Bogle on value tilting/REIT/emerging markets

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bdc
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Bogle on value tilting/REIT/emerging markets

Post by bdc » Sat Mar 17, 2012 1:07 pm

Let me preface my question by saying, as a novice investor, how much I've enjoyed starting my investment education with the topics contained in this forum. After reading Bogle's Common Sense text, he seems to include the "value tilt", REIT, and emerging market strategies among the fads that he's seen come and go over his long career in investing. As such, he seems to support simple total market indices as the prudent strategy. How do I reconcile his view with the empirical research of Fama/French, DFA, and others who seem to strongly support value tilting strategies? I apologize in advance if this question repeats previously posted topics. If it does, I appreciate someone directing me towards those topics.

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bob90245
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Re: Bogle on value tilting/REIT/emerging markets

Post by bob90245 » Sat Mar 17, 2012 3:21 pm

Because value tilt, REIT, and emerging market strategies were relatively new ideas at the time of the book's publication, Bogle viewed them as fads. So do we need another decade or two to switch the label from "fad" to established equity asset class?
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

dbr
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Re: Bogle on value tilting/REIT/emerging markets

Post by dbr » Sat Mar 17, 2012 3:39 pm

bdc wrote:Let me preface my question by saying, as a novice investor, how much I've enjoyed starting my investment education with the topics contained in this forum. After reading Bogle's Common Sense text, he seems to include the "value tilt", REIT, and emerging market strategies among the fads that he's seen come and go over his long career in investing. As such, he seems to support simple total market indices as the prudent strategy. How do I reconcile his view with the empirical research of Fama/French, DFA, and others who seem to strongly support value tilting strategies? I apologize in advance if this question repeats previously posted topics. If it does, I appreciate someone directing me towards those topics.
I wouldn't go so far as to say that Fama and French, by providing an understanding of value and size in stock pricing, necessarily support size and value tilt as a recommended investment strategy for anyone in particular. In fact, I believe one or the other or both may well have said otherwise on more than one occasion. It is also entirely possible to recognize possibilities in tilting to REIT's and/or to emerging markets, and/or to inclusion or tilting to whatever asset class without necessarily recommending that anyone in particular actually do it. There is a question of evaluating the costs and obstacles to practical implementation as well as less obvious risks relative to any promised advantage.

My own view is a little snarky, but it is along the lines that if you have to read about it here to do it, it might be you shouldn't be doing it. Reading about it here might be a starting point for further investigation.

That said, there are jillions of discussions of these topics, but actually digging out links to the most apropos is a major undertaking. You can glance through some of the topics on this page in the Wiki for starters and expand from there:

http://www.bogleheads.org/wiki/Category:US_Stocks

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Re: Bogle on value tilting/REIT/emerging markets

Post by Mortgasm » Sat Mar 17, 2012 3:43 pm

Bogle's premise has been to (a) simplify the investor portfolio and (b) reduce costs to the minimum.

(Almost) everyone on this board believes in the latter - that low cost passive funds will be superior to higher-cost and active ones.

But about simplicity there is a lot of debate. Because of the developments in retail investing, you can now develop a passive and inexpensive, but more complicated portfolios with many more classes than Bogle recommends.

There are people (like me) that believe a more complex portfolio than the '3-fund porftolio' which include alternative asset classes, rebalancing bonuses and value/small tilts will probably reward investors more than just total stock (US and International) and total bond market offer. And it's not a lot more. Few of us would tell an investor they are poorly served by a conventional Bogle portfolio.

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Re: Bogle on value tilting/REIT/emerging markets

Post by tibbitts » Sat Mar 17, 2012 4:31 pm

It's very hard to get agreement, even on this forum, whether value or small value or REITs or emerging markets are actually "asset classes", and whether or not there is any "free lunch" in investing in them (along with a correspondingly lower equity allocation, typically.) Generally the majority probably feel that over time, say hundreds of years, equities with certain risk characteristics are likely to have higher return. Over short times frames, say one or two lifetimes, most people will probably agree that the best you can do is stick to some reasonable plan, which will get you whatever the luck of your era gives you.

Paul

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Re: Bogle on value tilting/REIT/emerging markets

Post by jidina80 » Sat Mar 17, 2012 4:32 pm

Every business needs a marketing plan, but much of the tilting of portfolios is based on data mining of past historical returns. When historical market opportunities become well-known, more investors exploit them to the point that the advantage of tilting can disappear.

Even on this Bogleheads board, when a specific type of asset does well, be it REIT, commodities, small/value, many jump on the bandwagon.

Fifteen years ago, many smart investment analysts made a strong case that tech stocks were the path to future riches. Historical returns supported that too.

