Larry Swedroe: The Battle Of Passive Strategies

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Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Mon Jun 18, 2018 9:59 am

https://www.advisorperspectives.com/art ... strategies

May 2018 marks the 20th anniversary of Larry’s first book. The book had two main themes. First, passive beats active. Second, size and value represent independent sources of return from market beta, and it’s worthwhile to tilt an otherwise market portfolio towards those factors. This sets up the “battle of the passive strategies”: TSM as advocated by the father of index funds John Bogle and Tilting. Larry reviews the results of the last 20 years.
Lastly, Larry makes the point that there are some weaknesses associated with pure indexing that can be minimized with intelligent fund design and patient trading. He emphasizes that cost alone is not what matters. It’s cost per unit factor exposure and cost per unit value added that matter. When looked at from that perspective, there are potential advantages to more expensive funds with deeper factor exposure.

A few things not mentioned in the article

Larry doesn’t mention it in this article specifically, but there are other advantages to funds with deeper factor exposure. Less cost per unit factor exposure has a couple of implications. One is with regard to portfolio efficiency. When a fund has deeper factor exposure, less market beta exposure needs to be taken on to achieve the same tilt: a more efficient portfolio. Also cost differences are less than one would think because one can use less of the more expensive factor fund and more of the cheaper core / TSM fund to achieve the desired tilt.
It would be interesting to not only see the individual fund comparisons made in this article, but to also see how portfolios of the funds performed over the time periods discussed.
A couple other points regarding intelligent design. The DFA funds also use momentum and profitability screens and are more aggressive with securities lending. And lastly, VG does not offer any tax managed value funds while DFA does have some tax managed and tax advantaged value funds.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by jeffyscott » Mon Jun 18, 2018 11:07 am

Random Walker wrote:
Mon Jun 18, 2018 9:59 am
When a fund has deeper factor exposure, less market beta exposure needs to be taken on to achieve the same tilt: a more efficient portfolio. Also cost differences are less than one would think because one can use less of the more expensive factor fund and more of the cheaper core / TSM fund to achieve the desired tilt.
It's still going to cost more. If you truly believe factor exposure is all that matters you can mix, VTSAX and VSIAX with ERs of 0.05% and 0.07% to get it, rather than mixing a bit less DFSVX (ER 0.52%) with VTSAX.

Even at 100% VSIAX, the cost is only 0.07%, this is about equivalent to cost of 96%VTSAX/4% DFSVX or 90% VTSAX/10% DFSVX. There may be more value and small exposure in the DFA funds, but seems doubtful there is enough there to offset the higher costs.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by triceratop » Mon Jun 18, 2018 11:15 am

jeffyscott wrote:
Mon Jun 18, 2018 11:07 am
Random Walker wrote:
Mon Jun 18, 2018 9:59 am
When a fund has deeper factor exposure, less market beta exposure needs to be taken on to achieve the same tilt: a more efficient portfolio. Also cost differences are less than one would think because one can use less of the more expensive factor fund and more of the cheaper core / TSM fund to achieve the desired tilt.
It's still going to cost more. If you truly believe factor exposure is all that matters you can mix, VTSAX and VSIAX with ERs of 0.05% and 0.07% to get it, rather than mixing a bit less DFSVX (ER 0.52%) with VTSAX.

Even at 100% VSIAX, the cost is only 0.07%, this is about equivalent to cost of 96%VTSAX/4% DFSVX or 90% VTSAX/10% DFSVX. There may be more value and small exposure in the DFA funds, but seems doubtful there is enough there to offset the higher costs.
In general I agree and think your advice is prudent, but I want to observe that whether the exposure is worth it depends entirely on future factor excess returns which are of course unknowable.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by wolf359 » Mon Jun 18, 2018 11:55 am

I agree with the article's conclusion that so far, results have supported his book's contention that:
1) passive beats active; and
2) tilting towards size and/or value is superior to Total Stock Market.

What I'm unclear about in his article is that he also pushes the case that using DFA funds to tilt is superior to using Vanguard funds to tilt (although he does point out that both fund families are acceptable and recommended.)

His performance numbers indicate that DFA outperforms Vanguard funds during that timeframe, but I can't tell if he accounted for advisory fees during that outperformance. Use of DFA funds requires you to have an advisor. Depending upon your advisor's fees, DFA would have to outperform Vanguard by the amount of those fees just to break even.

