Larry Swedroe: What Investors Should Worry About

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Random Walker
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Larry Swedroe: What Investors Should Worry About

Post by Random Walker » Fri Feb 23, 2018 10:34 am

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

Larry is not in the business of making predictions, but I think it’s fair to say he’s in the business of helping build robust investor portfolios that can withstand the wide variety of outcomes predicted by many individuals. In this article he, while not making any prediction, does present the plausible possibility of a bear market for both stocks and bonds. There are multiple interacting factors that make this scenario sound more and more plausible as the article continues! At the end he suggests that addition of alternatives uncorrelated to both stocks and bonds are a way to buff up a portfolio for such a scenario. The effect of these alternatives on portfolio efficiency will be a large component of his new edition Reducing The Risk Of Black Swans coming out shortly. At a minimum, I think everyone should come away from this article appreciating that even a typical 60/40 portfolio (which many Bogleheads consider conservative these days) has 90% of its risk wrapped up in a single factor, equity market beta.

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Re: Larry Swedroe: What Investors Should Worry About

Post by randomizer » Fri Feb 23, 2018 10:53 am

He's probably right, but I was planning on just sticking to my 3-fund portfolio and not paying attention to the balances for the next 20 years.
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Re: Larry Swedroe: What Investors Should Worry About

Post by willthrill81 » Fri Feb 23, 2018 11:08 am

I'm a bit surprised that Larry called a 10% stock correction a "crash," especially when he immediately noted that there have been seven months since 1970 since this happened. I wouldn't call anything less than a bear market a crash.

I agree with Larry that alternative lending can be an effective means of diversification that is very likely to have robustly positive results. But rather than pay high fees for a fund, I just invest in P2P notes directly myself. It's easy to invest in hundreds or thousands of notes, giving you plenty of diversification.
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Re: Larry Swedroe: What Investors Should Worry About

Post by iceport » Fri Feb 23, 2018 12:31 pm

Great article, thanks.
Where Do You Turn?

What is an investor to do if they are concerned about the possibility of stocks and bonds both providing negative returns? The answer is not to move to cash.

First, as I stated, this scenario is only a possibility, not a certainty. Second, cash provides almost no return. The answer is to invest in other unique sources of risk (other than market beta and term risk) that also provide premiums that are persistent, pervasive, implementable (meaning they survive implementation costs), and have logical explanations for why we should expect them to continue in the future.
This part made me think about the only real alternative to traditional stocks and bonds I hold in my own portfolio: a state-sponsored stable value fund. With a yield of 2.84%, it currently holds about 22% of the overall portfolio.

Does a stable value fund offer any kind of real alternative to fixed income term risk?

(My naive assumption is that it does, if only due to the buffering effects of short durations and delayed price fluctuations due to the unique — and insured? — structure of such portfolios.)
"Discipline matters more than allocation.” ─William Bernstein

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Re: Larry Swedroe: What Investors Should Worry About

Post by Robert T » Fri Feb 23, 2018 1:35 pm

.
Interesting article (extract below):
“Due to the low correlation of the four strategies, we estimate a portfolio of the four would have volatility of only about 5%, similar to that of an intermediate bond portfolio, while providing an expected, forward-looking return of about 7.5%.”

Thus, relative to equities, you have similar expected returns with about 25% of the volatility…”
i.e. a significantly improved Sharpe ratio.

The four strategies (I prefer to see them as risk exposures) are:
  • (i) Lending (credit) risk: SR Alternative Lending Risk Premium Fund (LENDX))
    (ii) Reinsurance risk: SR Reinsurance Risk Premium Interval Fund (SRRIX));
    (iii) Variance risk: SR All Asset Variance Risk Premium Fund (AVRPX)
    (iv) Value-momentum-carry-defensive ‘risk factors’: Long-short alternative: AQR Style Premia Alternative Fund
Given the absence of a long-track record of these funds or associated readily available historical series on which to assess performance in different ‘market’ environments it is challenging to make as informed assessments as for stocks and bonds (re: Ken French data sets back to 1929, Dimson & Mash global data back to 1900).

What I like about Larry’s earlier engagement on this forum was he rightly stressed that you should look at a portfolio in totality (i.e. how risk exposure in different parts of the portfolio interact with each other, rather than looking at each in isolation) including consideration of ‘non-financial asset risk’ (e.g. human capital risk, etc).

Through this lens, together with other considerations:

(i) Lending (credit) risk (LENDX): This likely increases correlations with the stock portion of a portfolio. Granted, it may be a ‘different type’ of credit risk, but credit risk non-the-less. Why is the expected premium so much larger than other credit risk premiums? Due to much higher risk (higher correlation with stocks), or will the premium adjust more in-line with other credit risk premiums as the supply of capital (through funds like LENDX) to these borrowers increases.

(ii) Reinsurance risk (SRRIX): This likely increases correlation with ‘non-financial assets’. For example: those losing their home in hurricane Irma and Harvey, holding a large allocation to SRRIX would have seen this allocation decline 12.5% over past year (according to Bloomberg) just at the wrong time for them (when they lose their home). While correlations/probabilities may be small, impacts (on ‘non-financial’ assets) when they show up can be huge. Effects that don’t show up in portfolio Sharpe ratios. Why take the risk?

(iii) Variance risk (in the context of AVRPX fund). This increases the negative skewness of a portfolio (not reflected in Sharpe ratios). The increase in negative skewness (increased downside risk) could be large as the size of the variance risk premium seems directly related to magnitude of negative skewness.

(iv) Value-momentum-carry-defensive ‘risk factors’ (Long-short). Up to a certain point, tilting equities to value-momentum-carry-defensive (long only), in theory could achieve the same effect, holding implied stock:bond mixes across the portfolios equal (for moderate tilts to these factors).

Costs also matter - a lot. I think its worth reiterating that costs matter and should also be a central part of portfolio decisions (total costs: expense ratios, taxes, advisor fees, negative alpha etc). The total cost of exposure to equity risk, value risk, size risk, term risk (and credit risk) is can be very low. The total cost of exposure to the four sets of risks mentioned above is high.

Obviously no guarantees.

Robert
.

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Re: Larry Swedroe: What Investors Should Worry About

Post by heyyou » Fri Feb 23, 2018 2:21 pm

Seems like when I try to dodge specific future risks, slightly different risks appear that were not expected, nor were covered.

The article is very informative. When referring to the future, the words "if" and "could" are used very often. To get Larry's good results, you may need to implement every one of his suggestions, using only half of them might not produce half of his benefits.

Being prepared to adapt your retirement spending to your portfolio size is an alternative to allocation gymnastics. Living in a low cost area, trying to stay healthy, and having delayed SS will also help buffer times of low returns. We should each do whatever suits us.

