Search found 518 matches

by EDN
Tue Apr 23, 2013 8:42 pm
Forum: Personal Investments
Topic: Questions about Fee-Only Financial Advisor
Replies: 18
Views: 3029

Re: Questions about Fee-Only Financial Advisor

The only two legitimate options are to manage it yourself, following one of the models in William Bernstein's 4 Pillars or Intelligent Asset Allocator, or hire an independent, fee-only RIA (registered investment advisor) firm to assist you. They should have a strong belief in passive investment principles and will help you coordinate your entire financial picture. It should be fairly easy to consolidate most stuff to Schwab to make your life easier. RIAs don't have the conflicts of interest that ML or Schwab brokers do (they have a fiduciary responsibility to act in your best interest), and will be able to put together a better plan than the packaged products at brokerage firms. You just have to evaluate if paying a modest ongoing fee is wo...
by EDN
Tue Apr 23, 2013 4:07 pm
Forum: Investing - Theory, News & General
Topic: When to add 30 year bonds to one's portfolio?
Replies: 34
Views: 2520

Re: When to add 30 year bonds to one's portfolio?

^ There is a lot there, and not a lot I agree with. But you seem pretty invested in your views. I will just say (repeat) if long treasuries continue to counterbalance equities as they have since 2000, you will almost certainly earn large negative (not low, but negative) real returns into perpetuity. That is a major issue for a portfolio to have a component do so poorly for the price of lowering risk a bit. I think the last 10 years has convinced a lot of people they want exposure to interest rate "fluctuations", but really that just means falling rates. If LTT go from 3 to 7, you won't be nearly as happy with -50%+ losses. We've see that level or real return loss last 40 years, by the way. Even on a slice of a portfolio, that hurt...
by EDN
Tue Apr 23, 2013 3:22 pm
Forum: Investing - Theory, News & General
Topic: When to add 30 year bonds to one's portfolio?
Replies: 34
Views: 2520

Re: When to add 30 year bonds to one's portfolio?

Rmelvey, I'm not so sure things are as cut and dry as you assume. Just off the top of my head: #1 --The utility of extended duration bonds (i.e. longer than long-term) is a recent phenomenon. I'm not sure you would have come to the same conclusion looking at the previous few decades ending in 1999 -- major stock market declines were better offset with short-term bonds than long-term bonds. The later tended to be negative when the stock premium went south, and I'm only talking about 20 year bonds. 30 year would have been highly negative on average. Even during the deflationary Great Depression, 5YR bonds made out as well/slightly better than 20YR bonds. 1973-1974? VERY ugly for long-term debt. This "new normal" for bond behavior is...
by EDN
Mon Apr 22, 2013 10:49 pm
Forum: Personal Investments
Topic: Do small cap value tilters need REITs?
Replies: 45
Views: 8142

Re: Do small cap value tilters need REITs?

Bradley, Sectors are certainly not core holdings. Nice try. If you hold a TSM based portfolio, sure, REITs or almost anything else provide great diversification. Hold small and value, not so much, as my example above shows. Performance of sectors are full of noise, and some will outperform SV even over long periods. Tech in the 1990s, Precious Metals & Mining through '09, and REITs are the it-thing today. As I said, if you hold them long enough you'll be fine. But you'll have to endure periods like the 80s/90s when they trail bonds. No need to put yourself through those swings. Core equity and fixed asset classes are sufficient. As for your holdings, here is what you've told us you own: by Bradley » Sun Dec 05, 2010 7:19 pm I like and u...
by EDN
Mon Apr 22, 2013 8:09 pm
Forum: Personal Investments
Topic: Do small cap value tilters need REITs?
Replies: 45
Views: 8142

Re: Do small cap value tilters need REITs?

Sorry if some took my comments about REITs being in SV to represent that's why they aren't necessary. That was just a passing comment. No, small value is a 1,000 to 1,500 stock asset class diversified across all the sectors in the market that is well defined by the FF multifactor research. REITs, on the other hand, are hazy. Maybe a sector, maybe an asset class (if they proxy for commercial property). I personally don't care if they are/aren't, because I'm not sacrificing small value dollars to fund them (or large value). Sure, they've done marginally better than SV for the last 10-12 years, longer term, of course, that is not the case and certainly not expected. From early 80s through 1999, REITs trailed bonds! So is the case with sector-l...
by EDN
Mon Apr 22, 2013 4:31 pm
Forum: Personal Investments
Topic: A Question for Folks Who Have Abandoned Slice&Dice/Tilting
Replies: 36
Views: 5062

Re: A Question for Folks Who Have Abandoned Slice&Dice/Tilti

The slice and dicers and the tilters are all trying to win the race, which of course means that they can crash and burn along the way. When it comes to investing, I'm happy with coming in second or third, because I'm more likely to avoid a crash along the way, plus it's just easier on the soul. Sort of like the rabbit and the turtle. Good luck. I actually loathe all these euphemisms we seem to have come up with for investing like "win the race" or "already won the game". Investing is just a means to an end, and it ain't over till its over. Investors who hold different than TSM/TBM allocations aren't trying to win anything, they are just trying to match their goals/preferences with their portfolios. No different, really,...
by EDN
Mon Apr 22, 2013 3:36 pm
Forum: Personal Investments
Topic: Do small cap value tilters need REITs?
Replies: 45
Views: 8142

Re: Do small cap value tilters need REITs?

