Larry Swedroe’s New Book Available: Reducing Risk Of Black Swans

[Random Walker]

Reducing The Risk Of Black Swans: Using The Science Of Investing To Capture Returns With Less Volatility, 2018 Edition, paperback, by Larry Swedroe and Kevin Grogan now available on Amazon

https://www.amazon.com/Reducing-Risk-Bl ... droe+books

Dave

[hamishdad]

Orange (Swan) is the New Black (Swan)

[Scooter57]

I am mystified as to why this forum seems to worship Swedroe when he is continually changing course and recommending new portfolios that are supposed to give the investor some advantage. The portfolios are based on academic research which is, in turn, always based on backtesting, since no one can research the future and, more importantly, since there is no "science" to understanding how markets work.

How is this in line with the Boglehead approach of avoiding market timing, buying the whole market, and taking what the maket gives us?

[saltycaper]

I am mystified as to why this forum seems to worship Swedroe when he is continually changing course and recommending new portfolios that are supposed to give the investor some advantage. The portfolios are based on academic research which is, in turn, always based on backtesting, since no one can research the future and, more importantly, since there is no "science" to understanding how markets work.

How is this in line with the Boglehead approach of avoiding market timing, buying the whole market, and taking what the maket gives us?

I'm not one who finds his approach without fault, but it could be argued that most posters here do not follow those three aspects of the Boglehead approach, and really only the avoidance of market timing is explicitly part of the Boglehead's philosophy.

The primary tenet that seems to hold us all together is following an evidence-based approach. I'd say Larry tries to do that as much as anyone, and that is why he receives the attention he does. He also made contributions to the forum that would probably be labeled substantial by most even if you removed the parts you disagreed with.

I probably will not bother with the newest book until I see some reviews.

[am]

I wonder if any retail investor has actually come ahead of a three funder after fees, taxes, implementation costs, etc?

[Random Walker]

I don’t really see any changing course. It’s a continual unidirectional push towards improved portfolio efficiency. As new uncorrelated sources of return become investable, he alerts us to them with his writings. He is ardently passive in his recommendations.

Dave

[Random Walker]

Am,
That is certainly the question! I made the transition from an all BH portfolio to an advisor/tilt/factor/alt portfolio and gave up on making any comparisons. The overall AA is so different and has changed over time, and don’t know how the alternate path not taken would have evolved over time as well.

Dave

[GibsonL6s]

I don’t really see any changing course. It’s a continual unidirectional push towards improved portfolio efficiency. As new uncorrelated sources of return become investable, he alerts us to them with his writings. He is ardently passive in his recommendations.

Dave

It seems to me he uses passive products to continually tinker with his AA approach, and investment classes, so is it really passive?

[Dominic]

I am mystified as to why this forum seems to worship Swedroe when he is continually changing course and recommending new portfolios that are supposed to give the investor some advantage. The portfolios are based on academic research which is, in turn, always based on backtesting, since no one can research the future and, more importantly, since there is no "science" to understanding how markets work.

How is this in line with the Boglehead approach of avoiding market timing, buying the whole market, and taking what the maket gives us?

Larry is pretty careful to avoid data-mined research. When he suggests factors to invest in, he ensures that they consistently outperform, across countries, time periods, and asset classes. He makes sure that there is a risk-based or behavioral explanation that can't be arbitraged away to explain the performance.

The general gist of Larry's writing is to diversify. Not just in number of holdings, but in exposure to different types of risk, which should have uncorrelated returns. This is fundamentally in line with Boglehead philosophy.

I probably wouldn't invest in the AQR or Stone Ridge funds he recommends, even given the option. The expenses would make underperformance extremely painful for me, and there's no way i would be able to stay invested in them. I do, however, think that a multifactor equity fund is a totally justifiable investment based on what I've read. I also think that commodities funds are worth considering as a hedge against tail risk.

[JohnDindex]

I do not think this Forum worships Larry Swedroe, if you have been around a while you know there are some tough critics of his on here.

Having said that, I personally enjoy his articles and have read several of his books.

Larry is always the first one to say over and over again, that if you have tracking error regret, you should not tilt.