This has been a sticking point for me. I've been staying with Vanguard and have been happy with the results. Partly this is because I think the cost of using DFA funds is at least 1% AUM, and I'm unclear what other benefits I'd get from having that advisor (it would have to be more than just giving me access to an additional fund family.)

I'm not sure I have enough assets (outside of 401-ks) to even interest an advisor in my case.

I wouldn't reduce exposure to factors because I believe that factor funds are more efficient. Since the persistence of the premiums is not as great as the market premium, I will still maximize exposure to each of the factors I am targeting, hoping for outperformance. I am still saving/investing sufficiently to achieve my goals within an acceptable timeframe if the tilts are ineffective. The purpose of the tilts is to improve performance and the likelihood that I'll achieve my goals faster.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by vineviz » Mon Jun 18, 2018 12:10 pm

triceratop wrote:
Mon Jun 18, 2018 11:15 am
I want to observe that whether the exposure is worth it depends entirely on future factor excess returns which are of course unknowable.
And the same thing can be said about whether owning ANY stocks and bond are worth it.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Mon Jun 18, 2018 12:55 pm

Wolf359,
I believe you are seeing things correctly. Probably shouldn’t hire an advisor only for DFA access. The returns in the article do account for expense ratios but do not account for advisor fees. If you wanted DFA access alone, I think it is likely available for much less than the 1% fee you mention. I actually have gone the advisor route, and my initial interest was DFA access. Over time I’ve been continuously learning the benefits of a good advisor. If interested, I’ve got one or two threads posted on making the decision to go the advisor route.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by triceratop » Mon Jun 18, 2018 1:05 pm

vineviz wrote:
Mon Jun 18, 2018 12:10 pm
triceratop wrote:
Mon Jun 18, 2018 11:15 am
I want to observe that whether the exposure is worth it depends entirely on future factor excess returns which are of course unknowable.
And the same thing can be said about whether owning ANY stocks and bond are worth it.
Precisely true, though of course that exposure is basically free cost-wise.

I should say that I personally own quite a lot of US/Intl SCV in index funds.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by jeffyscott » Mon Jun 18, 2018 1:06 pm

wolf359 wrote:
Mon Jun 18, 2018 11:55 am
His performance numbers indicate that DFA outperforms Vanguard funds during that timeframe, but I can't tell if he accounted for advisory fees during that outperformance. Use of DFA funds requires you to have an advisor. Depending upon your advisor's fees, DFA would have to outperform Vanguard by the amount of those fees just to break even.

This has been a sticking point for me. I've been staying with Vanguard and have been happy with the results. Partly this is because I think the cost of using DFA funds is at least 1% AUM, and I'm unclear what other benefits I'd get from having that advisor (it would have to be more than just giving me access to an additional fund family.)
You don't even have to bring advisor fees into it. It was known that Vanguard small cap value index (which I think was using Russell 200 value back then) was less exposed to small and value factors 20 years ago. If you had naively just doubled up because of that (and I believe that may have been suggested back then, perhaps by Rick Ferri on the old indexfunds.com forums :?: ), you'd have ended up about that same place, for example 50/50 Total stock/VISVX, instead of 75% total stock/25% DFSVX.

As I recall, another thing from back then was that the S&P 600 was probably a better index to use than the R2K if those were your small cap options. There is not quite 20 years of data for the Vanguard fund that follows that (VTMSX) but over the 19.25 years that there is, the return is nearly equal to that for what is now called DFA Microcap (DFSCX). Anyone using that Vanguard fund would probably actually have given it higher weight than they would have given DFSCX, due to it's being less small.

To offset the lower factor loading of Vanguard funds, perhaps one would have chosen 1/3 in each of VTSMX, VISVX, VTMSX in an attempt to approximately replicate 25% each in VTSMX, DFLVX, DFSVX, DFSCX. Based on M* growth charts the results for the 19.25 years would've been very close $64,333 vs. $63,091 from an initial $10K.

Now, of course, there are a lot more options for those who believe in and want small and value factor exposure, with all the low cost ETFs out there.
press on, regardless - John C. Bogle

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by vineviz » Mon Jun 18, 2018 2:22 pm

wolf359 wrote:
Mon Jun 18, 2018 11:55 am
What I'm unclear about in his article is that he also pushes the case that using DFA funds to tilt is superior to using Vanguard funds to tilt (although he does point out that both fund families are acceptable and recommended.)
That might have been true in 1998, but I don't think it is now.

