Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

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Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by Ever Ready » Thu Apr 27, 2017 8:27 pm

Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

https://www.bloomberg.com/news/articles ... -promising

“Beware of any strategy that is designed to beat the market over 50 years,” he (Bogle) said. “I wouldn’t do it. Why take the risk when in the end the market return is there for the taking?”

(Rob) Arnott also said in a separate paper this month that while factor investing -- the circuitry behind smart-beta -- works well in theory, returns all but evaporate in most live portfolios.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by Vanguard Fan 1367 » Fri Apr 28, 2017 12:48 am

Whatever smart beta is this article sounds like classic Jack. I am glad that I discovered his books 3 years ago. Go ahead and buy the market with low fee index funds and avoid other strategies.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by happenstance » Fri Apr 28, 2017 8:15 am

This article suffers from a clear lack of definition of what "smart beta" is: do they mean equal weight, low volatility, dividend, quality, multi-factor, fundamental weighting, etc., or all of the above? Arnott's Research Affiliates produces the Fundamental Index series, which can be construed as "smart beta," so does he think that his company's products are over-promising? There do seem to be an ever-increasing number of non-market-cap-weighted (and expensive!) ETFs coming online though, so it definitely seems like a "hot space" right now.

Personally I use the Fundamental Index products; understand their construction, costs, risks, and sources of potential extra return; and only use them for tilting my portfolio rather than as a core holding. But I suspect most of the money pouring into these funds are from investors thoughtlessly chasing returns, rather than trying to achieve some specific allocation goal. Only time will tell!

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by in_reality » Sat Apr 29, 2017 12:25 am

Ever Ready wrote: (Rob) Arnott also said in a separate paper this month that while factor investing -- the circuitry behind smart-beta -- works well in theory, returns all but evaporate in most live portfolios.
Thanks for the pointer.
happenstance wrote:This article suffers from a clear lack of definition of what "smart beta" is: do they mean equal weight, low volatility, dividend, quality, multi-factor, fundamental weighting, etc., or all of the above? Arnott's Research Affiliates produces the Fundamental Index series, which can be construed as "smart beta," so does he think that his company's products are over-promising? There do seem to be an ever-increasing number of non-market-cap-weighted (and expensive!) ETFs coming online though, so it definitely seems like a "hot space" right now.
The paper Ever Ready cited is very interesting and part of a 2017 series called “Alice in Factorland.”

Their contention is that while factor loadings are useful, relative valuations impact future returns (momentum, gross profitability (quality), and low beta strategies are expensive now).

Factor adherents will also not be pleased by their contention that while the effect of smart beta methodology (such as the Fundamental Index, equal weight, and low-volatility strategies) can be achieved with factor tilts (combining several theoretical factor portfolios), factor tilted portfolios have higher turnover, lower performance, and smaller capacity. [Of course Research Affiliates isn't exactly a neutral party].

That's a future paper and so no idea on whether it addresses multi-factor funds and whether they go in the smart beta or factor tilt categories (likely factor tilt I'd guess), but the common ground is probably that all these strategies have a capacity limit and could get crowded.

Anyway, it's popular on this board to label smart beta with derision and to label those who question factor tilting as someone who just doesn't want to learn anything. I think it's interesting that smart beta and factor tilting both load on the same risks but have very different portfolios. You can clearly see that in the fundamental indexes which have far more growth in the Morningstar 9 box than most value funds. Intuitively, I'd expect that there could be growth type companies that have relatively attractive valuations.

But yeah, Bogle has a great approach and is right on the money as usual. Smart beta may very well be over promising and we need to be wary of that.

https://www.researchaffiliates.com/en_u ... idged.html

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by Alchemist » Sat Apr 29, 2017 12:45 am

in_reality wrote: That's a future paper and so no idea on whether it addresses multi-factor funds and whether they go in the smart beta or factor tilt categories (likely factor tilt I'd guess), but the common ground is probably that all these strategies have a capacity limit and could get crowded.
This is the key fact that should worry the advocates of any 'market-beating' strategy. We all make up the index together, if you find something that has beat the market over time in the past then all it takes for it to stop working is for enough people to know about it. It is the simple rules of humble arithmetic and there is no escaping them. No amount of research, backtesting, model building ect ect can overcome that simple fact. If too many people know about your 'secret sauce' then it will by definition stop working.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by Ever Ready » Sat Apr 29, 2017 9:56 am

William Bernstein had a pretty good take on factor investing:

http://www.etf.com/sections/index-inves ... nopaging=1

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by bertilak » Sat Apr 29, 2017 12:31 pm

Ever Ready wrote:William Bernstein had a pretty good take on factor investing:

http://www.etf.com/sections/index-inves ... nopaging=1
Favorite quote from that:
  • “Bear markets are when stocks are returned to their rightful owners.”
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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by patrick013 » Sat Apr 29, 2017 12:36 pm

The last I heard was equal weighting was working for large cap
but not working as well as expected for mid and small cap funds.
Haven't heard too much about that recently.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by Vanguard Fan 1367 » Sat Apr 29, 2017 12:39 pm

If Jack says it I believe it and that settles it for me. :happy

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by nedsaid » Sat Apr 29, 2017 12:42 pm

happenstance wrote:This article suffers from a clear lack of definition of what "smart beta" is: do they mean equal weight, low volatility, dividend, quality, multi-factor, fundamental weighting, etc., or all of the above? Arnott's Research Affiliates produces the Fundamental Index series, which can be construed as "smart beta," so does he think that his company's products are over-promising? There do seem to be an ever-increasing number of non-market-cap-weighted (and expensive!) ETFs coming online though, so it definitely seems like a "hot space" right now.