Final note: I recently read the book he wrote on factors, I had a question about the lack of exposure to momentum in cap weighted broad market indexes so I emailed him...he emailed me back that same day and was very helpful.

[Top99%]

I do not think this Forum worships Larry Swedroe, if you have been around a while you know there are some tough critics of his on here.

Having said that, I personally enjoy his articles and have read several of his books.

Larry is always the first one to say over and over again, that if you have tracking error regret, you should not tilt.

Final note: I recently read the book he wrote on factors, I had a question about the lack of exposure to momentum in cap weighted broad market indexes so I emailed him...he emailed me back that same day and was very helpful.

Larry does indeed have some tough critics around here and I have learned from both them and Larry himself. Larry also points out that in addition to tracking error the portfolios he recommends are trading off right tale upside for a decreased dispersion of outcomes. One can really see that in this article: http://www.retireearlyhomepage.com/reallife17.html. The Larry Portfolio lags 60/40 when starting in 1994 but does much better if one starts in 1999. As for Larry changing course, I agree that as new asset classes become investible, it makes sense to explore them. If TIPS just now came into existance would most people advocate ignoring them and instead just "staying the course"?

[Scooter57]

I simply do not see how the whole factor thing is anything but very fancy backtesting. Yes, it worked over many periods in the past, but it may very well have stopped working now for many reasons, starting with the way that computer trading has changed markets and moving on to "once everyone knows something it no longer works."

Beyond that, the way that factor funds select stocks does not please me at all. I spent several years deeply studying value investing at different market cap sizes and using various tools to screen for value, and what I found was that there is no way that any set of quantitative screens will identify the companies worth investing in. Screening, even complex screening is step one. Then a human brain has to study up about the business, the environment the business operates in, and apply common sense. You also have to react when the value parameters change and take profits intelligently. Knowing if a run is over is very difficult and only shows up in retrospect (and hence in backtesting.) If you only choose stocks based on quantitive aspects of individual companies you pretty much end up with a wash vs Total Stock Market.

My own study of many stocks over several years also convinced me that the market by no means has already priced in what is known about companies because there is far less common sense being applied to stock buying with ever passing year. Programmed trading plus chaining stocks in ETFs has made them move in lockstep in ways they never did even 15 years ago. Unless I get a time machine for Christmas, I'll stick to the Boglehead philosophy as defined by Mr. Bogle, rather than those who are too influenced by the academics and those who come up with fancy, higher fee products that entice investers with more of the old "We have a Secret Sauce" approach.

[azanon]

I am mystified as to why this forum seems to worship Swedroe when he is continually changing course and recommending new portfolios that are supposed to give the investor some advantage. The portfolios are based on academic research which is, in turn, always based on backtesting, since no one can research the future and, more importantly, since there is no "science" to understanding how markets work.

How is this in line with the Boglehead approach of avoiding market timing, buying the whole market, and taking what the maket gives us?

A lot of the notables or "expert panelists", for better or worse, have their deviation from strict Bogleheads. William Bernstein (of whom I'm a huge fan), certainly dabbles outside the boundaries, such as including precious metals or very milt tilting based on valuations. Even Rick Ferri, who's probably the closest of these 3 to being strict boglehead, I believe includes a slice of small cap value in one of his portfolios. Alan Roth also has or had PM, and maybe even some bitcoin?!? Taylor L., AFAIK, is the only one that doesn't stray even a little.

And the forum is named after Jack Bogle, whom admitted to adjusting stock holdings in the late 90s due to valuations, and has insinuated that'd he'd likely consider it again, if a situation warranted it, since he is fond of calculating expected returns. Specifically, he made that late 90s adjustment, because his calculated expected return for bonds greatly exceeded stocks at the time, despite stocks being riskier.

It's a good question though. If boglehead-ism is so solid, then why are the top experts that often represent us, doing something different?

[Dottie57]

I simply do not see how the whole factor thing is anything but very fancy backtesting. Yes, it worked over many periods in the past, but it may very well have stopped working now for many reasons, starting with the way that computer trading has changed markets and moving on to "once everyone knows something it no longer works."

