Total Market Index Funds--What experts say.

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Taylor Larimore
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Total Market Index Funds--What experts say.

Post by Taylor Larimore »

Hi Bogleheads:

When I began racing sailboats, I learned to listen to experts if I wanted to become a winner. It is the same with investing. This is what experts say about Total Market Index Funds:
American Association of Individual Investors: "It should come as no surprise that behavioral finance research makes a strong case for buying and holding low-cost, broadly diversified index funds."

Bill Bernstein: "If you own VTSMX with a bit of foreign and REIT, mixed with your bonds, you're most of the way there."

Jack Bogle: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk."

Scott Burns, columnist, author: "The odd are really, really poor than any of us will do better than a low-cost broad index fund."

Andrew Clarke, author: "If your stock portfoliio looks very different from the broad stock market, you're assuming additional risk that may, or may not, pay off."

John Cochrane, President American Finance Association: "The market in aggregate always gets the allocation of capital right."

Jonathan Clements of the Wall Street Journal: "If you want a surefire strategy for outpacing most other U.S. stock investors, simply shovel money into an index fund that tracks a broad U.S. market index such as the Wilshire 5000 or the Russell 3000."

Prof. Eugene Fama: "When I talk with pension fund people, what I start with is the market portfolio. That's always one of the optimal portfolio' one can settle on."

Paul Farrell, CBS: Where does Fama invest his retirement money?" In index funds. Mostly the Wilshire 5000."

Rick Ferri, author: "For 99% of the the investing population, I still recommend total stock and total bond market index funds."

Graham/Zweig, authors: "The single best choice for a lifelong holding is a total stock-market index fund."

Alan Greenspan: "Prices in the marketplace are by definition the right price."

Sheldon Jacobs who wrote the first book on no-load fund investing: "The best index fund for almost everyone is the Total Stock Market Index Fund.--The fund can only go wrong if the market goes down and never comes back again, which is not going to happen."

Lawrence Kudlow, CNBC: "I like the concept of the Wilshire 5000, which essentially gives you a piece of the rock of all actively traded companies."

Prof. Burton Malkiel: "I now believe the best general U.S. index to emulate is the broader Wilshire 5,000 Stock Index--not the S&P 500."

Bill Miller, famed fund manager: "With the market beating 91% of surviving managers since the beginning of 1982, it looks pretty efficient to me."

Motley Fools: "Invest your long-term moolah in index mutual funds that are designed to track the performance of a broad market index."

Pat Regnier, former Morningstar analyst: "We should just forget about choosing fund managers and settle for index funds to mimic the market."

Ron Ross, author: "Giving up the futile pursuit of beating the market is the surest way to increase your investment efficiency and enhance your financial peace of mind."

Paul Sameulson, Nobel Laureate: "The most efficient way to diversify a stock portfolio is with a low-fee index fund. Statistically, a broadly based stock index fund will outperform most actively managed equity portfolios."

Gus Sauter, "I think a very good way to gain exposure to the stock market is through the Total Stock Market Portfolio on the domestic side."

Bill Schultheis, author: The simplest approach to diversifying your stock market investments is to invest in one index fund that represents the entire stock market."

Charles Schwab: "Only about one out of every four equity funds outperforms the stock market. That's why I'm a firm believer in the power of indexing."

Chandan Sengupta, author: "Use a low-cost, broad-based index fund to passively invest in a little bit of a large number of stocks.

Prof. Jeremy Siegel: "For most of us, trying to beat the market leads to disastrous results."

Ben Stein: "Scholarly work by Burton Malkiel, Eugene Fama and others has proved that it is the rare investor indeed who can outperform the overall market."

"Robert Stovall, investment manager: It's just not true that you can't beat the market. Every year about one-third do it. Of course, each year it is a different group."

Larry Swedroe, author: "Over the last 75-years, investors who simply invested passively in the total U.S. stock Market would have doubled their investment approximately every seven years."

Peter D. Teresa, M* Sr. Analyst: My recommendation: a fund that indexes the entire market, such as Vanguard Total Stock Market Index."

Jason Zweig of Money magazine: "I think a total stock market index fund is not only the simplest, but the very best core investment for most people.