Personally I use the Fundamental Index products; understand their construction, costs, risks, and sources of potential extra return; and only use them for tilting my portfolio rather than as a core holding. But I suspect most of the money pouring into these funds are from investors thoughtlessly chasing returns, rather than trying to achieve some specific allocation goal. Only time will tell!
I have done a lot of factor investing. From experience and a lot of eyeballing, it seems that is sometimes works great and sometimes not so great. If you do this, you have to be patient and stick to your guns. Eventually you will be vindicated. There are several good strategies out there that work fairly well, you just have to pick a good one and stick to it. Pure market cap weighted indexing is a very good strategy.
A fool and his money are good for business.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by stlutz » Sat Apr 29, 2017 2:40 pm

The Arnott paper was interesting (as is the case with most of the stuff RA puts out) but is too dismissive of the issues with their own approach to the data (as is the case with most of the stuff RA puts out).

To summarize quickly, their conclusions is that investors (as measured by mutual fund returns) capture about 1/2 of the market and value premiums, pretty much all of the size premium, and none of the momentum premium.

They were fully able to explain the discrepancy with the market premium once they took into account the fact that high beta stocks do not provide the additional return that they "should" vs. low beta stocks. The fact that the real-world value premium has been a fair amount smaller than the theoretical one has been discussed quite a bit here over the years (although it has been a while since we've make a big issue of that).

Their results on size were the most interesting as the size factor has come under an awful lot of attack over recent years by people like RA (and stlutz). I might have to take a second look into that.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by nedsaid » Sat Apr 29, 2017 3:17 pm

stlutz wrote:The Arnott paper was interesting (as is the case with most of the stuff RA puts out) but is too dismissive of the issues with their own approach to the data (as is the case with most of the stuff RA puts out).

To summarize quickly, their conclusions is that investors (as measured by mutual fund returns) capture about 1/2 of the market and value premiums, pretty much all of the size premium, and none of the momentum premium.

Nedsaid: This is interesting and doesn't sound too far off. I remember an article by Larry Swedroe about the factors. Contrary to what I would have thought, Momentum actually had the largest and most reliable premium and yet most investors cannot seem to capture it. The problem is that most of this occurs in the smaller stocks and a lot of it is theoretically there if you could profitably short in that area of the market. Looks great on paper but difficult to capture in real life. So for a retail investor to capture it, you really need to be in the Large Cap space as you have larger trading volumes,less bid/ask spread, and a better ability to short.

They were fully able to explain the discrepancy with the market premium once they took into account the fact that high beta stocks do not provide the additional return that they "should" vs. low beta stocks. The fact that the real-world value premium has been a fair amount smaller than the theoretical one has been discussed quite a bit here over the years (although it has been a while since we've make a big issue of that).

Nedsaid: Funny how that works.

Their results on size were the most interesting as the size factor has come under an awful lot of attack over recent years by people like RA (and stlutz). I might have to take a second look into that.
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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by White Coat Investor » Sun Apr 30, 2017 1:50 pm

I've been a bit agnostic about the value of factor investing for the last decade. I ended up splitting the difference- tilting on the domestic side and not tilting on the international side. And a decade later...I'm still not sure what the right answer is. Not sure anyone is ever going to know.
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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by bertilak » Sun Apr 30, 2017 5:17 pm

White Coat Investor wrote:I've been a bit agnostic about the value of factor investing for the last decade. I ended up splitting the difference- tilting on the domestic side and not tilting on the international side. And a decade later...I'm still not sure what the right answer is. Not sure anyone is ever going to know.
To me, the fact that any benefit is not obvious means it is not worth the trouble. I don't mean obvious in theory but in observed, measured, widely reported practice. Perhaps that has happened but nothing has jumped into my view.

I see cap-weighted indexing, buy and hold, (capture whole-market return), with a risk-moderating (stabilizing) bond holding, as straightforward enough that any alternate strategy needs to show me something obvious -- especially complex strategies that are by their complex nature error-prone and not easily transferable to anther manager.
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Post by Taylor Larimore » Sun Apr 30, 2017 10:12 pm

Bogleheads:

I love this classic quote by Jack Bogle in the Wall Street Journal (4-29-2017) referring to Rob Arnott, "Godfather of 'Smart Beta'."
I wish I was as sure of anything as he is of everything.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by stlutz » Sun Apr 30, 2017 10:21 pm

LOL--that's a good line. Thanks for sharing, Taylor.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by iamlucky13 » Sun Apr 30, 2017 11:16 pm

happenstance wrote:This article suffers from a clear lack of definition of what "smart beta" is: do they mean equal weight, low volatility, dividend, quality, multi-factor, fundamental weighting, etc., or all of the above? Arnott's Research Affiliates produces the Fundamental Index series, which can be construed as "smart beta," so does he think that his company's products are over-promising?
Based on the Chuck Jaffe article I saw in the local paper, I think you're close to what Arnott was saying - the definition of smart beta is too ill-defined, and most of the funds claiming a smart beta strategy aren't that smart.

His excluded, of course. I can't properly comment on that angle. I'm just mentioning the approach I sensed from reading about Arnott's paper second hand.

There's also a Vanguard white paper on the smart beta funds from a couple years ago pointing out that they generally reduce their diversification (although still hold hundreds of stocks) to pursue their favored factors. Also, while they benchmark well compared to blended funds they are compared to, they don't necessarily do so against other index benchmarks that might be more appropriate. Perhaps somebody can correct me if I'm drawing conclusions too quickly from skimming. It was 16 pages of some of the denser writing of the Vanguard papers that I've seen:
https://personal.vanguard.com/pdf/ISGSBA.pdf

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"Factor Investing"

Post by Taylor Larimore » Mon May 01, 2017 8:08 am

(Rob) Arnott also said in a separate paper this month that while factor investing -- the circuitry behind smart-beta -- works well in theory, returns all but evaporate in most live portfolios.
Ever Ready:

This is my my opinion of Factor Investing: Factor Investing.