Beyond that, the way that factor funds select stocks does not please me at all. I spent several years deeply studying value investing at different market cap sizes and using various tools to screen for value, and what I found was that there is no way that any set of quantitative screens will identify the companies worth investing in. Screening, even complex screening is step one. Then a human brain has to study up about the business, the environment the business operates in, and apply common sense. You also have to react when the value parameters change and take profits intelligently. Knowing if a run is over is very difficult and only shows up in retrospect (and hence in backtesting.) If you only choose stocks based on quantitive aspects of individual companies you pretty much end up with a wash vs Total Stock Market.

My own study of many stocks over several years also convinced me that the market by no means has already priced in what is known about companies because there is far less common sense being applied to stock buying with ever passing year. Programmed trading plus chaining stocks in ETFs has made them move in lockstep in ways they never did even 15 years ago. Unless I get a time machine for Christmas, I'll stick to the Boglehead philosophy as defined by Mr. Bogle, rather than those who are too influenced by the academics and those who come up with fancy, higher fee products that entice investers with more of the old "We have a Secret Sauce" approach.

To me "buy the market" Makes so much sense, I hate to deviate. I unknowingly followed BH principles in my 401k because there were good low cost VG funds to use. It has done well.

[2015]

I am mystified as to why this forum seems to worship Swedroe when he is continually changing course and recommending new portfolios that are supposed to give the investor some advantage. The portfolios are based on academic research which is, in turn, always based on backtesting, since no one can research the future and, more importantly, since there is no "science" to understanding how markets work.

How is this in line with the Boglehead approach of avoiding market timing, buying the whole market, and taking what the maket gives us?

I stopped paying attention to Swedroe (and others like him) a while ago. Entirely too much complexity for my tastes as complexity will always strike me as noise.

[triceratop]

I wonder if any retail investor has actually come ahead of a three funder after fees, taxes, implementation costs, etc?

You don't have to wonder this, or you shouldn't anyway. Boglehead Robert T has done detailed attribution analysis showing his results and answering your question in the affirmative.

[triceratop]

I do not think this Forum worships Larry Swedroe, if you have been around a while you know there are some tough critics of his on here.

Having said that, I personally enjoy his articles and have read several of his books.

Larry is always the first one to say over and over again, that if you have tracking error regret, you should not tilt.

Final note: I recently read the book he wrote on factors, I had a question about the lack of exposure to momentum in cap weighted broad market indexes so I emailed him...he emailed me back that same day and was very helpful.

Larry does indeed have some tough critics around here and I have learned from both them and Larry himself. Larry also points out that in addition to tracking error the portfolios he recommends are trading off right tale upside for a decreased dispersion of outcomes. One can really see that in this article: http://www.retireearlyhomepage.com/reallife17.html. The Larry Portfolio lags 60/40 when starting in 1994 but does much better if one starts in 1999. As for Larry changing course, I agree that as new asset classes become investible, it makes sense to explore them. If TIPS just now came into existance would most people advocate ignoring them and instead just "staying the course"?

"It makes no sense to buy TIPS to reduce inflation risk. The bond market surely prices inflation risk into the yields for nominal treasuries across the yield curve. Why bother changing one's exposure from the most liquid fixed income and efficiently priced rates market in the world? Do we know how their prices will fluctuate on the open market in reaction to interest rate shocks? Also, the CPI calculation...seems complex and very newfangled. We should strive for simplicity in our investing (and also, will 10% allocation to TIPS really change the outcome appreciably)"

[gmaynardkrebs]

I do not think this Forum worships Larry Swedroe, if you have been around a while you know there are some tough critics of his on here.

Having said that, I personally enjoy his articles and have read several of his books.

Larry is always the first one to say over and over again, that if you have tracking error regret, you should not tilt.

Final note: I recently read the book he wrote on factors, I had a question about the lack of exposure to momentum in cap weighted broad market indexes so I emailed him...he emailed me back that same day and was very helpful.

Larry does indeed have some tough critics around here and I have learned from both them and Larry himself. Larry also points out that in addition to tracking error the portfolios he recommends are trading off right tale upside for a decreased dispersion of outcomes. One can really see that in this article: http://www.retireearlyhomepage.com/reallife17.html. The Larry Portfolio lags 60/40 when starting in 1994 but does much better if one starts in 1999. As for Larry changing course, I agree that as new asset classes become investible, it makes sense to explore them. If TIPS just now came into existance would most people advocate ignoring them and instead just "staying the course"?

