressive. Easier would be at Vanguard in my brokerage? Any tax implications?
Something like iShares iBonds Dec 2024 Term Corp ETF (IBDP) seems like a natural fit for a 2024 financial goal.
Please correct me if I'm wrong. It sounds like you think it's worth trying the get the credit risk premium, when it comes to asset liability matching for a goal 2.5 years from now? I've seen the data you've presented on default rates for investment grade bonds, and it is low.
by Park
Fri Jun 24, 2022 11:45 pm
Forum: Investing - Theory, News & General
Topic: Interactive Brokers (Best Kept Secret)
Replies: 924
Views: 207692

Possible US Inheritance Tax Implications For NonUs Resident/Citizen with IBKR Account?

https://milliondollarjourney.com/interactive-brokers-review-canada.htm The following is written from the perspective of a Canadian resident, but it's relevant to anyone who is not a US citizen/resident: "there is a very important question mark when it comes to using any US-based online brokerage as a Canadian resident. This question mark comes in the form of the interpretation of US Tax Law. It’s not that Interactive Brokers is in and of itself unsafe for Canadians to use from a tax standpoint, it’s that the USA has some unique tax rules when it comes to inheritance tax. It gets complicated in a hurry, but the basic idea is that the USA taxes “US In Situs Assets” at the time a person passes away. The estate of any Canadian resident who...
by Park
Wed Jun 08, 2022 7:41 am
Forum: Investing - Theory, News & General
Topic: The Diversification Value of Alternatives
Replies: 90
Views: 10889

Re: The Diversification Value of Alternatives

I think alternatives are worth a look. What matters is the portfolio as a whole, and portfolio volatility can suck up returns. We eat the Geo Mean return but we invest looking forward at Ari Mean expected returns. Geo Mean = Ari Mean -0.5*SD^2. It takes a 33% gain to break even after a 25% loss, a 50% gain to break even after a 33% loss, and a 100% gain to break even after a 50% loss. Avoiding big losses at the portfolio level is a significant part of accumulating wealth. Steps to keep portfolio expected return high and lessen portfolio volatility can have a positive effect on the Geo Mean. And it is the Geo Mean that we eat. Diversification across unique and independent sources of risk and return can be worth some additional cost. I’m inv...
by Park
Wed Jan 26, 2022 8:45 am
Forum: Investing - Theory, News & General
Topic: Lifecycle Investing - Leveraging when young
Replies: 1730
Views: 333270

Re: Lifecycle Investing - Leveraging when young

"But, you might ask, didn’t leveraging at 2:1 “margin out” during the catastrophic three-year bear market from 1929 to 1932 or even in the 2007–2009 one, which saw a loss of more than 50%? No. The constant stream of contributions prevented prevented younger investors from being sold out, while older ones had by that point eliminated their leverage. During severe bear markets, as the authors point out, investors who are leveraged but young will lose “a large percentage of a small amount" Bernstein, William J. The Ages of the Investor: A Critical Look at Life-cycle Investing (Investing for Adults Book 1) . Efficient Frontier Publications. Kindle Edition. The peak US unemployment rate in the Depression was 24.9%. If you were one of t...
by Park
Thu Dec 16, 2021 9:55 am
Forum: Investing - Theory, News & General
Topic: Should you leverage equities or bonds?
Replies: 13
Views: 2069

Re: Should you leverage equities or bonds?

From p. 51 of "The Value of Debt' by Thomas Anderson, "Market Debt Ratio: total debt as a percentage of the market value of equity for US nonfarm nonfinancial firms from 1995 to 2010 shows a range of roughly 40-55%" The information is somewhat dated, but I doubt it's changed that much. For every $1 that you invest in the stock market, you're getting approximately $0.40-$0.55 in debt. This borrowing is likely better quality than an individual investor could obtain; there is no margin call risk; there is no personal cost to the investor when assuming this leverage. In fact, you increase your income, when you assume this leverage. Some advocate leveraging a stock/bond portfolio. But IMO, it makes more sense for me to not borrow...
by Park
Sun Dec 12, 2021 10:57 am
Forum: Investing - Theory, News & General
Topic: Should you leverage equities or bonds?
Replies: 13
Views: 2069

Re: Should you leverage equities or bonds?