A better alternative: The Three-Fund Portfolio

Best wishes.
Taylor
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Re: "I wish I was as sure of anything as he is of everything"

Post by Theoretical » Mon May 01, 2017 8:36 am

Taylor Larimore wrote:Bogleheads:

I love this classic quote by Jack Bogle in the Wall Street Journal (4-29-2017) referring to Rob Arnott, "Godfather of 'Smart Beta'."
I wish I was as sure of anything as he is of everything.
Best wishes.
Taylor
Yep that's a gem. I like the fundamental index approach personally, but it's really hard to stomach some of Arnott and Co's sheer arrogance and cherry-picking.

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Re: "Factor Investing"

Post by sid hartha » Tue May 02, 2017 5:35 am

Taylor Larimore wrote:
(Rob) Arnott also said in a separate paper this month that while factor investing -- the circuitry behind smart-beta -- works well in theory, returns all but evaporate in most live portfolios.
Ever Ready:

This is my my opinion of Factor Investing: Factor Investing.

A better alternative: The Three-Fund Portfolio

Best wishes.
Taylor
Dear Taylor,

Ben Carlson, someone we both like to read, seems to think Factor Based Investing can work. He seems to offer a middle ground. But it's still too complicated and would involve too much time for me though.

http://awealthofcommonsense.com/2017/04 ... llocation/

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by rojas65 » Tue May 02, 2017 6:13 am

Gus Sauter gave a presentation on Smart Beta at the 2016 Bogleheads Conference.

Spoiler Alert:
His conclusion:
Smart Beta = Smart Marketing.
The presentation is available in the Wiki.
:happy
YMMV
J.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by wolf359 » Tue May 02, 2017 9:53 am

White Coat Investor wrote:I've been a bit agnostic about the value of factor investing for the last decade. I ended up splitting the difference- tilting on the domestic side and not tilting on the international side. And a decade later...I'm still not sure what the right answer is. Not sure anyone is ever going to know.
I think we'll eventually know, but it will be 20-30 years after we've placed our bets.

From what you've previously written, you're using factors to enhance returns, but you have so much money in and are playing so many angles that you're not relying on the extra (maybe imaginary, maybe not) factor returns to reach your goals. Maybe you'll get there sooner, maybe not. High savings rate is much more important.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by White Coat Investor » Tue May 02, 2017 10:02 am

wolf359 wrote:
White Coat Investor wrote:I've been a bit agnostic about the value of factor investing for the last decade. I ended up splitting the difference- tilting on the domestic side and not tilting on the international side. And a decade later...I'm still not sure what the right answer is. Not sure anyone is ever going to know.
I think we'll eventually know, but it will be 20-30 years after we've placed our bets.

From what you've previously written, you're using factors to enhance returns, but you have so much money in and are playing so many angles that you're not relying on the extra (maybe imaginary, maybe not) factor returns to reach your goals. Maybe you'll get there sooner, maybe not. High savings rate is much more important.
Agreed. There is no doubt that my financial success has little to do with whether I've tilted or not.
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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by willthrill81 » Tue May 02, 2017 10:15 am

White Coat Investor wrote:
wolf359 wrote:
White Coat Investor wrote:I've been a bit agnostic about the value of factor investing for the last decade. I ended up splitting the difference- tilting on the domestic side and not tilting on the international side. And a decade later...I'm still not sure what the right answer is. Not sure anyone is ever going to know.
I think we'll eventually know, but it will be 20-30 years after we've placed our bets.

From what you've previously written, you're using factors to enhance returns, but you have so much money in and are playing so many angles that you're not relying on the extra (maybe imaginary, maybe not) factor returns to reach your goals. Maybe you'll get there sooner, maybe not. High savings rate is much more important.
Agreed. There is no doubt that my financial success has little to do with whether I've tilted or not.
+1

I'm not aware of any studies of the issue, but I think it's safe to say that the time it takes most people to reach FI as well as the amount of one's retirement savings is impacted far more by your savings rate than your rate of return.
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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by Random Walker » Tue May 02, 2017 10:40 am

I don't necessarily think smart beta is over promising. Perhaps some people's expectations are unrealistic. I'm pretty much all in on the factor diversified passive investing. After expenses, I expect perhaps a 1-2% annualized advantage over a TSM portfolio on the equity side; maybe 1% premium for small and 2% for value.
But I'm not just looking at equity returns. I'm looking at taking less overall market risk to achieve my goals, diversifying my risk that market beta does poorly for a long period, minimizing volatility drag on the portfolio.

Dave

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Factor Investing

Post by Taylor Larimore » Tue May 02, 2017 1:09 pm

Random Walker wrote:I don't necessarily think smart beta is over promising. Perhaps some people's expectations are unrealistic. I'm pretty much all in on the factor diversified passive investing. After expenses, I expect perhaps a 1-2% annualized advantage over a TSM portfolio on the equity side; maybe 1% premium for small and 2% for value. -- Dave
Bogleheads:

I believe it is just as likely for a complex, expensive, factor diversified portfolio to have a 1-2% disadvantage over a Total Stock Market Index portfolio. Bogleheads can read why here.

Best wishes.
Taylor
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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by azanon » Tue May 02, 2017 1:14 pm

The real turnoff for me (about smart beta) is that even proponents of it will admit that all of these factors generally are at a higher risk (e.g Value is higher risk than market, small-cap is higher risk than total market, etc.), so even if it's an extra 1-2% return, how much of that expected return is nothing more than payment for extra risk. Or said another way, after you risk-adjust those supposedly-boosted returns, is it even worth bothering over, along with adding additional tracking error that comes along with that?

I'm with Bogle on this now; why not just be satisfied with your fair share of the market, minus 10 or so basis points of costs for index funds.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by triceratop » Tue May 02, 2017 1:18 pm

Taylor,
Much respect to your for the wisdom you provide. However, it is not true that factor investing has to be expensive. I have a significantly tilted portfolio and I will never pay more than 0.15% in expense ratio; in fact taxes on my dividends cost me twice as much per year as fund expenses. Robert T has other examples.