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Re: Larry Swedroe: What Investors Should Worry About

Post by Lauretta » Fri Feb 23, 2018 2:34 pm

Robert T wrote:
Fri Feb 23, 2018 1:35 pm


(iv) Value-momentum-carry-defensive ‘risk factors’ (Long-short). Up to a certain point, tilting equities to value-momentum-carry-defensive (long only), in theory could achieve the same effect, holding implied stock:bond mixes across the portfolios equal (for moderate tilts to these factors).

.
Interesting points. Like you say though a tilt to value-momentum-carry-defensive (long only) will only have the desired effect up to a point, as you don't have the short component, which as far as I understand makes the fund market neutral.
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Re: Larry Swedroe: What Investors Should Worry About

Post by thx1138 » Fri Feb 23, 2018 2:40 pm

Robert T wrote:
Fri Feb 23, 2018 1:35 pm
(iii) Variance risk (in the context of AVRPX fund). This increases the negative skewness of a portfolio (not reflected in Sharpe ratios). The increase in negative skewness (increased downside risk) could be large as the size of the variance risk premium seems directly related to magnitude of negative skewness.
It appears the literature shows the opposite of what you state above, the strategy actually reduces negative skewness while also reducing kurtosis making the downside risk even lower than SR alone suggests:

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

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Re: Larry Swedroe: What Investors Should Worry About

Post by digarei » Fri Feb 23, 2018 2:44 pm

Random Walker wrote:
Fri Feb 23, 2018 10:34 am

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

[…] I think it’s fair to say he’s in the business of helping build robust investor portfolios that can withstand the wide variety of outcomes predicted by many individuals.

I think it’s fair to say he’s in the business of helping his firm make money and himself a living.

That he also might wish to “Build robust investor portfolios that can withstand [a] wide variety of outcomes” would not be surprising but this sounds more like a mission statement than a business plan.
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Re: Larry Swedroe: What Investors Should Worry About

Post by willthrill81 » Fri Feb 23, 2018 2:47 pm

digarei wrote:
Fri Feb 23, 2018 2:44 pm
Random Walker wrote:
Fri Feb 23, 2018 10:34 am

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

[…] I think it’s fair to say he’s in the business of helping build robust investor portfolios that can withstand the wide variety of outcomes predicted by many individuals.

I think it’s fair to say he’s in the business of helping his firm make money and himself a living.
Larry has never once come across to me as a sleazy salesman trying to peddle investments. While he was posting on this forum over a period of years, he only picked up two or three clients. He isn't doing this just to try to make a quick buck.

And this kind of statement is why Larry is no longer active on this forum. He got tired of the personal attacks.
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Re: Larry Swedroe: What Investors Should Worry About

Post by digarei » Fri Feb 23, 2018 2:51 pm

willthrill81 wrote:
Fri Feb 23, 2018 2:47 pm
digarei wrote:
Fri Feb 23, 2018 2:44 pm
Random Walker wrote:
Fri Feb 23, 2018 10:34 am

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

[…] I think it’s fair to say he’s in the business of helping build robust investor portfolios that can withstand the wide variety of outcomes predicted by many individuals.

I think it’s fair to say he’s in the business of helping his firm make money and himself a living.
Larry has never once come across to me as a sleazy salesman trying to peddle investments. While he was posting on this forum over a period of years, he only picked up two or three clients. He isn't doing this just to try to make a quick buck.

And this kind of statement is why Larry is no longer active on this forum. He got tired of the personal attacks.
Quote removed from context. I did not state or imply any of these things.
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Re: Larry Swedroe: What Investors Should Worry About

Post by Dudley » Fri Feb 23, 2018 2:58 pm

Many of these Larry Swedroe articles I read all seem to end up talking about "Alternative something or other Premia" - I have no idea what these are but they are starting to sound like a cure for many problems.
(The one thing I have learnt about these magic things is that the little people can't buy them but that may possibly be good given I have no idea what they are.)

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Re: Larry Swedroe: What Investors Should Worry About

Post by Random Walker » Fri Feb 23, 2018 2:59 pm

Digarel,
I see no other way to interpret your comment. If there is, then please clarify.

Dave

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Re: Larry Swedroe: What Investors Should Worry About

Post by livesoft » Fri Feb 23, 2018 3:05 pm

willthrill81 wrote:
Fri Feb 23, 2018 11:08 am
I'm a bit surprised that Larry called a 10% stock correction a "crash," especially when he immediately noted that there have been seven months since 1970 since this happened. I wouldn't call anything less than a bear market a crash.
There is crash and there is crash. I think he was mostly telling us that the 10% drop happened in a 9 trading days (1/28 to 2/08) as opposed to many months. Also it was already about an 8% drop to 2/05, so 6 trading days. It is true he looked for 10% drops over one month or less probably just to find more of them.
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Re: Larry Swedroe: What Investors Should Worry About

Post by Lauretta » Fri Feb 23, 2018 3:11 pm

I know all this is hypothetical, but I wonder what the implication for stock markets outside the US would be in the scenario described in this piece.
For example if the S&P500 experiences a sharp drop, probably EM would drop by at least a similar amount; however over a long period of time it seems possible that the S&P500 might have zero or even negative returns (according to some forecasts of GMO or RA) whereas EM and to some extent Int'l can have good returns.
I personally don't have access to these alternative investments (except P2P) but I overweigh EM (and greatly underweigh US).
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Re: Larry Swedroe: What Investors Should Worry About

Post by Random Walker » Fri Feb 23, 2018 3:13 pm

Dudley,
I think that the reason the articles come across that way is that there is a common theme. We cannot predict the future and the only free lunch in investing is diversification. The only way to see an investment portfolio is as a whole. We create more efficient portfolios by diversifying broadly across sources of risk and sources of return. We can start with a typical 60/40 TSM/TBM portfolio. We can diversify the equities geographically. We can then diversify across independent factors known to drive equity returns. We can make the bonds more safe by going shorter duration and eliminating credit risk. Next we can look at alternative sources of independent risk and expected return that are not correlated with either stocks or bonds. The common unifying theme is portfolio efficiency and diversification. It’s sort of a broader view of diversification than we typically consider. But the principles of modern portfolio theory are the same.
For those interested, check out my thread on expanding on the rewards of multi asset class investing. All of Larry’s investment recommendations fit within this context well.

viewtopic.php?f=10&t=231257&p=3778438#p3778438

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Re: Larry Swedroe: What Investors Should Worry About

Post by digarei » Fri Feb 23, 2018 3:20 pm

Random Walker wrote:
Fri Feb 23, 2018 2:59 pm
Digarel,
I see no other way to interpret your comment. If there is, then please clarify.

Dave
When I read that Mr. Swedroe is “in the business of helping build robust investor portfolios[…]” it sounds like a value judgment or advertisement presented as fact. It may be true. It could very well be correct. But it’s either an opinion or an aspiration, not axiomatic. Hence,

“That he also might wish to “Build robust investor portfolios that can withstand [a] wide variety of outcomes” would not be surprising but this sounds more like a mission statement than a business plan.”