Warren Buffett, famed investor: "There seems to be some perverse human characteristic that likes to make easy things difficult."
Sixteen reasons to select Total Market Index Funds:

1. Low expense ratio.
2. Low Turnover (under 4%)
3. More diversification than any other US stock fund.
4. No stock overlap.
5. No manager changes.
6. No style drift.
7. Additions & withdrawals do not unbalance portfolio.
8. No worry--the stock market has always gone up.
9. Never below market's average performance.
10. Contains every style and cap-size.
11. Never needs rebalancing.
12. Past returns are much above average.
13. Extremely tax-efficient.
14. Turns tax-Inefficient stocks into tax-Efficient stocks leaving more room in tax-advantaged accounts.
15. Total market funds avoid "front running."
16. Simplicity--more free time.

Category Performance:
TOP 27%--Total Stock Market (15-years)*
TOP 18%--Total Stock Market after tax (10-years)*
TOP 21%--Total International (10-years)*
TOP 16%--Total International after tax (10-years)*
TOP 28%--Total Bond Market (15-years)*

*Longest period readily available at Morningstar

Investing in Total Markets
Last edited by Taylor Larimore on Fri Mar 11, 2011 9:48 pm, edited 3 times in total.
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Re: Total Market Index Funds--What experts say.

Post by natureexplorer »

Taylor Larimore wrote:Prof. Eugene Fama: "When I talk with pension fund people, what I start with is the market portfolio. That's always one of the optimal portfolio' one can settle on."

Paul Farrell, CBS: Where does Fama invest his retirement money?" In index funds. Mostly the Wilshire 5000."
Is this for real? So Fama himself doesn't tilt to value and/or small-cap?
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Re: Total Market Index Funds--What experts say.

Post by Taylor Larimore »

natureexplorer wrote:Is this for real? So Fama himself doesn't tilt to value and/or small-cap?
In his latest book, Don't Count on It, Mr. Bogle gives us this Fama quote (page 55):
"Whether you decide to tilt toward value depends on whether you are willing to bear the associated risk...The market portfolio is always efficient...For most people, the market portfolio is the most sensible decision."
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Re: Total Market Index Funds--What experts say.

Post by EmptyWallet »

Taylor Larimore wrote:
natureexplorer wrote:Is this for real? So Fama himself doesn't tilt to value and/or small-cap?
In his latest book, Don't Count on It, Mr. Bogle gives us this Fama quote (page 55):
"Whether you decide to tilt toward value depends on whether you are willing to bear the associated risk...The market portfolio is always efficient...For most people, the market portfolio is the most sensible decision."
I've decided to go with TR2045 as my main holding (401k) and then I tilt with my Roth towars small value (VBR) and Int Small Cap (VSS).

I have no idea if this is going to pay off, nor does anyone else, but as I'm young, and don't have a lot initially invested in those riskier accounts ($11k or so in Roth), I accept the risk and I'm going to ride the wave.

Is what I'm doing crazy? I really really really wish M* had a new upated style box for Total International (VGTSX). Since I've read it covers more small caps, and then maybe I wouldn't need VSS.
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Re: Total Market Index Funds--What experts say.

Post by bob90245 »

Taylor Larimore wrote:
natureexplorer wrote:Is this for real? So Fama himself doesn't tilt to value and/or small-cap?
In his latest book, Don't Count on It, Mr. Bogle gives us this Fama quote (page 55):
"...The market portfolio is always efficient...
This is a curious statement. The return and volatilities of different asset classes can be plotted to show which past combination layed on the efficient frontier.

http://www.bogleheads.org/forum/viewtopic.php?t=9445

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Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
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Post by radionightster »

That's it, I'm going 100% SCV! :)
35% US // 35% INTL // 30% BONDS
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Post by natureexplorer »

Taylor, thanks!

Despite these quotes, I don't believe that Fama is truly a total market investor himself.
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Post by cinghiale »

Taylor,
I like the fact that Mr. Bogle got pride of position. He deserves to be in bold font.
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Post by iceport »

natureexplorer wrote:Taylor, thanks!

Despite these quotes, I don't believe that Fama is truly a total market investor himself.
natureexplorer,

This doesn't address their personal portfolios, but the quote is consistent with this Q&A on the Fama/French Forum:

An Optimal Allocation?
EFF/KRF: There is no single right answer to this question. If there were one answer, it would have to be the market portfolio of domestic, international, and emerging stocks, since that is the only portfolio that can be held by everyone. Different tastes and circumstances, however, push investors away from the market portfolio and the optimal deviations vary across investors. For example, perhaps because of exchange rate uncertainty, people tend to overweight their domestic market. Similarly, some investors are happy to increase their expected return by tilting toward small stocks, while others prefer to reduce their risk by tilting toward large caps. It is important to diversify, but there is no single optimal mix.
Taylor,

Thanks for the reassurance!

