TSM believers, defend thyself! (In a good natured, friendly debate.)

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B4Xt3r
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TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by B4Xt3r » Mon Jan 29, 2018 10:32 am

Hi All,

Disclosure: I am a boglehead who invests in TSM. However, for the sake seeing how well I understand the argument for investing in TSM, I am currently taking the opposing view. I want to make sure that I can say, "I understand," before I say, "I disagree" with those who tilt. The following is an argument against TSM that I currently do not have an answer for. Many thanks to anyone who can show me the flaws.

TSM represents a cost-effective way to purchase securities according to the aggregate opinion of all active investors. Of course, there is much value to TSM. However, individuals are not "the average," so most individuals will not be well served by average opinion of all investors. For example, most bogleheads actually agree with this when on a different subject, namely bonds/stock asset allocation (I think this would be roughly 30:70). They recommend that individuals assess their individual investment needs and then heavily tilt away from the market proportions towards stocks or bonds depending on that assessment. However, when discussing titling away from TSM, it seems that bogleheads do not consistently apply the same arguments.

Example. If someone wishes to accumulate 1.0M+ over 30 years, but can realistically only save $500/month, they need a CAGR of ~10%. Is it legitimate for such a person to somewhat substantially tilt towards small cap/value? Why or why not?

If you have internally used the argument of "nobody knows anything" to convince yourself to buy equities according to TSM proportions, why do you not use the that same reasoning to buy the market proportion of bonds to bonds? If the reason was that stocks have historically outperformed bonds, and you need that risk premium, do you feel somewhat compelled that smallcap/value/emerging market tilts can be reasonable for certain people?

Best,

-kehyler

For a somewhat related reading, see: https://en.wikipedia.org/wiki/Ecological_fallacy

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by White Coat Investor » Mon Jan 29, 2018 10:35 am

Apples and oranges. It isn't particularly efficient to cap-weight between all of your asset classes, but it is tax and cost efficient to cap weight within any given asset class.

I'm not 100% cap weighted, but this isn't a reason I tilt my portfolio.
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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by B4Xt3r » Mon Jan 29, 2018 10:36 am

^ Mind flushing out why you believe the stock to bond choice is not analogous to the TSM to (TSM + tilt) choice?

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by bmritz » Mon Jan 29, 2018 10:53 am

kehyler wrote:
Mon Jan 29, 2018 10:36 am
^ Mind flushing out why you believe the stock to bond choice is not analogous to the TSM to (TSM + tilt) choice?
One potential answer I've told myself before is that when an institution decides how to fund itself, a lot more factors come into play than just the potential terms of a stock or bond issue. For example, government institutions have no way to sell stock, and tax implications are a huge factor for companies in the stock/bond financing decision. Even if investors would value cash flows from stocks or bonds the same (which is required to assume market weight reflects investor valuation), the institution on the other side of the trade wouldn't be indifferent and the total market for stocks and bonds would reflect that.

Inside stocks, the different factors influencing the stock/bond decision go away, so market weight is a good heuristic for and efficient portfolio within stocks.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by 2000rpm » Mon Jan 29, 2018 11:07 am

One issue I see is to tilt somewhere (low cap stocks e.g.), you lower the overall exposure to the market. By definition you're leaning away from the average. This increases your risk, but if you're reaching for higher return, obviously you accept more risk.

In your hypothetical example, someone needs a higher return to achieve their objective. If the level of return can be achieved with just adjusting the TSM/TBM ratio, why not do that? (perhaps it can't)

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by rkhusky » Mon Jan 29, 2018 1:19 pm

Stocks and bonds are very different. Smallcap value stocks are slightly different than Largecap growth stocks. However, if one needs a higher return than that provided by historical TSM returns, it is legitimate to search for alternative higher-returning investments. Choosing a narrow market segment that has a history of achieving higher returns is one way to do that, but one should be aware that with a higher expected return comes a higher risk of returning higher losses. There are other ways to achieve higher return, such as starting a business or investing in individual stocks, but these also have higher risk of losses.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by Bradiator » Mon Jan 29, 2018 2:01 pm

My effort here is not a defense of TSM itself, but an argument that the analogy is not valid.

Why the analogy doesn't fit: Debt and equity are more meaningfully different than the differences between large cap or small cap, for example.

Debt is an obligation whereas equity is a residual. Corporate managers view them differently and they have very different implications for the capital structure of a firm. They are qualitatively different things. (Of course, there are gray areas like junk, preferred, etc.) On the contrary, the stocks of large versus small companies are not qualitatively different things. For evidence: when a company's market cap grows it moves from one category to the other effortlessly. Thus, because stock-bond allocations and equity size/style allocations are so different, it is fine to approach them differently.

This counterargument in its essence says the equity risk premium is more real, more reliable, and more intuitively obvious by the nature of the securities themselves than factors like size and value. I believe that, although surely there are people more steeped in the research than I am who may be able to illuminate me.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by alex_686 » Mon Jan 29, 2018 2:13 pm

kehyler wrote:
Mon Jan 29, 2018 10:32 am
Is it legitimate for such a person to somewhat substantially tilt towards small cap/value? Why or why not?
It is if you believe that there is a an anomaly that grants a premium to small cap / value. That is, if there is a defect in the market that is giving away free money. This is hotly debated around here.