That’s all.
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Re: Larry Swedroe: What Investors Should Worry About

Post by Dudley » Fri Feb 23, 2018 3:21 pm

Random Walker wrote:
Fri Feb 23, 2018 3:13 pm
Dudley,
I think that the reason the articles come across that way is that there is a common theme. We cannot predict the future and the only free lunch in investing is diversification. The only way to see an investment portfolio is as a whole. We create more efficient portfolios by diversifying broadly across sources of risk and sources of return. We can start with a typical 60/40 TSM/TBM portfolio. We can diversify the equities geographically. We can then diversify across independent factors known to drive equity returns. We can make the bonds more safe by going shorter duration and eliminating credit risk. Next we can look at alternative sources of independent risk and expected return that are not correlated with either stocks or bonds. The common unifying theme is portfolio efficiency and diversification. It’s sort of a broader view of diversification than we typically consider. But the principles of modern portfolio theory are the same.
For those interested, check out my thread on expanding on the rewards of multi asset class investing. All of Larry’s investment recommendations fit within this context well.

viewtopic.php?f=10&t=231257&p=3778438#p3778438

Dave
And where/how does one buy these alternative/uncorrelated investments ? From what I've gathered they not available to individual investors ? Thanks

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Re: Larry Swedroe: What Investors Should Worry About

Post by Leesbro63 » Fri Feb 23, 2018 3:26 pm

I've followed Larry for a long time and he's definitely one of the good guys. That being said, he does seem to always have a slightly offbeat thing going on...commodities for one. Which he seems to have backed of without a full reconciliation of what happened. And his "Larry portfolio" seems prudent, but it's still an off-beat, factor-investing thing that might or might not work out longer term.

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Re: Larry Swedroe: What Investors Should Worry About

Post by Dudley » Fri Feb 23, 2018 3:27 pm

Random Walker wrote:
Fri Feb 23, 2018 3:13 pm
Dudley,
I think that the reason the articles come across that way is that there is a common theme. We cannot predict the future and the only free lunch in investing is diversification. The only way to see an investment portfolio is as a whole. We create more efficient portfolios by diversifying broadly across sources of risk and sources of return. We can start with a typical 60/40 TSM/TBM portfolio. We can diversify the equities geographically. We can then diversify across independent factors known to drive equity returns. We can make the bonds more safe by going shorter duration and eliminating credit risk. Next we can look at alternative sources of independent risk and expected return that are not correlated with either stocks or bonds. The common unifying theme is portfolio efficiency and diversification. It’s sort of a broader view of diversification than we typically consider. But the principles of modern portfolio theory are the same.
For those interested, check out my thread on expanding on the rewards of multi asset class investing. All of Larry’s investment recommendations fit within this context well.

viewtopic.php?f=10&t=231257&p=3778438#p3778438

Dave
How does the individual investor diversify into these "alternatives" ? I gathered those products listed are not available to individual investors.

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Re: Larry Swedroe: What Investors Should Worry About

Post by SeeMoe » Fri Feb 23, 2018 3:29 pm

heyyou wrote:
Fri Feb 23, 2018 2:21 pm
Seems like when I try to dodge specific future risks, slightly different risks appear that were not expected, nor were covered.

The article is very informative. When referring to the future, the words "if" and "could" are used very often. To get Larry's good results, you may need to implement every one of his suggestions, using only half of them might not produce half of his benefits.

Being prepared to adapt your retirement spending to your portfolio size is an alternative to allocation gymnastics. Living in a low cost area, trying to stay healthy, and having delayed SS will also help buffer times of low returns. We should each do whatever suits us.
Agree with all but delaying SS benefits. Better to “ take a bird in hand” soon as you can and let it work for you by investing it! Plus who knows what shape SS will be in a few years from now since nothing is being done to correct the huge losses experts keep telling about?

SeeMoe.. :shock:
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Re: Larry Swedroe: What Investors Should Worry About

Post by Random Walker » Fri Feb 23, 2018 3:41 pm

Dudley wrote:
Fri Feb 23, 2018 3:21 pm
And where/how does one buy these alternative/uncorrelated investments ? From what I've gathered they not available to individual investors ? Thanks
[/quote]


The Stone Ridge funds are only available through advisors. I believe the AQR funds are available directly to the public, at least through 401K plans and such.

Dave

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Re: Larry Swedroe: What Investors Should Worry About

Post by Grt2bOutdoors » Fri Feb 23, 2018 3:54 pm

Given the minimums required to invest in these funds, suffice to say I won't be joining in the rush to buy anytime soon.
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Re: Larry Swedroe: What Investors Should Worry About

Post by Noobvestor » Fri Feb 23, 2018 4:11 pm

A few open questions for anyone who wants to venture an answer:

1) What would someone do who agreed with Larry's prognosis but didn't want to venture outside of, say, Vanguard funds?

2) I know their histories are limited, but has he or anyone back-tested these funds alone or in combination, in theory or reality?

3) Did I misunderstand, or does he (a) not specify percentages and (b) recommend switching entirely to these four funds?

Last time I looked one or two of them up, saw they seemed kind of dismal, found I didn't fully understand them, and Larry PM'ed me some more info, which I looked into, but ... bottom line is I'm not buying anything Vanguard's not selling, so I'm not seeing anything actionable here (for me).

I also agree with Robert that costs matter, and that these carry their own kinds of risks (appreciate the details, Robert!).
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Larry Swedroe: What Investors Should Worry About

Post by Robert T » Fri Feb 23, 2018 4:29 pm

thx1138 wrote:
Fri Feb 23, 2018 2:40 pm
Robert T wrote:
Fri Feb 23, 2018 1:35 pm
(iii) Variance risk (in the context of AVRPX fund). This increases the negative skewness of a portfolio (not reflected in Sharpe ratios). The increase in negative skewness (increased downside risk) could be large as the size of the variance risk premium seems directly related to magnitude of negative skewness.
It appears the literature shows the opposite of what you state above, the strategy actually reduces negative skewness while also reducing kurtosis making the downside risk even lower than SR alone suggests:

http://www.etf.com/sections/index-inves ... nopaging=1
From Stone Ridge: “Variance risk premium” is defined as the tendency for “implied volatility” — the expected level of volatility priced into different types of investments – to be higher, on average, than the volatility actually experienced on the asset underlying the investment.”
So when implied volatility > realized (actual) volatility then there is a premium yielding positive returns for the fund. When the reverse in true and implied volatility < realized (actual) volatility then the returns to the fund would be negative.
Here’s an interesting chart for illustration purposes only: VIX = implied volatility. Look at the period when realized (actual) volatility > implied volatility (‘negative premium’) - when the shaded blue area was below zero – high negative skewness with a significant negative “variance risk” premium at the same time as the negative equity premium in 2008.
Image
http://vixandmore.blogspot.com/2009/08/ ... ility.html
What am I missing?
Robert
.
Last edited by Robert T on Fri Feb 23, 2018 4:34 pm, edited 2 times in total.