Vanguard's Total Stock Market Index fund (tracking the MSCI® US Broad Market Index, which represents 99.5% or more of the total market capitalization of all of the U.S. common stocks regularly traded on the New York and American Stock Exchanges, and the Nasdaq over-the-counter market) makes up nearly 31% of my entire portfolio, and over 47% of my equity portfolio.

--Pete
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Post by Mulligan »

The Totals Stock Market Index fund is my core domestic holding, and it will always be more core holding. Taylor thanks for posting the quotes on this index.

I'm curious what domestic equity index funds do forum members use in conjunction with this fund to round out their domestic investments or to add alpha?

Mulligan
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Post by tludwig23 »

Mulligan wrote:
I'm curious what domestic equity index funds do forum members use in conjunction with this fund to round out their domestic investments or to add alpha?

Mulligan
My domestic equity is:

2/3rds VTI/VTSMX
1/6th VBR (small cap value)
1/6th VNQ (REIT)
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Post by natureexplorer »

Those who state that they use Total Market as a core, that's is nice, but it is very different from using it as the only domestic equity allocation. Sure, there is a point at which the difference becomes neglible, but then why bother?

If you tilt and use a Total Market fund as one of your holdings, you are really merely using it as a more efficient vehicle to gain exposure to its holdings. For example a 2/3 VTI and 1/3 VBR+VNQ is 50% large cap and 50% small cap in the size world.
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Post by tludwig23 »

natureexplorer wrote:
If you tilt and use a Total Market fund as one of your holdings, you are really merely using it as a more efficient vehicle to gain exposure to its holdings. For example a 2/3 VTI and 1/3 VBR+VNQ is 50% large cap and 50% small cap in the size world.
Exactly. I doubt if one used 1/2 S&P 500 and 1/2 VBR+VNQ the long term results would be much different. In my case the setup is somewhat historical. When my portfolio was smaller I used only TSM Index for domestic equity because having other funds with just a few thousand $ wasn't worth the trouble.
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Post by ruralavalon »

Equity half of portfolio --
(total market =70% of equity allocation)

40% Total Stock Market (67% of domestic equity allocation)
10% SCV
10% REIT

30% Total Int'l (75% of int'l equity allocation)
10% Prec. Met. & Mining
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Post by golfallday »

Great post, Taylor. These reminders keep me from wandering from the path.

I look at Paul Merriman's FundAdvice "Ultimate Buy and Hold Portfolio" and I think instead of allocating 6% to 10 separate equity funds, you get a very similar result by coming up with an asset allocation b/n a Total US Index and a Total Int'l Index. Simpler, too.

Which brings us back to the debate that rages....do we need to use an Int'l Index at all if we are invested in a Total US Index? Mr Bogle shouts, "No!" everytime it's brought up.
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Post by bob90245 »

golfallday wrote:Great post, Taylor. These reminders keep me from wandering from the path.

I look at Paul Merriman's FundAdvice "Ultimate Buy and Hold Portfolio" and I think instead of allocating 6% to 10 separate equity funds, you get a very similar result by coming up with an asset allocation b/n a Total US Index and a Total Int'l Index. Simpler, too.
Simpler? Yes. Similar results? Not sure how you arrive at that conclusion from Paul Merriman's article:

Ultimate Buy and Hold Portfolio
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
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Post by jimkinny »

Thanks for the post. I have ordered John Bogle's book "Don't Count on It" and it should arrive today. I think I have arrived back where I started and that is that the TSM index fund is the best for me.

I suspect that if the small value premium was real (taking into account risk) in the past, it may not exist anymore. Physicists have known for a long time that the very act of measuring, affects what is measured.

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Post by JW-Retired »

I just took a look at the VG small cap index mountain chart in their annual report. Over 12/31/2000-12/31/2010 $10,000 grew to $20,096. Same time period TSM only grew to $12,744. That's been nice for the small cap tilters. However, wouldn't implementing a tilt now just be performance chasing?
JW
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Post by bob90245 »

Morgan wrote:
JW Nearly Retired wrote:I just took a look at the VG small cap index mountain chart in their annual report. Over 12/31/2000-12/31/2010 $10,000 grew to $20,096. Same time period TSM only grew to $12,744. That's been nice for the small cap tilters. However, wouldn't implementing a tilt now just be performance chasing?
JW
It's like this JW.

If the market for small cap value tumbles in the next decade, we will call this decision 'performance chasing'.

If the market continues to grow for the next decade, we will like to call it 'not timing the market'.