I'm at 70% stocks, 60% of that domestic, and 40% of my domestic equity is in Vanguard small cap value index (60% TSM). Of my total portfolio, TSM is 25% and SCV is 17%. From this link, which I'm not sure is still accurate (it's not too recent), it appears that REITs make up about 2% of TSM and about 10% of SCV index. http://www.bogleheads.org/wiki/Percentages_of_REITs_Present_in_Vanguard_Index_Funds So, basically about 2.5% or 3% of my portfolio is comprised of REITS. I like the simplicity of not owning a REIT fund (which is probably the answer to my question), but I'm wondering if the small value tilters out there own REITs separately, or do you just count on the SCV tilt to provide the REIT diversification? Thanks, all. No, I don't think...
by EDN
Mon Apr 22, 2013 1:48 pm
Forum: Investing - Theory, News & General
Topic: Ferri's 60-20-20 Bond Portfolio
Replies: 44
Views: 8756

Re: Ferri's 60-20-20 Bond Portfolio

In a recent discussion about the oddities of the Barclays Aggregate Bond Index used by the Total Bond funds, Rick Ferri mentioned a possible way to get around its 70% (approx) in government bonds. I believe his suggestion was the following: -- 60% in the Total Bond Market Index Fund -- 20% in the Vanguard High-Yield Corporate fund -- 20% in the Treasury Inflation Protected Securities fund I'm just wondering if anyone can breakdown what that would leave for an allocation between Treasuries, agencies, mortgages, corporate and the rest? Any other suggestions? Beta, I've gotten your post off track, so let me try to give you some advice to help in your efforts. INSTEAD of just farming out your fixed income exposure to TBM, I'd suggest you inste...
by EDN
Mon Apr 22, 2013 1:29 pm
Forum: Personal Investments
Topic: A Question for Folks Who Have Abandoned Slice&Dice/Tilting
Replies: 36
Views: 5062

Re: A Question for Folks Who Have Abandoned Slice&Dice/Tilti

A brief comment on what I've read here. First, a quick intro: today, we are relatively certain there are at least 5 factors that drive the expected returns of a diversified portfolio: stock/bond, small/large stock, value/growth stock, long/short maturity and credit/government exposure. That is the FF 5 Factor Model, the 3F model with 2 additional (generally non controversial) fixed income factors. Of course you can diversify across all the risks, some of the risks, or none of them. To be a multifactor investor, you simply have to admit these are considerations you've had and decided what was right for you. So, when you read and hear things like those who previously had stuck to TSM as the only necessary bond holding beginning to say that th...
by EDN
Mon Apr 22, 2013 1:11 pm
Forum: Investing - Theory, News & General
Topic: Ferri's 60-20-20 Bond Portfolio
Replies: 44
Views: 8756

Re: Ferri's 60-20-20 Bond Portfolio

To clarify, DFA 5YR Global Fund (one of the two "high quality bond" comparisons I made, the other Vanguard TBM) underperformed Vanguard HY by 3.8% over the last 10 years Eric Eric, Below is the M* reference which will provide you with the correct data. Vanguard’s HY ( VWEAX ) has actually outperformed DFA’s 5yr global by 3.91% not the 3.8% you claim. 3.91% per year over 10 yrs amounts to a growth of wealth in excess of 44% between the oft cited DFA fund vs Vanguard’s HY. http://performance.morningstar.com/fund/performance-return.action?t=VWEAX&region=USA&culture=en-us In case you missed an earlier post let me leave you with some actual performance data as opposed to your what if scenarios. Below is the growth of $10,000 o...
by EDN
Mon Apr 22, 2013 12:21 pm
Forum: Investing - Theory, News & General
Topic: Vanguard High Yield
Replies: 139
Views: 12587

Re: Vanguard High Yield

So you'll see, it seems as though you trumpet "diversification" when it works for you, but are quick to scale it back or remove it completely in other circumstances. I'm sure others are in the same :confused camp as I am. I doubt many people are confused at Rick's opinions, at least nowhere near as many as are lost when it comes to the other point of view. I don't know all that much, but I'm not at all confused. Can you then, very simply, explain why: a) high-yield does make sense for diversification purposes, but b) a more diversified (1000 vs 400) small value index doesn't c) including additional small cap diversification via a micro cap fund doesn't d) why including a large percentage of the world's fixed income market doesn't...
by EDN
Mon Apr 22, 2013 12:17 pm
Forum: Investing - Theory, News & General
Topic: Ferri's 60-20-20 Bond Portfolio
Replies: 44
Views: 8756

Re: Ferri's 60-20-20 Bond Portfolio

Eric, I don't insult you. I disagree with you. A large majority of your posts site DFA research. That's fine, except that it's well known that an adviser is needed to buy DFA funds, and you make it very clear in your posts that you're one of the advisers. Anyone who disagrees with had better standby for insults. I don't have your opinion that DFA is the answer to all things investing. They're just another fund company, and no fund company is everything to everyone in every asset class. DFA has good products and they have not so good products. They began as an institutional equity shop and equities remains their forte today. It's widely know that institutional investors favor a managers strong point, and this is why they seek DFA for equity...
by EDN
Mon Apr 22, 2013 11:58 am
Forum: Investing - Theory, News & General
Topic: Vanguard High Yield
Replies: 139
Views: 12587