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Re: Larry Swedroe: What Investors Should Worry About

Post by Elysium » Fri Feb 23, 2018 4:33 pm

I have high respect for Larry based on his contirbutions over the years in trying to help ordinary investors. That said, I stopped following all the complicated non-correlated alternative investment strategies he is talking about. Many years back Larry used to be big proponent of Commodities as a hedge against stocks and bonds and he had stood by the Pimco Commondities Fund (PCIRX) for years. This fund has had negative returns for the last several years for as long as you can count. I guess it does turn in a positive return once in a while, but the cumulaive returns have been so negative, that you would have been giving away all your profits in stocks and bonds to fill the hole created by this fund. I have not had anything to do with any alternatives for a long time, and intend to keep it that way.

That said, it is possible for stocks and bonds to lose money at the same time, but we have to realize that bonds still lose less money than stocks, and not all bonds and stocks all over the world will lose at the same rate at the same time. Even during the depths of 2008 financial crisis, large losses didn't start piling up until late into the bear market, from August through October in fact. Until then investors had plenty of time to judge their risk and reduce their allocations, and even you didn't, you came out in the end doing fine after the recovery. It's not worth running after fancy alternatives and paying a cost premium, especially something that we don't understand well, all in the name of protecting against some black swans that may or may not show up. It may make sense for clients of Buckingham with multi-million dollar portfolios, in excess of 5MM or so, and are worried about losing large sums. They may demand some alternatives and it's the job of the advisor to provide some.
Last edited by Elysium on Fri Feb 23, 2018 4:38 pm, edited 1 time in total.

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Re: Larry Swedroe: What Investors Should Worry About

Post by FIREchief » Fri Feb 23, 2018 4:36 pm

Interesting that the article mentions $155 expected earnings for the S&P 500 for 2018 (equivalent to a P/E of just over 17 at today's level), but still can't let go of the focus on CAPE 10 valuations. I would rather focus on what is happening in 2018 instead of what happened five to ten years ago.
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Re: Larry Swedroe: What Investors Should Worry About

Post by FIREchief » Fri Feb 23, 2018 4:40 pm

digarei wrote:
Fri Feb 23, 2018 2:44 pm
Random Walker wrote:
Fri Feb 23, 2018 10:34 am

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

[…] I think it’s fair to say he’s in the business of helping build robust investor portfolios that can withstand the wide variety of outcomes predicted by many individuals.

I think it’s fair to say he’s in the business of helping his firm make money and himself a living.
I don't understand why some are taking exception to this comment. It is in no way derogatory, just stating what is likely a fact. Making a living while helping your employer make money is as American as it gets. :sharebeer

That said, it is always a good idea to try to keep in mind the business side of things. Somebody making money off of me can certainly be a "friend," but if they're still making money from our releationship I will proceed very cautiously.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Larry Swedroe: What Investors Should Worry About

Post by willthrill81 » Fri Feb 23, 2018 4:41 pm

FIREchief wrote:
Fri Feb 23, 2018 4:36 pm
Interesting that the article mentions $155 expected earnings for the S&P 500 for 2018 (equivalent to a P/E of just over 17 at today's level), but still can't let go of the focus on CAPE 10 valuations. I would rather focus on what is happening in 2018 instead of what happened five to ten years ago.
Yes, despite the inability of CAPE 10 valuations to serve as a good predictor of the returns we've been experiencing for years now, Larry is still a bit too focused on valuations as a predictive tool. But most of the 'experts' are, probably because it's difficult for them to tell their clients that they really just don't know what's going to happen at all. Eventually, their predictions may come to pass; the broken watch is correct twice a day after all.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: What Investors Should Worry About

Post by Random Walker » Fri Feb 23, 2018 4:42 pm

I’ll venture a guess on a couple of the questions.
For an investor who is determined to stay VG only, I would decrease return expectations, tilt to some factors with what they have available, consider increasing equity allocation towards 50%, decrease overall equity allocation, increase bond allocation. Although both stocks and bonds may both decrease, the decrease in stocks would be way more significant. Of course, there is the irony for the investor who needs higher returns, that in the face of lower expected returns he might have to actually increase equity allocation to meet his goals and suffer consequences that risk actually shows up.

I think Larry’s firm recommends no more than 20-25% allocation to the alternatives as a whole, and equally allocating to each is certainly a reasonable starting point.

Dave

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Re: Larry Swedroe: What Investors Should Worry About

Post by WhyNotUs » Fri Feb 23, 2018 4:45 pm

A somewhat curious article to me and given the nature of the proposed investments one is really unable to do anything other than surrender to Larry's observations and dive into the great unknown or stay the course. The article seems to say:
1.) National and international economies are set up for growth- "about as good as it gets"
2.) Inflation is manageable
3.) But there is always something to worry about, that is why equities pay a premium
4.) The market dropped last month but historically that has followed by pretty good returns
5.) Someone asked me whether it is possible to have negative returns in stocks and bonds
6.) Here is a really bad scenario in which that could happen
7.) Here are some alternative investment options that most of us don't know much or anything about that might work in the scenario above.

Personally, I worry more about lack of integrity in financial reporting, computer trading, and currency manipulation. Still I don't have a better plan than diversification, low costs, and time.
I own the next hot stock- VTSAX

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Re: Larry Swedroe: What Investors Should Worry About

Post by thx1138 » Fri Feb 23, 2018 4:47 pm

Robert T wrote:
Fri Feb 23, 2018 4:29 pm
thx1138 wrote:
Fri Feb 23, 2018 2:40 pm
Robert T wrote:
Fri Feb 23, 2018 1:35 pm
(iii) Variance risk (in the context of AVRPX fund). This increases the negative skewness of a portfolio (not reflected in Sharpe ratios). The increase in negative skewness (increased downside risk) could be large as the size of the variance risk premium seems directly related to magnitude of negative skewness.
It appears the literature shows the opposite of what you state above, the strategy actually reduces negative skewness while also reducing kurtosis making the downside risk even lower than SR alone suggests:

http://www.etf.com/sections/index-inves ... nopaging=1
From Stone Ridge: “Variance risk premium” is defined as the tendency for “implied volatility” — the expected level of volatility priced into different types of investments – to be higher, on average, than the volatility actually experienced on the asset underlying the investment.”
So when implied volatility > realized (actual) volatility then there is a premium yielding positive returns for the fund. When the reverse in true and implied volatility < realized (actual) volatility then the returns to the fund would be negative.
Here’s an interesting chart for illustration purposes only: VIX = implied volatility. Look at the period when realized (actual) volatility > implied volatility (‘negative premium’) - when the shaded blue area was below zero – high negative skewness with a significant negative “variance risk” premium at the same time as the negative equity premium in 2008.
Image
http://vixandmore.blogspot.com/2009/08/ ... ility.html
What am I missing?
Robert
.
Doesn’t look like you are missing anything. It appears the disconnect is the study I linked to is actually analyzing a different trading strategy related to volatility than the Stone Ridge fund is. If we consider the Stone Ridge approach of selling options as how to harvest a “variance risk premium” then indeed it looks like negative skew to me as well. The typical “picking up pennies in front of a steam roller” insurance writing strategy.