As a side note it is not enough to believe that it offers higher risk and higher return. If the market basket is the most efficient portfolio- i.e. owing the total market via TSM - then the correct answer is to use leverage. This can be in very mild forms. Use a 80/20 portfolio instead of a 70/30. Don't pay down your mortgage, etc.
kehyler wrote:
Mon Jan 29, 2018 10:32 am
They recommend that individuals assess their individual investment needs and then heavily tilt away from the market proportions towards stocks or bonds depending on that assessment.
Using a customized index that factors in your specific goals, risk tolerance, special needs, taxes, and market expectations is the best option by far. It would factor in you human capital, social security, pensions, your home, etc. 2 problems here. It is expensive to do, mainly in time. The marginal benefit over TSM is actually small. If you got 10m it might be worth it. Maybe.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by CFM300 » Mon Jan 29, 2018 2:15 pm

kehyler wrote:
Mon Jan 29, 2018 10:32 am
However, individuals are not "the average," so most individuals will not be well served by average opinion of all investors. For example, most bogleheads actually agree with this when on a different subject, namely bonds/stock asset allocation (I think this would be roughly 30:70). They recommend that individuals assess their individual investment needs and then heavily tilt away from the market proportions towards stocks or bonds depending on that assessment. However, when discussing titling away from TSM, it seems that bogleheads do not consistently apply the same arguments.
You might find this article by Nobel economist William Sharpe helpful:

https://web.stanford.edu/~wfsharpe/art/ ... esting.htm

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by Random Walker » Mon Jan 29, 2018 2:16 pm

I’m one of the biggest factor and alternative junkies on this site, but even I can join in on this one :-) Costs are certain. All the potential benefits of tilting, factors, alternatives, are only just that, potential.

Dave

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by 2pedals » Mon Jan 29, 2018 2:41 pm

kehyler wrote:
Mon Jan 29, 2018 10:32 am
Example. If someone wishes to accumulate 1.0M+ over 30 years, but can realistically only save $500/month, they need a CAGR of ~10%. Is it legitimate for such a person to somewhat substantially tilt towards small cap/value? Why or why not?
Legitimate yes, if you want more risk. I think not, if you define a metric so that you need a CAGR of 10% and want to be a millionaire.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by aristotelian » Mon Jan 29, 2018 3:00 pm

I don't think you need to invest in every asset class according to market cap. Otherwise you should also own bitcoin, options, commercial and residential real estate, etc. You pick the assets you want and then own a diversified selection. The more expected volatility, the more you want to diversify (e.g. it is especially to important to diversify in stocks, while you could make a good argument for staying in Treasuries on the bond side).

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by Larry2623 » Mon Jan 29, 2018 3:11 pm

TSM=what?

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by AnalogKid22 » Mon Jan 29, 2018 6:30 pm

These are the top holdings in VTSAX. Boeing, McDonald's, Apple, Chevron, and Facebook are among the companies scheduled to report earnings later this week. VTSAX will most likely go up significantly.

Apple Inc. 111,385,671 $18,849,797,103
Microsoft Corp. 185,889,867 $15,901,019,223
Amazon.com Inc. 9,872,842 $11,545,992,534
Facebook Inc. Class A 57,482,974 $10,143,445,592
Johnson & Johnson 64,720,544 $9,042,754,408
Berkshire Hathaway Inc. Class B 45,474,304 $9,013,916,539
JPMorgan Chase & Co. 83,637,226 $8,944,164,948
Exxon Mobil Corp. 102,086,256 $8,538,494,452
Alphabet Inc. Class A 7,176,778 $7,560,017,945
Alphabet Inc. Class C 7,172,896 $7,505,718,374
Bank of America Corp. 238,841,012 $7,050,586,674
Wells Fargo & Co. 106,828,251 $6,481,269,988
AT&T Inc. 147,965,786 $5,752,909,760
Chevron Corp. 45,755,089 $5,728,079,592
Procter & Gamble Co. 61,125,747 $5,616,233,634
Home Depot Inc. 28,149,308 $5,335,138,345
Intel Corp. 112,809,258 $5,207,275,349
Verizon Communications Inc. 98,328,595 $5,204,532,533
Pfizer Inc. 143,596,574 $5,201,067,910
UnitedHealth Group Inc. 23,347,645 $5,147,221,817
Visa Inc. Class A 43,714,213 $4,984,294,566
Citigroup Inc. 63,729,446 $4,742,108,077
Cisco Systems Inc. 119,127,654 $4,562,589,148
Comcast Corp. Class A 112,431,166 $4,502,868,198
Coca-Cola Co. 92,395,438 $4,239,102,695
PepsiCo Inc. 34,268,128 $4,109,433,910
Boeing Co. 13,638,101 $4,022,012,366
DowDuPont Inc. 56,375,123 $4,015,036,260
Philip Morris International Inc. 37,427,463 $3,954,211,466
AbbVie Inc. 38,462,505 $3,719,708,859
Walt Disney Co. 34,585,185 $3,718,253,239
Merck & Co. Inc. 65,669,237 $3,695,207,966
General Electric Co. 209,030,693 $3,647,585,593
Oracle Corp. 75,440,549 $3,566,829,157
Wal-Mart Stores Inc. 36,002,550 $3,555,251,813
Mastercard Inc. Class A 22,636,557 $3,426,269,268
3M Co. 14,352,804 $3,378,219,477
McDonald's Corp. 19,210,798 $3,306,562,552
Altria Group Inc. 46,001,334 $3,284,955,261
International Business Machines Corp. 21,200,610 $3,252,597,586
Amgen Inc. 17,490,589 $3,041,613,427
Honeywell International Inc. 18,353,252 $2,814,654,727
Medtronic plc 32,616,588 $2,633,789,481
Union Pacific Corp. 18,973,969 $2,544,409,243
NVIDIA Corp. 13,146,656 $2,543,877,936
Broadcom Ltd. 9,833,581 $2,526,246,959
Texas Instruments Inc. 23,756,919 $2,481,172,620
Bristol-Myers Squibb Co. 39,434,795 $2,416,564,238
Abbott Laboratories 41,934,913 $2,393,225,485
United Technologies Corp. 18,279,165 $2,331,873,079

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by nisiprius » Mon Jan 29, 2018 6:42 pm

Larry2623 wrote:
Mon Jan 29, 2018 3:11 pm
TSM=what?
Vanguard Total Stock Market Index Fund, often abbreviated to "TSM" or "Total Stock." I think everybody should give the fund name in full the first time they mention it, but we often forget.

Other common nicknames are "Total Bond" or "TBM" for "Vanguard Total Bond Market Index Fund" and "Total International" or "TISM" for "Vanguard Total International Stock Index Fund."