Using the iShares S&P index ETFs (or the newer Vanguard equivalents) you can easily replicate the factor loadings of most domestic DFA funds for a fraction of the expense.

For instance if you had a EW portfolio of DFUVX, DFSTX, DFSCX (three funds Larry mentioned) you could have replicated it with near precision using just (IJS) iShares S&P Small-Cap 600 Value ETF and (IUSV) iShares Core S&P US Value ETF in the same proportions, from their inception until now.

https://www.portfoliovisualizer.com/bac ... n5_2=33.33
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by wolf359 » Mon Jun 18, 2018 2:36 pm

vineviz wrote:
Mon Jun 18, 2018 2:22 pm
wolf359 wrote:
Mon Jun 18, 2018 11:55 am
What I'm unclear about in his article is that he also pushes the case that using DFA funds to tilt is superior to using Vanguard funds to tilt (although he does point out that both fund families are acceptable and recommended.)
That might have been true in 1998, but I don't think it is now.

Using the iShares S&P index ETFs (or the newer Vanguard equivalents) you can easily replicate the factor loadings of most domestic DFA funds for a fraction of the expense.

For instance if you had a EW portfolio of DFUVX, DFSTX, DFSCX (three funds Larry mentioned) you could have replicated it with near precision using just (IJS) iShares S&P Small-Cap 600 Value ETF and (IUSV) iShares Core S&P US Value ETF in the same proportions, from their inception until now.

https://www.portfoliovisualizer.com/bac ... n5_2=33.33
His preference for DFA is mentioned in the article. Specifically, he says,
As a result, while both Dimensional’s structured asset class funds and Vanguard’s index funds are on our investment policy committee’s list of approved funds, Dimensional’s funds have been our preferred recommended vehicles. (We also include some of the funds from AQR and Bridgeway Capital Management.) Both of these fund families’ funds appear in the book’s appendix listing recommending funds that investors should consider when implementing their asset allocation plan.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by vineviz » Mon Jun 18, 2018 2:57 pm

wolf359 wrote:
Mon Jun 18, 2018 2:36 pm
His preference for DFA is mentioned in the article. Specifically, he says,
As a result, while both Dimensional’s structured asset class funds and Vanguard’s index funds are on our investment policy committee’s list of approved funds, Dimensional’s funds have been our preferred recommended vehicles. (We also include some of the funds from AQR and Bridgeway Capital Management.) Both of these fund families’ funds appear in the book’s appendix listing recommending funds that investors should consider when implementing their asset allocation plan.
Yeah, but it's not clear to me WHY (apart from marketing concerns) he maintains this preference.

Someone building a factor-optimized portfolio in 2018 has many choices of excellent funds outside of the four mutual fund families he mentions.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Mon Jun 18, 2018 3:14 pm

Wolf,
There are many reasons Larry and BAM prefer DFA over VG. I can rattle off a few of them. Deeper exposures to the factors means less market beta exposure for same exposure to other factors, tax management in many value funds, profitability and momentum screens, securities lending, patient trading, hold ranges, screen out stocks academics have shown to be bad performers (IPOs, bankruptcy, small growth with high investment and low profitability), use of core funds first and then tilt to taste with the mentioned asset class funds.
I’m not qualified to quantitate these benefits, but I do think it is fair to say that anyone looking at expense ratios alone is not by any means seeing the whole picture. Expense ratios are certain. Expected factor returns are only expected. Potential benefits of all the above mentioned characteristics are hard for people like us to quantitate and likewise only potential. Nonetheless the list starts to add up.
Also, VG is lacking in the passive international value, international small value, EM Small, EM value category.

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Last edited by Random Walker on Mon Jun 18, 2018 4:35 pm, edited 1 time in total.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by KyleAAA » Mon Jun 18, 2018 3:25 pm

wolf359 wrote:
Mon Jun 18, 2018 11:55 am
I agree with the article's conclusion that so far, results have supported his book's contention that:
1) passive beats active; and
2) tilting towards size and/or value is superior to Total Stock Market.

What I'm unclear about in his article is that he also pushes the case that using DFA funds to tilt is superior to using Vanguard funds to tilt (although he does point out that both fund families are acceptable and recommended.)