The study I linked is a momentum strategy based on volatility so not clear it really is directly related to a “variance risk premium” as defined.

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Re: Larry Swedroe: What Investors Should Worry About

Post by willthrill81 » Fri Feb 23, 2018 4:48 pm

Random Walker wrote:
Fri Feb 23, 2018 4:42 pm
Of course, there is the irony for the investor who needs higher returns, that in the face of lower expected returns he might have to actually increase equity allocation to meet his goals and suffer consequences that risk actually shows up.
While he was still posting here last year, Larry was actually recommending that. He said that current valuations are suggesting lower expected returns for stocks going forward, so this means that investors should actually increase their stock exposure to compensate for this. I told them that this sounded reasonable but that it's clearly market timing (i.e. changing one's investments based on market conditions), but he said that it wasn't. However, he's had posts espousing the potential benefits of momentum investing and managed futures, so I think he's slowly coming around to trend following. :wink:
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: What Investors Should Worry About

Post by saltycaper » Fri Feb 23, 2018 4:58 pm

Random Walker wrote:
Fri Feb 23, 2018 4:42 pm
For an investor who is determined to stay VG only, I would decrease return expectations, tilt to some factors with what they have available, consider increasing equity allocation towards 50%, decrease overall equity allocation, increase bond allocation. Although both stocks and bonds may both decrease, the decrease in stocks would be way more significant. Of course, there is the irony for the investor who needs higher returns, that in the face of lower expected returns he might have to actually increase equity allocation to meet his goals and suffer consequences that risk actually shows up.
I'm open to non-Vanguard options, but this is still pretty much where I'm at.

I'm not really interested in more credit risk, even if it's not quite like the credit risk I already take; I'm not interested in a multi-factor fund that probably does what my tilts do but might do it more efficiently, provided they don't mess up; I'm definitely not interested in a fund that could suffer heavy losses in the event of widespread natural and/or man-made catastrophes; and I'm not really interested in a fund that plays in the volatility market, where things should work out as expected as long as things work out as expected. (That last bit pretty much sums up my feelings on all these funds in general.)

Admittedly, I haven't really given any of these funds an honest chance due to their short existences, higher costs, and relative inaccessibility. Looks like I'm just going to have to just keep on worrying, although I would do that even if I had 20-25% of my portfolio in alternatives. But this way I get to worry while knowing I'm not paying high fees, investing in things I don't really understand, nor counting on people and computers that follow more complex strategies.
Quod vitae sectabor iter?

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Re: Larry Swedroe: What Investors Should Worry About

Post by Random Walker » Fri Feb 23, 2018 5:06 pm

Saltycaper wrote
Admittedly, I haven't really given any of these funds an honest chance due to their short existences, higher costs, and relative inaccessibility. Looks like I'm just going to have to just keep on worrying, although I would do that even if I had 20-25% of my portfolio in alternatives. But this way I get to worry while knowing I'm not paying high fees, investing in things I don't really understand, and counting on people and computers that follow more complex strategies.
I’m all in on the factors and alts, but I still see a lot of wisdom to your strategy. Knowing that efficient markets are ruthless and that the only thing certain is costs, you will have a lot of powerful reasoned conviction to stay with your plan.

Dave

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Re: Larry Swedroe: What Investors Should Worry About

Post by naha66 » Fri Feb 23, 2018 8:32 pm

willthrill81 wrote:
Fri Feb 23, 2018 2:47 pm
digarei wrote:
Fri Feb 23, 2018 2:44 pm
Random Walker wrote:
Fri Feb 23, 2018 10:34 am

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

[…] I think it’s fair to say he’s in the business of helping build robust investor portfolios that can withstand the wide variety of outcomes predicted by many individuals.

I think it’s fair to say he’s in the business of helping his firm make money and himself a living.
Larry has never once come across to me as a sleazy salesman trying to peddle investments. While he was posting on this forum over a period of years, he only picked up two or three clients. He isn't doing this just to try to make a quick buck.

And this kind of statement is why Larry is no longer active on this forum. He got tired of the personal attacks.
I guess you have inside information.

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Re: Larry Swedroe: What Investors Should Worry About

Post by willthrill81 » Fri Feb 23, 2018 8:35 pm

naha66 wrote:
Fri Feb 23, 2018 8:32 pm
willthrill81 wrote:
Fri Feb 23, 2018 2:47 pm
digarei wrote:
Fri Feb 23, 2018 2:44 pm
Random Walker wrote:
Fri Feb 23, 2018 10:34 am

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

[…] I think it’s fair to say he’s in the business of helping build robust investor portfolios that can withstand the wide variety of outcomes predicted by many individuals.

I think it’s fair to say he’s in the business of helping his firm make money and himself a living.
Larry has never once come across to me as a sleazy salesman trying to peddle investments. While he was posting on this forum over a period of years, he only picked up two or three clients. He isn't doing this just to try to make a quick buck.

And this kind of statement is why Larry is no longer active on this forum. He got tired of the personal attacks.
I guess you have inside information.
Read his 'farewell' post.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: What Investors Should Worry About

Post by FIREchief » Fri Feb 23, 2018 9:01 pm

willthrill81 wrote:
Fri Feb 23, 2018 8:35 pm
naha66 wrote:
Fri Feb 23, 2018 8:32 pm
willthrill81 wrote:
Fri Feb 23, 2018 2:47 pm
digarei wrote:
Fri Feb 23, 2018 2:44 pm
Random Walker wrote:
Fri Feb 23, 2018 10:34 am

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

[…] I think it’s fair to say he’s in the business of helping build robust investor portfolios that can withstand the wide variety of outcomes predicted by many individuals.

I think it’s fair to say he’s in the business of helping his firm make money and himself a living.
Larry has never once come across to me as a sleazy salesman trying to peddle investments. While he was posting on this forum over a period of years, he only picked up two or three clients. He isn't doing this just to try to make a quick buck.

And this kind of statement is why Larry is no longer active on this forum. He got tired of the personal attacks.
I guess you have inside information.
Read his 'farewell' post.
Link??
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Larry Swedroe: What Investors Should Worry About

Post by Angst » Fri Feb 23, 2018 9:50 pm

willthrill81 wrote:
Fri Feb 23, 2018 8:35 pm
naha66 wrote:
Fri Feb 23, 2018 8:32 pm
willthrill81 wrote:
Fri Feb 23, 2018 2:47 pm
digarei wrote:
Fri Feb 23, 2018 2:44 pm
Random Walker wrote:
Fri Feb 23, 2018 10:34 am

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

[…] I think it’s fair to say he’s in the business of helping build robust investor portfolios that can withstand the wide variety of outcomes predicted by many individuals.