Re: Vanguard High Yield

Why would you opt for less diversification when you can have move with high yield bonds? You remember the 1970s. Treasuries don't always go up in value with stocks go down. Because the benefits are minor in terms of adding some unique risk and the negatives far outweigh that small benefit. Larry Yes, the benefits are minor in terms of adding some unique risk, but who ever said that finding a unique risk asset class that generates a positive real return was easy? Progress in made in basis points, not percentages. Rick Ferri Rick, I think what confuses us the most about your views is how quick you are to point out the importance of high yield diversification (measured in "basis points"), yet for a more important asset class -- US s...
by EDN
Mon Apr 22, 2013 11:38 am
Forum: Investing - Theory, News & General
Topic: Ferri's 60-20-20 Bond Portfolio
Replies: 44
Views: 8756

Re: Ferri's 60-20-20 Bond Portfolio

............ HY suffered devastating losses at just the wrong time in 2008. A total blood bath like nothing we'd ever seen from "bonds". Eric “devastating losses” ??? Eric, you crack me up. I have already provided the data that shows VWEAX (Vanguard’s Hy Yield )outperformed DFGBX ( Dimensional’s 5yr Global Fixed ) in excess of 44% over the past 10 years. Tough to characterize one year performance as devastating in context and without cherry picking time period. As 10% of a buy hold rebalance strategy, in a well constructed portfolio, it is an overreach to characterize a fleeting 21% dip as devastating especially when the largest single allocation to fixed and portfolio as a whole VBTLX ( Vanguard’s Total Bond Fund ) returned 5.15...
by EDN
Mon Apr 22, 2013 11:21 am
Forum: Investing - Theory, News & General
Topic: Ferri's 60-20-20 Bond Portfolio
Replies: 44
Views: 8756

Re: Ferri's 60-20-20 Bond Portfolio

Advisors have 28% of their DFA assets in bonds, institutions have 16%. Thanks for proving my point. Rick Ferri [Response to personal attack removed by admin LadyGeek] Rick, I don't think I insulted you in any way. If I did, please provide the example and I am happy to apologize. That is never my intention. My assumption, however, is that you find it insulting that someone would question your opinions . My comments are simply designed to correct mistakes you have made. For example, my participation in this thread was to comment on this opinion you offered: This is why large institutional investors hire DFA for their equity management and not fixed income. Ironically, it's advisers who flock to DFA for fixed income, which should tell you som...
by EDN
Sun Apr 21, 2013 9:27 pm
Forum: Investing - Theory, News & General
Topic: Ferri's 60-20-20 Bond Portfolio
Replies: 44
Views: 8756

Re: Ferri's 60-20-20 Bond Portfolio

The amount that advisors vs institutions have in DFA bond funds as a percentage of their total DFA assets isn't that different. And by the looks of Harvard and Yale, I'm guessing they and their trustees wish it was more! Eric DFA used to make it easy to find this information. They used to breakout the amount being managed by advisers and for institutions for each asset class. I looked for an hour the other day and couldn't find the breakdown. Institutions seek out the best in class for each investment category. They'll seek DFA for value investing and other firms for fixed income investing. There are always exceptions, though. Rick Ferri That could be why do many of your comments re: DFA are inaccurate! :P I can find it in 60 seconds--advi...
by EDN
Sun Apr 21, 2013 8:56 pm
Forum: Investing - Theory, News & General
Topic: Ferri's 60-20-20 Bond Portfolio
Replies: 44
Views: 8756

Re: Ferri's 60-20-20 Bond Portfolio

Bradley wrote:
EDN wrote:
In 2008, the spread in losses between HY and the two high quality bonds was more than -25%!


Eric

In 2009, the spread in gain between HY (VWEAX ) and DFA 5 yr Global DFGBX was in excess of 35%!

Bradley
I'd hope so, HY suffered devastating losses at just the wrong time in 2008. A total blood bath like nothing we'd ever seen from "bonds". What was the spread between HY and EM Value in 2009? Can you look that up for me?

Eric
by EDN
Sun Apr 21, 2013 8:52 pm
Forum: Investing - Theory, News & General
Topic: Ferri's 60-20-20 Bond Portfolio
Replies: 44
Views: 8756

Re: Ferri's 60-20-20 Bond Portfolio

I learned a long time ago that when an equity firm decides to manage fixed income products that it's usually wise to avoid those products. This is why large institutional investors hire DFA for their equity management and not fixed income. Ironically, it's advisers who flock to DFA for fixed income, which should tell you something about advisers. Rick Ferri Of course Rick is wrong about his opinion regarding DFA bond funds. To the extent they aren't used more by institutional investors, it simply reflects their tendency to hold longer-term debt. Eric Hmmm. I was born at night, but not last night. Rick Ferri Sometimes I'm not so sure! PS--the amount that advisors vs institutions have in DFA bond funds as a percentage of their total DFA asse...
by EDN
Sun Apr 21, 2013 8:27 pm
Forum: Investing - Theory, News & General
Topic: Ferri's 60-20-20 Bond Portfolio
Replies: 44
Views: 8756