Actual ticker symbols are even worse because, ever since they reduced the minimum for Admiral shares to $10,000, for the most popular index funds, many Bogleheads are using the investor class, Admiral class, and ETF versions of the same fund

Total Stock has the ticker symbols VTSMX (Investor class), VTSAX (Admiral shares), and VTI (ETF).
Total Bond: VBMFX/VBTLX/BND
Total International: VGTSX/VTIAX/VXUS.

Are you supposed to memorize these? No. I believe everyone should spell out a fund name in full on the first appearance in a post. But at least, now you know.
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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by Larry2623 » Mon Jan 29, 2018 10:28 pm

Thanks...figured it was not taiwan semi

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by golfCaddy » Mon Jan 29, 2018 10:44 pm

100% SCV/EM with no bonds is too risky even for a young investor. Factors, at least on here, are sold as a barbell approach of increasing the percentage of the total portfolio in bonds while increasing the expected returns to stocks. If you think you need a 10% real CAGR, either find some way to increase your income or find some way to decrease your spending.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by gips » Tue Jan 30, 2018 6:16 am

kehyler wrote:
Mon Jan 29, 2018 10:32 am
TSM represents a cost-effective way to purchase securities according to the aggregate opinion of all active investors. Of course, there is much value to TSM. However, individuals are not "the average," so most individuals will not be well served by average opinion of all investors.
Your logic eludes me: 1) Most people are "the average" (say one standard deviation from the mean) and 2) It's been proven time and again that most people can not outperform TSM on a risk-adjusted basis over the long-term.
kehyler wrote:
Mon Jan 29, 2018 10:32 am
For example, most bogleheads actually agree with this when on a different subject, namely bonds/stock asset allocation (I think this would be roughly 30:70).
How do you come by this knowledge? most bogleheads would consider age and I doubt most bogleheads are 30:70
kehyler wrote:
Mon Jan 29, 2018 10:32 am
They recommend that individuals assess their individual investment needs and then heavily tilt away from the market proportions towards stocks or bonds depending on that assessment.
tail wagging the dog. One should not take more risk (say more exposure to equities) because of investment needs. The main allocation factor is age.
kehyler wrote:
Mon Jan 29, 2018 10:32 am
Example. If someone wishes to accumulate 1.0M+ over 30 years, but can realistically only save $500/month, they need a CAGR of ~10%. Is it legitimate for such a person to somewhat substantially tilt towards small cap/value? Why or why not?
see above
kehyler wrote:
Mon Jan 29, 2018 10:32 am
If you have internally used the argument of "nobody knows anything" to convince yourself to buy equities according to TSM proportions, why do you not use the that same reasoning to buy the market proportion of bonds to bonds? If the reason was that stocks have historically outperformed bonds, and you need that risk premium, do you feel somewhat compelled that smallcap/value/emerging market tilts can be reasonable for certain people?
Personally, I don't believe there's a real premium but there is a perfectly balanced increase in risk/reward. I think it's fine depending on the amount of the tilt, age and risk tolerance.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by nisiprius » Tue Jan 30, 2018 7:38 am

1) One rationale for cap-weighted total market investing is the financial economics theory that shows that, under a bunch of "assume a spherical cow' assumptions, the market portfolio is special and, in particular, is a mean-variance optimum. That's where cap-weighting comes from. It's not just somebody's intriguing idea of a clever way to weight stocks. However, it assumes a single "market" within which trading is frictionless, so that rational actors can say "well, if this mix of A and B is better than C, I shall exchange C for that mix of A and B." It's not at all clear how cap-weighting plays out if you have a group of separate markets, joined only by cash and separated by cost and possibly other factors.

Do financial economists think that the stock and bond "markets" act as if they were really a single market? In my casual reading of lay material I haven't run across anything about this, one way or the other.

2) One thing that can be said about the theory is that on those tangent-portfolio charts, when you look at them, the optimum is wide and shallow. And it fluctuates depending on the return of the riskless asset. And differences in standard deviation that might look meaningful as raw number ("hey! we reduced the standard deviation from 9.8 to 9.4!) are virtually imperceptible psychologically. And in most cases the efficient frontier itself fluctuates... violently. Therefore, arguments of the form "this calculation says that from 1926-2014, the optimum was 44.67% stocks, therefore your 60% stocks allocation is wrong and you are not a good person" are silly. I don't think it makes sense to be any more precise than Benjamin Graham was:
We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds. There is an implication here that the standard division should be an equal one, or 50–50, between the two major investment mediums.
The theory and the numbers convince me that 100% stocks and 100% bonds are both unwise, and that something in between is a good idea.

3) I wish I could remember who in this forum pointed it out to me, but, as you say, in ordinary life we accept that there is no such thing as "the" value. That's the basis of trade. Trade could not occur unless both participant think they had benefited, and it is not a zero-sum game. The lean has a higher value for Jack Spratt than for Jack Spratt's wife. We tend to overlook this in investing because of securities being so liquid, but it is still true, and it certainly applies to investments that have different levels of risk.

If you think you need a lower level of risk than most of the investors in the market, then bonds are worth more to you, and stocks are worth less to you, than they are to other investors. Measure in value to you instead of dollars, and the efficient portfolio chart will squirm around and call out a new optimum with a lower stock allocation.

It is fairly credible that an investor would say "I personally need higher risk" or "I personally need lower risk." I don't think it is anywhere near as credible that an ordinary retail investor or retirement saver could say, honestly, "I personally need mid-caps." Of course, if you can formulate something reasonable--"I have chosen to draw my retirement income directly from dividend payments"--that would justify a departure from cap-weighting.

In this regard, Eugene Fama's statement is relevant:
Interviewer: Some people cite your research showing that value and small firms have higher average returns over time and they assume that you would recommend most investors have a big helping of small and value stocks in their portfolios. Is that a fair representation of your views?