I think it’s fair to say he’s in the business of helping his firm make money and himself a living.
Larry has never once come across to me as a sleazy salesman trying to peddle investments. While he was posting on this forum over a period of years, he only picked up two or three clients. He isn't doing this just to try to make a quick buck.

And this kind of statement is why Larry is no longer active on this forum. He got tired of the personal attacks.
I guess you have inside information.
Read his 'farewell' post.
Uh, which farewell post would that be? :wink: C'mon, don't get me wrong. I love reading what Larry has to say, and I abolutely find nothing "sleazy/saleman"-like about him at all. He's often fascinating, he has a great way with words and is a master of effective analogies, and I've personally followed/invested in some of his suggestions... including QSPIX and QSMLX e.g., we won't talk about PCRIX... But people who've been around this forum a long time (let alone the earlier M* forum - I was a lurker there a good while) know that Larry's something of a bully, and a somewhat thin-skinned one at that. I think Rick Ferri's a saint for the way he put up with Larry's abuse at times. Anyhow, there's a lot of history going back to the start of this forum in 2007, let alone M*, that you might want to aquaint yourself with. Take your time, you'll need a lot.

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Re: Larry Swedroe: What Investors Should Worry About

Post by willthrill81 » Fri Feb 23, 2018 9:59 pm

FIREchief wrote:
Fri Feb 23, 2018 9:01 pm
willthrill81 wrote:
Fri Feb 23, 2018 8:35 pm
naha66 wrote:
Fri Feb 23, 2018 8:32 pm
willthrill81 wrote:
Fri Feb 23, 2018 2:47 pm
digarei wrote:
Fri Feb 23, 2018 2:44 pm


I think it’s fair to say he’s in the business of helping his firm make money and himself a living.
Larry has never once come across to me as a sleazy salesman trying to peddle investments. While he was posting on this forum over a period of years, he only picked up two or three clients. He isn't doing this just to try to make a quick buck.

And this kind of statement is why Larry is no longer active on this forum. He got tired of the personal attacks.
I guess you have inside information.
Read his 'farewell' post.
Link??
Taylor Larimore wrote:
Wed Apr 19, 2017 10:15 pm
Bogleheads:

Many years ago I met a very knowledgeable author (15 books) and advisor named Larry Swedroe. I asked him to visit the Bogleheads Forum and share his knowledge. He accepted my invitation and has contributed over 15,000 posts.

Larry has decided to stop posting. He explained his reasons for leaving in an e-mail he sent me today (slightly edited):

Taylor,

As to my departure, I'm afraid for a variety of reasons this is highly likely to be permanent. I can spread only so thinly. Also I'm getting near retirement and want to spend more time with family.

Bogleheads were taking up to 10-15 hours a week sometimes. But the main reason is I just got tired of the personal attacks, questioning my integrity--assuming I'm spending all that time and patience answering the same questions for the reason of self-promotion or making money.

First, it's not true. That should be obvious given all the time spent on a DYI site and all the PMs and emails Bogleheads know I answer from people who will never do business with an advisor. I think there have been two Bogleheads who are clients. Do you think I would spend that much time for two clients?

It's simply mostly my way of giving back, trying to help others. That's 90% of it. The other 10% is it's great to debate ideas and have to defend positions, that's how we learn. So I never mind the debates or even answering the same question over and over again. It's the personal attacks. And some people are even clueless, asking for help after they make the accusations.

It's sad that a few bad apples can spoil everything for the majority, but that's the nature of the internet and why most pros won't post on such sites. I see this everywhere. Your moderators do a good job, so not blaming them.

At any rate you can feel free if you like to summarize my reasons for not posting. And you can tell the Bogleheads, as I have told the many who e-mailed or PM'd me that I'm always happy to answer e-mails or PMs, but not posting.

Best wishes.

Larry.
viewtopic.php?f=10&t=217022
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: What Investors Should Worry About

Post by stlutz » Fri Feb 23, 2018 10:02 pm

What would someone do who agreed with Larry's prognosis but didn't want to venture outside of, say, Vanguard funds?
While you you can't do all of these strategies using only Vanguard mutual funds, you can execute on most of them using your Vanguard brokerage account. For example:

1) The "variance risk premium" is simply about writing options on a variety of assets. On can do that against the SPY, the TLT, and GLD (3 ETFs on completely different assets that are pretty low cost and that have low option spreads). And the nice thing about doing this at Vanguard is that your cash collateral stays right in a relatively high-yielding (compared to other brokers) money market fund.

2) Vanguard now has a "multi-factor" equity ETF. Yeah, it's not as cool as as a long/short fund levered 4x from AQR, but you can address that problem by taking a larger position in the Vanguard fund as opposed only taking small position in the levered long/short fund. (Since "alternatives" are only supposed to be 20% of your portfolio, you'd still have the beta risk that is a present in a long-only fund in a Swedroe-style portfolio as well). As Robert T has noted elsewhere, it's all about overall factor exposure, not the specific funds you use to get said exposure.

3) For reinsurance, the main attraction of the fund that Swedroe promotes is not the exposure to reinsurance (there are plenty of companies in that business); it's being able to get exposure to the underlying business without having the equity beta exposure. With reinsurance stocks, the underlying business can do just fine but the stocks can drop 50% if the market plummets as well. However, there are other ways to accomplish much the same thing as the Stone Ridge fund. Most obviously, one can go long stocks that are heavy in the reinsurance business and hedge the market exposure by buying out of the money puts. That's a straightforward way to get long exposure to reinsurance without having market beta risk. Advantage of this approach is you can do it with other businesses as well! (What makes reinsurance so special?). However, one should note irony of buying puts here vs. selling them in strategy #1.

4) While he didn't mention it in this article, "time series momentum" is another strategy where some people claim you need to invest in higher cost mutual funds to "get access" to the strategy. Again, not true. Anybody can trade any asset against a moving average or using the more pure academic version of the strategy (total return over X months)--you can use VTI, VWO, GLD, TLT etc. and get any number of risk exposures based on the strategy.

Whether any of these approaches are a good idea would be interesting to debate. But I think it's time for us on this forum to put on our big boy pants and move past the idea that one can only do these things by investing in funds sold only through Buckingham or similar asset management firms. We can discuss value strategies outside of the question of using DFA all of the time; it's time to make the same true with these ideas as well!

At least that's my modest proposal.