And, your post refers to active managers. Boglehead factor investors are using passive index funds.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by triceratop » Tue May 02, 2017 1:22 pm

azanon wrote:The real turnoff for me (about smart beta) is that even proponents of it will admit that all of these factors generally are at a higher risk (e.g Value is higher risk than market, small-cap is higher risk than total market, etc.), so even if it's an extra 1-2% return, how much of that expected return is nothing more than payment for extra risk. Or said another way, after you risk-adjust those supposedly-boosted returns, is it even worth bothering over, along with adding additional tracking error that comes along with that?

I'm with Bogle on this now; why not just be satisfied with your fair share of the market, minus 10 or so basis points of costs for index funds.
I pay about 10bp, perhaps slightly less, now with a factor-tilted portfolio. So it seems this is not a serious objection.

I would welcome a 1-2% extra return in exchange for extra risk. It is difficult to obtain equity exposure greater than 100%. At my age my use of bonds is very limited, and I use them sparingly (<10% of allocation).
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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by azanon » Tue May 02, 2017 1:23 pm

triceratop wrote:Taylor,
Much respect to your for the wisdom you provide. However, it is not true that factor investing has to be expensive. I have a significantly tilted portfolio and I will never pay more than 0.15% in expense ratio; in fact taxes on my dividends cost me twice as much per year as fund expenses. Robert T has other examples.

And, your post refers to active managers. Boglehead factor investors are using passive index funds.

triceratop
There's a tilted international stock mutual fund or ETF for 0.15% or less? Would you mind sharing the ticker on that. Or are you US stock only?

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by azanon » Tue May 02, 2017 1:26 pm

triceratop wrote:
azanon wrote:I would welcome a 1-2% extra return in exchange for extra risk. It is difficult to obtain equity exposure greater than 100%. At my age my use of bonds is very limited, and I use them sparingly (<10% of allocation).
My point was, if I were only getting 1-2% extra and it wasn't just "alpha", rather payment for extra risk, why bother. For me 100% stocks went out of the question for me, the moment I had a basic MPT lesson. As you can tell by my comments, I'm care about the most return for the least risk and cost possible. I certainly can't maximize risk-adjusted returns without bonds.

I want my portfolio to work smart, and hard given its risks, but I'm putting a lot of the work too on my savings effort, and just time to compound. I'm not in THAT big of a hurry.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by gkaplan » Tue May 02, 2017 1:47 pm

triceratop wrote:Taylor,
Much respect to your for the wisdom you provide. However, it is not true that factor investing has to be expensive. I have a significantly tilted portfolio and I will never pay more than 0.15% in expense ratio; in fact taxes on my dividends cost me twice as much per year as fund expenses. Robert T has other examples.

And, your post refers to active managers. Boglehead factor investors are using passive index funds.

triceratop

Likewise, for me.
Gordon

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by triceratop » Tue May 02, 2017 2:06 pm

azanon wrote:
triceratop wrote:Taylor,
Much respect to your for the wisdom you provide. However, it is not true that factor investing has to be expensive. I have a significantly tilted portfolio and I will never pay more than 0.15% in expense ratio; in fact taxes on my dividends cost me twice as much per year as fund expenses. Robert T has other examples.

And, your post refers to active managers. Boglehead factor investors are using passive index funds.

triceratop
There's a tilted international stock mutual fund or ETF for 0.15% or less? Would you mind sharing the ticker on that. Or are you US stock only?
Of course, 0.15% is the portfolio weighted cost and I never claimed there was such a tilted international fund (however VSS comes close!) If you can buy a US SCV fund for 0.07% and an International SC fund for 0.13% then your options expand considerably for getting value. Also, I only tilt so I also have market-cap US and international.

My US/international ratio is 0.5.
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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by triceratop » Tue May 02, 2017 2:13 pm

azanon wrote:
triceratop wrote:
azanon wrote:I would welcome a 1-2% extra return in exchange for extra risk. It is difficult to obtain equity exposure greater than 100%. At my age my use of bonds is very limited, and I use them sparingly (<10% of allocation).
My point was, if I were only getting 1-2% extra and it wasn't just "alpha", rather payment for extra risk, why bother. For me 100% stocks went out of the question for me, the moment I had a basic MPT lesson. As you can tell by my comments, I'm care about the most return for the least risk and cost possible. I certainly can't maximize risk-adjusted returns without bonds.

I want my portfolio to work smart, and hard given its risks, but I'm putting a lot of the work too on my savings effort, and just time to compound. I'm not in THAT big of a hurry.
I understand your point; but you undermined the applicability of your post to only yourself by saying "I'm with Bogle on this now; why not just be satisfied with your fair share of the market, minus 10 or so basis points of costs for index funds."

I provided an example of why I don't want to be satisfied with this and I am happy to take on the risk. I've been told that in one's early 20s is when to take risks: that is what I am doing.

And further, nobody knows how to maximize risk-adjusted returns: efficient frontier curves are backwards-looking. But I can look at bonds and see they have little hope of beating inflation. At least stocks have some promise given possible earnings growth.

When one is 40+ years from retirement it's hard to imagine what exactly "risk-adjusted" return even is with present bond yields. My present income is a bond.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by azanon » Tue May 02, 2017 2:32 pm

triceratop wrote:
azanon wrote:
triceratop wrote:Taylor,
Much respect to your for the wisdom you provide. However, it is not true that factor investing has to be expensive. I have a significantly tilted portfolio and I will never pay more than 0.15% in expense ratio; in fact taxes on my dividends cost me twice as much per year as fund expenses. Robert T has other examples.

And, your post refers to active managers. Boglehead factor investors are using passive index funds.

triceratop
There's a tilted international stock mutual fund or ETF for 0.15% or less? Would you mind sharing the ticker on that. Or are you US stock only?
Of course, 0.15% is the portfolio weighted cost and I never claimed there was such a tilted international fund (however VSS comes close!) If you can buy a US SCV fund for 0.07% and an International SC fund for 0.13% then your options expand considerably for getting value. Also, I only tilt so I also have market-cap US and international.