From p. 51 of "The Value of Debt' by Thomas Anderson, "Market Debt Ratio: total debt as a percentage of the market value of equity for US nonfarm nonfinancial firms from 1995 to 2010 shows a range of roughly 40-55%" The information is somewhat dated, but I doubt it's changed that much. For every $1 that you invest in the stock market, you're getting approximately $0.40-$0.55 in debt. This borrowing is likely better quality than an individual investor could obtain; there is no margin call risk; there is no personal cost to the investor when assuming this leverage. In fact, you increase your income, when you assume this leverage. Some advocate leveraging a stock/bond portfolio. But IMO, it makes more sense for me to not borrow ...
by Park
Sat Sep 18, 2021 10:00 am
Forum: Investing - Theory, News & General
Topic: Outperforming The Stock Market Long Term!
Replies: 120
Views: 29287

Re: Outperforming The Stock Market Long Term!

invt wrote: Sat Sep 18, 2021 9:15 am
YRT70 wrote: Sat Sep 18, 2021 9:10 am I don't think so. Vanguard lists VTI as 8% too.

https://investor.vanguard.com/etf/profile/portfolio/vti

VEA lacks US.
Weird. This must be a rare event. Probably due to COVID bankruptcies.

https://www.msci.com/documents/10199/67 ... b53e8d0d9f

Still doesn't change the fact that small cap value produces lots of capital gains and is a tax-inefficient strategy.
In an ETF wrapper, cap gains isn't a significant problem under present tax laws. If tax laws change, that may no longer be true.

When it comes to tax, my goal is not to pay the least tax possible, but to maximize aftertax return.
by Park
Sat Sep 18, 2021 4:19 am
Forum: Investing - Theory, News & General
Topic: Outperforming The Stock Market Long Term!
Replies: 120
Views: 29287

Re: Outperforming The Stock Market Long Term!

Most responses have appropriately been variants on the themes of concentration and leverage. About leverage, my greatest problem is the asymmetrical risk return profile. T'here is commonly a cap to your upside. For example, with a 2X ETF, you can double your money at most. The downside is that with leverage, your downside is potential bankruptcy. Leverage may be the only way for an investor to go bankrupt. Now it would be extremely difficult for a 2X ETF to go bankrupt. But volatility decay makes your return path dependent, which usually means considerably less effective long term leverage than 2X. If your return on such an ETF drops below its unlevered counterpart and the ETF subsequently closes, your "loss" could now become perm...
by Park
Tue Mar 16, 2021 12:35 am
Forum: Investing - Theory, News & General
Topic: Borrowing to cancel dividend?
Replies: 22
Views: 2965

Re: Borrowing to cancel dividend?

What this thread is about is how to decrease taxation on dividends. Assume you're a buy and hold ETF investor. If you lever your ETF investments, you'll disproportionately increase deferred cap gains relative to dividends. Another option is owning a fund with low dividend yield. Finally, another way to deal with it is asset location. Have your highly yielding investments in your tax advantaged space. Other suggestions?
by Park
Thu Mar 11, 2021 6:37 pm
Forum: Investing - Theory, News & General
Topic: Borrowing to cancel dividend?
Replies: 22
Views: 2965

Re: Borrowing to cancel dividend?

From what I understand, what the OP is suggesting is not that different from what many corporations do. One reason corporations take on debt is that the interest is tax deductible and acts as a tax shield. The OP is suggesting changing one's own capital structure to improve tax efficiency. Google Finance states the present dividend yield for VTI is 1.67%. And if you're a SCV type, Yahoo Finance gives the dividend yield on Avantis small cap value as 1.68%. For IB Pro, highest margin rate is 1.57%. So you could effectively pay tax on a dividend yield of about 0.10%. This thread is about leverage. One caution I have about leverage is that these types of threads tend to be more common, when things are going well. When the situation is more blea...
by Park
Wed Mar 10, 2021 12:56 am
Forum: Investing - Theory, News & General
Topic: Borrowing to cancel dividend?
Replies: 22
Views: 2965

Re: Borrowing to cancel dividend?

The underlying issue is that you are getting more income from your stocks than you need, and you're looking for a way to decrease the resultant tax bill. As Grabiner points out, you could select stocks with low dividends. Smaller stocks and growth stocks tend to have lower dividends. For example, Vanguard small growth has a dividend yield of 0.52% per Google Finance. Another way, which you're suggesting, is to deduct investment expenses to decrease taxation. You're going to want to go with the lowest borrowing cost, and that may lead you to IB. Right now, the highest borrowing cost at IB is 1.57%. At such a rate, it may not decrease income much. It might be best to combine both strategies: decrease income and increase deductible expenses. H...
by Park
Tue Jan 19, 2021 10:26 am
Forum: Investing - Theory, News & General
Topic: Small Cap Value heads Rejoice !!!
Replies: 5577
Views: 619071

Re: Small Cap Value heads Rejoice !!!