"It makes no sense to buy TIPS to reduce inflation risk. The bond market surely prices inflation risk into the yields for nominal treasuries across the yield curve. Why bother changing one's exposure from the most liquid fixed income and efficiently priced rates market in the world? Do we know how their prices will fluctuate on the open market in reaction to interest rate shocks? Also, the CPI calculation...seems complex and very newfangled. We should strive for simplicity in our investing (and also, will 10% allocation to TIPS really change the outcome appreciably)"

Nominal bonds earn you a premium for taking on the inflation risk yourself. TIPS are the insurance.

[gasman]

I am mystified as to why this forum seems to worship Swedroe when he is continually changing course and recommending new portfolios that are supposed to give the investor some advantage. The portfolios are based on academic research which is, in turn, always based on backtesting, since no one can research the future and, more importantly, since there is no "science" to understanding how markets work.

How is this in line with the Boglehead approach of avoiding market timing, buying the whole market, and taking what the maket gives us?

“When my information changes, I alter my conclusions. What do you do, sir?”

― John Maynard Keynes

[Random Walker]

Scooter57,
Larry’s criteria for a factor/source of return are
Persistent: over time and economic regimes
Pervasive: different markets and different asset classes
Robust to different definitions
Investable: can be implemented with readily available instruments
Intuitive: rational risk based or behavioral based explanation for the premium to exist and persist. Of these five criteria, this is the one I think is most forward looking. I think this is very important. We can only invest looking forward and data only looks backward. During inevitable periods of underperformance, it is these intuitive rationale that can give us conviction to stick with the plan looking forward.

Dave

[randomizer]

Looking forward to reading this one, although I won't buy a paperback format (would prefer Kindle).

Larry's advice is generally far more optimization-driven than I would ever implement, but I find it intellectually interesting. I'm just too allergic to complexity to go beyond a basic three-fund portfolio.

[HomerJ]

He is ardently passive in his recommendations.

I see this as his biggest fault, to be honest.

No one should be so SURE when talking about finance and economics.

[gmaynardkrebs]

He is ardently passive in his recommendations.

I see this as his biggest fault, to be honest.

No one should be so SURE when talking about finance and economics.

Especially when the biggest black swan out there is passive investing.

[larryswedroe]

Was reading some of the comments and thought I would clarify a few things that might be helpful

First, re factors. I think it's fair to say I'm highly skeptical of research. As evidence I submit that there are over 600 factors identified in the literature, and I've vetted them down, using strong critieria of persistence across time and economic regimes, pervasive across countries, sectors, regions and even asset classes, robust to various definitions, and implementable, while also have strong intuitive risk or behavorial explanations for why we should expect persistence in the future. There are only eight that meet all the criteira. That's about 1% of the factors. Skepticism is healthy but not to the point you reject anything that doesn't agree with your preconceived notions.

Second, yes my strategy has evolved, just like all should evolve when you learn new things, and new vehicles and strategies become available that meet your criteria.

Third, there are very few things I'm sure about---and when it comes to returns there are none. Which is why I believe that hyperdiversification is the right strategy, not having almost all my eggs in market beta basket which is what even 60/40 portfolios have. If you believe markets are efficient, which supposedly all Bogleheads do, then you should also believe that all risky assets should similar risk adjusted returns, so why load up on market beta? To me that makes no sense when other options are available.

Fourth, the focus almost exclusively on costs is just wrong, That's another thing I'm sure about. Yes costs matter, but exclusively looking at them is not correct. That should be the case if something is a pure commodity, and investments are not except if index funds. And indexing clearly has negatives that can be minimized and the positives maximized by intelligent decision and patient trading (even Vanguard recognized this and has changed its definitions of universes to avoid negatives of some indices).

I wrote my first book in May of 1998 and since then DFA SV has outperformed VSIVX despite a 40 bp disadvantage in costs. And since we switched to BOSVX is has outperformed DFSVX even by more than we estimated, despite a higher ER. It's value added not costs that matter. And in some cases some funds are expensive because you are asking the provider not to run an "index" or similar fund, but to run a bank or insurance company for you, which costs a lot more. Similarly with the VRP, you cannot do it purely passively like an index fund. You must be an intelligent passive, patient trader so you make markets, not pay away spreads.