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Re: Bogle on value tilting/REIT/emerging markets

Post by chaz » Sat Mar 17, 2012 4:42 pm

I don't tilt - I like to keep it simple.
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Re: Bogle on value tilting/REIT/emerging markets

Post by tibbitts » Sat Mar 17, 2012 5:32 pm

jidina80 wrote:Every business needs a marketing plan, but much of the tilting of portfolios is based on data mining of past historical returns. When historical market opportunities become well-known, more investors exploit them to the point that the advantage of tilting can disappear.

Even on this Bogleheads board, when a specific type of asset does well, be it REIT, commodities, small/value, many jump on the bandwagon.

Fifteen years ago, many smart investment analysts made a strong case that tech stocks were the path to future riches. Historical returns supported that too.
There is definitely a tendency even here for some of us to arrive a little late at the party with regard to some asset classes or sub-classes, depending how they're defined. The problem is that by the time the evidence becomes convincing and the knowledge widespread, often either:

1. the effect goes away, or

2. the effect isn't seen again for a while, which is expected (although exactly when and to what degree can't be know ahead of time.)

I know that we'll have people claiming they've been small-value tilting since 1921, but the reality is that most of us need to be gradually persuaded by evidence, and the evidence tends to become more overwhelming at exactly the wrong time for future investments.

Paul

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bob90245
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Re: Bogle on value tilting/REIT/emerging markets

Post by bob90245 » Sat Mar 17, 2012 5:46 pm

Investors expecting value tilting/REIT/emerging markets to pay off year in and year out will be disappointed. This is strictly a long term strategy. Those who lack the neccesary patience should stick to total markets.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Bogle on value tilting/REIT/emerging markets

Post by stlutz » Sat Mar 17, 2012 7:46 pm

After reading Bogle's Common Sense text, he seems to include the "value tilt", REIT, and emerging market strategies among the fads that he's seen come and go over his long career in investing. As such, he seems to support simple total market indices as the prudent strategy. How do I reconcile his view with the empirical research of Fama/French, DFA, and others who seem to strongly support value tilting strategies?
Welcome to the forum! To see how Bogle address your questions, see http://www.vanguard.com/bogle_site/sp20020626.html

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Re: Bogle on value tilting/REIT/emerging markets

Post by ClaireTN » Sat Mar 17, 2012 8:00 pm

bob90245 wrote:Investors expecting value tilting/REIT/emerging markets to pay off year in and year out will be disappointed. This is strictly a long term strategy. Those who lack the neccesary patience should stick to total markets.
The total market strategy is also not for those who lack patience.

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Re: Bogle on value tilting/REIT/emerging markets

Post by Mortgasm » Sat Mar 17, 2012 8:21 pm

ClaireTN wrote:
bob90245 wrote:Investors expecting value tilting/REIT/emerging markets to pay off year in and year out will be disappointed. This is strictly a long term strategy. Those who lack the neccesary patience should stick to total markets.
The total market strategy is also not for those who lack patience.

Yes, but it takes less. You get tracking error risk with a more volatile portfolio, where you have to endure periods of under-performance. That causes people to switch because they lose confidence in their strategy.

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Re: Bogle on value tilting/REIT/emerging markets

Post by nisiprius » Sat Mar 17, 2012 8:50 pm

The simple answer is that none of this stuff is as cut-and-dried as people make it out to be.
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Re: Bogle on value tilting/REIT/emerging markets

Post by DVMResident » Sun Mar 18, 2012 10:10 am

tibbitts wrote:There is definitely a tendency even here for some of us to arrive a little late at the party with regard to some asset classes or sub-classes, depending how they're defined. The problem is that by the time the evidence becomes convincing and the knowledge widespread, often either:

1. the effect goes away, or

2. the effect isn't seen again for a while, which is expected (although exactly when and to what degree can't be know ahead of time.)
This is true if you're trying to buy into the "hot" asset class, but that's not the point of tilting. The point of tilting in the way Ferri and others advocates is there will be periods of low correlation between the core fund and the tilt funds (e.g. S&P 500 vs REIT). REITs will go up and REITs will go down. (REITs also have the odd tax rules, but for another thread) When? Who knows? Not me.

If you believe in reversion of the mean will occur over time (could take a decade) and there are periods of low correlations (which is hard to deny), then there is an advantage to rebalancing during the periods of poor correlation.
If you don't believe in reversion of the mean theory, then why are we talking about rebalancing at all?

That being said, I agree the effects are small, especially when titling 5-10%. Other factors, like 401k options, could overwhelm the benefits.

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Re: Bogle on value tilting/REIT/emerging markets

Post by abuss368 » Sun Mar 18, 2012 12:05 pm

Look at the great Yale Investment Manager, and his book Unconventional Success. He invests and allocates 30% of equity to REITs (may have been adjusted to 20% of equity). Point is, a large percentage of equity to REITs in general, as Mr. Swensen considers them another asset class.

