Super strongly major league recommend William Bernstein’s e book on life cycle investing. Look up Murphy’s Law of Retirement. Think I’ve posted on it here at BH.
Dave
Search found 5540 matches
- Mon Mar 04, 2024 4:01 pm
- Forum: Investing - Theory, News & General
- Topic: Aggressive savers: Reduce stocks % the closer you are to your target numbers?
- Replies: 32
- Views: 3662
- Sun Mar 03, 2024 12:42 pm
- Forum: Investing - Theory, News & General
- Topic: Municipal bonds vs treasury bonds -- just a matter of after tax yield?
- Replies: 18
- Views: 1456
Re: Municipal bonds vs treasury bonds -- just a matter of after tax yield?
The entirety of my bond holdings are muni’s. Average duration about 4-5 years, only AAA and AA, only state General Obligation or essential service revenue, only from states with no state income tax. The state I live in has no income tax.
Dave
Dave
- Sun Feb 18, 2024 9:15 am
- Forum: Investing - Theory, News & General
- Topic: Significance of Standard Deviation measurement in a portfolio
- Replies: 40
- Views: 2754
Re: Significance of Standard Deviation measurement in a portfolio
Volatility can be tough on a portfolio. If I make 100% on a portfolio in year 1 and lose 50% in year 2, my average return is 25%. But I’m right back where I started.
Need 100% return to break even after 50% loss
Need 50% return to break even after 33% loss
Need 33% return to break even after 25% loss
Dave
Need 100% return to break even after 50% loss
Need 50% return to break even after 33% loss
Need 33% return to break even after 25% loss
Dave
- Sun Feb 18, 2024 9:09 am
- Forum: Investing - Theory, News & General
- Topic: Significance of Standard Deviation measurement in a portfolio
- Replies: 40
- Views: 2754
Re: Significance of Standard Deviation measurement in a portfolio
GeoMean=AriMean-(0.5*SD^2) The GeoMean of a portfolio is the compounded return, that’s the return we actually eat. Volatility can suck away at portfolio returns. The reason is that after a big loss, there is less money present to experience the subsequent comeback. We make portfolios looking at the component expected returns, which is an AriMean. We actually accumulate a GeoMean. If two portfolios have the same AriMean return, the less volatile one will accumulate more money. One can calculate potential effects of volatility on two portfolios with the above equation. Here we frequently discuss expense ratio differences of 0.1-0.2%. I believe portfolio efficiency differences can easily be larger than that. What a component potentially adds t...
- Sun Jan 21, 2024 10:14 am
- Forum: Investing - Theory, News & General
- Topic: More Evidence Against Factor Investing
- Replies: 650
- Views: 46460
Re: More Evidence Against Factor Investing
If we throw out the factor model and you still want to take more risk in stocks than the total market provides, is there no reasonable portfolio choice (let's assume you are 100% stocks already)? Certainly the market has to apply a higher discount rate to stocks that are riskier or no one would buy them? So what are those riskier stocks than the market (is it higher beta stocks?) and what does that look like in relatively diversified fund choice? Is levering up the market portfolio the only option if we consider the Fama/French stuff as suspect? In essence the idea of the various factor models is to identify such risks. An issue with loading up on riskier stocks (however defined) is decreasing diversification (perhaps riskier, but basic th...
- Sun Jan 07, 2024 9:06 am
- Forum: Investing - Theory, News & General
- Topic: New Book on the Life Cycle Model - "The Missing Billionaires: A Guide to Better Financial Decisions"
- Replies: 154
- Views: 33612
Re: New Book on the Life Cycle Model - "The Missing Billionaires: A Guide to Better Financial Decisions"
Considering the interest rates, market valuations, inflation, im trying to come up with a current asset allocation based on the book. I think it would be heavily bond weighted... The book i think gives more credence to Vanguard's most recent annual return projections which is heavily bond weighted...Any thoughts of where we are currently and how the book would recommend allocating? I read the book, got a bit lost in the math nomenclature. That being said, I frequently found myself thinking that the whole book seems to reduce to two concepts: 1. Volatility Drag: it takes 100% gain to comeback from 50% loss, 50% gain from 33% loss, 33% gain from 25% loss, etc. 2. The behavioral finance finding that the pain of a loss is twice as great as the...