Any questions? ;-)

We've all the bases for rationalisation covered here! :D
Back in 2004 when I started tilting to small and value, I wasn't reading Diehards (Bogleheads wasn't in existence). So I had no one telling me that I may be just performance chasing. Worked out anyway. Sometimes ignorance is bliss. :D
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
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Re: Total Market Index Funds--What experts say.

Post by fundtalker123 »

natureexplorer wrote:
Taylor Larimore wrote:Prof. Eugene Fama: "When I talk with pension fund people, what I start with is the market portfolio. That's always one of the optimal portfolio' one can settle on."

Paul Farrell, CBS: Where does Fama invest his retirement money?" In index funds. Mostly the Wilshire 5000."
Is this for real? So Fama himself doesn't tilt to value and/or small-cap?
Maybe this is because he makes sufficient extra income as an advisor to DFA, which uses his back testing model to convince people to invest in DFA funds so that DFA can make profit, that he doesn't need to enhance his risk return profile by investing in small value.

Also, I wonder whether the guy that invented "Kool Aid" actually drinks it?
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Post by field4kids »

So if you were using Vanguard ETFs (or others with low cost), which ones would you use to build the "Ultimate Buy and Hold Portfolio" - Portfolio 6?
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Post by 1210sda »

I too have made the full circle. In my younger days when I had an accumulation portfolio, among my equity holdings were DFLVX (large value), DFSCX (small cap), DFSVX (small value)and in international, DFIVX (international value).

Now that I am retired (and in the distribution stage) I use only VTSAX , and VTIAX for my equities.

In my 50/50 portfolio, and without the expense of an advisor, I question how much of a disadvantage there is to using the Three Fund Portfolio.

1210
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Post by Beagler »

Alan Greenspan: "Prices in the marketplace are by definition the right price."

Is this always correct?
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Re: Total Market Index Funds--What experts say.

Post by kirent »

Taylor Larimore wrote:Hi Bogleheads:

When I began racing sailboats, I learned to listen to experts if I wanted to become a winner. It is the same with investing.
What if the expert was an active manager who disagreed with index funds? What makes someone an expert?

I consider your advice more of an expert's advice than many on your list because I know you've managed your funds the Bogleheads way and it has worked.
Disclaimer: I am not a financial or legal expert and all information I provide is given for entertainment purposes only, at your own risk and with no guarantees of accuracy.
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Active managers ?

Post by Taylor Larimore »

Hi stives:
What if the expert was an active manager who disagreed with index funds?
Nearly all active fund managers disagree with index funds. But remember this:
It is difficult to convince a man he is wrong if his income depends on maintaining his belief
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Post by Default User BR »

jimkinny wrote:I suspect that if the small value premium was real (taking into account risk) in the past, it may not exist anymore. Physicists have known for a long time that the very act of measuring, affects what is measured.
Do you believe that small and value stocks have greater risk associated with them?




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Re: Total Market Index Funds--What experts say.

Post by idahospud »

Reading this forum often has protected me from making very silly and stupid mistakes and has helped in many ways.
At the same time many posts and threads on this forum, more than on the old Diehard forum, have encouraged and tempted me to make some more 'sophisticated tinkering around the edges' of my portfolio.

So it is worthwhile to repost in bold and remember:
Taylor Larimore wrote: Category Performance:

TOP 27%--Total Stock Market (15-years)*
TOP 18%--Total Stock Market after tax (10-years)*
TOP 21%--Total International (10-years)*
TOP 16%--Total International after tax (10-years)*
TOP 28%--Total Bond Market (15-years)*


*Longest period readily available at Morningstar
Investing in Total Markets
In investing it really is easy to be 'above' average.
The 'majesty of simplicity'.
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Re: Active managers ?

Post by natureexplorer »

Taylor Larimore wrote:Hi stives:
What if the expert was an active manager who disagreed with index funds?
Nearly all active fund managers disagree with index funds. But remember this:
It is difficult to convince a man he is wrong if his income depends on maintaining his belief
Nearly all index fund managers disagree with active funds. But remember this:
It is difficult to convince a man he is wrong if his income depends on maintaining his belief
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Post by Chuck T »

field4kids wrote:So if you were using Vanguard ETFs (or others with low cost), which ones would you use to build the "Ultimate Buy and Hold Portfolio" - Portfolio 6?
field4kids

I wouldn't use Portfolio 6. I would use the following ETF's/Funds in whatever AA level you want (example 60/40 AA).