My US/international ratio is 0.5.
Ahh ok. I don't see "tilts" (where the holder is holding sizable portions of total market funds as well) as being all that big of a deal anyway. I think those 1-2% extra return numbers can only be potentially seen when you're holding 100% small or 100% value (or both concurrently). A morningstar dot slightly to the left of center or slightly towards the bottom for your sum total of stocks possibly isn't even worth the trouble.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by triceratop » Tue May 02, 2017 2:43 pm

azanon wrote:
triceratop wrote:
azanon wrote:
triceratop wrote:Taylor,
Much respect to your for the wisdom you provide. However, it is not true that factor investing has to be expensive. I have a significantly tilted portfolio and I will never pay more than 0.15% in expense ratio; in fact taxes on my dividends cost me twice as much per year as fund expenses. Robert T has other examples.

And, your post refers to active managers. Boglehead factor investors are using passive index funds.

triceratop
There's a tilted international stock mutual fund or ETF for 0.15% or less? Would you mind sharing the ticker on that. Or are you US stock only?
Of course, 0.15% is the portfolio weighted cost and I never claimed there was such a tilted international fund (however VSS comes close!) If you can buy a US SCV fund for 0.07% and an International SC fund for 0.13% then your options expand considerably for getting value. Also, I only tilt so I also have market-cap US and international.

My US/international ratio is 0.5.
Ahh ok. I don't see "tilts" (where the holder is holding sizable portions of total market funds as well) as being all that big of a deal anyway. I think those 1-2% extra return numbers can only be potentially seen when you're holding 100% small or 100% value (or both concurrently). A morningstar dot slightly to the left of center or slightly towards the bottom for your sum total of stocks possibly isn't even worth the trouble.
We're going in circles; Even if I paid the ~0.20-0.25% needed to achieve a 100% tilt it would emphatically not be the case that I am just as likely to underperform by 1-2% as outperform, as originally claimed.

Either you believe the cost of a tilt in proportion to its degree is less than the expected excess return due to that degree of tilt or you don't. If you think it's a bad strategy for a 100% tilt, then it is a poor strategy for a 50% tilt.

As for whether it isn't worth the trouble: if I achieve a 0.5%-1% premium, then compounding over the years until full retirement age that comes out to a $3500-8000 difference in annual real retirement income on my current savings alone. I am 25. You may not think it isn't worth the trouble for that; I disagree.
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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by azanon » Tue May 02, 2017 2:45 pm

triceratop wrote:
azanon wrote:
triceratop wrote:
azanon wrote:I would welcome a 1-2% extra return in exchange for extra risk. It is difficult to obtain equity exposure greater than 100%. At my age my use of bonds is very limited, and I use them sparingly (<10% of allocation).
My point was, if I were only getting 1-2% extra and it wasn't just "alpha", rather payment for extra risk, why bother. For me 100% stocks went out of the question for me, the moment I had a basic MPT lesson. As you can tell by my comments, I'm care about the most return for the least risk and cost possible. I certainly can't maximize risk-adjusted returns without bonds.

I want my portfolio to work smart, and hard given its risks, but I'm putting a lot of the work too on my savings effort, and just time to compound. I'm not in THAT big of a hurry.
I understand your point; but you undermined the applicability of your post to only yourself by saying "I'm with Bogle on this now; why not just be satisfied with your fair share of the market, minus 10 or so basis points of costs for index funds."

I provided an example of why I don't want to be satisfied with this and I am happy to take on the risk. I've been told that in one's early 20s is when to take risks: that is what I am doing.

And further, nobody knows how to maximize risk-adjusted returns: efficient frontier curves are backwards-looking. But I can look at bonds and see they have little hope of beating inflation. At least stocks have some promise given possible earnings growth.

When one is 40+ years from retirement it's hard to imagine what exactly "risk-adjusted" return even is with present bond yields. My present income is a bond.
I had an answer here, then I realized it said or had nothing to do with Smart Beta. I'll just say what we've both realized by now; we approach investing pretty differently.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by nedsaid » Tue May 02, 2017 2:49 pm

triceratop wrote:
azanon wrote:
triceratop wrote:
azanon wrote:I would welcome a 1-2% extra return in exchange for extra risk. It is difficult to obtain equity exposure greater than 100%. At my age my use of bonds is very limited, and I use them sparingly (<10% of allocation).
My point was, if I were only getting 1-2% extra and it wasn't just "alpha", rather payment for extra risk, why bother. For me 100% stocks went out of the question for me, the moment I had a basic MPT lesson. As you can tell by my comments, I'm care about the most return for the least risk and cost possible. I certainly can't maximize risk-adjusted returns without bonds.

I want my portfolio to work smart, and hard given its risks, but I'm putting a lot of the work too on my savings effort, and just time to compound. I'm not in THAT big of a hurry.
I understand your point; but you undermined the applicability of your post to only yourself by saying "I'm with Bogle on this now; why not just be satisfied with your fair share of the market, minus 10 or so basis points of costs for index funds."

I provided an example of why I don't want to be satisfied with this and I am happy to take on the risk. I've been told that in one's early 20s is when to take risks: that is what I am doing.

And further, nobody knows how to maximize risk-adjusted returns: efficient frontier curves are backwards-looking. But I can look at bonds and see they have little hope of beating inflation. At least stocks have some promise given possible earnings growth.

When one is 40+ years from retirement it's hard to imagine what exactly "risk-adjusted" return even is with present bond yields. My present income is a bond.
Triceratop, I think you are taking a rational approach. If you achieved an extra 1% or 2% a year in returns over 40 years by tilting, that would add up to a lot of extra money upon retirement. It would be worth it even if you experienced additional volatility. My guess is that your excess returns will more likely be something like 0.50% a year. Over 40 years, even that would make a difference. You have something to gain and little, if anything, to lose.

There is also a concept of "good enough is good enough." Let's say by tilting you only achieved 95% of market return over 40 years. A minor tragedy but still good enough and you would still be ahead of the greatest share of investors. I have not heard the critics of tilting argue that Small/Value tilting would actually reduce your returns except by unlikely timing issues. What I mean by that is if you hit a long period of Small/Value underperformance and gave up on your strategy. 40 years should be long enough to capture whatever premiums might be out there.