- Sat Jan 06, 2024 11:22 am
- Forum: Investing - Theory, News & General
- Topic: How do you get out of value investing
- Replies: 30
- Views: 5293
Re: How do you get out of value investing
I would stick with your SV plan. Based on current valuations, the expected return for value relative to growth is near all time highs. Moreover, as you noted, your SV fund has plenty of market beta in it as well. Overall, value tends to be uncorrelated or maybe even negatively correlated with market. That can improve portfolio efficiency for you in the future. Very long stretches have seen the market underperform TBills: 1929-1943, 1966-1982, 2000-2012. In the long run, sticking to one’s plan is more important than the specific plan chosen.
Dave
Dave
- Sun Dec 17, 2023 9:43 am
- Forum: Investing - Theory, News & General
- Topic: The Illusion of the Small Cap premium
- Replies: 121
- Views: 17583
Re: The Illusion of the Small Cap premium
Larry Swedroe reviews the size factor in Appendix I of his Factor book. The size of the premium increases monotonically with decreasing company size. The more tightly the the factor is defined, the greater the premium.
Dave
Dave
- Sun Dec 10, 2023 4:11 pm
- Forum: Investing - Theory, News & General
- Topic: My Case Against Factor Investing
- Replies: 93
- Views: 19570
Re: My Case Against Factor Investing
Just like market factor underperforming T Bills for 3 periods 13 years or longer: 1929-1943, 1966-1982, 2000-2012. Contrary to common thought here, diversification across factors likely more important the shorter one’s investing horizon is.AlwaysLearningMore wrote: ↑Sun Dec 10, 2023 1:08 pm But sometimes those "expected" returns don't show up.
And if Mr. Ferri is correct about it taking up to 25 years to see said results, that might be out of the timeframe some investors' lifespans.
Dave
- Sun Dec 10, 2023 4:00 pm
- Forum: Investing - Theory, News & General
- Topic: My Case Against Factor Investing
- Replies: 93
- Views: 19570
Re: My Case Against Factor Investing
Sounds like a strong reason to decrease overall equity allocation, increase allocation to safe bonds, and diversify across equity factors.
Dave
- Sun Dec 10, 2023 8:32 am
- Forum: Investing - Theory, News & General
- Topic: My Case Against Factor Investing
- Replies: 93
- Views: 19570
Re: My Case Against Factor Investing
What amount making the case FOR factor investing? Factors get enough arguments against them around these parts… Anyway, I listened to snippets and am not convinced of many arguments against factor investing. Factor investing certainly was a thing back before it was quantified. The concept of value isn’t new to the 90s. Factor decay? Or just normal periods of factor underperformance. The post-GFC period isn’t unprecedented, it’s part of the reason a premium exists; risk. Perhaps premiums are now much larger due to Value spreads being high. I certainly don’t see money chasing into Factor strategies these days, unlike growth strategies. If it were as simple to get rid of risk premiums after they have been identified, why hasn’t the market pre...
- Sat Nov 25, 2023 3:16 pm
- Forum: Investing - Theory, News & General
- Topic: New Book on the Life Cycle Model - "The Missing Billionaires: A Guide to Better Financial Decisions"
- Replies: 154
- Views: 33612
Re: New Book on the Life Cycle Model - "The Missing Billionaires: A Guide to Better Financial Decisions"
I think a lot of the book can be summarized by the behavioral finance finding that the pain of a loss is 2X the happiness of an equal sized gain. I think that 2:1 ratio rises dramatically with one’s total net worth as well. The concept of marginal utility of additional wealth is invaluable for the individual investor. Each of us needs to appreciate where our own personal marginal utility curve hits an inflection point and starts to flatten out. Warren Buffett’s quote about LTCM (referenced in the book) is sage advice for all of us “They risked money they had and needed to try to make money they didn’t have and didn’t need”.