Re: Ferri's 60-20-20 Bond Portfolio

Another really unique/interesting strategy they've been managing is their "World exUS Government Bond Fund". It too is intermediate term, and offers excellent diversification to their US Government Bond fund (#1 ranked Int'd Government fund for the last 15 years, has actually outperformed Vanguard HY Corporate). You just never hear as much about these funds because of the popularity and eye-popping returns of their equity strategies. But for those of us who have strong exposure to small and value globally, this fund allows us to significantly lower overall portfolio risk without having to concentrate in US-only bonds. Unlike the contribution from "variable credit" that has led Investment Grade to outperform TBM by 1% per...
by EDN
Sun Apr 21, 2013 8:13 pm
Forum: Investing - Theory, News & General
Topic: Ferri's 60-20-20 Bond Portfolio
Replies: 44
Views: 8756

Re: Ferri's 60-20-20 Bond Portfolio

DFA also has a few intermediate funds, ...........................DFA Investment Grade is similar to Total Bond Index Eric DFA Investment Grade....................DFAPX inception date 3/02/2013. M* has no “Rating & Risk” data because it’s so new. It's over 2 years old. Simulations show a variable credit/maturity approach add about 1% higher returns relative to a static bond index (1975-2010). Since March 2011 inception, net of fund fees, it has beaten Barclays Agg by 1% per year. Exactly what you'd expect. Current durations of the fund/index are 5.3 and 5.2 respectively, despite the index having a 0.9 year longer maturity. DFAPX currently holds more in A/BBB bonds (but all investment grade, no junk) because credit spreads are wide. If ...
by EDN
Sun Apr 21, 2013 8:02 pm
Forum: Investing - Theory, News & General
Topic: Ferri's 60-20-20 Bond Portfolio
Replies: 44
Views: 8756

Re: Ferri's 60-20-20 Bond Portfolio

Per the comment above, that shows how $10k in a combo of riskier Vanguard bond funds (noteably Vanguard HY) grew compared to much safer fixed income, it offers another chance to compare "risk in bonds" vs "risk in stocks". If ever there was a decade where the former had a chance of outpacing the later, it would be the last 10 years--junk bond spreads were cut in half (hurting higher quality bonds) and yields fell by about 60% (which hurt shorter-term bonds). For some, their "core" bond strategy is TBM. HY Bonds grew to about $5,500 more than TBM. I'd opt for the even safer DFA 5YR Global (1-5 yrs, AA or better and globally diversified). HY Bonds grew to about $6,500 more than 5YR bonds. In 2008, the spread in l...
by EDN
Sun Apr 21, 2013 6:46 pm
Forum: Investing - Theory, News & General
Topic: Ferri's 60-20-20 Bond Portfolio
Replies: 44
Views: 8756

Re: Ferri's 60-20-20 Bond Portfolio

I learned a long time ago that when an equity firm decides to manage fixed income products that it's usually wise to avoid those products. This is why large institutional investors hire DFA for their equity management and not fixed income. Ironically, it's advisers who flock to DFA for fixed income, which should tell you something about advisers. Rick Ferri This of course isn't true. Many of DFAs oldest fixed income funds are very short-term and very high quality in nature and very well diversified (globally, for example) for those who prefer to "take their risk in equities" and want more liquidity, for example. And over the last 10 years yields have come way down and junk bond spreads have narrowed considerably, so of course sho...
by EDN
Fri Apr 19, 2013 2:50 pm
Forum: Investing - Theory, News & General
Topic: Jack Bogle: We need to fix the bond index
Replies: 48
Views: 9725

Re: Jack Bogle: We need to fix the bond index

There is nothing wrong with TBM, you just have to understand that its pricing formula and credit/maturity restrictions can lead to very concentrated exposure when one major issuer of debt is crowding out all others. This is no different than issues with TSM, it too is marketed as "total", but is basically a large cap fund. In the late 1990s it looked like a watered down tech fund. Some tried to warn against this in favor of more distinct asset class diversification, but that was largely ignored. I think Jack is rightly coming around to the idea that "total" might not be "totally appropriate" for everyone. Instead, you start with the question of where returns come from. And conclude that your allocation should ...
by EDN
Fri Apr 19, 2013 2:40 pm
Forum: Investing - Theory, News & General
Topic: Is Low-Vol Anomaly really explained by Value factor?
Replies: 51
Views: 3998

Re: Is Low-Vol Anomaly really explained by Value factor?

stlutz wrote:Eric: Just to make sure I understand you correctly, do you think that low volatility/minimum variance portfolio are more, equally, or less risky than that market overall?
Different risky. If you can afford to take value and term risk, but not as much volatility, it's safer. If you are OK with volatility, but business cycle or inflation risk (which would hurt value and term), it is riskier.