His performance numbers indicate that DFA outperforms Vanguard funds during that timeframe, but I can't tell if he accounted for advisory fees during that outperformance. Use of DFA funds requires you to have an advisor. Depending upon your advisor's fees, DFA would have to outperform Vanguard by the amount of those fees just to break even.

This has been a sticking point for me. I've been staying with Vanguard and have been happy with the results. Partly this is because I think the cost of using DFA funds is at least 1% AUM, and I'm unclear what other benefits I'd get from having that advisor (it would have to be more than just giving me access to an additional fund family.)

I'm not sure I have enough assets (outside of 401-ks) to even interest an advisor in my case.

I wouldn't reduce exposure to factors because I believe that factor funds are more efficient. Since the persistence of the premiums is not as great as the market premium, I will still maximize exposure to each of the factors I am targeting, hoping for outperformance. I am still saving/investing sufficiently to achieve my goals within an acceptable timeframe if the tilts are ineffective. The purpose of the tilts is to improve performance and the likelihood that I'll achieve my goals faster.
I use DFA funds in my 401k without needing to go through an advisor. It's also not difficult to get DFA access without paying anywhere near 1%.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by vineviz » Mon Jun 18, 2018 4:30 pm

Random Walker wrote:
Mon Jun 18, 2018 3:14 pm
There are many reasons Larry and BAM prefer DFA over VG. I can rattle off a few of them. Deeper exposures to the factors means less market beta exposure for same exposure to other factors, tax management in many value funds, profitability and momentum screens, securities lending, patient trading, hold ranges, screen out stocks academics have shown to be bad performers (IPOs, bankruptcy, small growth with high investment and low profitability), use of core funds first and then tilt to taste with the mentioned asset class funds.
If those are, indeed, the reasons that Larry prefers DFA categorically over Vanguard then it's easy to put them to the test.

If we compare the factor loadings of DFSTX to a similar fund at Vanguard (VIOV) over the past five years we can see that the funds have virtually identical loadings on Rm-Rf, SmB, and HmL. Same beta, some factor exposure, lower expenses.

Code: Select all

Factor regression results
Name	Ticker	Start Date	End Date	Rm-Rf	SMB	HML	Alpha	Annual Alpha	R2
Vanguard S&P Small-Cap 600 Value ETF	VIOV	Jun 2013	Apr 2018	0.99	0.81	0.41	0.06%	0.66%	96.6%
DFA US Small Cap I	DFSTX	Jun 2013	Apr 2018	0.99	0.76	0.30	-0.04%	-0.53%	97.6%
https://www.portfoliovisualizer.com/fac ... sion=false

Maybe the tax-managed DFA funds have good tax efficiency, but according to Morningstar VIOV has a better tax-cost ratio and higher tax-adjusted returns (mostly because VIOV has higher absolute returns in pretty much every period, but still . . . ).

http://performance.morningstar.com/fund ... ture=en_US

Most of the other advantages you list would show up in the fund's alpha if they were significant drivers of return but honestly I don't see that being the case.

There are definitely some DFA funds that are harder to replicate than others, especially the international ones, and I'm definitely not suggesting that the typical individual investor would (or should) want to learn the skills necessary to do it. But unlike the world 20 years ago, today it is definitely possible to do so.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by triceratop » Mon Jun 18, 2018 5:24 pm

Don't pay attention to M* for tax cost ratios, their numbers are not reliable.

However, SP600 ETFs like IJS/VIOV are incredibly tax efficient. See e.g. this thread and related ones: viewtopic.php?t=242137

I would be surprised if vanilla DFA funds (not tax-managed) were more tax efficient. They're probably even competitive with the tax-managed versions, but obviously without actual data on DFA fund distributions this is hard to say.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Mon Jun 18, 2018 6:35 pm

Vineviz,
I realize in your comparison you were trying to match funds by factor exposure. But it’s important to appreciate (as I’m sure you do) that you are comparing Vanguard’s SCV Fund (VIOV) with Dimensional’s Small Blend Fund (DFSTX). One of the advantages of DFA asset class funds is that you need less of them to achieve a given factor exposure compared to an analogous Vanguard fund. One could compare DFA US SV Fund (DFSVX) as well. It’s market exposure is about same as VIOV at 1.05, it’s SmB exposure is about same as VIOV at 0.85, but it has much more HmL exposure than VIOV: 0.52 v. O.28. So one could use just about half as much DFSVX to get the same value tilt as VIOV. And since the investor is using half the allocation, he would also be adding half the market exposure to get the same value tilt.
Currently Larry’s firm is recommending BOSVX for SV exposure. It wasn’t mentioned in the article because it wasn’t available 20 years ago. But it has higher loading on size, value, profitability, quality than their previous DFA recommendation.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by vineviz » Mon Jun 18, 2018 8:21 pm