If you stick to your strategy for 40 years, it is unlikely you will underperform the indexes. Something to possibly gain and really nothing to lose. It is a bet that I would take. If the robots take the factors away, which I doubt, you will still achieve a near market return.
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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by azanon » Tue May 02, 2017 2:53 pm

triceratop wrote:
azanon wrote:
triceratop wrote:
azanon wrote:
triceratop wrote:Taylor,
Much respect to your for the wisdom you provide. However, it is not true that factor investing has to be expensive. I have a significantly tilted portfolio and I will never pay more than 0.15% in expense ratio; in fact taxes on my dividends cost me twice as much per year as fund expenses. Robert T has other examples.

And, your post refers to active managers. Boglehead factor investors are using passive index funds.

triceratop
There's a tilted international stock mutual fund or ETF for 0.15% or less? Would you mind sharing the ticker on that. Or are you US stock only?
Of course, 0.15% is the portfolio weighted cost and I never claimed there was such a tilted international fund (however VSS comes close!) If you can buy a US SCV fund for 0.07% and an International SC fund for 0.13% then your options expand considerably for getting value. Also, I only tilt so I also have market-cap US and international.

My US/international ratio is 0.5.
Ahh ok. I don't see "tilts" (where the holder is holding sizable portions of total market funds as well) as being all that big of a deal anyway. I think those 1-2% extra return numbers can only be potentially seen when you're holding 100% small or 100% value (or both concurrently). A morningstar dot slightly to the left of center or slightly towards the bottom for your sum total of stocks possibly isn't even worth the trouble.
We're going in circles; Even if I paid the ~0.20-0.25% needed to achieve a 100% tilt it would emphatically not be the case that I am just as likely to underperform by 1-2% as outperform, as originally claimed.

Either you believe the cost of a tilt in proportion to its degree is less than the expected excess return due to that degree of tilt or you don't. If you think it's a bad strategy for a 100% tilt, then it is a poor strategy for a 50% tilt.

As for whether it isn't worth the trouble: if I achieve a 0.5%-1% premium, then compounding over the years until full retirement age that comes out to a $3500-8000 difference in annual real retirement income on my current savings alone. I am 25. You may not think it isn't worth the trouble for that; I disagree.
Let's wrap this up. I don't think it's worth the trouble, that's right. And if I understood him correctly, neither does Jack Bogle.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by Dirghatamas » Tue May 02, 2017 3:25 pm

nedsaid wrote: If you stick to your strategy for 40 years, it is unlikely you will underperform the indexes. Something to possibly gain and really nothing to lose. It is a bet that I would take. If the robots take the factors away, which I doubt, you will still achieve a near market return.
I don't have a dog in this argument because I never tilt (country, factors, sectors whatever). However, the above is too simplistic.

If true it means Heads I win, tails I win. If so, why would we all rationally not do this? It isn't because all of us are stupid but because we can see scenarios where heavy tilting can LOSE, not for a few years but over your whole investing span.

The country tilting case is obvious: Just because US has done much better than average for 100 years, lets assume the same in future. The bad case isn't that the US now drops to average but that it does much worse than average. Same is true for all tilts.

Consider the small/value tilt (both US and International) which seems to be the most popular on this forum. How could this strategy possibly lose?

I can come up with dozens of scenarios off the top of my head. Currently retail is going through a meltdown. Big retailers like Sears, Macy etc. will first become "small" then they become "value" and then possibly bankrupt. Amazon (large and growth) could dominate and if you were the contrarian (small and value), you could lose big.

Take Oil. Lets say OPEC keeps oil prices marginally low enough to drive out the small US shale companies but not low enough to drive out the big OPEC/non OPEC based companies. All your small O&G guys become small and then value and then go to 0 while an Exxon and Saudi Aramaco and Shell continue to function profitably..

Take financials. With more and more automation, large companies like JP Morgan, Wells Fargo etc. leverage the economies of scale and much more IT investment, driving out the profit margins and competitiveness of small banks and financials. They go to small then value...

The point overall is that the small and value thesis is the market overreacts to risk: each small/value company maybe risky but when we diversify across 100s or thousands, the risk is systematically misplaced and making the bet leads to oversize returns. Yes, so far and greater than a 50% chance but as the Amazon example shows, what if the risks are systemic and diversification doesn't help..what then?

Being Market consensus maybe "dumb money" but when you tilt, your worst case is NOT the same as market returns but potentially FAR FAR worse. You could lose your shirt!

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by azanon » Tue May 02, 2017 3:32 pm

Who besides me remembers the 90s, when "smart beta" was anything growth, or maximum growth. I remember a time when only chumps were buying value, and that time was a good decade long.

I wonder what the factor(s) du-jour will be 10 years from now.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by Random Walker » Tue May 02, 2017 3:48 pm

Azanon,
Certainly small is a risk story and value is combination risk and behavioral. The point is that even if these are risk factors, they are different risks with low correlations to market beta and each other. When a factor diversified portfolio underperforms, it tends to underperform by small amounts. When it outperforms, the outperformance tends to be more significant.

Dave

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by triceratop » Tue May 02, 2017 3:55 pm

azanon wrote:Who besides me remembers the 90s, when "smart beta" was anything growth, or maximum growth. I remember a time when only chumps were buying value, and that time was a good decade long.

I wonder what the factor(s) du-jour will be 10 years from now.
You mean like this paper, published in 1993: Common Risk Factors in the Returns On Stocks And Bonds (Fama, French)

Or in 1998 when Larry Swedroe published The Only Guide to a Winning Investment Strategy You'll Ever Need ? You'll note that the table of contents on that book indicates it contains a lot of information on a so-called "5 factor model" and advocates that strategy. Those five factors: market, value, size, term, and default. Same as today!