Fifth, I've learned that the mind is a very stubborn thing. Once a person has a set belief it is very hard to change (like indexing is best and three fund portfolios are best). It has to deal with confirmation bias, cognitive dissonance, "and resulting" (basing decisions on outcomes not ex-ante strategy), cherry picking data to maintain our illusions. The result is that instead of changing our mind based on new information we alter our narrative/interpretation to accommodate the new information. The research even shows that these traits are correlated with IQ, and math skills. Our capacity for self-deception is boundless.

Sixth, the comments on TSM are very interesting from this perspective. When those who believe in efficient markets say you should invest in the market portfolio that does NOT mean the TSM as Bogleheads think about it. It means ALL INVESTABLE assets, that includes things like insurance and consumer, small business, and student loans, among other assets. Now one should only consider investing in other assets such as these if it can be done in a cost effective manner. The ordinary investor cannot invest in many things, such as rubber plantations. But because of the new innovation of interval funds new asset types are now accessible because daily liquidity is not required. Thus one can access now new sources of risk and return that diversify portfolios.

Finally, most of the products I have discussed, not all, are very simple, not complex at all. Nothing really much simpler than LENDX or SRRIX in terms of understanding the risks of the fund and how they are run. Of course it helps to be able to do the in depth due diligence we do, often taking years to get to know providers. We took over three before we invested with Stone Ridge. But all our clients get to read detailed white papers explaining all the risks before they invest. And of course we are their to answer any questions.

I hope that is helpful. The new book will provide those interested with all the information one needs to make an intelligent decision. But it's only for people interested in perhaps learning something new. If anyone has any other questions feel free to email, Won't respond further here. Just wanted to clarify some things.

Best wishes, and always happy to answer emails or even PMs.

[lack_ey]

I think it's pretty reasonable to say "I don't believe in a lot of these things" and/or "I prefer lower cost, as that's a known advantage."

But I'd say that reducing reliance on equity market risk for returns (for a given risk budget or target return) is surely in line with the title's goal of reducing the risk of black swans.

[KlangFool]

Larry,

Enjoy the previous edition. Waiting for your Kindle version. Keep on writing.

KlangFool

[willthrill81]

I am mystified as to why this forum seems to worship Swedroe when he is continually changing course and recommending new portfolios that are supposed to give the investor some advantage. The portfolios are based on academic research which is, in turn, always based on backtesting, since no one can research the future and, more importantly, since there is no "science" to understanding how markets work.

How is this in line with the Boglehead approach of avoiding market timing, buying the whole market, and taking what the maket gives us?

“When my information changes, I alter my conclusions. What do you do, sir?”

― John Maynard Keynes

+1

Larry has definitely changed his stance on some issues, like trend following. Just four months ago, he wrote this article on the benefits of trend following, which is about the same time that I decided to employ this method myself. The long-term data on the value of trend following is too much for some of us to ignore or blame on chance.

Also, I think that Larry's advice to consider diversifying into some alternative investments like peer-to-peer lending is prudent give that stock valuations are high and bonds aren't likely to do well in a rising interest rate environment. My own P2P lending has earned 7-9% returns.

[HomerJ]

Fifth, I've learned that the mind is a very stubborn thing. Once a person has a set belief it is very hard to change (like indexing is best and three fund portfolios are best).

Indexing and three fund portfolio is "good enough", not best. I'm quite certain there are "better" investment portfolios. Especially looking backwards.

But indexing is simple and good enough.

Finally, most of the products I have discussed, not all, are very simple, not complex at all. Nothing really much simpler than LENDX or SRRIX in terms of understanding the risks of the fund and how they are run. Of course it helps to be able to do the in depth due diligence we do, often taking years to get to know providers. We took over three before we invested with Stone Ridge. But all our clients get to read detailed white papers explaining all the risks before they invest. And of course we are their to answer any questions.

You state the products are simple, yet it took your team years to do in-depth due diligence, and you have created "detailed white papers" to explain ALL (you sure?) the risks. And we should just trust you?