Fama: Um, no. (Laughs) Basically this a risk story the way we tell it, so there is no optimal portfolio. The way I like to talk about it when I give presentations for DFA or other people is, in every asset pricing model, the market portfolio is always an efficient portfolio. It's always a relevant portfolio for an investor to hold. And investors can decide to tilt away from that based on their personal tastes. But that's what it amounts to. You can decide to tilt toward more value or smaller size based on your tastes for these dimensions of risk. But you needn't do it. You could also decide to go the other way. You could look at the premiums and say, no, I think I like the growth stocks better. Then, as long as you get a diversified portfolio of them, I can't argue with that either. So there's a whole multi-dimensional continuum here of efficient portfolios that anybody can decide to buy that I can't quarrel with. And I have no recommendations about because I think it's totally a matter of taste. If you eat oranges and I eat apples I can't really quarrel very much with that.
In short, I am not a Vanguard Total Stock Market Index Fund (TSM) "believer," only a person whose finds that the market portfolio is to my taste.

Oh, by the way: who says that nobody has a 30/70 allocations?
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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by qwertyjazz » Tue Jan 30, 2018 8:05 am

alex_686 wrote:
Mon Jan 29, 2018 2:13 pm
kehyler wrote:
Mon Jan 29, 2018 10:32 am
Is it legitimate for such a person to somewhat substantially tilt towards small cap/value? Why or why not?
It is if you believe that there is a an anomaly that grants a premium to small cap / value. That is, if there is a defect in the market that is giving away free money. This is hotly debated around here.

As a side note it is not enough to believe that it offers higher risk and higher return. If the market basket is the most efficient portfolio- i.e. owing the total market via TSM - then the correct answer is to use leverage. This can be in very mild forms. Use a 80/20 portfolio instead of a 70/30. Don't pay down your mortgage, etc.
kehyler wrote:
Mon Jan 29, 2018 10:32 am
They recommend that individuals assess their individual investment needs and then heavily tilt away from the market proportions towards stocks or bonds depending on that assessment.
Using a customized index that factors in your specific goals, risk tolerance, special needs, taxes, and market expectations is the best option by far. It would factor in you human capital, social security, pensions, your home, etc. 2 problems here. It is expensive to do, mainly in time. The marginal benefit over TSM is actually small. If you got 10m it might be worth it. Maybe.
Why is it so hard to do? There are not any easy calculators that incorporate personal factors. But it should not be that hard to build one. I had thought about doing such but then realized there was no market for it. It is a (relatively) defined problem and average data exists to fill in numbers even for human factor issues. FAs seem more interested in sales and consumers I think are more interested in stories and salesmen. Or am I wrong? Is there a market for an easy approach as you outline above?

Thank you
QJ
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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by Watty » Tue Jan 30, 2018 8:15 am

kehyler wrote:
Mon Jan 29, 2018 10:32 am
Example. If someone wishes to accumulate 1.0M+ over 30 years, but can realistically only save $500/month, they need a CAGR of ~10%. Is it legitimate for such a person to somewhat substantially tilt towards small cap/value? Why or why not?
Putting a lot into small cap value(SCV) would increase your risk.

Even SCV outperformance continues into the future and has not already been priced into the market once it was widely known putting a lot of money into any one small sector will likely give you a larger standard deviation of your return even if the expected return is higher.

There is also a significant risk that the small cap value outperformance has already at least partially been priced into the market.

I also think "substantially tilt" is a very misleading phrase to use. To me "tilt" would imply putting an extra 5 or 10 percent of your funds into an asset class like that. The problem is that with a 70 percent stock portfolio 10% extra would only be an extra 7% in that asset class. If the SCV outperformance does continue the outperformance is only a fraction of a percent of that 7%. Just like a lower expense ratio is good that would add up over the years but it would not be a magic wand. "Make a large sector bet" might be more accurate.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by B4Xt3r » Tue Jan 30, 2018 10:07 am

bmritz wrote:
Mon Jan 29, 2018 10:53 am
kehyler wrote:
Mon Jan 29, 2018 10:36 am
^ Mind flushing out why you believe the stock to bond choice is not analogous to the TSM to (TSM + tilt) choice?
One potential answer I've told myself before is that when an institution decides how to fund itself, a lot more factors come into play than just the potential terms of a stock or bond issue. For example, government institutions have no way to sell stock, and tax implications are a huge factor for companies in the stock/bond financing decision. Even if investors would value cash flows from stocks or bonds the same (which is required to assume market weight reflects investor valuation), the institution on the other side of the trade wouldn't be indifferent and the total market for stocks and bonds would reflect that.

Inside stocks, the different factors influencing the stock/bond decision go away, so market weight is a good heuristic for and efficient portfolio within stocks.
Sure, but shouldn't all such known information about the various pros/cons of stock vs bond funding be be priced into the current price of the bond and stock funds? Do we know something "more than the market?" (Remember, I'm just arguing the other side for the moment.)

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by B4Xt3r » Tue Jan 30, 2018 10:07 am

2000rpm wrote:
Mon Jan 29, 2018 11:07 am
One issue I see is to tilt somewhere (low cap stocks e.g.), you lower the overall exposure to the market. By definition you're leaning away from the average. This increases your risk, but if you're reaching for higher return, obviously you accept more risk.

In your hypothetical example, someone needs a higher return to achieve their objective. If the level of return can be achieved with just adjusting the TSM/TBM ratio, why not do that? (perhaps it can't)
It can't really, that's why I choose the example. (TSM returns 8.8% according to Simba backtesting sheet.)

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by B4Xt3r » Tue Jan 30, 2018 10:11 am

Bradiator wrote:
Mon Jan 29, 2018 2:01 pm
My effort here is not a defense of TSM itself, but an argument that the analogy is not valid.

Why the analogy doesn't fit: Debt and equity are more meaningfully different than the differences between large cap or small cap, for example.

Debt is an obligation whereas equity is a residual. Corporate managers view them differently and they have very different implications for the capital structure of a firm. They are qualitatively different things. (Of course, there are gray areas like junk, preferred, etc.) On the contrary, the stocks of large versus small companies are not qualitatively different things. For evidence: when a company's market cap grows it moves from one category to the other effortlessly. Thus, because stock-bond allocations and equity size/style allocations are so different, it is fine to approach them differently.