Jeb -- something like 0.7 beta, 0.0 size, 0.3 value, 0.5 term, and 0.1 credit. R^2 north of 80%

Eric
by EDN
Fri Apr 19, 2013 2:18 pm
Forum: Investing - Theory, News & General
Topic: Jack Bogle: We need to fix the bond index
Replies: 48
Views: 9725

Re: Jack Bogle: We need to fix the bond index

There is nothing wrong with TBM, you just have to understand that its pricing formula and credit/maturity restrictions can lead to very concentrated exposure when one major issuer of debt is crowding out all others. This is no different than issues with TSM, it too is marketed as "total", but is basically a large cap fund. In the late 1990s it looked like a watered down tech fund. Some tried to warn against this in favor of more distinct asset class diversification, but that was largely ignored. I think Jack is rightly coming around to the idea that "total" might not be "totally appropriate" for everyone. Instead, you start with the question of where returns come from. And conclude that your allocation should s...
by EDN
Fri Apr 19, 2013 2:02 pm
Forum: Investing - Theory, News & General
Topic: holy cow - what's our definition of SV?
Replies: 21
Views: 7661

Re: holy cow - what's our definition of SV?

I noticed that in this thread: http://www.bogleheads.org/forum/viewtopic.php?f=10&t=114985&view=viewpoll there doesn't seem to be a consistent definition of "SV". For some folks, it means small and value, and for others, it means small or value. Does the specific lettering/punctuation make a difference? Is "SV" the same as "small-value"? I apologize if this is covered somewhere. If it isn't, could the approved notation be included on the wiki? https://dl.dropboxusercontent.com/u/89313347/feh.gif If I remember that thread, I was correcting Rick who tried to nitpick an example I provided. It is pretty simple, as has been mentioned previously, "small value" is a small cap value fund or index. Sm...
by EDN
Fri Apr 19, 2013 12:49 pm
Forum: Investing - Theory, News & General
Topic: Momentum based investing in real world
Replies: 24
Views: 2649

Re: MOMENTUM based investing in real world

FWIW, I view the approach that unbundles (for the most part) low-priced value from high-priced profitability as a better one for investors than one that tries to do everything (profitability, value, and momentum) all inside a core fund. There maybe some trading efficiencies there (relative to a pure long-only momentum fund), but you loose the visual exposure to the extreme offsetting results. From 1995-1999, the S&P 500 did 28% per year but Russell 1000 Value only did 23%. It'd been nice to see the separate Large Growth Index earning its 31% to give you some indication you were diversified and exposed to that side of the market. From 2007-2008, we had one year (2007) where the market was up modestly but value got killed, and then the ne...
by EDN
Fri Apr 19, 2013 12:37 pm
Forum: Investing - Theory, News & General
Topic: Momentum based investing in real world
Replies: 24
Views: 2649

Re: MOMENTUM based investing in real world

So this could be used as a tilt, just like one might tilt to value? To what would you attribute the disparity in tracking error between the small and large caps? If you hold a value fund, or even large and small value, a momentum fund is not what I would use to counterbalance it. Let's set aside the fact that momentum is an anomaly (which means it could persist, or could not), and your momentum fund must be run by a firm that can absorb the costs of about 100% turnover through patient trading (not easy). Let's evaluate the claim from momentum proponents: They say you should buy a basket of stocks that has recently just gone up quite a bit with the assumption that it will continue to go up for a little while longer...and you'll be able to s...
by EDN
Fri Apr 19, 2013 10:29 am
Forum: Investing - Theory, News & General
Topic: Is Low-Vol Anomaly really explained by Value factor?
Replies: 51
Views: 3998

Re: Is Low-Vol Anomaly really explained by Value factor?

Eric--actually if you read Falkenstein's stuff he bashes the CAPM more than anyone I've seen. In terms of the history of the theory, CAPM was developed because of the hypothesis that higher risk=higher expected returns. The low vol. proponents and the value titling proponents both agree that CAPM has failed to explain returns however--more beta has not meant higher returns.. The question is where one goes from there. Fama & Co. stuck to the view that higher returns can only come from higher risk, and went in search of other ways to define risk. The way this was done was to look for strategies that provided higher historical returns (value, size) and then develop ways to explain those as risk. Thus, the theory that more risk=more expect...
by EDN
Fri Apr 19, 2013 10:16 am
Forum: Investing - Theory, News & General
Topic: Is Low-Vol Anomaly really explained by Value factor?
Replies: 51
Views: 3998

Re: Is Low-Vol Anomaly really explained by Value factor?

But low vol seems to be well explained by other issues To get to the practical level, why should I care how much one return stream covaries with another one? If I can get the market return and take less risk than the market overall, who cares whether some academic or fund company selling a different strategy claims to "explain" the result? I already explained this. It's not that one return stream covaries with another, it's that the strategy in question "low vol" is almost fully explained by exposure to priced sources of expected return. Knowing where returns come from help with expectations, and also allows one to decide for themselves if the bundled package is the best approach to achieving those results. For example,...
by EDN
Thu Apr 18, 2013 4:18 pm
Forum: Investing - Theory, News & General
Topic: iShares Enters Factor Investing Market in a Big Way
Replies: 41
Views: 4818

Re: iShares Enters Factor Investing Market in a Big Way

I'd love to have access to a DFA-like fund without having to hire an advisor. I agree to that thought. RM I know what you are saying, but to defend DFA, we were just treated to this comment above: Some years ago, I invested in a Vanguard value fund and it performed quite poorly. I decided to just stick with the SP500 and Total Market. DFA runs strategies that are intensely focused on what they perceive to be the sources of expected returns. Not guaranteed returns, and the likely returns certainly won't show up in every period. In the component space, their value funds are very value oriented, their small funds are very small, and their growth funds hold very highly profitable companies, and all their equity funds screen out any security th...
by EDN
Thu Apr 18, 2013 3:07 pm
Forum: Investing - Theory, News & General
Topic: Is Low-Vol Anomaly really explained by Value factor?
Replies: 51
Views: 3998

Re: Is Low-Vol Anomaly really explained by Value factor?