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2980497 "We hypothesize that the common stock portfolio returns of value investors will be more negatively skewed, or at least lower than that of gamblers. Similarly, we hypothesize that the kurtosis of portfolio returns of value investors will be greater than that of gamblers. Using stock returns data from NYSE from 1999 to 2013, we created two portfolios based on price-to-book ratio: one we call quasi value (lowest price-to-book) and the other glamour portfolios (highest price-to-book). We then compared the higher moments of both sets of portfolios. The results show that contrary to what we hypothesized, the returns of glamour portfolios had lower skewness than the quasi value portf...
by Park
Mon Dec 28, 2020 3:00 am
Forum: Personal Finance (Not Investing)
Topic: Does renting allow for better savings?
Replies: 16
Views: 1768

Re: Does renting allow for better savings?

Nestegg_User wrote: Sun Dec 27, 2020 8:07 pm
Triple digit golfer wrote: Sun Dec 27, 2020 4:06 pm
hi_there wrote: Sun Dec 27, 2020 3:50 pm The choice is very skewed as presented, since people usually buy a nicer home than they would rent. So overall, people probably gain more by renting, which tends to be coincident with living in a worse place to begin with.
Bingo. Exactly what I was thinking as I was reading this thread.

...or said another way, when people rent they only rent the approximately optimum space they need

[see the many other threads on this (e.g. renters don't get apartments with spare dining rooms, etc)]
Also, renters are less likely to spend money on home renovation. Such projects can be money losers.
by Park
Sat Nov 28, 2020 9:25 am
Forum: Investing - Theory, News & General
Topic: Bill Bengen on Valuation Based Market Timing
Replies: 2
Views: 359

Bill Bengen on Valuation Based Market Timing

https://www.kitces.com/blog/bill-bengen-4-percent-rule-safe-withdrawal-rates-historical-returns-research-book/ Bill Bengen, creator of the 4% safe withdrawal rate: "if the market were to return to historically reasonable valuations, let’s say, high-teens, mid-teens in the Shiller CAPE. Then I would look in to get very, very aggressive in stocks. Maybe higher than 50 per cent to 60 per cent I would recommend because there are very few sources of reliable income. And fixed-income investments are giving me nothing. So, I thought I’d go to 80 per cent, 70 per cent, 80 per cent, 90 per cent dividend-paying stocks if I could get them at cheap enough prices. I’m not concerned about safety. Because if you buy something at the right price, you’...
by Park
Thu Nov 05, 2020 11:51 pm
Forum: Investing - Theory, News & General
Topic: Do options have a place in a Boglehead portfolio?
Replies: 20
Views: 1821

Re: Do options have a place in a Boglehead portfolio?

Compared to other areas of investing, I spent a good amount of time reading about options. I came to the conclusion, that with 2 exceptions, I didn't see a role for them. One exception was if you wanted to use leverage in a tax advantaged account (deep in the money calls). The second exception was if your broker's margin rate was on the high side, you could sell box spreads on European options. Grabiner also points out that there may be tax planning strategies that use options. About the first two exceptions, some might say that there isn't a place for leverage in a Boglehead portfolio, so the first two exceptions are irrelevant. If one ignores that, there still are issues. There is a limited number of ETFs for which there is sufficient liq...
by Park
Tue Oct 27, 2020 11:46 pm
Forum: Investing - Theory, News & General
Topic: Lifecycle Investing Leverage Strategy Using LEAPS - How To?
Replies: 146
Views: 29534

Re: Lifecycle Investing Leverage Strategy Using LEAPS - How To?

That doesn't mean I abandoned leverage. Several weeks ago, as per my IPS based on valuations, I went 125% asset allocation to stocks in my open account. I'm using IB margin loans. Based on personal experience with IB margin loans, I'm a little anxious. Hopefully, the previous bad experience with IB margin loans won't happen again. Could you explain what you put in your IPS that let you to 125% in stock? What was your previous bad experience and I hope this time around was better. With stocks rising since April, your stock exposure must be much higher. I want to do something similar but don't have it clearly specified in my IPS. My current exposure to stocks is ~120% In my IPS, I have a market timing section, based on valuations. When CAPE ...
by Park
Tue Sep 22, 2020 7:56 am
Forum: Investing - Theory, News & General
Topic: For Small Value Tilters, Are the Latest Pricing Models Important?
Replies: 11
Views: 1292

Re: For Small Value Tilters, Are the Latest Pricing Models Important?