VTI - Total Stock Mkt
VBR - Small Cap Value
VEU or VXUS - FTSE All World ex-US or Total International
VSS - FTSE All World ex-US Small Cap

For Bonds I would use VG's Int Term Treasury Fund and Inflation Protected Securities in a 50/50 mix.

This is my opinion only. It may or may not be right for you. I base it on some of the research in the following lengthy thread by Trev H. Please read it carefully. Good luck. Chuck

http://www.bogleheads.org/forum/viewtop ... highlight=
Chuck | Past Performance Is Just That - bob | For info on the SC LowCountry & Savannah GA Area Bogleheads contact me at chucktanner46@gmail.com
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Post by field4kids »

Chuck T wrote: I wouldn't use Portfolio 6. I would use the following ETF's/Funds in whatever AA level you want (example 60/40 AA).

VTI - Total Stock Mkt
VBR - Small Cap Value
VEU or VXUS - FTSE All World ex-US or Total International
VSS - FTSE All World ex-US Small Cap

For Bonds I would use VG's Int Term Treasury Fund and Inflation Protected Securities in a 50/50 mix.
This is almost exactly what I had come up with as far as what I thought would work best for me. Thanks for the info.
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Post by Multifactor Advisor »

natureexplorer wrote:Taylor, thanks!

Despite these quotes, I don't believe that Fama is truly a total market investor himself.
Both Fama and French tilt their personal portfolios to small/value and reduce risk with short term nominal bonds.
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Post by Multifactor Advisor »

Here is where the TSMers lose: they advocate TSM as the only viable US allocation (with deviations from TSM representing active "bets"), but you don't necessarily also need to hold Int'l stocks in world cap weight proportions (is Taylor 60% international stocks?). Next, because of various "lost decades" (00-10, 66-81, 37-47, etc.) for TSM, you often see a recommendation to overweight sectors like REITs or natural resources/commodities (a "sector" being defined as an investment with concentrated risk characteristics that is not well explained by a standard asset pricing model like the FF5F model), but those aren't bets? Next, despite a world average of about 40% in bonds (many of which are overseas) and 60% equity, many TSMers instead choose an active (and overly conservative) "age in bonds" while sticking with domestic-only fixed income holdings while seriously overweighting TIPS despite their minuscule representation on the world stage. Again, if these deviations aren't bets, then what are they?

Apparently, when you start with TSM, any other asset allocation decision related to risk/return is kosher. YET, if you tilt away from TSM (or, heaven forbid, go all-value), it's all active and speculative, backtested baloney?
There are some reasons to stick with TSM, but almost none have been mentioned here. And, unfortunately, the inconsistencies I point out above invalidate most of the arguments I read supporting TSM-only portfolios.
Last edited by Multifactor Advisor on Fri Mar 11, 2011 7:18 pm, edited 1 time in total.
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Post by Roy »

Multifactor Advisor wrote:
natureexplorer wrote:Taylor, thanks!

Despite these quotes, I don't believe that Fama is truly a total market investor himself.
Both Fama and French tilt their personal portfolios to small/value and reduce risk with short term nominal bonds.
I believe Larry tilts too, and massively, judging from his discussions on the topic. Though he does not recommend his strategy for all investors, his books indicate investors should consider allocating across three equity risk factors.
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Post by redarmymembe »

Roy wrote:
Multifactor Advisor wrote:
natureexplorer wrote:Taylor, thanks!

Despite these quotes, I don't believe that Fama is truly a total market investor himself.
Both Fama and French tilt their personal portfolios to small/value and reduce risk with short term nominal bonds.
I believe Larry tilts too, and massively, judging from his discussions on the topic. Though he does not recommend his strategy for all investors, his books indicate investors should consider allocating across three equity risk factors.
Maybe the amount has surpassed what would be "needed" and they consider the "overage" expendable and would not suggest it for someone who has less than what would be needed.
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Post by Multifactor Advisor »

redarmymembe wrote:
Roy wrote:
Multifactor Advisor wrote:
natureexplorer wrote:Taylor, thanks!

Despite these quotes, I don't believe that Fama is truly a total market investor himself.
Both Fama and French tilt their personal portfolios to small/value and reduce risk with short term nominal bonds.
I believe Larry tilts too, and massively, judging from his discussions on the topic. Though he does not recommend his strategy for all investors, his books indicate investors should consider allocating across three equity risk factors.
Maybe the amount has surpassed what would be "needed" and they consider the "overage" expendable and would not suggest it for someone who has less than what would be needed.
Actually, this is the opposite of how you should look at it. If you aren't "there", meaning you need future appreciation, you are better off spreading your risky assets across MULTIPLE risk/return dimensions (market, size, and value). If you are already "there", then theoretically you could bet on just one dimension (ie. Market or beta) and hope it pays off. As 37-47; 66-81; and 00-10 prove*, this is far from a sure thing.