Dave
Dave
- Sat Nov 25, 2023 3:05 pm
- Forum: Investing - Theory, News & General
- Topic: New Book on the Life Cycle Model - "The Missing Billionaires: A Guide to Better Financial Decisions"
- Replies: 154
- Views: 33612
Re: New Book on the Life Cycle Model - "The Missing Billionaires: A Guide to Better Financial Decisions"
With regard to the shifting asset allocation, I think the book’s advice to take more equity risk when the expected equity risk premium is greater makes sense. But one can just as wisely take the opposite approach. If the expected equity risk premium drops, one might need to increase the equity allocation and overall expected return of the portfolio to meet their financial goals.
Dave
Dave
- Sat Nov 25, 2023 10:07 am
- Forum: Investing - Theory, News & General
- Topic: "In general, bonds add little or no value to the portfolio of ordinary long-term investors"
- Replies: 262
- Views: 48954
Re: "In general, bonds add little or no value to the portfolio of ordinary long-term investors"
Even for the major league equity oriented investor, I think there is a significant role for bonds, but perhaps primarily from a behavioral perspective. If a 100% equity investor goes to 90% equity/10% bonds, it will instill the discipline of rebalancing. It will build the stomach and fortitude to buy into a falling market, provide a small bit of solace when markets drop, and rebalancing will at least partially satisfy the human need to “do something”.
Dave
Dave
- Fri Nov 03, 2023 9:42 pm
- Forum: Investing - Theory, News & General
- Topic: You can't eat Sharpe Ratio (or can you)?
- Replies: 54
- Views: 4944
Re: You can't eat Sharpe Ratio (or can you)?
I think Sharpe ratio of individual assets not very meaningful; best to assume all assets have approximately same Sharpe. What matters is the Sharpe of portfolios and how the addition of an asset to a portfolio will affect the portfolio’s expected return, volatility, and Sharpe. I’d be quite wary of using too many decimal places when looking at asset class historical premiums, volatilities, correlations, but I do think they can be used qualitatively to create likely more efficient portfolios looking forward.
Dave
Dave
- Tue Oct 17, 2023 9:25 am
- Forum: Investing - Theory, News & General
- Topic: New Book on the Life Cycle Model - "The Missing Billionaires: A Guide to Better Financial Decisions"
- Replies: 154
- Views: 33612
Re: New Book on the Life Cycle Model - "The Missing Billionaires: A Guide to Better Financial Decisions"
I’m about 35 pages into the book. Using the concept of biased coin flips to bring up one of my favorite investing issues: volatility drag.
Dave
Dave
- Mon Oct 16, 2023 9:09 am
- Forum: Investing - Theory, News & General
- Topic: WSJ: Factor ETFs Fail to Deliver Their Promised Returns
- Replies: 207
- Views: 16700
Re: WSJ: Factor ETFs Fail to Deliver Their Promised Returns
https://www.wsj.com/finance/investing/factor-etf-returns-b4c2e75 The premise of isolating a particular investment trait to outperform the market may have seemed like a good idea, but the data say something else These exchange-traded funds aim to isolate an equity factor or trait that is believed to generate higher risk-adjusted returns—such as value or low volatility. Examining six categories of factor ETFs, however, my research assistants John Walton and Ben Korhnak and I find no evidence that over the past 10 years any of them have outperformed. And for half of the groups, volatility exceeded that of the S&P 500. Yet more data showing that overweighting certain stocks buys your more risk, and less returns, than TSM. 10 years is just ...
- Sun Oct 15, 2023 8:08 pm
- Forum: Investing - Theory, News & General
- Topic: New Book on the Life Cycle Model - "The Missing Billionaires: A Guide to Better Financial Decisions"
- Replies: 154
- Views: 33612
Re: New Book on the Life Cycle Model - "The Missing Billionaires: A Guide to Better Financial Decisions"
I just started the book based on a recommendation in a Larry Swedroe tweet. Book looks outstanding so far.
Dave
Dave
- Fri Sep 01, 2023 5:33 pm
- Forum: Investing - Theory, News & General
- Topic: small-cap securities lending is more than double fund expenses
- Replies: 3
- Views: 712
Re: small-cap securities lending is more than double fund expenses
And I don’t think VG is even particularly aggressive in the securities lending realm. I think other firms more aggressive with securities lending. Another reason why expense ratios, while extremely important, don’t tell the whole story.