Why would it be dangerous to not know where your returns are coming from? Well, during a period where the strategy isn't working (because the return on beta is significant, or the value premium is negative), you might be fooled into thinking this anomaly no longer works. But if you understand the underlying source of returns, then you'll better understand why what is happening is happening, both good and bad. The stats were from the time frame of 1968-2010, the DFA paper referenced in the link in your OP. In the wiki, I took a glance at the MSCI minimum volatility series and its annualized return from 2000-2012 of 4% per year. A 75% MSCI 750 Value, 25% Barclays Treasury Index mix earned +5.4%, and had less downside risk in 01-02 and 08. Ret...
by EDN
Thu Apr 18, 2013 2:24 pm
Forum: Investing - Theory, News & General
Topic: iShares Enters Factor Investing Market in a Big Way
Replies: 41
Views: 4818

Re: iShares Enters Factor Investing Market in a Big Way

Eric If you're going to make the argument that index funds and ETFs that track indexes are inferior to whatever you're selling, then you're going to have to quantify in real dollars. Provide some relevant analysis. Sure, the iShare S&P 600 value ETF (IJS) has only 446 holdings while other funds have more holdings, but how has this disadvantage IJS? Show some real data. Rick Ferri Rick, First, you must have me confused with a commissioned-based broker (who sells products) and not the fee-only advisor that I am (who sells the quality of their advice). On small value, I have no idea what you are talking about. My only mention of IJS (S&P 600 Value) was to say it has almost 3X less in assets than IWN (Russell 2000 Value), yet is a bett...
by EDN
Thu Apr 18, 2013 2:06 pm
Forum: Investing - Theory, News & General
Topic: Is Low-Vol Anomaly really explained by Value factor?
Replies: 51
Views: 3998

Re: Is Low-Vol Anomaly really explained by Value factor?

Eric, this is not a DFA bashing, so you can relax. Will you please back up your claims with evidence? Did you look at the chart in the post showing the inconsistency of the value factor? What exactly is the term loading on a low-vol portfolio such as SPLV? Another poster has shown that a 5 factor regression of VPU explains 48% of the returns. Any ideas where the rest comes from? No one said anything about DFA, that's a strawman. On VPU, you must have missed my comments on that. Its a sector fund! Not a high dividend strategy (that holds all sectors). FF models work for diversified portfolios, not sectors with loads of unsystematic (diversifiable) risk. And part of the low vol story is just that -- a huge overweight to Utilities, as much as...
by EDN
Thu Apr 18, 2013 1:41 pm
Forum: Investing - Theory, News & General
Topic: iShares Enters Factor Investing Market in a Big Way
Replies: 41
Views: 4818

Re: iShares Enters Factor Investing Market in a Big Way

Just one thought here It's much better to have a core fund strategy that incorporates multifactors than to have separate funds for each factor Larry The other thing is, and I speak from real world application and not theoretical academic performance perspectives -- there are significant behavioral reasons to unbundle factors. Lets say you know you'll be holding LV and SV for obvious reasons. But you don't want that much tracking error relative to the market. Should you buy an integrated core vehicle like AQR that sorts on combo of value, momentum, and quality? Or are you better off simply buying a LG fund that sorts on quality and sticks with the traditional high priced companies we know don't correlate very well with beaten down distresse...
by EDN
Thu Apr 18, 2013 1:24 pm
Forum: Investing - Theory, News & General
Topic: buying bonds, why sometimes buying smaller can be better
Replies: 30
Views: 3991

Re: buying bonds, why sometimes buying smaller can be better

In taxable space, if using munis, it is much easier to vary average maturity using a combo of short-term and intermediate-term funds than individual bonds. DFA ideally manages two that cap credit exposure at AA or above and have a modified variable maturity process inside the funds (using cash-flows to alter maturities). With Vanguard, say a combo of ST, Ltd Term, and Int'd Term, or even Baird Int'd Term on the long end for higher credit quality will work. Credit risk is a bit higher on the short end with Vanguard, but if you are buying individual munis with a 0.5% yield above the benchmark, most likely the credit rating is wrong and your higher yield is just higher risk as well. Eric Eric what is your opinion on the question I posed to la...
by EDN
Thu Apr 18, 2013 1:20 pm
Forum: Investing - Theory, News & General
Topic: Is Low-Vol Anomaly really explained by Value factor?
Replies: 51
Views: 3998

Re: Is Low-Vol Anomaly really explained by Value factor?

Yes, value and TERM. These guys hate it when they are trying to sell a new strategy and find out combos of old strategies work better. Happens all the time. They just hope there are enough uninformed to pay the bills.