Random Walker wrote:
Mon Jun 18, 2018 6:35 pm
Vineviz,
I realize in your comparison you were trying to match funds by factor exposure. But it’s important to appreciate (as I’m sure you do) that you are comparing Vanguard’s SCV Fund (VIOV) with Dimensional’s Small Blend Fund (DFSTX). One of the advantages of DFA asset class funds is that you need less of them to achieve a given factor exposure compared to an analogous Vanguard fund. One could compare DFA US SV Fund (DFSVX) as well. It’s market exposure is about same as VIOV at 1.05, it’s SmB exposure is about same as VIOV at 0.85, but it has much more HmL exposure than VIOV: 0.52 v. O.28. So one could use just about half as much DFSVX to get the same value tilt as VIOV. And since the investor is using half the allocation, he would also be adding half the market exposure to get the same value tilt.
I don't know if S&P was specifically targeting DFA when they built their indexes, but they've really given the modern investor a lot really great tools.

Without claiming equivalence on all fronts, I see little that DFSVX would do in a portfolio that an S&P 600 Pure Value fund couldn't do (e.g. Invesco S&P Smallcap 600 Pure Value ETF, RZV). The monthly returns don't match precisely (R-square d of .841) but the factor exposures are close at least for SmB and HmL:

Code: Select all

Name	Description	Rm-Rf	SMB	HML	Alpha	Annual Alpha	R2	F-stat	F-stat p-value	Returns Regression R2
DFSVX	DFA US Small Cap Value I (DFSVX)	1.06	0.87	0.49	-0.10%	-1.20%	98.5%	3,058.74	0.000	-
Factor Exposure Clone	RZV=100.00%	1.19	1.18	1.06	-0.04%	-0.43%	84.5%	256.95	0.000	84.1%
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Mon Jun 18, 2018 8:56 pm

Vineviz,
RZV certainly seems to meet the criteria we’re discussing. Just quickly looking at it, seems to beat DFSVX according to loadings and expenses. I’d be interested to hear more of the DFA argument.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Rick Ferri » Mon Jun 18, 2018 9:11 pm

OP wrote:
When a fund has deeper factor exposure, less market beta exposure needs to be taken on to achieve the same tilt: a more efficient portfolio.
I do not believe in having less market exposure because of a hope that other factor premiums will make up the difference. I believe in allocating to stocks first, then maybe allocating some stocks to factors with the hope of achieving a higher return but not counting on it!.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Mon Jun 18, 2018 9:25 pm

Rick Ferri wrote:
Mon Jun 18, 2018 9:11 pm
OP wrote:
When a fund has deeper factor exposure, less market beta exposure needs to be taken on to achieve the same tilt: a more efficient portfolio.
I do not believe in having less market exposure because of a hope that other factor premiums will make up the difference. I believe in allocating to stocks first, then maybe allocating some stocks to factors with the hope of achieving a higher return but not counting on it!.

Rick Ferri
Do you agree that your approach implies a bigger bet on the market factor? And that the market factor already dominates the portfolio?

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by wootwoot » Mon Jun 18, 2018 10:18 pm

vineviz wrote:
Mon Jun 18, 2018 4:30 pm
If we compare the factor loadings of DFSTX to a similar fund at Vanguard (VIOV) over the past five years we can see that the funds have virtually identical loadings on Rm-Rf, SmB, and HmL. Same beta, some factor exposure, lower expenses.
Why did you choose 5 years? Are you going to be FIRE that quickly? Just wondering why you compared such a short timeline.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by stlutz » Mon Jun 18, 2018 10:29 pm

This thread is like old times. It's been a long time since we've had a Vanguard sucks/DFA rules thread. :mrgreen:

Of course, a closer look at the data shows that we have two things going on--an excellent market-timing call by Swedroe to dump most stocks and only go SV back in 1998/1999. After the tech bust, his fund recommendations collected together (both equity and fixed income) haven't yielded any value over a standard 3 or 4 funder.