Thanks for everyone's responses. As mentioned previously, previous pricing models had trouble explaining small growth returns. The latest Fama French model, their 5 factor model, includes profitability and investment. https://www.etf.com/sections/index-investor-corner/swedroe-22?nopaging=1 "Dimensional Fund Advisors has long used screens in its funds’ construction rules to eliminate “lottery stocks ” (that is, penny stocks, IPOs, stocks in bankruptcy, and small growth stocks with high investment and low profitability " I've added the emphasis in the above quote. It looks like the 5 factor model helps explain the returns of small growth better than the preceding models. But if you're tilting to small value, how relevant is that, as...
by Park
Sun Sep 13, 2020 9:49 am
Forum: Investing - Theory, News & General
Topic: For Small Value Tilters, Are the Latest Pricing Models Important?
Replies: 11
Views: 1292

For Small Value Tilters, Are the Latest Pricing Models Important?

The Fama-French pricing model for stocks uses the market, small and value factors. Momentum has been added, followed by profitability/quality.

The most recent pricing models have more factors yet, and value is playing a lesser role.

My question is as follows. The earlier pricing models had trouble explaining the poor returns of small growth. My guess is that in the latest models, small growth is less of an issue. But for many on this board who invest based on these models, resolution of the small growth anomaly isn't relevant to them, as they aren't going to invest in small growth stocks. For someone who tilts to small and value (+/- momentum or profitability/quality) based on earlier models, do the later models add anything?
by Park
Mon Aug 03, 2020 1:46 pm
Forum: Investing - Theory, News & General
Topic: Who's doing 100% international equity?
Replies: 129
Views: 20030

Re: Who's doing 100% international equity?

https://www.starcapital.de/en/research/studies/

Image

Except at the extremes, the dispersion of returns at any particular CAPE is not small. I modestly tilt towards regional stock subasset classes with lower valuations. But the operative word is modestly.
by Park
Mon Aug 03, 2020 11:43 am
Forum: Investing - Theory, News & General
Topic: Who's doing 100% international equity?
Replies: 129
Views: 20030

Re: Who's doing 100% international equity?

http://www.fortunefinancialadvisors.com/blog/the-limits-of-cape-analysis-for-global-market-rotation "Consider the case of Sweden which, hit a Japan-like CAPE high of 79 in early 2000. At the same time, the U.S. was also at its all-time high, but seemingly a relative bargain at just 47. Since then through 2017, U.S. shares have indeed outperformed Swedish shares, but it would have taken the patience of saint to wait so long; despite the huge premium, MSCI Sweden outperformed the MSCI USA index by more than 240 basis points annually over the ten year period starting in March 2000" Another example would be the case of Switzerland, which reached a peak CAPE of almost 60 in July of 1998, versus 40 for the U.S. Despite the discount, U.S...
by Park
Mon Aug 03, 2020 1:26 am
Forum: Investing - Theory, News & General
Topic: REIT's and Rick Ferri
Replies: 100
Views: 27994

Re: REIT's and Rick Ferri

https://humbledollar.com/2020/05/betting-on-bricks/ "CEM Benchmarking’s 2019 study reviewed asset class returns of public and private sector pensions, and found that their REIT returns over the last 20 years significantly outperformed both private funds and internally managed real estate." https://www.reit.com/sites/default/files/media/DataResearch/NAREIT_CEM_ES_2019_October.pdf "All styles of unlisted real estate underperform listed equity REITs by between 1-3 percent depending on style, primarily driven by differences in investment fees (see ES5)... • Listed equity REITs provided the highest Sharpe ratio of all real estate implementation styles" https://pdfs.semanticscholar.org/20e5/f24617ac8fabe32069bba4bdac582b7ba9f4...
by Park
Sat Jul 18, 2020 9:53 pm
Forum: Investing - Theory, News & General
Topic: Count Cash as Fixed Income?
Replies: 80
Views: 4440

Re: Count Cash as Fixed Income?

The following is for beginner investors, like myself. Consider cash in your wallet. It's completely liquid and there is no chance of nominal loss. That makes it different from fixed income. The liquidity means it can be used as an asset to match unknown liabilities (emergencies); you're managing risk by hedging. The principal stability means it can also be used to derisk a portfolio by decreasing the volatility of stocks and bonds. The drawbacks are that it's inconvenient to have anything more than a small amount of cash. Also, it generates no income. So instead of holding large amounts of cash, people invest in fixed income securities that are similar to cash, also known as cash equivalents. This is what investors are taking about, when th...
by Park
Tue Jun 16, 2020 8:21 am
Forum: Investing - Theory, News & General
Topic: Small Cap Value heads Rejoice !!!
Replies: 5577
Views: 619071

Re: Small Cap Value heads Rejoice !!!