Dave
Dave
- Tue Aug 08, 2023 11:46 am
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
Larry Swedroe says that DFA and Avantis are systematic/replicable and he regards them as passive. I can't see behind the curtain what Avantis is doing, but you do wonder if the managers actually have a bit of discretion here . Even tweaking the process a bit can accomplish the same thing. What I will say is that Avantis has definitely delivered with performance. I respect Mr. Swedroe, but I disagree that DFA and Avantis are passive. Whether a human picks stocks or a human-designed algorithm picks stocks, the result is still stock-picking. And to your point (that I put in bold ), the managers do have the ability to tweak the algorithm as they see fit. In fact, they frequently acknowledge that they are open to new research and will adjust th...
- Mon Aug 07, 2023 10:59 am
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
I just don't think SV funds are that different from TSM at the end of the day. They are equities, after all, and behave like equities. More volatile then the market as a whole. Maybe more return, but that could be said of any subset of the market in a given time frame. I'm not convinced "diversifying" across factor exposures really adds true diversification at least in terms of risk. Its all just equity risk. Similar to the discussion of US vs. international equities. True diversifiers are fixed income, alternatives, and real estate (not Reits, those are equities too). I agree with you way more than many people might expect. A big part of that is that SV funds typically have a market beta of a bit >1. It’s not all equity risk in ...
- Mon Aug 07, 2023 10:52 am
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
Can you break down the logic behind this? A long only factor fund is an overlay of the market portfolio and a long/short fund isn't it? Such that as a natural result the "long" components of the long/short are overweighted, and the "short" components of the long/short underweighted? So what's the point of the argument? Of course the overlay portfolio has more correlation to the market, after overlaying the long/short onto the market portfolio. I think the entire point of the long/short was to overlay it on a market portfolio; nobody would just invest in a long/short and nothing in the market. If you can please break this down for me what's the point of this argument. The argument starts with the idea that investing in i...
- Mon Aug 07, 2023 10:35 am
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
The question is being asked how much of the factor premiums are the "long" portion that use mere mortals can invest in and how much are represented by the "short portion"? My guess is that the long portion is 30% to 40% of the factor premium and that the short portion represents 60% to 70%. I did some very rough math above and knowing the flaws of my approach, I came up with an educated guess. Not sure anyone else has tried to answer that precise question. I at least took a stab at it. Doing a factor regression of a long-only fund will tell you what fraction of the premium you will receive, whether positive or negative. That is my understanding as well. So Advantis and DFA are doing well to get Size and Value factor loa...
- Mon Aug 07, 2023 10:23 am
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
Of course, no one really invests in the factors. Instead, they invest in long-only funds that have much higher correlation to the market and within themselves. You make a good comment. The majority of academic studies are long-short analyses, but most individuals invest long only. Some academics, such as Dr. Pim van Vliet, suggest that when you adjust factor returns for this difference, much of the premia disappear. Can you break down the logic behind this? A long only factor fund is an overlay of the market portfolio and a long/short fund isn't it? Such that as a natural result the "long" components of the long/short are overweighted, and the "short" components of the long/short underweighted? So what's the point of th...
- Sun Aug 06, 2023 11:31 am
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
I am aware that institutions hold 90% of stocks. So yes, if I make a stock trade it is pretty likely that an institution is on the other side of the trade. Problem is, this is not the topic. I am not talking about individual trades. I am making a more general and broad comment about investor behavior. Over the years, I have talked to a lot of people. What I find is a very broad ignorance about the markets and how investing works. Most people just don't have the interest or the passion about these topics that many of us here have. Sometimes folks who don't know much will realize the Target Date funds within their 401(k) plan makes the decisions for them and will choose that as their option, which by the way is a pretty smart thing. A lot of...
- Fri Aug 04, 2023 7:03 pm
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
Finally, I will post correlation data between the factors, it is similar to the table in Larry Swedroe's book. Size (SMB) to Market 0.2753 Value (HML) to Market -0.2628 Profitability (RMW) to Market -0.2276 Investment (CMA) to Market -0.3868 Investment (CMA) to Value (HML) 0.6982 Profitability (RMW) to Value (HML) 0.0749 Value (HML) to Size (SMB) -0.0720 Profitability (RMW) to Size (SMB) -0.3497 Investment (CMA) to Size (SMB) -0.1094 Profitability (RMW) to Investment (CMA) -0.0208 Of course, no one really invests in the factors. Instead, they invest in long-only funds that have much higher correlation to the market and within themselves. I think that is a poor argument. Say a typical long only SV fund has a 1.1 loading on market, a 0.5 loa...
