William Bernstein likes factor tilts?

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neomutiny06
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William Bernstein likes factor tilts?

Post by neomutiny06 »

I thought Bernstein was always a proponent of simple portfolios. I didn't realize he liked factor tilts: http://www.etf.com/sections/features/19 ... nopaging=1
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nisiprius
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Re: William Bernstein likes factor tilts?

Post by nisiprius »

Well, he's somewhere in between. Maybe he'll choose to speak for himself. In If You Can: How Millennials Can Get Rich Slowly, he says explicitly
start by saving 15% of your salary at age 25... Put equal amounts of that 15 percent into just three different mutual funds:
  • A U.S. total stock market fund
  • An international total stock market index fund
  • A U.S. total bond market index fund
So, he is recommending a Boglehead three-fund portfolio approach, he's recommending that 50% of stocks be international, and he's recommending that the portfolio be 2/3 stocks, 1/3 bonds.

However, I think he recommends this on the basis of being more than good enough, and from hints he's dropped I think his personal investing style is closer to "the gospel according to Dimensional." I'm pretty sure he's mentioned using and liking Dimensional's funds. I'm afraid it's been a while since I read The Investor's Manifesto. I ought to re-read it.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
lack_ey
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Re: William Bernstein likes factor tilts?

Post by lack_ey »

I've read a few of his books and they have multiple sample portfolios that are textbook slice-and-dice to varying degrees. You find small and value funds in them. That is, other than If You Can, which is barebones and simplified itself, intended to be a starting place.

My understanding is that he believes in factor tilts but has also come around to the reality that many people have a hard enough time sticking with and maintaining a simpler allocation. (in part from his growing experience as an RIA)

I mean, he's famously on the precious metals equity bandwagon for long-term diversification/rebalancing purposes (again, check the books) and was talking about it in late 2015 here:
http://www.morningstar.com/Cover/videoC ... ?id=718322

The portfolio we have from him in the wiki has this allocation:
https://www.bogleheads.org/wiki/Lazy_po ... _portfolio

Hopefully we'll hear from the man himself, though.
Bill Bernstein
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Re: William Bernstein likes factor tilts?

Post by Bill Bernstein »

Hi All:

All of the above are true. Anyone who tells you that he or she knows the optimal future portfolio is exhaling a large amount of sooty particulate matter.

Yes, I think that factor tilts *probably* will be more efficient, and that over the very long term, a slight overweighting to precious metals equities and, within one's equity allocation, to relatively cheap asset classes (now, international, both developed and developing) will *probably* also add value.

But no guarantees about all of the above; the above strategies are more costly and less tax efficient than an untilted market-weighted portfolio, and I have no problems with it at all.

Far, far, more important in the long run is sticking with your strategy at a given stock/bond split, than exactly what's in those stocks or bonds.

Finally, one last observation: it's interesting that DFA's life-strategy funds are nearly untilted.

Bill
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iceport
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Re: William Bernstein likes factor tilts?

Post by iceport »

Bill Bernstein wrote:Far, far, more important in the long run is sticking with your strategy at a given stock/bond split, than exactly what's in those stocks or bonds.
Thank you, Dr. Bernstein, for reaffirming the signature line attributed to you that I lifted from a January 2016 New York Times article. I don't believe this point can be over-emphasized — especially here among us Bogleheads. ;-)
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
john94549
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Re: William Bernstein likes factor tilts?

Post by john94549 »

The best ever quoted from Dr. Bernstein was "when you've won the game, stop playing". Thank you, Dr. Bill. Many Bogleheads have gotten less poor following your advice.
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alpenglow
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Re: William Bernstein likes factor tilts?

Post by alpenglow »

Bill Bernstein wrote:
Finally, one last observation: it's interesting that DFA's life-strategy funds are nearly untilted.

Bill
That's very interesting. Thanks for sharing that tidbit.

If anyone is curious, Morning* fund x-ray shows this breakdown for the DFA 2055 Target Retirement Fund.