Eric
by EDN
Thu Apr 18, 2013 1:07 pm
Forum: Investing - Theory, News & General
Topic: buying bonds, why sometimes buying smaller can be better
Replies: 30
Views: 3991

Re: buying bonds, why sometimes buying smaller can be better

Conceivably, an advisor building individual bond ladders has access to all passive/structured funds. And if so, I doubt the benefits of buying any size of individual holdings. Most bond investors will want to place them in tax-deferred accounts, which means you can use high quality globally diversified strategies that have a variable maturity approach. Historically, this has added north of 3/4% annually beyond buy and hold. DIY investors can get something similar from simply using ST Bond Index and Int'd Bond Index and adjusting from 25/75 to 75/25 based on inverted/flat, normal, and steep yield curves. Plus you get the added benefit of high-quality corporate exposure that further increases expected returns. And much better liquidity withou...
by EDN
Thu Apr 18, 2013 12:58 pm
Forum: Investing - Theory, News & General
Topic: iShares Enters Factor Investing Market in a Big Way
Replies: 41
Views: 4818

Re: iShares Enters Factor Investing Market in a Big Way

I'm not sure it is in ETF form. Either you reconstitute just once per year and your exposure to the factors is completely watered down, or you do so on a monthly or quarterly basis and the blind reconstitution trading kills you in costs. ETFs have come a long way in the past few years. Holdings are expanding, index methodology is getting better, liquidity is better, and the way these funds create and redeem is quite robust today. For example, custom creation and redemption baskets are now common, which allows the fund manager increased flexibility to hold more securities and less liquid securities. I'm not saying use only ETFs. I'm saying that the market is maturing and the old stale arguments against ETFs don't apply as much. Rick Ferri A...
by EDN
Thu Apr 18, 2013 12:46 pm
Forum: Investing - Theory, News & General
Topic: iShares Enters Factor Investing Market in a Big Way
Replies: 41
Views: 4818

Re: iShares Enters Factor Investing Market in a Big Way

Simple question: Will all the new products competing to exploit the FF size and value premiums overgraze the available S&V premiums and reduce returns to the just the equity premium? It seems to me that most equity investments now are done by institutions and professionals, all of whom are familiar with the FF model. Why won't the premium be arbitraged away if everyone knows about it and so many are trying to exploit it? Garland Whizzer First, new products won't likely increase the amount of people tilting to small and value, it will just change how they are doing it , or it might not if no one embraces the new ways. Second, risk doesn't go away because more people embrace it, that only applies to anomalies. The odds of going down in a...
by EDN
Thu Apr 18, 2013 11:55 am
Forum: Investing - Theory, News & General
Topic: "value factor" doesn't seem reliable to me
Replies: 66
Views: 5899

Re: "value factor" doesn't seem reliable to me

No source of higher EXPECTED return is reliable (read: guaranteed), not stocks over bonds, or long bonds over short ones. That is not specific to this conversation. Eric People often fail to see the forest for the trees. It can be useful to point out the forest. I continue to find the term "expected" misleading for many investors. As I said in another thread (again, not specific to this conversation): ------- Expected return is one of the more misleading terms in investing. Large numbers of investors appear to believe that expected returns are returns they should expect to receive. An investment with a 99% chance of returning nothing and a 1% chance of returning $1 million has an expected return of $10,000, but $10,000 is not at ...
by EDN
Thu Apr 18, 2013 11:32 am
Forum: Investing - Theory, News & General
Topic: how heavily do you tilt?
Replies: 23
Views: 2403

Re: how heavily do you tilt?

Eric I'm sure you can play with these numbers and come up with a hypothetical strategy of some mix using large-value, small-value, S&P 500 and whatever that shows it beat the market during the 1981-2000 period. The question in this conversation was the benefit of adding small-cap value to a total market fund, which is what I addressed. Rick Ferri Not quite Rick. The OP said "small-value" as in "small" dash "value". It's called the FF "3 Factor" model because small and value are separate. So results are dependent on how you tilt and what you use to tilt. Pretty obvious stuff. And coming up with combos that beat TSM over that period aren't any great mystery. FF HmL was + 4.6% and SmB was -1.4%, whi...
by EDN
Thu Apr 18, 2013 11:28 am
Forum: Investing - Theory, News & General
Topic: iShares Enters Factor Investing Market in a Big Way
Replies: 41
Views: 4818

Re: iShares Enters Factor Investing Market in a Big Way

larryswedroe wrote:Just one thought here
It's much better to have a core fund strategy that incorporates multifactors than to have separate funds for each factor
Larry
Larry,

I'm not sure it is in ETF form. Either you reconstitute just once per year and your exposure to the factors is completely watered down, or you do so on a monthly or quarterly basis and the blind reconstitution trading kills you in costs.