*all periods saw a negative cumulative equity risk premium AND above average size/value premiums
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Post by Roy »

redarmymembe wrote:
Roy wrote:
Multifactor Advisor wrote:
natureexplorer wrote:Taylor, thanks!

Despite these quotes, I don't believe that Fama is truly a total market investor himself.
Both Fama and French tilt their personal portfolios to small/value and reduce risk with short term nominal bonds.
I believe Larry tilts too, and massively, judging from his discussions on the topic. Though he does not recommend his strategy for all investors, his books indicate investors should consider allocating across three equity risk factors.
Maybe the amount has surpassed what would be "needed" and they consider the "overage" expendable and would not suggest it for someone who has less than what would be needed.
Based on Larry's writings for the general public, and the fund family he mentions most frequently (DFA), I would be surprised if he recommended anything resembling a total markets approach for more than a tiny minority of his clients (those that feared tracking error regret or had labor capital in Small and Value firms). I have no idea how Fama himself invests. I would have guessed Fama did not tilt, based on ownership in DFA, but it appears I'm mistaken, as MFA seems to know him. I do know that in Fama's interviews he said that he can understand tilting in any direction, due to an investor's personal preference.
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Correction

Post by Taylor Larimore »

Hi Multifactor Advisor:

It is necessary to correct a misrepresentation.
Here is where the TSMers lose: "They advocate TSM as the only viable US allocation (with deviations from TSM representing active "bets").


There are very few Bogleheads who dogmatically say: "TSM is the only viable US allocation." Mr. Bogle has never said it. Mel has never said it. I have never said it. My mantra has long been: "There is more than one road to Dublin."

However, I confess to believing that Total Stock Market Index Fund (Mr. Bogle's favorite fund) is a darn good road for most investors. :wink:

If there is dogmatism, it is investors who firmly believe they have discovered a way to beat the market.
"Simplicity is the master key to financial success." -- Jack Bogle
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Post by Multifactor Advisor »

Taylor: if you've come around, great. I stand by my views, TSMers view all non-TSM allocations as bets, thereby making TSM the only viable position.

Roy: I asked Fama a few years ago if he preferred Core or component funds to build allocations. He said investors and their advisors are best served by first determining their desired market/size/value exposure. Then, pick the "core" fund that gets you as close as possible, adding tilted component vehicles to finish off the allocation. Regardless of his personal portfolio (even if he didn't tilt), I think his guidance is the fairest representation of his portfolio construction views.
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Post by Roy »

Multifactor Advisor wrote: I stand by my views, TSMers view all non-TSM allocations as bets, thereby making TSM the only viable position.
MFA, I agree with you on this, as a tendency. Of course, TSM, by virtue of its CAPM design, is also a bet. It is, however, the only bet that will not have tracking error regret to manage. That would not be enough reason for me to use it exclusively, though I can fully understand others who do.

I asked Fama a few years ago if he preferred Core or component funds to build allocations. He said investors and their advisors are best served by first determining their desired market/size/value exposure. Then, pick the "core" fund that gets you as close as possible, adding tilted component vehicles to finish off the allocation. Regardless of his personal portfolio (even if he didn't tilt), I think his guidance is the fairest representation of his portfolio construction views.
Just so I am clear, when Fama used the word "core" did he mean the DFA "Core" funds? Or was this a reference to the "market portfolio", as per Taylor's "gem" above?

Prof. Eugene Fama: "When I talk with pension fund people, what I start with is the market portfolio..."
---


MFA, I asked you this on another thread (Grok's Tip on skipping foreign Bonds), so forgive the repeat: Do you recommend ST Corporates or ST Treasuries as the best mix for your equities? If you use both, what are the circumstances that dictate their particular use for you?
pauliec84
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Post by pauliec84 »

I am in agreement with Multifactor Advisor.

Strike 1) TSM assumes that the market portfolio is all publicity traded stocks, whereas the true market portfolio stocks, bonds, real estate, human capital, etc etc etc. Something that can not be achieved. Richard Roll (1977),"A critique of Asset Pricing Theory Tests" expands upon this.