This counterargument in its essence says the equity risk premium is more real, more reliable, and more intuitively obvious by the nature of the securities themselves than factors like size and value. I believe that, although surely there are people more steeped in the research than I am who may be able to illuminate me.
Sure, but shouldn't this known information be "priced into" the price of BND and TSM? If we tilt from these market weights, isn't it a statement that we know something more than the market? (Remember, I'm just arguing the other side for the moment.)

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by B4Xt3r » Tue Jan 30, 2018 10:23 am

alex_686 wrote:
Mon Jan 29, 2018 2:13 pm
kehyler wrote:
Mon Jan 29, 2018 10:32 am
Is it legitimate for such a person to somewhat substantially tilt towards small cap/value? Why or why not?
It is if you believe that there is a an anomaly that grants a premium to small cap / value. That is, if there is a defect in the market that is giving away free money. This is hotly debated around here.
I'm not thinking about "free" money, but rather a higher risk and therefore higher reward, regardless if it has a higher risk adjusted reward or not.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by B4Xt3r » Tue Jan 30, 2018 10:31 am

CFM300 wrote:
Mon Jan 29, 2018 2:15 pm
kehyler wrote:
Mon Jan 29, 2018 10:32 am
However, individuals are not "the average," so most individuals will not be well served by average opinion of all investors. For example, most bogleheads actually agree with this when on a different subject, namely bonds/stock asset allocation (I think this would be roughly 30:70). They recommend that individuals assess their individual investment needs and then heavily tilt away from the market proportions towards stocks or bonds depending on that assessment. However, when discussing titling away from TSM, it seems that bogleheads do not consistently apply the same arguments.
You might find this article by Nobel economist William Sharpe helpful:

https://web.stanford.edu/~wfsharpe/art/ ... esting.htm
I read this, and I think I understand what indexing is and the value it represents. I am not trying to suggest that a title can achieve a better risk adjusted return than TSM.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by B4Xt3r » Tue Jan 30, 2018 10:38 am

gips wrote:
Tue Jan 30, 2018 6:16 am
kehyler wrote:
Mon Jan 29, 2018 10:32 am
TSM represents a cost-effective way to purchase securities according to the aggregate opinion of all active investors. Of course, there is much value to TSM. However, individuals are not "the average," so most individuals will not be well served by average opinion of all investors.
Your logic eludes me: 1) Most people are "the average" (say one standard deviation from the mean) and 2) It's been proven time and again that most people can not outperform TSM on a risk-adjusted basis over the long-term.

1) Most people are not the average, and lets not cloud this. If the average grade received in a course was a B, but you were a good student and received an A (likely one standard deviation away), would report that you were just an average student to an employer? I think not.

2) I agree, and I'm not saying that you can beat it on a risk adjusted basis. Rather, what I'm trying to ask is wether or not, if you need the extra risk, that you should tilt.

kehyler wrote:
Mon Jan 29, 2018 10:32 am
For example, most bogleheads actually agree with this when on a different subject, namely bonds/stock asset allocation (I think this would be roughly 30:70).
How do you come by this knowledge? most bogleheads would consider age and I doubt most bogleheads are 30:70

You've misunderstood my post. I agree that most bogleheads tilt away from 30:70, for good reason. I'm trying to understand why we don't also tilt away from TSM via the same kind of arguments.
kehyler wrote:
Mon Jan 29, 2018 10:32 am
They recommend that individuals assess their individual investment needs and then heavily tilt away from the market proportions towards stocks or bonds depending on that assessment.
tail wagging the dog. One should not take more risk (say more exposure to equities) because of investment needs. The main allocation factor is age.
I disagree. Need/willingness/ability are the three factors, of which age is but one.
kehyler wrote:
Mon Jan 29, 2018 10:32 am
Example. If someone wishes to accumulate 1.0M+ over 30 years, but can realistically only save $500/month, they need a CAGR of ~10%. Is it legitimate for such a person to somewhat substantially tilt towards small cap/value? Why or why not?
see above
kehyler wrote:
Mon Jan 29, 2018 10:32 am
If you have internally used the argument of "nobody knows anything" to convince yourself to buy equities according to TSM proportions, why do you not use the that same reasoning to buy the market proportion of bonds to bonds? If the reason was that stocks have historically outperformed bonds, and you need that risk premium, do you feel somewhat compelled that smallcap/value/emerging market tilts can be reasonable for certain people?
Personally, I don't believe there's a real premium but there is a perfectly balanced increase in risk/reward. I think it's fine depending on the amount of the tilt, age and risk tolerance.

We might actually be in agreement overall then, and then just be disagreeing on semantics?

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by Alexa9 » Tue Jan 30, 2018 10:42 am

TSM is good enough for most people. SCV is no guarantee and riskier.
If you want higher than average returns, it might be worth a gamble if you're young and can invest for 40 years.
If you want similar returns to TSM with a higher bond allocation and less volatility it might be a good strategy.
TSM is mostly a large cap fund so I like a tilt to small value for that reason.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by alex_686 » Tue Jan 30, 2018 11:06 am

qwertyjazz wrote:
Tue Jan 30, 2018 8:05 am
Why is it so hard to do? There are not any easy calculators that incorporate personal factors. But it should not be that hard to build one. I had thought about doing such but then realized there was no market for it. It is a (relatively) defined problem and average data exists to fill in numbers even for human factor issues. FAs seem more interested in sales and consumers I think are more interested in stories and salesmen. Or am I wrong? Is there a market for an easy approach as you outline above?
For 2 reasons. I will use myself as an example. My human capital is tied to financial services and interest rates.

I should underweight financial services in my custom portfolio. Question - by how much? Correlations between the total market, financial services, interest rates, and my human capital are unstable. Untangling cause and effect is hard. etc. It requires continuous subjective skilled evaluations and adjustments.

O.K., maybe we can just ballpark this. Next, how would I actually do this? There is not a low cost mutual fund that invests in all sectors except financial services. Now, thanks to robotraders the cost of implementing a customized index is falling, but it is still out of reach for myself and most people.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by alex_686 » Tue Jan 30, 2018 11:49 am

kehyler wrote:
Tue Jan 30, 2018 10:23 am
I'm not thinking about "free" money, but rather a higher risk and therefore higher reward, regardless if it has a higher risk adjusted reward or not.
Which portfolio would yo pick?