- Fri Aug 04, 2023 6:58 pm
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
Finally, I will post correlation data between the factors, it is similar to the table in Larry Swedroe's book. Size (SMB) to Market 0.2753 Value (HML) to Market -0.2628 Profitability (RMW) to Market -0.2276 Investment (CMA) to Market -0.3868 Investment (CMA) to Value (HML) 0.6982 Profitability (RMW) to Value (HML) 0.0749 Value (HML) to Size (SMB) -0.0720 Profitability (RMW) to Size (SMB) -0.3497 Investment (CMA) to Size (SMB) -0.1094 Profitability (RMW) to Investment (CMA) -0.0208 Of course, no one really invests in the factors. Instead, they invest in long-only funds that have much higher correlation to the market and within themselves. I think that is a poor argument. Say a typical long only SV fund has a 1.1 loading on market, a 0.3 loa...
- Fri Aug 04, 2023 11:31 am
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
Finally, I will post correlation data between the factors, it is similar to the table in Larry Swedroe's book. Size (SMB) to Market 0.2753 Value (HML) to Market -0.2628 Profitability (RMW) to Market -0.2276 Investment (CMA) to Market -0.3868 Investment (CMA) to Value (HML) 0.6982 Profitability (RMW) to Value (HML) 0.0749 Value (HML) to Size (SMB) -0.0720 Profitability (RMW) to Size (SMB) -0.3497 Investment (CMA) to Size (SMB) -0.1094 Profitability (RMW) to Investment (CMA) -0.0208 I’m currently reading William Bernstein’s second addition of 4 Pillars. He cites an old joke: Question: “How do you know financial economists have a sense of humor?” Answer: “They use decimal points” :-) That being said, the correlations are a very big part of wh...
- Thu Aug 03, 2023 12:51 pm
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
The reason I tilt so heavily to size and value is that I disagree with this statement. I don’t think “risk is risk”. If size, value, and market each represent unique risks, then I prefer to diversify across them instead of just taking on more of the same market risk. The lack of correlation between size and market, value and market, and size and value I believe are compelling reasons to tilt.secondopinion wrote: ↑Thu Aug 03, 2023 12:33 pmbut risk is risk according to the market, so why should I get rewarded for taking more of one risk and less of another? I feel like that we are missing the root here.
Dave
- Wed Aug 02, 2023 11:58 pm
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
I don’t hear much about the Larry portfolio, the coffeehouse or the “ultimate buy and hold” anymore. Probably because in the time that they have been in the vernacular, they have underperformed. And the proponents of those portfolios have generally moved on to other recommendations, though are very careful not to completely disavow their previous recommendations. Doing that would compromise the credibility of their current recs. I think this is unfair. As far as I know Larry Swedroe, Bill Schultheis, and Paul Merriman have not backed off of their recommendations. You can find the Coffeehouse portfolio and the Ultimate Buy and Hold Portfolio on the internet. Paul Merriman updates the figures on his portfolio each year. Larry also has Altern...
- Wed Aug 02, 2023 11:39 pm
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
One other thing to consider when factor tilting is that even the very best factor products will not give you 100% exposure to a factor except for Market. There is also a trade-off between factor loading and expense. For example, let's look at Avantis US Small Cap Value ETF. Market Factor MKT-RF 1.12 Size Factor SMB 0.76 Value HML 0.73 Expense Ratio 0.25 DFA Small Cap Value ETF Note: I took the loadings from the Mutual Fund Version in Portfolio Visualizer. Market Factor MKT-RF 1.04 Size Factor SMB 0.72 Value HML 0.70 Expense Ratio 0.31 Here is Vanguard Small Cap Value Index Fund Admiral Market Factor MKT-RF 1.04 Size Factor SMB 0.54 Value HML 0.49 Expense Ratio 0.07 You can see that Vanguard has the lower expense ratio but Avantis and DFA h...