Too many variables, in my mind. I'm not sure that you know all the risks of the various factors, or can quantify them perfectly. I'm not saying you're wrong. You may be right. But I don't know if you missed a variable or two.

So I'll stick with the "good enough", and let others read your book in search of a better portfolio.

[Jiu Jitsu Fighter]

Was reading some of the comments and thought I would clarify a few things that might be helpful
...
Best wishes, and always happy to answer emails or even PMs.

Welcome back Larry! Can't wait to read the new book. The original was excellent. You and Robert T are my two favorite contributors. I sure hope you're back for good!

[Chuffly]

Too many variables, in my mind. I'm not sure that you know all the risks of the various factors, or can quantify them perfectly. I'm not saying you're wrong. You may be right. But I don't know if you missed a variable or two.

One could say the same about investing in U.S. equities.

[naha66]

Larry says

I wrote my first book in May of 1998 and since then DFA SV has outperformed VSIVX despite a 40 bp disadvantage in costs. And since we switched to BOSVX is has outperformed DFSVX even by more than we estimated, despite a higher ER. It's value added not costs that matter. And in some cases some funds are expensive because you are asking the provider not to run an "index" or similar fund, but to run a bank or insurance company for you, which costs a lot more. Similarly with the VRP, you cannot do it purely passively like an index fund. You must be an intelligent passive, patient trader so you make markets, not pay away spreads.

Hey BOSVX has only been around since 2011 unless I missed something. Guess what VISVX has beaten both since 2011.

[Dominic]

Larry says

I wrote my first book in May of 1998 and since then DFA SV has outperformed VSIVX despite a 40 bp disadvantage in costs. And since we switched to BOSVX is has outperformed DFSVX even by more than we estimated, despite a higher ER. It's value added not costs that matter. And in some cases some funds are expensive because you are asking the provider not to run an "index" or similar fund, but to run a bank or insurance company for you, which costs a lot more. Similarly with the VRP, you cannot do it purely passively like an index fund. You must be an intelligent passive, patient trader so you make markets, not pay away spreads.

Hey BOSVX has only been around since 2011 unless I missed something. Guess what VISVX has beaten both since 2011.

But the value premium is currently negative, so this is exactly what you should expect. The funds with lower value exposure have done better in recent years.

[naha66]

Larry says

I wrote my first book in May of 1998 and since then DFA SV has outperformed VSIVX despite a 40 bp disadvantage in costs. And since we switched to BOSVX is has outperformed DFSVX even by more than we estimated, despite a higher ER. It's value added not costs that matter. And in some cases some funds are expensive because you are asking the provider not to run an "index" or similar fund, but to run a bank or insurance company for you, which costs a lot more. Similarly with the VRP, you cannot do it purely passively like an index fund. You must be an intelligent passive, patient trader so you make markets, not pay away spreads.

Hey BOSVX has only been around since 2011 unless I missed something. Guess what VISVX has beaten both since 2011.

But the value premium is currently negative, so this is exactly what you should expect. The funds with lower value exposure have done better in recent years.

That's been the case for the last 14 years how much longer will you wait?

[corn18]

I'm perfectly happy being average. Takes fewer words to write my IPS.

[HomerJ]

Too many variables, in my mind. I'm not sure that you know all the risks of the various factors, or can quantify them perfectly. I'm not saying you're wrong. You may be right. But I don't know if you missed a variable or two.

One could say the same about investing in U.S. equities.

We DO say the same about investing in U.S. equities.

Perhaps you've seen multiple people post "Nobody knows nothing." I prefer, "Nobody knows enough", myself.

[daveydoo]

Larry is pretty careful to avoid data-mined research.

Ah, so all of his data are from the future. That makes sense now.

Everyone who back-tests any strategy should be forced to publish a book on it so we'd know what the true denominator is -- I'm sure it's in the millions.

[printer]

I am mystified as to why this forum seems to worship Swedroe when he is continually changing course and recommending new portfolios that are supposed to give the investor some advantage. The portfolios are based on academic research which is, in turn, always based on backtesting, since no one can research the future and, more importantly, since there is no "science" to understanding how markets work.

How is this in line with the Boglehead approach of avoiding market timing, buying the whole market, and taking what the maket gives us?