One nice thing about Portfolio Visualizer is how easy it is to look at how various recommendations have performed for various time periods.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Rick Ferri » Tue Jun 19, 2018 6:58 am

Random Walker wrote:
Mon Jun 18, 2018 9:25 pm
Rick Ferri wrote:
Mon Jun 18, 2018 9:11 pm
OP wrote:
When a fund has deeper factor exposure, less market beta exposure needs to be taken on to achieve the same tilt: a more efficient portfolio.
I do not believe in having less market exposure because of a hope that other factor premiums will make up the difference. I believe in allocating to stocks first, then maybe allocating some stocks to factors with the hope of achieving a higher return but not counting on it!.

Rick Ferri
Do you agree that your approach implies a bigger bet on the market factor? And that the market factor already dominates the portfolio?

Dave
No. I do not agree. All stocks have a market factor. Some of those stocks have other risk factors, and those stocks are actively overweight in a tilted portfolio. That doesn’t change the amount of market risk. Adding additional risk adds to total expected long-term return (and I do mean l-o-n-g term, like 25 years if you apply these factors religiously).
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by vineviz » Tue Jun 19, 2018 7:07 am

wootwoot wrote:
Mon Jun 18, 2018 10:18 pm
vineviz wrote:
Mon Jun 18, 2018 4:30 pm
If we compare the factor loadings of DFSTX to a similar fund at Vanguard (VIOV) over the past five years we can see that the funds have virtually identical loadings on Rm-Rf, SmB, and HmL. Same beta, some factor exposure, lower expenses.
Why did you choose 5 years? Are you going to be FIRE that quickly? Just wondering why you compared such a short timeline.
Unless the underlying index has had a major change in methodology, a fund like VIOV is unlikely to experience major drift in factor loadings over time (unlike returns, which can vary significantly).

And since we are never entirely sure when DFA changes ITS methodology, I wanted to use a short enough period to capture an apples to apples comparison.

Five years of daily or monthly returns is plenty of power for a regression of this type usually.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Rick Ferri » Tue Jun 19, 2018 7:11 am

Or it could be a random event.

How one decides which selection and weighting methodology to use for value or any other factor goes beyond the icing on the cake. It is the sprinkles on the icing on the cake. In other words, it’s mostly an academic excerise. The “best” method as measured by performance over the next ten years will be a random event. Pick your poison and live with it - if you can.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by privatefarmer » Tue Jun 19, 2018 8:11 am

wolf359 wrote:
Mon Jun 18, 2018 11:55 am
I agree with the article's conclusion that so far, results have supported his book's contention that:
1) passive beats active; and
2) tilting towards size and/or value is superior to Total Stock Market.

What I'm unclear about in his article is that he also pushes the case that using DFA funds to tilt is superior to using Vanguard funds to tilt (although he does point out that both fund families are acceptable and recommended.)

His performance numbers indicate that DFA outperforms Vanguard funds during that timeframe, but I can't tell if he accounted for advisory fees during that outperformance. Use of DFA funds requires you to have an advisor. Depending upon your advisor's fees, DFA would have to outperform Vanguard by the amount of those fees just to break even.

This has been a sticking point for me. I've been staying with Vanguard and have been happy with the results. Partly this is because I think the cost of using DFA funds is at least 1% AUM, and I'm unclear what other benefits I'd get from having that advisor (it would have to be more than just giving me access to an additional fund family.)

I'm not sure I have enough assets (outside of 401-ks) to even interest an advisor in my case.

I wouldn't reduce exposure to factors because I believe that factor funds are more efficient. Since the persistence of the premiums is not as great as the market premium, I will still maximize exposure to each of the factors I am targeting, hoping for outperformance. I am still saving/investing sufficiently to achieve my goals within an acceptable timeframe if the tilts are ineffective. The purpose of the tilts is to improve performance and the likelihood that I'll achieve my goals faster.
some firms will "sell" DFA access for a one-time flat fee (I paid about 1k) regardless of portfolio size, so you don't always have to pay an AUM fee. or, you could hire a DFA advisor, get your $$$ invested, and then end your relationship w/ the advisor but keep your money invested in DFA. not the most ethical which is why I found one that would just sell me access for a one-time fee.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by vineviz » Tue Jun 19, 2018 9:10 am

Rick Ferri wrote:
Tue Jun 19, 2018 6:58 am
No. I do not agree. All stocks have a market factor. Some of those stocks have other risk factors, and those stocks are actively overweight in a tilted portfolio. That doesn’t change the amount of market risk. Adding additional risk adds to total expected long-term return (and I do mean l-o-n-g term, like 25 years if you apply these factors religiously).
Rick,

As I understand it, the point that Dave was making is that one way to optimize a portfolio's risk is to set risk factor targets. You can do this more efficiently (i.e. with fewer undesirable side effects) using funds with stronger factor loads, giving the investor more freed to diversify their risk exposure and/or take only the risks they are comfortable taking.