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Re: Larry Swedroe: What Investors Should Worry About

Post by fennewaldaj » Fri Feb 23, 2018 10:33 pm

I was a little surprised to find a fund selling volatility insurance as one Larry's recommendations. I would think that would be a fund that would respond very poorly to very adverse market conditions like the financial crisis. Andrew Ang discusses the selling volatility insurance strategy at length in his book Asset Management: A Systematic Approach to Factor Investing. The data seem to show that while it is a good strategy for long term results it can face massive losses at times and often at very inopportune times. That seems the opposite of Larry's normal recommendations. Maybe I am missing something on the exact implementation of this fund. The other strategies seem reasonable. I am skeptical that alternative lending will end up having a low correlation to equities long term but I can see why it might be a lower correlation to high yield bonds (and the return is likely better).

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Re: Larry Swedroe: What Investors Should Worry About

Post by warowits » Fri Feb 23, 2018 10:46 pm

willthrill81 wrote:
Fri Feb 23, 2018 11:08 am
I just invest in P2P notes directly myself. It's easy to invest in hundreds or thousands of notes, giving you plenty of diversification.
I would be interested where you are doing this, and if it is a retirement account or taxable.
There are an army of people whose pay checks depend on convincing people to invest in ways that are against their self interest. This forum is the volunteer army that fights back!

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Re: Larry Swedroe: What Investors Should Worry About

Post by Theoretical » Fri Feb 23, 2018 10:52 pm

Robert T wrote:
Fri Feb 23, 2018 1:35 pm
.
Interesting article (extract below):
“Due to the low correlation of the four strategies, we estimate a portfolio of the four would have volatility of only about 5%, similar to that of an intermediate bond portfolio, while providing an expected, forward-looking return of about 7.5%.”

Thus, relative to equities, you have similar expected returns with about 25% of the volatility…”
i.e. a significantly improved Sharpe ratio.

The four strategies (I prefer to see them as risk exposures) are:
  • (i) Lending (credit) risk: SR Alternative Lending Risk Premium Fund (LENDX))
    (ii) Reinsurance risk: SR Reinsurance Risk Premium Interval Fund (SRRIX));
    (iii) Variance risk: SR All Asset Variance Risk Premium Fund (AVRPX)
    (iv) Value-momentum-carry-defensive ‘risk factors’: Long-short alternative: AQR Style Premia Alternative Fund
Given the absence of a long-track record of these funds or associated readily available historical series on which to assess performance in different ‘market’ environments it is challenging to make as informed assessments as for stocks and bonds (re: Ken French data sets back to 1929, Dimson & Mash global data back to 1900).

What I like about Larry’s earlier engagement on this forum was he rightly stressed that you should look at a portfolio in totality (i.e. how risk exposure in different parts of the portfolio interact with each other, rather than looking at each in isolation) including consideration of ‘non-financial asset risk’ (e.g. human capital risk, etc).

Through this lens, together with other considerations:

(i) Lending (credit) risk (LENDX): This likely increases correlations with the stock portion of a portfolio. Granted, it may be a ‘different type’ of credit risk, but credit risk non-the-less. Why is the expected premium so much larger than other credit risk premiums? Due to much higher risk (higher correlation with stocks), or will the premium adjust more in-line with other credit risk premiums as the supply of capital (through funds like LENDX) to these borrowers increases.

(ii) Reinsurance risk (SRRIX): This likely increases correlation with ‘non-financial assets’. For example: those losing their home in hurricane Irma and Harvey, holding a large allocation to SRRIX would have seen this allocation decline 12.5% over past year (according to Bloomberg) just at the wrong time for them (when they lose their home). While correlations/probabilities may be small, impacts (on ‘non-financial’ assets) when they show up can be huge. Effects that don’t show up in portfolio Sharpe ratios. Why take the risk?

(iii) Variance risk (in the context of AVRPX fund). This increases the negative skewness of a portfolio (not reflected in Sharpe ratios). The increase in negative skewness (increased downside risk) could be large as the size of the variance risk premium seems directly related to magnitude of negative skewness.

(iv) Value-momentum-carry-defensive ‘risk factors’ (Long-short). Up to a certain point, tilting equities to value-momentum-carry-defensive (long only), in theory could achieve the same effect, holding implied stock:bond mixes across the portfolios equal (for moderate tilts to these factors).

Costs also matter - a lot. I think its worth reiterating that costs matter and should also be a central part of portfolio decisions (total costs: expense ratios, taxes, advisor fees, negative alpha etc). The total cost of exposure to equity risk, value risk, size risk, term risk (and credit risk) is can be very low. The total cost of exposure to the four sets of risks mentioned above is high.

Obviously no guarantees.

Robert
.
I think this is one of your real gems of a post, Robert. It could make sense to do as an equity replacement, with the risk of replacing equity or equity+ returns with bondlike or worse returns after fees. But I think your list of risks highlights the lack of suitability as bond replacements.

The most notable missing piece of the quad is Managed Futures, which means they're almost certainly being used as part of the bond allocation, where you've previously demonstrated they have served the tail risk hedging strategy well.

Something about the high valuations, low returns, and alternatives recommendations makes me wonder if what is being cautiously/conservatively advanced is a inf/stagflation strategy without calling it inflationary, and because the desired returns are in the equity range. If the desired returns for that situation were lower, then just tbills is fine.

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Re: Larry Swedroe: What Investors Should Worry About

Post by nedsaid » Fri Feb 23, 2018 11:01 pm

Larry Swedroe said:

While this is happening, the Fed also has to finance a now-$1 trillion budget deficit, adding to its borrowing needs. Again, that could put further pressure on interest rates. And don’t forget that, with $20 trillion in debt, rising interest rates themselves create a problem as the cost of financing that debt increases, increasing the deficit. Every 1% increase in rates equals another $200 billion in the cost of financing that debt.
Larry is a neat guy, and I know he has some economic training, but let me ask three simple questions. Is there any evidence at all that budget deficits affect interest rates? I don't know of any. Furthermore, I don't know if there is any correlation or causation between the two. Is there any evidence that public "borrowing" competes with private borrowing? You know, the "crowding out effect"? If the US Government, an entity with its own currency and its own bank, wants to spend more than what it takes in with taxation, couldn't it by fiat just issue more currency at zero interest? Why does the Government need the credit markets at all?

Just asking the questions. My feeling is that part of Larry's answer would have to do with the velocity of money. High deficits coupled with low money velocity works as an explanation for high deficits and low interest rates during the Obama era. But somehow, I would find it hard to believe money velocity was low during the Reagan years, another time of high deficits and falling interest rates. A big reason for the "need" for a National Debt is probably that paying interest on debt helps support the value of the dollar. Currency in my mind is analogous to a National Checking Account and that US Treasury debt is like the National Savings Account.

What I am trying to say is that the conventional wisdom about deficits and interest rates is just plain wrong. Obviously, other things are at play here. I am surprised that a guy as smart as Larry hasn't tumbled to this. I am wondering if the National Debt really finances anything at all.
A fool and his money are good for business.