- Mon Jul 31, 2023 8:24 pm
- Forum: Investing - Theory, News & General
- Topic: Bill Bernstein's new book available [Four Pillars of Investing]
- Replies: 114
- Views: 25724
Re: Bill Bernstein's new book available
I think I’ve read all of Dr. Bernstein’s investing books. I’m only about 40 pages into this new one, but can strongly recommend nonetheless. I know WBern above estimated above that it’s 15-20% new material, but he’s clearly thought a lot about his old material and weaves it all together wonderfully in this book. And of course he adds 20 more years of data, post dot com, GFC, and pandemic insights as well. Just 40 pages in it’s already touched on topics from each of his prior books and added a couple new thoughts. Intelligent Asset Allocator started me on the path towards factor junkie. I’m not deviating from my plan at this point, but his carefully chosen words enjoyably make me think through these issues again.
Dave
Dave
- Sun Jul 30, 2023 10:07 am
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
I’m a big fan of Larry Swedroe’s factor book. The book is worth its price for just a couple of tables in chapter 9. One looks at the correlations between the factors. Another looks at frequency of negative outcomes for various factors over varying time periods. The real attention getter is the 1/n portfolios diversified across factors. The odds of negative outcome over any time period decrease markedly when diversified across the factors with the 1/n portfolios. The benefits of factor diversification are perhaps greatest over shorter time periods. This is possibly of greatest interest to those most susceptible to sequence of returns risk.
Dave
- Sun Jul 30, 2023 8:57 am
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
Dear Bogleheads, Here is my contribution to this discussion: https://i.postimg.cc/GtMqRTBy/US.jpg I have attached 20 year forward rolling geometric returns of the five Fama - French factors for the US Markets. Mkt - RF is the market return minus the risk free rate, SMB (size) is small minus big, HML (value) is high minus low, and RMW and CMA are the two newer additional factors which are purported to explain poor returns in small growth. In parenthesis in the legend I have also included the average return over the entire time series: Mkt - RF > HML > CMA > RMW > SMB. Interpret it as you will. Following the green time series data, the HML investor who started around 2000 has had the worst experience *ever* of HML (value) investors. Could th...
- Tue Jul 25, 2023 11:08 pm
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
1. SV is more risky, and risk and return should be related in an efficient market An efficient market means that investors have easy access to all public information and they can easily invest with little friction. An efficient market is not necessarily correct in terms of future returns. And, unfortunately, stock investors have no control over future returns, so they can’t trade off risk for return. An efficient market should be efficient in pricing risk. That’s what markets do: they price risk. If a market efficiently prices risk, then all investable assets should have similar risk adjusted returns. Not similar returns, similar risk adjusted returns-similar Sharpe ratios (I realize there are other ways to think about risk). If all invest...
- Tue Jul 25, 2023 5:40 pm
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
It’s not at all inconsistent. What is an SV investor to do? SV has underperformed TSM for quite a while now. But I don’t believe it’s because TSM earnings have been greater. Instead it’s because of TSM P/E multiple expansion. Past returns for TSM have won because of P/E expansion. Those past returns portend lower future expected returns, not continued higher ones. As Ilmanen says in his most recent book “we have borrowed returns from the future”. So what is more likely, that TSM (LG) will continue to outperform by continued P/E expansion, or that relative valuations will revert towards a mean? The worst time to give up on a strategy is after it has become relatively cheap. The best predictor we have of future returns is current valuations....
- Tue Jul 25, 2023 5:34 pm
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
No predictions about the future performance or value spreads are needed if this is your belief. I really do hope the above stameent is true, and I hope you can understand why making predictions, talking about which past performance chart you like, or talking about value spreads may look like performance chasing. Us big SV tilters are not making predictions about the future. We are admitting that we can’t predict the future. When you don’t know which factor(s) will do well in the future and over any given time frame, isn’t it logical to consider diversifying across factors. Us SV tilters are invested in long only funds with a market beta of 1 or a small bit greater than 1. In absolute terms we’re generally doing ok when TSM does well. Which...