Portfolio #1, high risk, high return, higher efficiency, lower fees.

Portfolio #2, high risk, high return, lower efficiency, higher fees.

Portfolio #1 is, of course, the better choice. It is the one were you lever up TSM. i.e, lower bond AA, have a mortgage, etc.

Portfolio #2 is a small cap value portfolio where we assume no small cap value premium.

I can always build a better portfolio by focusing on risk adjusted returns. As they say, always have your end in mind, focus on your goals. Nail this down first, then focus on the individual assets next.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by B4Xt3r » Tue Jan 30, 2018 12:04 pm

alex_686 wrote:
Tue Jan 30, 2018 11:49 am
kehyler wrote:
Tue Jan 30, 2018 10:23 am
I'm not thinking about "free" money, but rather a higher risk and therefore higher reward, regardless if it has a higher risk adjusted reward or not.
Which portfolio would yo pick?

Portfolio #1, high risk, high return, higher efficiency, lower fees.

Portfolio #2, high risk, high return, lower efficiency, higher fees.

Portfolio #1 is, of course, the better choice. It is the one were you lever up TSM. i.e, lower bond AA, have a mortgage, etc.

Portfolio #2 is a small cap value portfolio where we assume no small cap value premium.

I can always build a better portfolio by focusing on risk adjusted returns. As they say, always have your end in mind, focus on your goals. Nail this down first, then focus on the individual assets next.
Your two examples above, in my opinion, cloud more than they reveal. With regard to there higher expense: vanguard small-cap fund and value fund both have expense ratio of 0.06%. This is higher than the TSM at 0.04% but this difference is really not that big of a deal. Both are very cheap.

Would you mind explaining why small cap value has lower efficiency?

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by pkcrafter » Tue Jan 30, 2018 12:11 pm

kehyler wrote:
Mon Jan 29, 2018 10:32 am
Hi All,

Disclosure: I am a boglehead who invests in TSM. However, for the sake seeing how well I understand the argument for investing in TSM, I am currently taking the opposing view. I want to make sure that I can say, "I understand," before I say, "I disagree" with those who tilt. The following is an argument against TSM that I currently do not have an answer for. Many thanks to anyone who can show me the flaws.

TSM represents a cost-effective way to purchase securities according to the aggregate opinion of all active investors.

No, TSM is not the default choice of all, or even most active investors.


Of course, there is much value to TSM. However, individuals are not "the average," so most individuals will not be well served by average opinion of all investors.

TSM and Boglehead investing is not done by most individuals. Individuals tend to try for better returns than simple TSM investing, but TSM ends up beating 80% of all other strategies, including professional fund managers after 20 years. That is because it tracks the market and it's very low cost. If you want to deviate by adding small caps or any other strategy, the odds of beating the market are 4-1 against you. And when you lose, you not only don't get the extra return, you also don't get the market return. If it were actually easy to beat the market by overweighting small, the market and TSM would incorporate the strategy.


For example, most bogleheads actually agree with this when on a different subject, namely bonds/stock asset allocation (I think this would be roughly 30:70). They recommend that individuals assess their individual investment needs and then heavily tilt away from the market proportions towards stocks or bonds depending on that assessment. However, when discussing titling away from TSM, it seems that bogleheads do not consistently apply the same arguments.

I'm not following this. TSM is a stock allocation and has nothing to do with bonds. Adding bonds is for overall portfolio risk management and risk diversification. Stock allocations using some other asset class such as international is recommended, and some investors do tilt with small caps. I don't recommend it to newer investors because it's tough to hold something that can underperform for long periods of time. And don't forget that when you add small you get no guarantee that you will beat the market. If you buy the whole market and don't make behavioral errors, you will get what the market provides.

Example. If someone wishes to accumulate 1.0M+ over 30 years, but can realistically only save $500/month, they need a CAGR of ~10%. Is it legitimate for such a person to somewhat substantially tilt towards small cap/value? Why or why not?

The risk definitely goes up, but the expected return is not a lock. Again, if it were easy and guaranteed everyone would do it. Also, you can not simply dial in the return you would like and get it. That's what risk is about.


If you have internally used the argument of "nobody knows anything" to convince yourself to buy equities according to TSM proportions, why do you not use the that same reasoning to buy the market proportion of bonds to bonds? If the reason was that stocks have historically outperformed bonds, and you need that risk premium, do you feel somewhat compelled that smallcap/value/emerging market tilts can be reasonable for certain people?

The small caps are there for those who what to invest in them, just understand there is added risk not only in performance, but also in behavior.

Paul


Best,

-kehyler

For a somewhat related reading, see: https://en.wikipedia.org/wiki/Ecological_fallacy
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by alex_686 » Tue Jan 30, 2018 12:48 pm

kehyler wrote:
Tue Jan 30, 2018 12:04 pm
Would you mind explaining why small cap value has lower efficiency?
So, lets go through this step by step.

This goes back to risk adjusted return. While holding risk constant, can I get a higher expected return? While holding expected return constant, can I build a portfolio with lower risk? Optimize the above and you get the most efficient portfolio.

Let us assume that small cap value (SCV) has the same risk adjusted return as TSM. SCV can have higher expected return and risk and the same risk adjusted return as TSM. If that is true I can get the same return with a TSM/bond portfolio as a SCV/bond portfolio. I just need to tweak the bond portion of the AA and I save a bit in the expense ratio. It is a little more than you suggest - you only capture explicit expenses, not the implicit ones. But, hey, maybe it is not much. But maybe a penny saved is a penny earned.

Now, lets break the assumption that TSM and SCV have the same risk adjusted return. Theory says that the most efficient portfolio is the market portfolio. After all it is the most diverse portfolio out there. Therefor any subsection of the whole has to offer worse risk adjusted returns. Broadly speaking this is true. However as we look at the fine structure things start to pop up.