https://www.morningstar.com/articles/988237/small-value-stocks-peril-and-opportunity A link to a column by John Rekenthaler at morningstar. "Even at peak conditions, most small value firms are relatively unprofitable. Nor are they financially robust, recording an average grade of C+ on Morningstar’s Financial Health measure (the market norm being B+). These problems might be manageable if their revenues were recession-resistant. Unfortunately, they are not. Almost 60% of the Small Value Index’s companies operate cyclical businesses... No company in the Small Value index qualifies as having a wide moat. Just under 40% of those receiving scores (not all stocks are graded) have no moat, as opposed to 10% for the overall market... In gener...
by Park
Sun May 03, 2020 1:19 am
Forum: Investing - Theory, News & General
Topic: The Bottom Line on Factor Investing
Replies: 328
Views: 29258

Re: The Bottom Line on Factor Investing

there are also risks DonIce mentioned that apply much more to growth stocks than value stocks. A priori, these are much more compelling risks and are precisely why we intuitively think of Tesla or Facebook as being riskier than Johnson & Johnson. Ultimately, as you seem to acknowledge, even if there is some correlation, this is a very blunt way of measuring risk. Should that itself not further blunt our confidence in the these multi-factor models? IMO, there is a risk and nonrisk component to the value premium. I've tried to make a case for a risk component. However, there is a nonrisk component, and some would make the case that there is only a nonrisk component. Part of the nonrisk component is overpricing of growth stocks, with bubb...
by Park
Sat May 02, 2020 6:29 pm
Forum: Investing - Theory, News & General
Topic: The Bottom Line on Factor Investing
Replies: 328
Views: 29258

Re: The Bottom Line on Factor Investing

value companies are NOT riskier Assume there are two companies that are very similar, except for their risk. In order to compensate for increased risk, expected return will increase. Increased expected return will likely manifest as lower price multiples for the company of higher risk. Of the two companies, the one with the higher risk will likely be more of a value stock , and the one with the lower risk will likely be more of a growth stock. Tautological. You are defining higher risk as lower price multiple, and defining value as lower price multiple. And no, investing in a company with a low price multiple is not higher risk. Investing in a company with a HIGH price multiple is a higher risk, because a lot more has to go right for that ...
by Park
Sat May 02, 2020 6:00 pm
Forum: Investing - Theory, News & General
Topic: The Bottom Line on Factor Investing
Replies: 328
Views: 29258

Re: The Bottom Line on Factor Investing

DonIce wrote: Sat May 02, 2020 5:41 pm value companies are NOT riskier
Assume there are two companies that are very similar, except for their risk. In order to compensate for increased risk, expected return will increase. Increased expected return will likely manifest as lower price multiples for the company of higher risk. Of the two companies, the one with the higher risk will likely be more of a value stock , and the one with the lower risk will likely be more of a growth stock.
by Park
Sat May 02, 2020 5:27 pm
Forum: Investing - Theory, News & General
Topic: The Bottom Line on Factor Investing
Replies: 328
Views: 29258

Re: The Bottom Line on Factor Investing

Value/growth is not the only way to differentiate companies based on risk. However,If you believe that the market prices risk well in the long run, value/growth will reflect risk. Why is value more risky than growth? For a value company to meet expectations, all it has to do is keep plodding along. When value investing really worked was when viable companies could be bought at a P/B of less than 1. That is, you literally could sell off these companies for more than you paid for them by just selling off their physical assets, financial assets, property, etc. The risk an investor was taking to invest in such a value company was close to zero. If you read Ben Graham, the "father" of value investing, you'll see that his entire philos...
by Park
Sat May 02, 2020 3:36 pm
Forum: Investing - Theory, News & General
Topic: The Bottom Line on Factor Investing
Replies: 328
Views: 29258

Re: The Bottom Line on Factor Investing

With value stocks, the idea that they are riskier is reverse engineered from looking at performance data over some period of time. If the performance data had been the opposite, it would been easy to come up with plausible explanations for why growth stocks are riskier. For example, if FF had made a coding error and found a growth premium instead of a value premium, they would have concluded that growth is riskier and could have easily given us a good explanation for why. For example, growth stocks depend on future earnings growth to justify their prices and so might be especially risky because who knows whether the earnings growth will actually materialize. Or perhaps growth stocks are more likely to be part of a bubble than value funds. ...
by Park
Sat May 02, 2020 1:20 pm
Forum: Investing - Theory, News & General
Topic: The Bottom Line on Factor Investing
Replies: 328
Views: 29258

Re: The Bottom Line on Factor Investing

especially if a group of people think these stocks have some ability to create excess returns when in fact they do not (the Emperor has No Clothes effect). Packer Your point is well taken. Value stocks don't have an inherent ability to create excess returns; it is the pricing of value stocks that can result in increased expected returns. If these stocks become more popular, relative to the rest of the stock market, they will become overpriced. And overpricing means decreased expected returns. But unlike growth stocks, there is some limitation as to how much of a bubble you can get in value stocks. An overpriced value stock will tend to become a growth stock. An overpriced growth stock will tend to stay a growth stock. An underpriced value ...
by Park
Sat May 02, 2020 12:37 pm
Forum: Investing - Theory, News & General
Topic: The Bottom Line on Factor Investing
Replies: 328
Views: 29258