Imagine a hypothetical portfolio that is 60% Vanguard Small-Cap Value ETF (VBR) and 40.00% Vanguard Total Bond Market ETF (BND). This portfolio would have a load on SmB of 0.34 and a load on HmL of 0.19, and has a market beta (RmF) of 0.64.

If, for whatever reason, the investor concluded that this market exposure was more than they were comfortable, without finding different funds they really only have one option: allocate more to bonds AT THE EXPENSE of reducing their SmB and HmL exposure below their desired allocation.

Instead, give the investor access to funds with stronger factor exposures. Let them build a portfolio that is 35.00% Invesco S&P Smallcap 600 Pure Value ETF (RZV) ) and 65.00% Vanguard Total Bond Market ETF (BND), for instance.

They have achieved virtually the same SmB and HmL exposure (0.37 and 0.21 respectively), but with significantly less exposure to the market factor (RmF=0.42). They've efficiently reduced their market factor exposure (aka market risk) while holding their size and value factor exposure constant and without increasing their fixed income risk factors (term risk and credit risk) significantly.

I'm not saying that's a better portfolio necessarily, although it could readily be superior for some investors, just pointing out that market risk exposure is not a given but another variable in portfolio construction like any other. By making conscious choices about how to construct the portfolio, the investor potentially has multiple ways to approach their goals.

For instance, instead of holding a relatively bland bond fund like BND the investor could have (if they'd wanted to) used the extra freedom to increase their fixed income factor loads (by taking adding long term treasuries and/or corporate bonds) to gain back some of the expected return they gave up by reducing market beta.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Tue Jun 19, 2018 9:31 am

Vineviz,
Yes, you got my point exactly. If one looks at diversification a bit differently, then “not putting all your eggs in one basket” can be “don’t put all your eggs in the same risk basket”. By using SV funds with deeper exposures, one can have a portfolio with same SV factor loadings and less market factor loading. This would be a move in the direction of risk parity. It’s worthwhile to note that the value factor is nearly as persistent as market factor.

Dave

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by jeffyscott » Tue Jun 19, 2018 9:46 am

Random Walker wrote:
Tue Jun 19, 2018 9:31 am
It’s worthwhile to note that the value factor is nearly as persistent as market factor.
May also be worth noting that it has been MIA for about 15 years, based on returns of DFLVX vs. S&P 500.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Bulgogi Head » Tue Jun 19, 2018 10:02 am

If I wanted to outperform the market just a bit over the long term, would the Vanguard Multifactor ETF (VFMF) be a good candidate? Even if value didn’t reappear as strongly as the past, would the other factors in the ETF make up for that?

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Tue Jun 19, 2018 10:10 am

jeffyscott wrote:
Tue Jun 19, 2018 9:46 am
Random Walker wrote:
Tue Jun 19, 2018 9:31 am
It’s worthwhile to note that the value factor is nearly as persistent as market factor.
May also be worth noting that it has been MIA for about 15 years, based on returns of DFLVX vs. S&P 500.
Is your point that maybe value is gone or that it’s time for it to make a comeback? :-)

Dave

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by jeffyscott » Tue Jun 19, 2018 11:30 am

Random Walker wrote:
Tue Jun 19, 2018 10:10 am
jeffyscott wrote:
Tue Jun 19, 2018 9:46 am
Random Walker wrote:
Tue Jun 19, 2018 9:31 am
It’s worthwhile to note that the value factor is nearly as persistent as market factor.
May also be worth noting that it has been MIA for about 15 years, based on returns of DFLVX vs. S&P 500.
Is your point that maybe value is gone or that it’s time for it to make a comeback? :-)

Dave
Yes. :wink:
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by vineviz » Tue Jun 19, 2018 1:25 pm

Bulgogi Head wrote:
Tue Jun 19, 2018 10:02 am
If I wanted to outperform the market just a bit over the long term, would the Vanguard Multifactor ETF (VFMF) be a good candidate? Even if value didn’t reappear as strongly as the past, would the other factors in the ETF make up for that?
It's really hard to predict how Vanguard's strategy will perform over the long term. The factors they are targeting (value, momentum, quality, and volatility) are ones that have generally produced excess returns even after expenses, but the approach that Vanguard is using with VFMF allows the managers to adjust the portfolio rules over time which adds a little uncertainty to the mix.