Farma-French found that SCV historically was a anomaly, that it offered a premium return above the standard risk adjusted return. Free money! This is why so many Bogleheads pile into SCV.

So far this is all either factors or solid theory. Now we get to opinions. Is SCV real, was it a statistical fluke, and is it still alive and kicking today? I think that it is gone but like I said it is a point for debate. However, if you don't think it is real then you should not invest in SCV.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by IlliniDave » Tue Jan 30, 2018 1:00 pm

For me the biggest reason I don't go for "total market" between asset classes is that for the most part they serve different purposes and aren't all equally desirable/prudent for me. Plus I don't have anywhere to keep a race horse and I don't want any bit coins or baseball cards. I'm being a little specious but you have to draw a line where your cap weighting ends somewhere.

I like cap weighted stock funds because they are self-adjusting when prices change and that lowers the fund's ER and my ongoing tax drag for the portion of my assets in taxable accounts.
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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by blevine » Tue Jan 30, 2018 1:19 pm

Regarding OP comment "why do you not use the that same reasoning to buy the market proportion of bonds to bonds?"

Most types of bonds are not available to purchase, other than something like a US Treasury.
Try and purchase some random specific issue of a muni or a corporate bond, it may not be available.
Hence indexing is relatively difficult to implement in the bond world, unless you limit the universe
of bonds and sample (vs buying the actual index). There are many published bond indices but only a few
of them are followed precisely with an index fund. In most cases though, active funds compare themselves
to all these bond indices and often come very close to the performance by optimizing purchase of similar bonds
that are both available and considered relatively cheap. If they were cheap but not available, does not help.
If you don't care about cheap, you still can't buy many bonds that are included in many bond indices.

As to why cap weighted vs other weightings among your stock portfolio, that is a very complex discussion.
Personally if I can get 95% of the return with a far simpler strategy, I am happy with that trade off.
And I don't think anyone can prove that TSM is a compromise, just saying...if it was, we often pay for simplicity.
Apple built the largest most valuable company in the word based on the idea of making computers simpler,
and people pay a premium.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by Bradiator » Wed Jan 31, 2018 2:43 pm

kehyler wrote:
Tue Jan 30, 2018 10:11 am
Sure, but shouldn't this known information be "priced into" the price of BND and TSM? If we tilt from these market weights, isn't it a statement that we know something more than the market? (Remember, I'm just arguing the other side for the moment.)
I don't know what the "priced in" thinking has to do with my claim that bonds and stocks are qualitatively different things. Markets "pricing in" information does not somehow magically destroy the differences in the asset classes themselves. In other words, it does not mean (a) investors can and should be indifferent to the allocation amongst asset classes or (b) that different assets classes will have similar risk or volatility or (c) that all asset classes have the same expected returns, which of course is a restatement of item b.

If it did somehow mean that, it would follow that security selection is entirely trivial, in the mathematical sense. You wouldn't need to buy everything...you could buy anything and the results would be the same. Seems...unrealistic.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by CFM300 » Fri Feb 02, 2018 3:42 pm

kehyler wrote:
Tue Jan 30, 2018 10:31 am
CFM300 wrote:
Mon Jan 29, 2018 2:15 pm
kehyler wrote:
Mon Jan 29, 2018 10:32 am
However, individuals are not "the average," so most individuals will not be well served by average opinion of all investors. For example, most bogleheads actually agree with this when on a different subject, namely bonds/stock asset allocation (I think this would be roughly 30:70). They recommend that individuals assess their individual investment needs and then heavily tilt away from the market proportions towards stocks or bonds depending on that assessment. However, when discussing titling away from TSM, it seems that bogleheads do not consistently apply the same arguments.
You might find this article by Nobel economist William Sharpe helpful:

https://web.stanford.edu/~wfsharpe/art/ ... esting.htm
I read this, and I think I understand what indexing is and the value it represents. I am not trying to suggest that a title can achieve a better risk adjusted return than TSM.
You may have misunderstood my intention. I thought the article agreed with your basic premise: that none of us is average and that we need to adjust our portfolios to account for our unique differences. As Sharpe wrote:

"The global market portfolio might be a good choice for a truly international investor, who lives in hotels and on airlines, pays taxes everywhere, consumes goods from all over the world, is of average age and risk tolerance, and so on. Of course this is not likely to describe anyone in this room. But the global market portfolio is a good place for you to start, tilting each of your investment positions in a direction that makes sense, based on the differences between your characteristics and those of this fictional global investor. Good investment advice will help you do this effectively."

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by david1082b » Fri Feb 02, 2018 4:35 pm

AnalogKid22 wrote:
Mon Jan 29, 2018 6:30 pm
Boeing, McDonald's, Apple, Chevron, and Facebook are among the companies scheduled to report earnings later this week. VTSAX will most likely go up significantly.
One of my main beliefs is "never make return predictions", since reality has a way of smashing them.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by AnalogKid22 » Fri Feb 02, 2018 4:38 pm

david1082b wrote:
Fri Feb 02, 2018 4:35 pm
AnalogKid22 wrote:
Mon Jan 29, 2018 6:30 pm
Boeing, McDonald's, Apple, Chevron, and Facebook are among the companies scheduled to report earnings later this week. VTSAX will most likely go up significantly.
One of my main beliefs is "never make return predictions", since reality has a way of smashing them.
So true. All of these companies posted solid returns, as expected, but who knew this was the week the Fed would raise rates?

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by TropikThunder » Fri Feb 02, 2018 9:29 pm

AnalogKid22 wrote:
Fri Feb 02, 2018 4:38 pm
david1082b wrote:
Fri Feb 02, 2018 4:35 pm
AnalogKid22 wrote:
Mon Jan 29, 2018 6:30 pm
Boeing, McDonald's, Apple, Chevron, and Facebook are among the companies scheduled to report earnings later this week. VTSAX will most likely go up significantly.
One of my main beliefs is "never make return predictions", since reality has a way of smashing them.
So true. All of these companies posted solid returns, as expected, but who knew this was the week the Fed would raise rates?
At the most recent Fed meeting "Federal Reserve Leaves Rates Unchanged":
https://www.nytimes.com/2018/01/31/us/p ... rates.html

The market drop today has been attributed to stronger than expected wage growth, implying potential higher inflation, implying accelerated future rate increases. But they didn't go up this week.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by Finridge » Fri Feb 02, 2018 10:36 pm

WIT? (What is TSM?)