Implication: Ones non-diversification exposure to these non publicly traded risks, dictates deviation from market portfolio re-arrive at personal efficient portfolio. Thus each persons efficient portfolio is unique (even assuming homogeneous utility functions).

Strike 2) Consumption CAPM tries to capture this. The idea is basically, instead of looking at market risk via covariance of returns with market returns, we look at covariance of returns with aggregate consumption. What is found is that SMB & HML factors provide proxies for a stocks exposure to consumption risk, which is really what we are looking for with the true total portfolio. Parker Julliard (2005), 'consumption risk and the cross section of expected returns" expands upon this.
sashwin
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Post by sashwin »

I asked this question as a fresh topic, but it appears very relevant to this thread:

I often see the arguments on the boards here between so called lumpers vs slice-and-dice. From my naive understanding, it appears everyone (including Mr. Bogle himself) advocates a form of slice-and-dice. If you really take the statement "the market determines the best allocation" to heart, then you should compute the total cap of the world's bond and stock markets, find the proportions currently allocated to bond vs stock, domestic vs international (ie, 4 quadrants), and then allocate your own funds in exactly that ratio. Further, you should *never rebalance*, because the moment you rebalance, your allocation now does not match the market's wisdom. I don't see anyone advocating this, so isn't everyone really advocating slice-and-dice, and merely disagreeing on how many slices you need ? What am I missing ?

Thanks.

-- Ashwin
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Post by Beagler »

MFA, whenever tilting is discussed there are always cautions about potentially under-performing beta portfolio (TSM). Your post makes many salient points.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.
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Post by Multifactor Advisor »

Roy wrote:
Multifactor Advisor wrote: I stand by my views, TSMers view all non-TSM allocations as bets, thereby making TSM the only viable position.
MFA, I agree with you on this, as a tendency. Of course, TSM, by virtue of its CAPM design, is also a bet. It is, however, the only bet that will not have tracking error regret to manage. That would not be enough reason for me to use it exclusively, though I can fully understand others who do.

I asked Fama a few years ago if he preferred Core or component funds to build allocations. He said investors and their advisors are best served by first determining their desired market/size/value exposure. Then, pick the "core" fund that gets you as close as possible, adding tilted component vehicles to finish off the allocation. Regardless of his personal portfolio (even if he didn't tilt), I think his guidance is the fairest representation of his portfolio construction views.
Just so I am clear, when Fama used the word "core" did he mean the DFA "Core" funds? Or was this a reference to the "market portfolio", as per Taylor's "gem" above?

Prof. Eugene Fama: "When I talk with pension fund people, what I start with is the market portfolio..."
---


MFA, I asked you this on another thread (Grok's Tip on skipping foreign Bonds), so forgive the repeat: Do you recommend ST Corporates or ST Treasuries as the best mix for your equities? If you use both, what are the circumstances that dictate their particular use for you?
Roy: Fama's definition of a Core portfolio is just a total stock index that is either cap weighted or fundamentally weighted in as close to market value porportions as possible for a given size/value tilt. So that would impure Vanguard/iShares TSM, DFA Core 1 and DFA Core 2. Vector probably applies as well even though it skips the biggest 100 growth stocks. His point was: if you want a 0.0/0.1 portfolio, use TSM and LV. If you want a 0.1/0.2, you are better off using Core 1 and LV instead of TSM, small, and LV. If your goal is 0.0/0.0, 0.1/0.1, 0.2/0.2, or 0.4/0.4, then he thinks TSM, Core1, Core2, or Vector is your best bet.

As for bonds, I like a little high quality corporate bond exposure (increases expected returns, diversification, and provides a potential cushion as rates rise as credit and term have low to 0 correlations) along with treasuries/agencies. Vanguard ST Bond index would be my choice. My preference is a variable maturity approach (reach strongly indicates term premiums largely result rrom upward sloping yield curves) with a max of 5YR bonds while staying AA or better (research strongly indicates a credit premium when there is an above average spread between corporates and treasuries), and VIBSX is close enough.
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Post by rustymutt »

jimkinny wrote:Thanks for the post. I have ordered John Bogle's book "Don't Count on It" and it should arrive today. I think I have arrived back where I started and that is that the TSM index fund is the best for me.

I suspect that if the small value premium was real (taking into account risk) in the past, it may not exist anymore. Physicists have known for a long time that the very act of measuring, affects what is measured.