26 24 23
07 07 06
03 03 02
Topic Author
neomutiny06
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Re: William Bernstein likes factor tilts?

Post by neomutiny06 »

Bill Bernstein wrote:Hi All:

All of the above are true. Anyone who tells you that he or she knows the optimal future portfolio is exhaling a large amount of sooty particulate matter.

Yes, I think that factor tilts *probably* will be more efficient, and that over the very long term, a slight overweighting to precious metals equities and, within one's equity allocation, to relatively cheap asset classes (now, international, both developed and developing) will *probably* also add value.

But no guarantees about all of the above; the above strategies are more costly and less tax efficient than an untilted market-weighted portfolio, and I have no problems with it at all.

Far, far, more important in the long run is sticking with your strategy at a given stock/bond split, than exactly what's in those stocks or bonds.

Finally, one last observation: it's interesting that DFA's life-strategy funds are nearly untilted.

Bill
This reply is excellent and I will take it to heart. Thank you.
Levett
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Re: William Bernstein likes factor tilts?

Post by Levett »

The original link dates back to July 2, 2013.

As in the original link, Mr. Bernstein continues to affirm:

"Far, far, more important in the long run is sticking with your strategy at a given stock/bond split, than exactly what's in those stocks or bonds."

Speaking as a longtime naive investor, I find Mr. Bernstein's affirmation to be true to my experience, and I suspect many others would agree with Mr. Bernstein.

Why then (I ask myself) does there continue to be such "a large amount of sooty particulate matter" (Mr. Bernstein's apt phrase) at this and many other financial sites?

Some at this site have offered the advice not "to peek." Some might be equally well advised not "to speak." :annoyed

Lev
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nisiprius
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Re: William Bernstein likes factor tilts?

Post by nisiprius »

Another sort of random comment: I'm surprised that we don't hear more in this forum about Bill Schultheis's "Coffeehouse Portfolio." I'm not touting it particularly.

What it has going for it is that, first, it was described in 1998, so it does have at least eighteen years of "out-of-sample" data--it's not the usual backtested thing; and second, it is an interesting midpoint between the three-fund portfolio and the swamps of "smart beta" and "factor investing." It is a reasonable approximation to "invest with simplicity," the nice round numbers indicate a healthy respect for simplicity and eschewing false precision, and it can be implemented easily and cheaply with Vanguard index funds or index funds or ETFs from many providers. And it doesn't have much of a conflict of interest problem, either; Schultheis isn't managing a mutual fund or anything like that.

It is a clear, simple, form of "slice and dice" or "factor tilts," for those who like that sort of thing.

And you can see the results, out-of-sample, here, since being described in 1998. I compared the Coffeehouse portfolio--as predefined on the PortfolioVisualizer site--versus a three-fund portfolio in which we replace Schultheis' five U.S. stock funds with Total Stock.

Somewhat more risk (but not a lot), quite a bit more return, thus higher Sharpe ratio. Not bad given that we are talking about results that were in the future relative to his first book.

But I do have to editorialize. Almost all the difference in Sharpe ratio goes away if you start at 2003. The period from 2000-2003 was "one great shining moment" and it's my personal opinion that it made the reputation of a number of asset classes (e.g. small value) which went up while the stock market in general was going down. This led people to say that these assets "have" low correlation with stocks. Well, what happened in 2000-2003 is historical fact, and anyone holding small-cap value in that time frame is justified in patting themselves on the back. But most of the benefit did occur during a short period of time that is now well in the past.

By the way... it speaks volumes for the way conventional wisdom has changed that he only allocates 1/6th of the equities to international stocks.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Volkdancer
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Re: William Bernstein likes factor tilts?

Post by Volkdancer »

I also find it useful, and sobering, to refer to the ongoing tracking of 'lazy portfoios' on the Marketwatch site as a basic ground check against which to compare any other portfolios -- https://web.archive.org/web/20150516010 ... yportfolio -- as well as madsinger's monthly reports on bogleheads.org

Karl V
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