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by taguscove » Fri Feb 02, 2018 11:00 pm

Lol, the obvious TSM I am aware of is the professional League of Legends team Team Solomid. With over 20 million followers, they've established themselves as the top North American team through consistent play and split pushing effectiveness. However, TSM has floundered on the global stage against both the Korean and Chinese teams. TSMs conservative play leads to a "play not to lose" attitude.

Moral of the story is that junky questions lead to junky answers.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by pkcrafter » Fri Feb 02, 2018 11:31 pm

Finridge wrote:
Fri Feb 02, 2018 10:36 pm
WIT? (What is TSM?)

TSM = Total Stock Market
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by anon54010 » Sat Feb 03, 2018 1:40 am

Does it ever make sense for anyone to own bonds AND tilt SCV?

In other words how does the risk/return between 100% TSM compare to, for example, 80% TSM, 10% bond, 10% SCV. Is the latter pointless?

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by Finridge » Sat Feb 03, 2018 1:49 am

pkcrafter wrote:
Fri Feb 02, 2018 11:31 pm
Finridge wrote:
Fri Feb 02, 2018 10:36 pm
WIT? (What is TSM?)

TSM = Total Stock Market
Thank you! :sharebeer

Turns out that I'm a "TSM believer" and didn't even know it. :D

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by B4Xt3r » Sun Feb 04, 2018 3:21 pm

alex_686 wrote:
Tue Jan 30, 2018 12:48 pm
kehyler wrote:
Tue Jan 30, 2018 12:04 pm
Would you mind explaining why small cap value has lower efficiency?
So, lets go through this step by step.

This goes back to risk adjusted return. While holding risk constant, can I get a higher expected return? While holding expected return constant, can I build a portfolio with lower risk? Optimize the above and you get the most efficient portfolio.

Let us assume that small cap value (SCV) has the same risk adjusted return as TSM. SCV can have higher expected return and risk and the same risk adjusted return as TSM. If that is true I can get the same return with a TSM/bond portfolio as a SCV/bond portfolio. I just need to tweak the bond portion of the AA and I save a bit in the expense ratio. It is a little more than you suggest - you only capture explicit expenses, not the implicit ones. But, hey, maybe it is not much. But maybe a penny saved is a penny earned.

Now, lets break the assumption that TSM and SCV have the same risk adjusted return. Theory says that the most efficient portfolio is the market portfolio. After all it is the most diverse portfolio out there. Therefor any subsection of the whole has to offer worse risk adjusted returns. Broadly speaking this is true. However as we look at the fine structure things start to pop up.

Farma-French found that SCV historically was a anomaly, that it offered a premium return above the standard risk adjusted return. Free money! This is why so many Bogleheads pile into SCV.

So far this is all either factors or solid theory. Now we get to opinions. Is SCV real, was it a statistical fluke, and is it still alive and kicking today? I think that it is gone but like I said it is a point for debate. However, if you don't think it is real then you should not invest in SCV.
I might be understanding something. So is the most "efficient" portfolio the one that only minimized "specific risk" the most, thus said portfolio has only "market risk?"

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by B4Xt3r » Sun Feb 04, 2018 3:24 pm

So after reading all of the replies, I guess perhaps it comes down to wether or not one believes in factors like small and/or value...

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by B4Xt3r » Sun Feb 04, 2018 3:28 pm

IlliniDave wrote:
Tue Jan 30, 2018 1:00 pm
For me the biggest reason I don't go for "total market" between asset classes is that for the most part they serve different purposes and aren't all equally desirable/prudent for me. Plus I don't have anywhere to keep a race horse and I don't want any bit coins or baseball cards. I'm being a little specious but you have to draw a line where your cap weighting ends somewhere.

I like cap weighted stock funds because they are self-adjusting when prices change and that lowers the fund's ER and my ongoing tax drag for the portion of my assets in taxable accounts.
Let me understand your view a little bit more fully. Do you believe that small and/or value will continue their outperformance?

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Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by B4Xt3r » Sun Feb 04, 2018 3:30 pm

blevine wrote:
Tue Jan 30, 2018 1:19 pm
Regarding OP comment "why do you not use the that same reasoning to buy the market proportion of bonds to bonds?"

Most types of bonds are not available to purchase, other than something like a US Treasury.
Try and purchase some random specific issue of a muni or a corporate bond, it may not be available.
Hence indexing is relatively difficult to implement in the bond world, unless you limit the universe
of bonds and sample (vs buying the actual index). There are many published bond indices but only a few
of them are followed precisely with an index fund. In most cases though, active funds compare themselves
to all these bond indices and often come very close to the performance by optimizing purchase of similar bonds
that are both available and considered relatively cheap. If they were cheap but not available, does not help.
If you don't care about cheap, you still can't buy many bonds that are included in many bond indices.

As to why cap weighted vs other weightings among your stock portfolio, that is a very complex discussion.
Personally if I can get 95% of the return with a far simpler strategy, I am happy with that trade off.
And I don't think anyone can prove that TSM is a compromise, just saying...if it was, we often pay for simplicity.
Apple built the largest most valuable company in the word based on the idea of making computers simpler,
and people pay a premium.
Huh, in this case then you might be able to help me learn something. Are you saying that vanguard's TBM is not really "total?"

WhyNotUs
Posts: 1336
Joined: Sun Apr 14, 2013 11:38 am

Re: TSM believers, defend thyself! (In a good natured, friendly debate.)

Post by WhyNotUs » Sun Feb 04, 2018 4:09 pm

kehyler wrote:
Sun Feb 04, 2018 3:24 pm
So after reading all of the replies, I guess perhaps it comes down to wether or not one believes in factors like small and/or value...
Bingo
I own the next hot stock- VTSAX

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