Re: The Bottom Line on Factor Investing

If there are two companies, which are very similar except for risk, I"m going to expect a higher return for the more risky company. This is true, only if the market compensates for that risk. However, not all risks such as idiosyncratic risks are compensated. There are few who doubt that there is an equity risk premium. The expected return for stocks is greater than that of bond, due to the increased risk associated with stocks. That increased risk of stocks can't be diversified away. There are few who think that bonds are homogeneous in risk. Bonds vary in risk, and some of that risk can't be diversified away. For bonds with greater credit or duration risk, expected return is greater. For duration risk up to medium term and credit ri...
by Park
Sat May 02, 2020 9:43 am
Forum: Investing - Theory, News & General
Topic: The Bottom Line on Factor Investing
Replies: 328
Views: 29258

Re: The Bottom Line on Factor Investing

Many believe that factors such as small and value have been arbitraged away. But there’s an even stronger case to be made that the equity premium itself has been arbitraged away by efficient markets. Indeed, since 2000 the Shiller CAPE has remained at historic highs, consistent with such a hypothesis. By contrast, the valuation gap between value and growth stocks is near historic highs, suggesting that the value premium has not been arbitraged away. There will always be a valuation gap between the top half of companies by P/B and the bottom half of companies by P/B (or whatever other metric). Obviously, not all companies should sell at the same P/B or P/E. Some companies have better prospects than others, and they are priced differently ac...
by Park
Mon Apr 27, 2020 10:10 pm
Forum: Investing - Theory, News & General
Topic: Lifecycle Investing Leverage Strategy Using LEAPS - How To?
Replies: 146
Views: 29534

Re: Lifecycle Investing Leverage Strategy Using LEAPS - How To?

I abandoned this strategy; when I looked at the effective interest rates, it didn't make sense.

That doesn't mean I abandoned leverage. Several weeks ago, as per my IPS based on valuations, I went 125% asset allocation to stocks in my open account. I'm using IB margin loans. Based on personal experience with IB margin loans, I'm a little anxious. Hopefully, the previous bad experience with IB margin loans won't happen again.
by Park
Wed Apr 08, 2020 1:23 am
Forum: Investing - Theory, News & General
Topic: What is the CAPE of US Small Value?
Replies: 11
Views: 2280

Re: What is the CAPE of US Small Value?

https://mailchi.mp/verdadcap/whats-pric ... b838bc224f

Figure 1: March 2020 vs. June 2009 TEV/EBITDA Multiples

Image

"Growth stocks in the US and Europe are still 30–40% more expensive than 2009. By contrast, extreme value stocks are already at 2009 bottom levels in the US and Europe."
by Park
Sat Apr 04, 2020 4:25 pm
Forum: Investing - Theory, News & General
Topic: Margin loan or leveraged ETFs?
Replies: 19
Views: 2915

Re: Margin loan or leveraged ETFs?

About leveraged ETFs, you're making a bet on the price of the underlying assets and you're also making a bet on the volatility of those assets. The effect of the volatility bet can have a very significant impact on the return of the first bet.
by Park
Sat Apr 04, 2020 4:04 pm
Forum: Investing - Theory, News & General
Topic: What is the CAPE of US Small Value?
Replies: 11
Views: 2280

Re: What is the CAPE of US Small Value?

https://www.osam.com/Commentary/blizzardwintericeage https://portalvhdst3l6zspf51mvl.blob.core.windows.net/osam/blogphotos/photo_1732.PNG "when we compare the earnings yield of the cheapest small stocks (cheapest decile by price-to-earnings) to the most expensive decile of large cap stocks, we see a spread of more than 21%. Following extreme periods like this historically, small value outperformed large growth by 16.8%/year over the subsequent 10 years." https://portalvhdst3l6zspf51mvl.blob.core.windows.net/osam/blogphotos/photo_1733.PNG "compare the earnings yield on small cap stocks (cheapest decile) to the yield on the U.S. government 10-year bond. Most of the time, that spread is between 3-6%. Today it is greater than 20%...
by Park
Sat Apr 04, 2020 12:54 pm
Forum: Investing - Theory, News & General
Topic: What is the CAPE of US Small Value?
Replies: 11
Views: 2280

Re: What is the CAPE of US Small Value?