1993 was 24 years ago; 1998 was 19 years ago.

Investors may have been piling into internet stocks, making for a negative premia on value, but that does not mean the academics, who are the main influencers of the factor people here, were going in that direction.
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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by iceport » Tue May 02, 2017 4:50 pm

azanon wrote:Who besides me remembers the 90s, when "smart beta" was anything growth, or maximum growth. I remember a time when only chumps were buying value, and that time was a good decade long.

I wonder what the factor(s) du-jour will be 10 years from now.
I remember, to some degree, the prolonged under-performance of value stocks. That's when, before I knew better, I dumped my position in small cap value — just before that sector took off again. This is but one of the lessons learned the hard way that made me the Boglehead I am today.
triceratop wrote:Investors may have been piling into internet stocks, making for a negative premia on value, but that does not mean the academics, who are the main influencers of the factor people here, were going in that direction.
That might be, but it might interest you to learn that even Bogleheads, known then as Vanguard Diehards, fell prey to the lure of tilting towards growth:
Taylor Larimore wrote:In the 90s, Growth stocks were among the top performers until they became an overvalued "bubble" peaking in January 2000. During this period many investors on the Diehard forum 'tilted" their portfolios towards growth.
"Tilting" to what's doing well?

That fact is important to bear in mind, always. We are all only human, a condition none of us can overcome, no matter how intelligent or knowledgeable. So even the Bogleheads forum, being populated by humans, is not immune from human flaws.
"Discipline matters more than allocation.” ─William Bernstein

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by nedsaid » Tue May 02, 2017 5:03 pm

Dirghatamas wrote:
nedsaid wrote: If you stick to your strategy for 40 years, it is unlikely you will underperform the indexes. Something to possibly gain and really nothing to lose. It is a bet that I would take. If the robots take the factors away, which I doubt, you will still achieve a near market return.
I don't have a dog in this argument because I never tilt (country, factors, sectors whatever). However, the above is too simplistic.

If true it means Heads I win, tails I win. If so, why would we all rationally not do this? It isn't because all of us are stupid but because we can see scenarios where heavy tilting can LOSE, not for a few years but over your whole investing span.

Nedsaid: For one thing, not everyone is going to small/value tilt their portfolios. Secondly, a lot depends on how heavily you tilt. I for one am not a fan of the "Larry Portfolio" which is 30% US and International Small Value and 70% treasuries. I would not advocate putting all your stocks in the Small Value basket. An investor should own Large Caps too. The key is "tilt" which to me does not imply only owning Small Value. To me, tilting means owning certain segments of the market at above market weightings but it doesn't mean wholesale abandoning other segments of the market.

The country tilting case is obvious: Just because US has done much better than average for 100 years, lets assume the same in future. The bad case isn't that the US now drops to average but that it does much worse than average. Same is true for all tilts.

Consider the small/value tilt (both US and International) which seems to be the most popular on this forum. How could this strategy possibly lose?

Nedsaid: I just haven't seen anything that says that Small Value will do worse than the rest of the market. What I have read is that tilters need to be prepared for long periods of underperformance, maybe 20 years at a stretch. I would think that 40 years would be enough to capture premiums. People who doubt tilting merely have said that this strategy might not outperform in the future.

I can come up with dozens of scenarios off the top of my head. Currently retail is going through a meltdown. Big retailers like Sears, Macy etc. will first become "small" then they become "value" and then possibly bankrupt. Amazon (large and growth) could dominate and if you were the contrarian (small and value), you could lose big.

Nedsaid: So there is only one sector in the economy and that is retail? And no more formation of new companies? This is a bit of an extreme argument. There have always been dying industries and companies on the way up and companies on the way down.

Take Oil. Lets say OPEC keeps oil prices marginally low enough to drive out the small US shale companies but not low enough to drive out the big OPEC/non OPEC based companies. All your small O&G guys become small and then value and then go to 0 while an Exxon and Saudi Aramaco and Shell continue to function profitably..

Nedsaid: Actually the opposite seems to be happening right now.

Take financials. With more and more automation, large companies like JP Morgan, Wells Fargo etc. leverage the economies of scale and much more IT investment, driving out the profit margins and competitiveness of small banks and financials. They go to small then value...

Nedsaid: Okay, now the economy has three sectors now: Retail, Oil, and Financials. Again, in a dynamic economy there are always rising and falling industries and rising and falling companies. The reality is that the US economy has a number of sectors, at least eleven. New industries and new companies will spring up as they always have.

The point overall is that the small and value thesis is the market overreacts to risk: each small/value company maybe risky but when we diversify across 100s or thousands, the risk is systematically misplaced and making the bet leads to oversize returns. Yes, so far and greater than a 50% chance but as the Amazon example shows, what if the risks are systemic and diversification doesn't help..what then?

Nedsaid: One can always cook up scenarios. Somehow the country and the economy have renewed themselves and continued to thrive. The main risk that I see with Small Value is that too many people will pile in and the strategy won't work any more at least until those investors get bored and move on to something else. Another risk is that somehow the robots will take the factors away.

But I just don't get your "lose your shirt" arguments. Stock market investing is inherently risky. Factor tilting is still investing in stocks but investing in stocks with certain characteristics in greater proportion than their market weights as opposed to simply investing in the entire stock market through a Total Market Index.

Small Value can be very volatile which is why I don't like extreme tilting. It is up to the individual to decide how much they want to tilt. The theory is that tilting should boost returns and reduce volatility because different slices of the market act differently than the market itself. For example, Growth and Value will take turns outperforming each other as does Large and Small. You should get a nice diversification benefit.


Being Market consensus maybe "dumb money" but when you tilt, your worst case is NOT the same as market returns but potentially FAR FAR worse. You could lose your shirt!
A fool and his money are good for business.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by azanon » Tue May 02, 2017 5:10 pm

triceratop wrote:
azanon wrote:Who besides me remembers the 90s, when "smart beta" was anything growth, or maximum growth. I remember a time when only chumps were buying value, and that time was a good decade long.