My impression about Larry:

He's a seeker of truth. He tries as best he can to base his opinions on data and critical thinking. He reads a lot and works to learn as much as he can. Integrity is important to him and he wants to help others. He works in an imprecise field, makes conclusions in that field, and changes his mind when he thinks he has a better conclusion. I suspect that these things, and a human tendency to listen to people that they think are experts, are big contributing factors to why people listen to him in this forum. He is human, and makes mistakes. As for there being a science about markets - there are aspects of markets that are not predictable or even comprehensible, but that does not mean that nothing scientific can be learned. I've seen, by the way, especially in Larry's articles about factors, that Larry is a fan of establishing objective testable criteria. You can see this in one of his articles about what makes something into what he considers to be a factor (sorry, don't have the link handy).

[jdb]

I am ordering the book. Probably will not follow it, I think Larry is guru in bonds but don’t follow his equity investment advice. And other than some direct stock and bond investments if Vanguard doesn’t offer it I am generally not interested. But Larry is always interesting. And I like to know the options. Thanks Larry.

[gmaynardkrebs]

I am ordering the book. Probably will not follow it, I think Larry is guru in bonds but don’t follow his equity investment advice. And other than some direct stock and bond investments if Vanguard doesn’t offer it I am generally not interested. But Larry is always interesting. And I like to know the options. Thanks Larry.

Like much of what is said on Bogleheads, much of the finer points of Swedroe's work is way over my head. But I've been a "fan" of him for many years because I think he looks at things from the perspective of people like me. I emphasize "people," because most of the other financial writers seem to focus on something called "investors," and I'm not sure what an investor is, and whether it even includes me -- a working stiff who just wants to put together a safe, solid retirement in the age of no defined benefit plans. Larry is great at anticipating the questions of just such a person, and in particular, the focus on risk, something that most writers pay lip service to, before ending with "stocks for the long run." So, I'm buying his book, even though much of it will be over my head -- there's always plenty of good common sense, intelligence, and genuine concern for folks like me in what he writes. And, I am very glad to see him return to the forum, if only for a brief interlude.

[Robert T]

If you believe markets are efficient, which supposedly all Bogleheads do, then you should also believe that all risky assets should similar risk adjusted returns...

Extract from an earlier paper by Campbell Harvey - provides a slightly different view
https://faculty.fuqua.duke.edu/~charvey ... ing_in.pdf

The particular asset with high variance and low correlation is not judged on its own variance. It is judged on how it contributes to the variance of the well-diversified portfolio. In the example, it reduces the variance of the portfolio. As a result, this asset is valuable (investors like variance reducing assets) and the expected return as a result is low. In other words, because investors value the variance reducing properties of this asset in the context of their portfolio, the price is bid up to the point that the future expected returns are low.

So, to be clear here, it is possible that a high volatility asset has a low expected return and it is also possible that the high volatility asset has a high expected return. It is not the variance of the asset that matters – it is the contribution to the variance of the portfolio. This contribution is the covariance.

Robert
.

[Da5id]

Larry is pretty careful to avoid data-mined research.

Ah, so all of his data are from the future. That makes sense now.

Everyone who back-tests any strategy should be forced to publish a book on it so we'd know what the true denominator is -- I'm sure it's in the millions.

Though I argued with him some when he was active here, I am in fact a Larry Swedroe fan. I don't do factors, but I like his writing. When I read his articles I learn things and think about them. I think he does show care to avoid the p-hacked data that leads to many "factors" seeming great but not working out in the future. Maybe someday I'll even drink the factor Koolaid, but not yet, happy with largely 3 fund.

As to "back-testing", well, we all make assumptions to determine our investment strategy to one degree or another. e.g. about the equity premium persisting.

[bgf]

I wonder if any retail investor has actually come ahead of a three funder after fees, taxes, implementation costs, etc?

of course. plenty have. so far, i have.

plenty have also failed to do so.

[bgf]

Our capacity for self-deception is boundless.

ugh, so true it hurts.

thanks for the detailed response.

[GibsonL6s]

Larry is pretty careful to avoid data-mined research.

Ah, so all of his data are from the future. That makes sense now.

Everyone who back-tests any strategy should be forced to publish a book on it so we'd know what the true denominator is -- I'm sure it's in the millions.