- Tue Jul 25, 2023 5:16 pm
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
It’s not more hope than plan when the period ending today is resulting in some of the widest Growth vs Value spreads in history. What seems more hope than plan is expecting the market to continue outperforming despite how wide that gap is. Also - a big flaw is only analyzing US data, premiums internationally have still held up over this same period So, those that believe in mean reversion should be in US SV and Int’l LG, while those who believe the current situation will continue should be US LG and Int’l SV? Value spreads are wide globally. That’s a big hurdle to potentially overcome for market cap weighted funds Market Cap weight has outperformed enough in my timeline that the hurdle is for value. I'm curious how you got the past predict...
- Tue Jul 25, 2023 8:46 am
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
I like....the odds https://global.discourse-cdn.com/business7/uploads/rationalreminder1/original/2X/d/ddd0ffdcf2b07fde9ef548b028120bdb4596996e.png https://global.discourse-cdn.com/business7/uploads/rationalreminder1/original/2X/5/502756bef458d1113af03ec85f83c20ec03b3975.png Great chart! I see two ways to view it: 1. SV has a long history of higher returns, the last 15 or so years have been poor, and we’re due for huge SV comeback. 2. Something has fundamentally changed over the decades and the premium just no longer there. For example SV more investible and liquidity component erased, behavioral component lessened, or just less risky than in the past. Personally, all my eggs are in the option 1 basket. But I could well be wrong! I think it...
- Fri Jul 21, 2023 9:22 am
- Forum: Investing - Theory, News & General
- Topic: How often do you check the market?
- Replies: 91
- Views: 7626
Re: How often do you check the market?
On the one hand it’s ok to check as much as one wants, as long as he doesn’t act. On the other hand I do think there is a deeper almost subconscious adverse effect from being a frequent market checker. Those of us who see the volatility day to day or hour to hour may have more conservative asset allocations than we might have if we had our heads more in the sand. In my case, I check frequently throughout the day, stick rigidly to my plan, but in the big picture my allocation is a bit conservative because of my knowledge of the volatility.
Dave
Dave
- Tue Jul 18, 2023 1:11 pm
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
While you can certainly increase risk by concentrating your portfolio into small value stocks, there is no guarantee that you will be compensated for taking that extra risk. And correspondingly, you don’t know if the future expected return will be higher with small value. Yes that is the nature of risk. Expected returns are “expected”. We create the expectations, so we will know about expected returns. Actual returns are unknown. Sometimes / frequently the risk shows up. Sounds like a good reason to diversify across unique and independent sources of risk to me. Dave In other words, concentrate risk into a small subset of the market, thereby increasing risk for which there is uncertainty as to whether the risk will be compensated. It’s alwa...
- Mon Jul 17, 2023 11:20 am
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
Diversifying into net exposure to size and value increases equity risk by adding different risks that have low correlations with market risk. This is inconsistent with the Fama-French 3 factor model, which basically says what's important is exposure to size, value and market factors. It does not matter how the portfolio is constructed, just the exposure to these three factors. Perhaps my effort at brevity made my statement confusing. HmL and SmB are risk factors that are unique and independent from the market factor and from each other. If one wants to increase the expected return of a 100% TSM portfolio, he can certainly lever up the 100% TSM, but that is simply adding more of the same risk. Alternatively, the investor could increase the ...
- Mon Jul 17, 2023 11:14 am
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
BTW, typically what I see from Larry is something to the effect "it's risk and not a free lunch, but maybe also a free stop at the dessert table". I also see assertions such as the quotes from Ben Felix above, again without answering the questions. I will also say that Book Value, in my opinion, is still important as a measure of Value but is of declining importance. I believe we should look at the Income Statement and not so much at the Balance Sheet when looking for Value metrics. Price to Earnings, Price to Cash Flow, Price to Sales in my opinion is more important. In other words, you view companies as a set of cash flows over looking at companies as a set of assets and liabilities. The income statement is primary, the balance...
- Mon Jul 17, 2023 9:31 am
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
Diversifying into net exposure to size and value increases equity risk by adding different risks that have low correlations with market risk. This is inconsistent with the Fama-French 3 factor model, which basically says what's important is exposure to size, value and market factors. It does not matter how the portfolio is constructed, just the exposure to these three factors. Perhaps my effort at brevity made my statement confusing. HmL and SmB are risk factors that are unique and independent from the market factor and from each other. If one wants to increase the expected return of a 100% TSM portfolio, he can certainly lever up the 100% TSM, but that is simply adding more of the same risk. Alternatively, the investor could increase the ...