Oh, both Mr. Bogle and Mr. Swensen, have written forwards to each others books. That says something.
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Re: Bogle on value tilting/REIT/emerging markets

Post by jginseattle » Sun Mar 18, 2012 4:22 pm

bob90245 wrote:Investors expecting value tilting/REIT/emerging markets to pay off year in and year out will be disappointed. This is strictly a long term strategy. Those who lack the neccesary patience should stick to total markets.
Total markets pay off year in and year out?

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Re: Bogle on value tilting/REIT/emerging markets

Post by bob90245 » Sun Mar 18, 2012 4:35 pm

jginseattle wrote:
bob90245 wrote:Investors expecting value tilting/REIT/emerging markets to pay off year in and year out will be disappointed. This is strictly a long term strategy. Those who lack the neccesary patience should stick to total markets.
Total markets pay off year in and year out?
I don't think those choosing Total markets are worrying about years or decade of underperformance relative to value tilting/REIT/emerging markets. But the opposite seems to worry investors more, and hence their choice for Total markets.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Bogle on value tilting/REIT/emerging markets

Post by jginseattle » Sun Mar 18, 2012 4:40 pm

bob90245 wrote:
jginseattle wrote:
bob90245 wrote:Investors expecting value tilting/REIT/emerging markets to pay off year in and year out will be disappointed. This is strictly a long term strategy. Those who lack the neccesary patience should stick to total markets.
Total markets pay off year in and year out?
I don't think those choosing Total markets are worrying about years or decade of underperformance relative to value tilting/REIT/emerging markets. But the opposite seems to worry investors more, and hence their choice for Total markets.
Yes, investors concerned about tracking error should consider sticking with total markets.

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Re: Bogle on value tilting/REIT/emerging markets

Post by Clearly_Irrational » Mon Mar 19, 2012 3:44 pm

Mortgasm wrote:Yes, but it takes less. You get tracking error risk with a more volatile portfolio, where you have to endure periods of under-performance. That causes people to switch because they lose confidence in their strategy.
I tilt, but this concept is key if you're going to do so successfully. Personally I'm aok with tracking error since I'm not looking for market performance in the first place. (I'd rather have steady high returns than crazy good one year and terrible bad another)

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Re: Bogle on value tilting/REIT/emerging markets

Post by stemikger » Mon Mar 19, 2012 3:50 pm

Because the Enemy of a good plan is a perfect plan.

Mr. Bogle is one of the smartest men in investing in the world, I would go along with him and keep my life simple.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: Bogle on value tilting/REIT/emerging markets

Post by Taylor Larimore » Mon Mar 19, 2012 4:00 pm

How do I reconcile his view with the empirical research of Fama/French, DFA, and others who seem to strongly support value tilting strategies?
Hi bdc:

When experts disagree, it is often because it doesn't make much difference (or they have a conflict of interest).

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Bogle on value tilting/REIT/emerging markets

Post by KyleAAA » Mon Mar 19, 2012 4:07 pm

The way I see it is that while Bogle is a very smart man and has done far more to help the average investor than perhaps any other person, he's not ALWAYS right about EVERYTHING. I disagree with him on a few different points, as do a lot of other Bogleheads. I don't really feel the need to reconcile his beliefs with my own other than to just respectfully agree to disagree.

I also agree with Taylor on this. When experts disagree, it's often because it doesn't make much difference. I don't think you could seriously go wrong with either strategy. Just pick one and stick with it. You're probably looking at + or - a fraction of a percent over the long term in any case.

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Re: Bogle on value tilting/REIT/emerging markets

Post by Lumpr » Mon Mar 19, 2012 4:37 pm

nisiprius wrote:The simple answer is that none of this stuff is as cut-and-dried as people make it out to be.
+1

The tilting debate goes on and on, with respected authorities on both sides.

The threads on this topic have a tendency to be dominated by rhetoric that is more demonstrative of a lack of understanding than providing a basis of understanding. In my opinion, one must sift through a lot of bald allegations, fallacious reasoning (ad hominem attacks, straw man arguments, irrelevant conclusions, verbosity, etc.), confirmation bias, over-simplifications, useless aphorisms, etc. to come up with a few gems that might inform your understanding of the issue. If you're perceptive you'll see evidence of this unfortunate tendency beginning to emerge in this thread.

At the end of the day you have to make your own decision and be willing to live with it.

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Re: Bogle on value tilting/REIT/emerging markets

Post by yobria » Mon Mar 19, 2012 4:40 pm

It's a question of degree. If you go with a simple total market strategy, and earn and save effectively, you're going to be fine. I don't know anyone who disagrees with this type of portfolio. If you're going to tilt your portfolio to any pet theory very modestly, go ahead. However, if you find that 50% of your stock portfolio is invested in 5% of the market, for example, you've got a gambling problem.

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