Eric
by EDN
Thu Apr 18, 2013 11:27 am
Forum: Investing - Theory, News & General
Topic: iShares Enters Factor Investing Market in a Big Way
Replies: 41
Views: 4818

Re: iShares Enters Factor Investing Market in a Big Way

I agree, more choices are a good thing. I have a belief though that as more products become available to capture certain factors/styles of the market that their previous premiums will diminish. In general, more choices are a good thing. But the evidence shows that investors are particularly susceptible to chasing past performance (simulated or otherwise) and the more narrowly focused and volatile a strategy is, the more likely it is that an investor will underperform the actual returns of the fund (see Bogle's comments/statistics on this). There is an inherent "grass is always greener" mindset amongst some investors. As in, nothing is better than what has yet to come out. We like shiny, we like new, but usually all we get is a gl...
by EDN
Thu Apr 18, 2013 11:20 am
Forum: Investing - Theory, News & General
Topic: how heavily do you tilt?
Replies: 23
Views: 2403

Re: how heavily do you tilt?

http://i902.photobucket.com/albums/ac225/Justin_Melquist/ee368906-8d51-45f7-a36c-864adef7d582_zps4ef3f113.jpg From Rick Ferri Great graph by Mr. Ferri, but not useful. Unless one is investing at the start of one decade and cashing out at the end does it matter?? Unlike most on here I think rolling returns to be much more useful then decade by decade returns. Good luck. To the contrary, there are several useful lessons to be learned from my graph: 1) The benefit from small-value investing is not consistent. It changes over different periods: 1981-1990 (red), small-value decreased the portfolio return over the total stock market (TSM) and increased the risk. 1991-2000 (green), small-value added slightly to TSM return and reduced portfolio ri...
by EDN
Thu Apr 18, 2013 10:13 am
Forum: Investing - Theory, News & General
Topic: iShares Enters Factor Investing Market in a Big Way
Replies: 41
Views: 4818

Re: iShares Enters Factor Investing Market in Big Way

More products from the Wall Street marketeers. Some basis in legitimate asset pricing research, some attempt to exploint recent patterns and profit from the fees for doing so. Some of these will survive, others won't. I'd be very hesitant to use ETFs outside of conventional market cap weighted strategies, their reconstitution approach could create issues here. And, of course, Vanguard funds already cover the spaces these products are entering that are worth consideration, so Im not sure this means much. Index Universe has something more to fill my spam box with, serious investors won't be interested. One thing is certain, the ETF industry has taken marketing and "throw stuff against the wall and see what sticks" to a level traditi...
by EDN
Thu Apr 18, 2013 10:03 am
Forum: Investing - Theory, News & General
Topic: "value factor" doesn't seem reliable to me
Replies: 66
Views: 5899

Re: "value factor" doesn't seem reliable to me

richard wrote:The underlying issue is the value premium is not reliable. Value is a risk factor and sometimes gets a higher return due to higher risk.

If we could clearly identify value stocks and have a high degree of confidence in their performance, then they wouldn't be riskier and therefore there would be no reason to think they might earn more. Only the real chance of substantial under-performance or losses gives the hope of higher performance.
No source of higher EXPECTED return is reliable (read: guaranteed), not stocks over bonds, or long bonds over short ones. That is not specific to this conversation.

Eric
by EDN
Thu Apr 18, 2013 9:25 am
Forum: Investing - Theory, News & General
Topic: "value factor" doesn't seem reliable to me
Replies: 66
Views: 5899

Re: "value factor" doesn't seem reliable to me

I find it a bit ironic today when I read folks believe or buy into the size effect, but question the value premium. 5 or 10 years ago, it was the opposite. What changed? Simple: small premium has been high lately, value premium has been more muted. So it's a plain and simple recency effect with rationale created after the fact. You see somewhat of the same discussion indirectly around the equity premium (negative for 13 years) in terms of constant mention of "stocks as risky assets", ultra-low equity allocations, and this new found interest in immediate annuities and the extremely high cost of certainty. Best to just tune out all the noise, conspiracies, and new paradigms. Traditional investing is tough to beat. There are no conce...
by EDN
Thu Apr 18, 2013 9:19 am
Forum: Investing - Theory, News & General
Topic: "value factor" doesn't seem reliable to me
Replies: 66
Views: 5899

Re: "value factor" doesn't seem reliable to me

"Value", or more appropriately the high book to market effect identified by FF is just a way to isolate high from low priced (relative to fundamentals) stocks I understand that, but I have a problem with the underlying assumption that we know the fundamentals. And if we don't know the fundamentals we can't isolate the stocks that are priced low relative to the fundamentals. There's nothing there. Any discrepancy in the value of assets on an individual basis is certainly washed out across a portfolio of thousands of value companies. Further, even if there was some flaw in how we measure book value, portfolios sorted on this flawed factor still produce the expected results. Value portfolios using other metrics produce similar retur...
by EDN
Thu Apr 18, 2013 8:08 am
Forum: Investing - Theory, News & General
Topic: "value factor" doesn't seem reliable to me
Replies: 66
Views: 5899

Re: "value factor" doesn't seem reliable to me

I just skimmed, something like this comes up weekly. "Value", or more appropriately the high book to market effect identified by FF is just a way to isolate high from low priced (relative to fundamentals) stocks--a distinct expected return from the overall market effect. A ton of empiracle evidence on this. Price is what matters, what you scale price by matters less. Book value just produces the most stability in ratios, leading to very low turnover. This becomes important when you also introduce other sorts, such as one on relative profitability, which has also been shown to have explainatory power. The Vanguard fund you reference holds REITS and financial stocks, but makes no distinction between the two. It is not necessary to h...