Jim
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Even educators need education. And some can be hard headed to the point of needing time out.
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Post by dbr »

It would be nice to distinguish discussions of how things behave from discussions of what anyone has chosen to do themselves from discussions of what someone thinks someone else should do from discussions of what someone thinks everyone should do from discussions of what everyone thinks everyone should do.
peter71
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Post by peter71 »

sashwin wrote:I asked this question as a fresh topic, but it appears very relevant to this thread:

I often see the arguments on the boards here between so called lumpers vs slice-and-dice. From my naive understanding, it appears everyone (including Mr. Bogle himself) advocates a form of slice-and-dice. If you really take the statement "the market determines the best allocation" to heart, then you should compute the total cap of the world's bond and stock markets, find the proportions currently allocated to bond vs stock, domestic vs international (ie, 4 quadrants), and then allocate your own funds in exactly that ratio. Further, you should *never rebalance*, because the moment you rebalance, your allocation now does not match the market's wisdom. I don't see anyone advocating this, so isn't everyone really advocating slice-and-dice, and merely disagreeing on how many slices you need ? What am I missing ?

Thanks.

-- Ashwin
Ashwin,

I also just responded to you in the other thread but here I'll be a little more constructive: I think you're absolutely right to be skeptical of "experts" talking about TSM, but you should also be skeptical of "experts" talking about small and value "risk factors" (which may well just be proxies for illiquidity and/or various behavioral attributes). . .

And for that matter you should be skeptical of people talking about illiquidity premia and behavioral attributes too (though perhaps less so if they're not invoking their own expertise :D )

Bottom line: across disciplines, "experts" don't have a very good track record!

http://www.newyorker.com/archive/2005/1 ... rbo_books1

All best,
Pete
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Post by natureexplorer »

dbr wrote:It would be nice to distinguish discussions of how things behave from discussions of what anyone has chosen to do themselves from discussions of what someone thinks someone else should do from discussions of what someone thinks everyone should do from discussions of what everyone thinks everyone should do.
If there is someone among everyone who doesn't understand a thing of something of what you just said about something about someone to everyone, then I might be one of those someones.
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Post by Roy »

natureexplorer wrote:
dbr wrote:It would be nice to distinguish discussions of how things behave from discussions of what anyone has chosen to do themselves from discussions of what someone thinks someone else should do from discussions of what someone thinks everyone should do from discussions of what everyone thinks everyone should do.
If there is someone among everyone who doesn't understand a thing of something of what you just said about something about someone to everyone, then I might be one of those someones.
I think this qualifies as a 3-Factor "gem".
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iceport
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TSM the only viable position?

Post by iceport »

MFA,

Your points are well-made; they help to clarify this discussion. However, I think you've only got it partly correct in this statement:
Multifactor Advisor wrote:I stand by my views, TSMers view all non-TSM allocations as bets, thereby making TSM the only viable position.
The first part, I don't really dispute. Deviations from the market portfolio are attempts to either decrease the risk/return potential or increase it. But it doesn't logically follow that TSM's, by definition, need to refuse any deviation from the market portfolio.

In essence, Fama and French strike me as TSM-ers that advocate doing just that!
EFF/KRF: There is no single right answer to this question. If there were one answer, it would have to be the market portfolio of domestic, international, and emerging stocks, since that is the only portfolio that can be held by everyone. Different tastes and circumstances, however, push investors away from the market portfolio and the optimal deviations vary across investors. For example, perhaps because of exchange rate uncertainty, people tend to overweight their domestic market. Similarly, some investors are happy to increase their expected return by tilting toward small stocks, while others prefer to reduce their risk by tilting toward large caps. It is important to diversify, but there is no single optimal mix.
It's all a matter of direction, degree, and understanding in the first place that it is a deviation.

--Pete
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Total World Stock ETF as the single equity fund

Post by artthomp »

I am considering the Total World Stock ETF (ER=.25%) as a replacement for the Total Stock ETF (ER=.07%) and the Total International ETF (ER=.20%) as I invest more taxable money.

My reasons for seriously considering the Total World Stock ETF for new taxable funds (unneeded proceeds from my IRS required distributions - RMDS) are:

1. No taxable re-balancing to keep world market weighting.
2. I would like to keep equities proportioned according to world wide weightings in the future. I remember a decade or so ago that the U. S. constituted around 55% by weight of world equities and it now constitutes less than 42%. While no one can predict the future, I would definitely be ahead if I could have purchased a Total World Stock ETF a decade or so ago.
3. I'm not sure U. S. markets are any more transparent than international markets today - witness what the banking and credit system did and consider Enron, Worldcom, Adelphia, etc.
Art
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