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Re: Larry Swedroe: What Investors Should Worry About

Post by willthrill81 » Fri Feb 23, 2018 11:03 pm

warowits wrote:
Fri Feb 23, 2018 10:46 pm
willthrill81 wrote:
Fri Feb 23, 2018 11:08 am
I just invest in P2P notes directly myself. It's easy to invest in hundreds or thousands of notes, giving you plenty of diversification.
I would be interested where you are doing this, and if it is a retirement account or taxable.
I'm currently investing with Lending Club and have been since 2013. To date, my net returns have averaged close to 8% with little volatility. I use my own selection criteria developed using Nickel Steamroller, which was free back in 2013 but is no longer free. I started with a taxable account that has little left in it; it's a pain to compute the taxes for P2P notes. I have a larger Roth IRA with them that uses my investment criteria to automatically invest in appropriate notes.

Basically, I invest in mostly 'E' and some 'D' grade notes with borrowers that need money for credit card payoffs or loan consolidations, have no bankruptcies, have no more than one credit inquiry in the last two years, and have no delinquencies on record. Using these criteria and a few others, I'm in the top 5% of all Lending Club investors for returns; most are in the 4-6% range, though I think that 6% is easy to achieve.

With Lending Club, the minimum investment in a note is $25, so every $1k invested gets you 40 more notes. In my experience, once you have 200 notes, there isn't much extra benefit from diversification.

Defaults are part of the deal and something to expect. Some get upset about this, but it's baked into the returns, just like the occasional 20-30% drop is in stocks. If you go into it expecting 6% returns over the long-run, I think you'll be happy with the results.

Frankly, if it weren't for the platform risk, I'd invest considerably more than I do in P2P notes (they are currently less than 4% of my portfolio) because the returns are good and stable. Even so, I might eventually bump this up to 10% of my portfolio. Once I gain accredited investor status, I'll probably do some 'hard money' loans with some of the crowdfunding platforms, whose returns look to be very similar to that of P2P notes.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

BogleMelon
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Re: Larry Swedroe: What Investors Should Worry About

Post by BogleMelon » Fri Feb 23, 2018 11:13 pm

I am confused, aren't these "Alternatives" (and their underlined companies) already included in the TSM fund?!
Last edited by BogleMelon on Fri Feb 23, 2018 11:13 pm, edited 1 time in total.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

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nedsaid
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Re: Larry Swedroe: What Investors Should Worry About

Post by nedsaid » Fri Feb 23, 2018 11:13 pm

Theoretical wrote:
Fri Feb 23, 2018 10:52 pm

Something about the high valuations, low returns, and alternatives recommendations makes me wonder if what is being cautiously/conservatively advanced is a inf/stagflation strategy without calling it inflationary, and because the desired returns are in the equity range. If the desired returns for that situation were lower, then just tbills is fine.
Well, the one historical scenario I can think of where you had a bear market in both stocks and bonds were the stagflation years of the earlier 1970's. Later in that decade, the economy picked up a bit and stagflation just became plain old inflation. This is probably what Larry had in the back of his mind when he was writing the article. Commodities would have done great during that stagflation period, a time during which not too much else worked. At that time, commodities were probably the ultimate alternative investment.

When the 1973-74 bear market hit, I was about 14 years old. Obviously I had no money in the financial markets at that time. But it is within my lifetime and I do remember how the economy was affected. That was also the end of 25 to 30 cent a gallon gasoline. I remember the lines and the odd/even days. Not likely to happen again.

The thing is, history doesn't repeat itself, it just rhymes. Doubtless, we may see another stagflation scenario in our lifetime but the cause will most likely be something other than severe disruptions in the oil markets. What worked during the 1970's stagflation might be completely useless during the next stagflation. Hard to predict what that magic diversifier might be in the future.
A fool and his money are good for business.

thx1138
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Re: Larry Swedroe: What Investors Should Worry About

Post by thx1138 » Fri Feb 23, 2018 11:15 pm

nedsaid wrote:
Fri Feb 23, 2018 11:01 pm
Larry Swedroe said:

While this is happening, the Fed also has to finance a now-$1 trillion budget deficit, adding to its borrowing needs. Again, that could put further pressure on interest rates. And don’t forget that, with $20 trillion in debt, rising interest rates themselves create a problem as the cost of financing that debt increases, increasing the deficit. Every 1% increase in rates equals another $200 billion in the cost of financing that debt.
Larry is a neat guy, and I know he has some economic training, but let me ask three simple questions. Is there any evidence at all that budget deficits affect interest rates? I don't know of any. Furthermore, I don't know if there is any correlation or causation between the two. Is there any evidence that public "borrowing" competes with private borrowing? You know, the "crowding out effect"? If the US Government, an entity with its own currency and its own bank, wants to spend more than what it takes in with taxation, couldn't it by fiat just issue more currency at zero interest? Why does the Government need the credit markets at all?

Just asking the questions. My feeling is that part of Larry's answer would have to do with the velocity of money. High deficits coupled with low money velocity works as an explanation for high deficits and low interest rates during the Obama era. But somehow, I would find it hard to believe money velocity was low during the Reagan years, another time of high deficits and falling interest rates. A big reason for the "need" for a National Debt is probably that paying interest on debt helps support the value of the dollar. Currency in my mind is analogous to a National Checking Account and that US Treasury debt is like the National Savings Account.

What I am trying to say is that the conventional wisdom about deficits and interest rates is just plain wrong. Obviously, other things are at play here. I am surprised that a guy as smart as Larry hasn't tumbled to this. I am wondering if the National Debt really finances anything at all.
If you try to sell more bonds (increase supply) the price will drop (interest rates higher) unless there is an increase in demand. Larry didn’t say rates go up because of debt, he said they increase pressure on the rates (increase supply lowers rates). That’s a pretty much Econ 101 thing and not particularly debatable. What *actually* happens to rates depends on demand which is a whole separate unknown.

Fundamentally the Treasury is going to auction more debt and because of the way the auction is structured by definition for a set of bids they will get a higher rate if they sell more rather than less. Of course at the same time other related and unrelated economic factors are changing the bids so rates could in the end go up or down.

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Lauretta
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Re: Larry Swedroe: What Investors Should Worry About

Post by Lauretta » Fri Feb 23, 2018 11:22 pm

willthrill81 wrote:
Fri Feb 23, 2018 11:03 pm

Frankly, if it weren't for the platform risk, I'd invest considerably more than I do in P2P notes (they are currently less than 4% of my portfolio) because the returns are good and stable. Even so, I might eventually bump this up to 10% of my portfolio. Once I gain accredited investor status, I'll probably do some 'hard money' loans with some of the crowdfunding platforms, whose returns look to be very similar to that of P2P notes.
10% seems quite high: did the platform you are using exist in 2008 and if so how did it fare? My worry about P2P is that I don't know what would happen in a recession.
When everyone is thinking the same, no one is thinking at all

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