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2736423 The above link provides research examining the forecasting ability of CAPE and price book. From the paper, "the results may even suggest that PB is superior to CAPE". It is possible to get price book data on small value. https://www.etf.com/sections/index-investor-corner/23066-swedroe-understanding-small-value-etfs.html https://www.multpl.com/s-p-500-price-to-book/table/by-quarter In August 2014, IJS (proxy for US small value) had a price book ratio of 1.7. At that time, the S&P500 had a price book ratio of 2.675. https://www.ishares.com/us/products/239775/ishares-sp-smallcap-600-value-etf https://www.multpl.com/s-p-500-price-to-book/table/by-quarter As of April 2/20...
by Park
Sat Apr 04, 2020 12:32 pm
Forum: Investing - Theory, News & General
Topic: What is the CAPE of US Small Value?
Replies: 11
Views: 2280

Re: What is the CAPE of US Small Value?

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2736423 The above link provides research examining the forecasting ability of CAPE and price book. From the paper, "the results may even suggest that PB is superior to CAPE". It is possible to get price book data on small value. https://www.etf.com/sections/index-investor-corner/23066-swedroe-understanding-small-value-etfs.html https://www.multpl.com/s-p-500-price-to-book/table/by-quarter In August 2014, IJS (proxy for US small value) had a price book ratio of 1.7. At that time, the S&P500 had a price book ratio of 2.675. https://www.ishares.com/us/products/239775/ishares-sp-smallcap-600-value-etf https://www.multpl.com/s-p-500-price-to-book/table/by-quarter As of April 2/20,...
by Park
Sat Apr 04, 2020 11:55 am
Forum: Investing - Theory, News & General
Topic: What is the CAPE of US Small Value?
Replies: 11
Views: 2280

What is the CAPE of US Small Value?

https://www.multpl.com/shiller-pe It is relatively easy to get an estimate of the CAPE of the S&P500. The source above gives an estimate of 23.49. However, my guess is that if you divide the US stock market by small//mid/large and value/blend/growth, there is significant diversity of CAPE between the 9 possibilities. https://www.morningstar.com/articles/976372/such-a-narrow-stock-market From a column by John Rekenthaler recently, small value had the lowest returns of the 9 possibilities for the 5 years ending Dec 31/19. Annualized return of small value was 5.5%. For large blend (proxy for entire market), it was 9.7%. From Jan 1/20- April 1/20, small value has declined 40.9%. Large blend has declined 24.3%. This would suggest the CAPE fo...
by Park
Wed Feb 05, 2020 12:08 pm
Forum: Investing - Theory, News & General
Topic: Jason Hsu and William Bernstein Like Overbalancing
Replies: 63
Views: 13422

Re: Jason Hsu and William Bernstein Like Overbalancing

https://www.morningstar.com/podcasts/the-long-view/41 It looks like Ben Carlson and Ritholtz Wealth Management also like overbalancing: "In recent years, we have made just a slight overallocation to international markets...it's something that we think over the next three, five, seven years can potentially work, because there are lower valuations and higher yields overseas in places like foreign-developed markets and emerging markets. But we're definitely not smart enough to figure out the correct time to make a huge push over there. And definitely, it's one of the things where we don't like to think in terms of extremes. So, we're not going to make a huge shift completely out of one asset class and all into another one, because that's ...
by Park
Sat Feb 01, 2020 9:17 am
Forum: Personal Investments
Topic: Tilt In Stock Subasset Allocation Based On CAPE (Overbalancing)
Replies: 7
Views: 750

Re: Tilt In Stock Subasset Allocation Based On CAPE (Overbalancing)

A fundamental index is a reasonable option, although it doesn't work as well in my case. If one is using fundamental indices, then overbalancing is of lesser importance, although you can still make a case for it. https://www.starcapital.de/fileadmin/user_upload/files/publikationen/Research_2016-01_Predicting_Stock_Market_Returns_Shiller_CAPE_Keimling.pdf If you go to the bottom of page 12 on the above link, there is Figure 8. Once again, I can't post the figure here, so the following is a written summary. It shows the relationship to CAPE and maximum drawdown of national stock markets. For CAPE 0-10, the worst maximum drawdown of a national stock market over the next 3 years was 51%. The average maximum drawdown over the next 3 years, using...
by Park
Fri Jan 31, 2020 1:44 pm
Forum: Personal Investments
Topic: Tilt In Stock Subasset Allocation Based On CAPE (Overbalancing)
Replies: 7
Views: 750