I wonder what the factor(s) du-jour will be 10 years from now.
You mean like this paper, published in 1993: Common Risk Factors in the Returns On Stocks And Bonds (Fama, French)

Or in 1998 when Larry Swedroe published The Only Guide to a Winning Investment Strategy You'll Ever Need ? You'll note that the table of contents on that book indicates it contains a lot of information on a so-called "5 factor model" and advocates that strategy. Those five factors: market, value, size, term, and default. Same as today!

1993 was 24 years ago; 1998 was 19 years ago.

Investors may have been piling into internet stocks, making for a negative premia on value, but that does not mean the academics, who are the main influencers of the factor people here, were going in that direction.
Until 2000, I imagine neither were very popular.

My point was Growth, matter of fact, outperformed value for a very long time, really from early 80s to late 90s. Very few people statistically would stick with value for that long, despite that reality. If you are that exception and are committed to being a militant value or small investor for the remainder of your life despite any new research that comes out, or despite any actual pattern of returns that might end up occurring, then you may be a candidate for factor investing.

My point was growth used to be hot, and it was hot for a very long time (matter of fact, not in theory). My point wasn't that there existed no papers or no one that took an opposing view.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by triceratop » Tue May 02, 2017 5:26 pm

azanon wrote:
triceratop wrote:
azanon wrote:Who besides me remembers the 90s, when "smart beta" was anything growth, or maximum growth. I remember a time when only chumps were buying value, and that time was a good decade long.

I wonder what the factor(s) du-jour will be 10 years from now.
You mean like this paper, published in 1993: Common Risk Factors in the Returns On Stocks And Bonds (Fama, French)

Or in 1998 when Larry Swedroe published The Only Guide to a Winning Investment Strategy You'll Ever Need ? You'll note that the table of contents on that book indicates it contains a lot of information on a so-called "5 factor model" and advocates that strategy. Those five factors: market, value, size, term, and default. Same as today!

1993 was 24 years ago; 1998 was 19 years ago.

Investors may have been piling into internet stocks, making for a negative premia on value, but that does not mean the academics, who are the main influencers of the factor people here, were going in that direction.
Congratulations; that had absolutely nothing to do with my comment. Until 2000, I imagine neither were very popular.

My point was Growth, matter of fact, outperformed value for a very long time, really from early 80s to late 90s. Very few people statistically would stick with value for that long, despite that reality. If you are that exception and are committed to being a militant value or small investor for the remainder of your life despite any new research that comes out, or despite any actual pattern of returns that might end up occurring, then you may be a candidate for factor investing.
The problem here is that your comment had to do with mine. You said that in the 90s "smart beta" was growth, and implied that the factor du jour was growth. That is not so: the Asness/Fama/Swedroe people were advocating value even as the evidence-based strategy as growth was winning handily. So I presented the research showing this fact, that small/value factor investing has not really changed in theory.

And you say "despite any new research that comes out" -- there has been a premia since publication of the first papers. And there has been a negative premia in recent years, so I do not quite see why I would be performance chasing. It seems like the reasonable long-term strategy.

Image

(blue: DFSVX, green: NAESX, orange: S&P500

Oh, and I don't care what some people did in the 90s. I am not a statistic. To quote Robert Wilson, "The average is that which no person quite ever is."
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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by azanon » Tue May 02, 2017 5:32 pm

I apologize for the snark - I deleted that opener from my post.

Ok i read your post, and have no new information to add to this item.

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Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by Dirghatamas » Tue May 02, 2017 5:51 pm

nedsaid wrote: I just haven't seen anything that says that Small Value will do worse than the rest of the market.

But I just don't get your "lose your shirt" arguments. Stock market investing is inherently risky. Factor tilting is still investing in stocks but investing in stocks with certain characteristics in greater proportion than their market weights as opposed to simply investing in the entire stock market through a Total Market Index.
Anytime you chose a highly concentrated portion of the stock market, you take the risk (by definition) that the portion you chose will do much worse than the market in aggregate. In 1989-1990, Japan made up more than 40% of the world stock market. Since the second world war, it had beaten the pants off every other major country's stock market. A Japanese investor could rationally look at this data and say what is the downside? Upside, Japan continues to do as well as it has for almost 50 years and worst case, it behaves like the world average. A person "tilting" like this to home country then proceeded to lose their shirt for the next 25 years without any hope long term of recovering.

That happened to someone picking 40% of the total world market cap in 1000s of different companies but all tied to a common concentration (country of origin).

Now, lets look at small value. You are now choosing just 3% of the market cap of the stock market. So, 97% of the money invested decides to go elsewhere. I would say that is far more concentrated than the 40% case of the Japanese investor. Claim from tilters is that the worst case for this 3% will have similar returns as the other 97% and probably much better than the 97%..

I am extremely skeptical of such claims. The one lesson I have learned over time when dealing with risk is to diversify, diversify, diversify! It is far more prudent in my opinion to not try and beat the market but simply increase one's saving rate or decrease one's expected expenses in retirement or many other ways. Reaching for yield always has risks and they tend to show up at the wrong time.

Theoretical
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Joined: Tue Aug 19, 2014 10:09 pm

Re: Vanguard's Jack Bogle Warns Smart Beta May Be Over-Promising

Post by Theoretical » Tue May 02, 2017 8:31 pm

One difference is that megacaps tend to be highly concentrated while ex-megacap investing tends to be far more dispersed. Cisco used to be something like 5-6% of the S&P and Enron used to be number 7 globally.

The top 10 holdings of most TSM funds tend to be 20-30% of the entire fund while most value or small indexers tend to be more like 4-7% with a wide dispersion.

In my opinion, the benefit of large companies is that they have more margin for error in truly dark times (Exxon would not go out of business simply because 2008 happened, but 90% of small Value might well have). But on the other side, with the Japanese megacaps and the mega bank stocks, you have the skyscraper-size version of the domino effect in terms of bad management.

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