- Sun Jul 16, 2023 6:14 pm
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
If “burstiness” and the potential to go down at any time and for long lengths of time is the case for all factors including market beta, that is a reason to diversify across factors, not avoid them.Northern Flicker wrote: ↑Sun Jul 16, 2023 2:58 pmYes. Risky investments are volatile. If you want to get the return of stocks in general, or of a factor-tilted stock portfolio, you really do have to take the risk.nedsaid wrote: I don't know but it seems that if you want those excess returns, even from the Equity Risk Premium, it seems that you embrace burstiness rather than cringe when it happens.
Dave
- Sun Jul 16, 2023 12:45 am
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
Leverage would be amplifying a single risk, market risk. Diversifying into net exposure to size and value increases equity risk by adding different risks that have low correlations with market risk.SB1234 wrote: ↑Sat Jul 15, 2023 11:32 pmIf by using factors you're going to increase risk in your portfolio, Why not just use leverage then, what's the point of using factors.Northern Flicker wrote: ↑Sat Jul 15, 2023 9:39 pm It is not a correct statement that it is extremely difficult to beat the market. What is true is that it is extremely difficult to beat the market without taking more risk than the risk of the market. If you are willing to take more risk than market risk to try to beat the market, factors provide a systematic framework for trying to do that. But the strategy may fail. That's the nature of risk.
Dave
- Sat Jul 15, 2023 10:41 pm
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
It’s not just about different amounts of risk, it’s also about different types of risk. Risks that are unique and independent from one another.000 wrote: ↑Sat Jul 15, 2023 10:18 pmIn what way?Northern Flicker wrote: ↑Sat Jul 15, 2023 9:39 pm Small value stocks are riskier than the overall market.
And at any price?
What are the comparative risk levels of the nine style boxes (large,mid,small x growth,blend,value)? How was it determined?
Vanguard assigns a "4" risk level to its large cap growth, blend, and value funds and a "5" to its small and mid cap growth, blend, and value funds.
Dave
- Sat Jul 15, 2023 10:12 pm
- Forum: Investing - Theory, News & General
- Topic: Interrogating the size and value factors
- Replies: 647
- Views: 54397
Re: Interrogating the size and value factors
I think it is usually a mistake for investors to try to beat the market using "size and value factors" promoted by the financial industry. Trying to beat the market is not the only justification for a factor tilt. People are exposed to different risks at different levels at different times in their life course (such as job loss or inflation). An investor may adjust their factor exposures at times to try to reduce the correlation of portfolio risk with other risks the investor faces. I don't understand why you find the size and value factors controversial. I think you are a believer in market efficiency. Small value stocks are riskier than the overall market. An efficient market should reward investors for taking systematic (undiv...
- Sat Jul 15, 2023 11:26 am
- Forum: Investing - Theory, News & General
- Topic: How active are Dimensional Funds?
- Replies: 32
- Views: 4073
Re: How active are Dimensional Funds?
Totally agree. Larry Swedroe has consistently made the point that the prospectuses are written by lawyers to protect the fund company and jump through various legal hoops. The wide range of behaviors suggested by the prospectus does not necessarily reflect the true behavior of the organization.
Dave
- Fri Jul 07, 2023 10:09 pm
- Forum: Investing - Theory, News & General
- Topic: What allocation did you or are you going into retirement with and why
- Replies: 87
- Views: 8809
Re: What allocation did you or are you going into retirement with and why
I’m 45% equities equally divided US/Int and heavily tilted to size and value
25% safe bonds with average maturity about 4 years
30% Alternatives including: AQR Style Premia, Reinsurance, middle market lending, alternative lending.
I’ve sort of hyper diversified across factors and unique sources of return in an effort to lessen sequence of returns risk.
Dave
25% safe bonds with average maturity about 4 years
30% Alternatives including: AQR Style Premia, Reinsurance, middle market lending, alternative lending.
I’ve sort of hyper diversified across factors and unique sources of return in an effort to lessen sequence of returns risk.
Dave