Re: Tilt In Stock Subasset Allocation Based On CAPE (Overbalancing)

https://www.starcapital.de/fileadmin/user_upload/files/publikationen/Research_2016-01_Predicting_Stock_Market_Returns_Shiller_CAPE_Keimling.pdf In the above link, there is a figure (Fig. 6) at the top of page 11, which shows the relationship between CAPE and average real return over the next 10-15 years for national stock markets. Unfortunately, I don't know how to put the figure in this post. There is a relationship, especially when CAPE less than 30. The dispersion of the returns, expecially between CAPE of 10-60, is not small. However, the data showing good returns when CAPE is greater than 40 is dominated by small countries (Sweden, Denmark). For someone investing in broad based funds, I'm not certain that the Swedish or Danish data is ...
by Park
Thu Jan 30, 2020 11:49 pm
Forum: Personal Investments
Topic: Tilt In Stock Subasset Allocation Based On CAPE (Overbalancing)
Replies: 7
Views: 750

Re: Tilt In Stock Subasset Allocation Based On CAPE (Overbalancing)

There is a disparity between the market capitalization data that I presented and that derived from VT. For an investor using US domiciled market cap mutual funds/ETFs, the VT data is more relevant.

I agree that a 10% relative tilt doesn't move the needle much. I'm not sure that less than a 10% relative tilt is meaningful. One could consider a 15 or 20% relative tilt. But valuations are such a noisy signal that any tilt should be modest IMO.

I would feel much more comfortable with this type of strategy, if there was data backing it up. But I can't backtest this type of strategy, and I'm not aware of anyone who has. Some might say that the absence of such data suggests that it was tested and found not to work.
by Park
Thu Jan 30, 2020 11:59 am
Forum: Personal Investments
Topic: Tilt In Stock Subasset Allocation Based On CAPE (Overbalancing)
Replies: 7
Views: 750

Tilt In Stock Subasset Allocation Based On CAPE (Overbalancing)

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=199349&p=4933165&hilit=Overbalancing#p4933165 The above thread is one I started on overbalancing. That's where you go a step beyond rebalancing to one's original asset allocation, and instead mildly increase one's asset allocation to underperforming assets and mildly decrease one's asset allocation to overperforming assets. I like the idea of overbalancing, but I haven't seen research to support it or a systematic way to implement it. The following is my tentative plan on implementing this in a systematic way. Overbalancing would only be done in stock subasset classes. It's based on the assumption that valuations revert to the mean. In this case, valuation would be on the bas...
by Park
Thu Jan 23, 2020 7:41 pm
Forum: Investing - Theory, News & General
Topic: Lowest cost way to get leveraged equity exposure
Replies: 49
Views: 5258

Re: Lowest cost way to get leveraged equity exposure

I'm presently reading "The Sceptical Investor" by John Stepek: "If you use leverage, you are transforming volatility risk - risk that sceptical investors can ignore to their advantage - into a genuine risk, one that can cause the permanent loss of capital. That why so many people lose so much money spread betting - even when their long term view is correct, the short term involves too much volatility to be capable of remaining in a position." I've heard the argument made that volatility only matters, if it occurs when you plan to sell an investment. Otherwise, you can ignore it. Indeed, one can at least in theory profit from volatility (rebalancing between subasset classes aka volatility harvesting). But if you use lever...
by Park
Fri Jan 17, 2020 11:39 pm
Forum: Investing - Theory, News & General
Topic: Lowest cost way to get leveraged equity exposure
Replies: 49
Views: 5258

Re: Lowest cost way to get leveraged equity exposure

https://pbs.twimg.com/media/EN3Tg4IU8AAntJe?format=png&name=small The S&P500 assets to equity ratio is about 4. So there's lots of leverage when you buy an S&P500 index fund. The companies that make up the S&P500 can often borrow on better terms than the individual investor, and their borrowing costs will be tax deductible. Finally, you're not personally liable for corporate debt, despite owning part of the corporation. About the only way for an individual investor to go bankrupt is with leverage, but that can't happen when your only exposure to leverage is through owning company shares. If you want more exposure to leverage than the S&P500 or a total market index fund, a tilt to small cap value will expose you to compa...
by Park
Sun Jan 05, 2020 12:00 am
Forum: Investing - Theory, News & General
Topic: Jason Hsu and William Bernstein Like Overbalancing
Replies: 63
Views: 13422

Re: Jason Hsu and William Bernstein Like Overbalancing

I'm thinking about overbalancing between stock subasset classes... I can't predict when a stock subasset class will reach its relative peak or nadir. I would expect no more than modest benefit from this strategy, so I plan to make modest portfolio changes. I would plan to own a little more of what is cheap, and a little less of what is expensive. It comes down to how good valuations are at predicting future returns of stock subasset classes. If I could predict with a high probability which stock subasset class will outperform, I should make a high allocation to that bet. At its extreme, if I could predict when a stock subasset class will reach its relative peak or nadir, I should put all my stock allocation in that stock subasset class (al...