Though I argued with him some when he was active here, I am in fact a Larry Swedroe fan. I don't do factors, but I like his writing. When I read his articles I learn things and think about them. I think he does show care to avoid the p-hacked data that leads to many "factors" seeming great but not working out in the future. Maybe someday I'll even drink the factor Koolaid, but not yet, happy with largely 3 fund.

As to "back-testing", well, we all make assumptions to determine our investment strategy to one degree or another. e.g. about the equity premium persisting.

We also have 113 years of World Series data, does that predict next year's winner?

[willthrill81]

Larry is pretty careful to avoid data-mined research.

Ah, so all of his data are from the future. That makes sense now.

Everyone who back-tests any strategy should be forced to publish a book on it so we'd know what the true denominator is -- I'm sure it's in the millions.

Though I argued with him some when he was active here, I am in fact a Larry Swedroe fan. I don't do factors, but I like his writing. When I read his articles I learn things and think about them. I think he does show care to avoid the p-hacked data that leads to many "factors" seeming great but not working out in the future. Maybe someday I'll even drink the factor Koolaid, but not yet, happy with largely 3 fund.

As to "back-testing", well, we all make assumptions to determine our investment strategy to one degree or another. e.g. about the equity premium persisting.

We also have 113 years of World Series data, does that predict next year's winner?

If it weren't for historical data, I doubt that most of us on this forum would be invested in equities.

You have to treat historical data with care, but ignoring it entirely as some here seem to suggest seems foolish.

[gmaynardkrebs]

Larry is pretty careful to avoid data-mined research.

Ah, so all of his data are from the future. That makes sense now.

Everyone who back-tests any strategy should be forced to publish a book on it so we'd know what the true denominator is -- I'm sure it's in the millions.

Though I argued with him some when he was active here, I am in fact a Larry Swedroe fan. I don't do factors, but I like his writing. When I read his articles I learn things and think about them. I think he does show care to avoid the p-hacked data that leads to many "factors" seeming great but not working out in the future. Maybe someday I'll even drink the factor Koolaid, but not yet, happy with largely 3 fund.

As to "back-testing", well, we all make assumptions to determine our investment strategy to one degree or another. e.g. about the equity premium persisting.

We also have 113 years of World Series data, does that predict next year's winner?

If it weren't for historical data, I doubt that most of us on this forum would be invested in equities.

You have to treat historical data with care, but ignoring it entirely as some here seem to suggest seems foolish.

I would guess that the best argument for ignoring is some variant of the EMT, which is not a bad argument. The question then becomes, what do you look at, other than your navel.

[lack_ey]

We also have 113 years of World Series data, does that predict next year's winner?

Actually, yes, better than a know-nothing approach of assuming every team has an equal chance, relying only on the list of who won previously and which teams were in existence. Then of course better than that if using wins-projected kinds of stats for team strength (or more crudely, something like last year's wins and total team salary should be positively correlated with chances of winning).

Or alternatively, there's the market approach: check the sports betting markets!

In the investing context too we're only talking probibalistically.

[GibsonL6s]

So you are sure that analyzing the past world series winners and using this data is going to beat picking a name out of a hat or having someone who has no idea about the game pick the winner?

In investing there are plenty of people who invest based on today's reality and do no look at the past. I have bought lots of stocks looking at the current ROE and Dividend yield with no regard for the last 50 years of ROEs, dividend yields, stock prices, squiggly lines or any other past piece of information.

[cfs]

. . . Was reading some of the comments and thought I would clarify a few things that might be helpful . . .

Thanks for all you do, and thanks for your post. I have the original version and now I will order the 2018 revision [after reading I will donate to my local library]. You are a good American. God bless you and your family, and gracias por leer ~cfs~

[daveydoo]

Larry is pretty careful to avoid data-mined research.

Ah, so all of his data are from the future. That makes sense now.

Everyone who back-tests any strategy should be forced to publish a book on it so we'd know what the true denominator is -- I'm sure it's in the millions.

Though I argued with him some when he was active here, I am in fact a Larry Swedroe fan. I don't do factors, but I like his writing.

Agreed. Was not so much criticizing Larry (will get me tarred and feathered here) as I was the reference to his avoiding data-mining.