For a typical buy-and-hold investor, a fund like Vanguard Multifactor ETF (VFMF) is probably a good candidate. Assembling an optimal factor-based portfolio on your own requires some skill and a level of activity that probably isn't fully consistent with the Boglehead philosophy, and VFMF provides a one-and-done solution.

My opinion is that VFMF could be an excellent core holding, possibly even replacing Vanguard Total Stock Market in a three- or four-fund portfolio, but I'd like to observe it for more than a couple of months before endorsing it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Rick Ferri » Tue Jun 19, 2018 5:06 pm

I understand the argument. I don’t agree with it. Factor premiums are not guarantees. I don’t treat them like they are. They should be used as a potential additive to beta, not a substitute for beta.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Tue Jun 19, 2018 6:16 pm

Rick Ferri wrote:
Tue Jun 19, 2018 5:06 pm
I understand the argument. I don’t agree with it. Factor premiums are not guarantees. I don’t treat them like they are. They should be used as a potential additive to beta, not a substitute for beta.
I appreciate your point. Market beta aside, when it comes to other factors, do you see your above rationale as a reason to diversify across them, or do you pick just one or two favorites to tilt a bit towards?

Dave

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Rick Ferri » Tue Jun 19, 2018 9:17 pm

If you tilt, I recommend a barbell. Use 75% in total market, 25% in the most heavily factor weighted fund or funds you can find.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by bgf » Wed Jun 20, 2018 7:21 am

im having a difficult time wrapping my head around the factor tilt strategy. while i think i understand market cap weighted index funds, i have not read much about factor tilting.

what makes factor tilting any different from investing in old school mutual funds that we all shun?

is it just the fact that we can now get these funds for 0.5% expense ratios instead of 1.5% that they are deemed beneficial? as far as I can tell, any argument against an 'old school' mutual fund applies to a factor fund. you still have a guy thinking up a long term strategy to outperform the market and then executing it. he either will, or he won't.

"In addition, structured asset-class funds, such as those offered by Dimensional, can provide greater exposure to the factors investors are trying to access. Thus, while they have higher expenses, investors should not solely care about cost. Instead, they should focus on higher expected return (which may be achieved by lowering the cost per unit of factor exposure)."

Read that again. How does that sound any different than a guy selling you an old school value/small cap mutual fund, apart from the fact that its cheaper now than it was then?
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Wed Jun 20, 2018 7:49 am

Bgf,
Not sure what you mean by old school, but if you mean active, these passive asset class funds are certainly not that. There is no market timing or specific stock picking. It’s formulaic. These funds simply provide access to the factors identified by academics to explain equity returns. They are not so much looking to beat the market as they are looking to provide access to known factors the way TSM accesses market beta. When looking at the behavior of equity portfolios, market beta explains about 2/3. Adding small and value gets you to about 90%. The remaining factors take it up to about 95% . Passive asset class funds simply access these explanatory factors.

Dave

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by nedsaid » Wed Jun 20, 2018 8:03 am

To me, there are a couple of key issues here.

First, can an individual factor tilt with the "right" funds as well as an advisor can? Or at least close enough? Case in point was the Vanguard Small Value Index ETF that I purchased upon recommendation from Paul Merriman's former firm. Right after that, I saw threads that said the Vanguard Small Value Index had too many Mid-Caps and wasn't valuey enough. DFA and Bridgeway were much better supposedly. Frustration as what were the "right" funds yesterday are not the "right" funds today.

Second, can the increased performance of factor tilts overcome the drag of advisor fees? This point has been debated endlessly here.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by JohnDindex » Wed Jun 20, 2018 8:30 am

Random Walker wrote:
Wed Jun 20, 2018 7:49 am
Bgf,
Not sure what you mean by old school, but if you mean active, these passive asset class funds are certainly not that. There is no market timing or specific stock picking. It’s formulaic. These funds simply provide access to the factors identified by academics to explain equity returns. They are not so much looking to beat the market as they are looking to provide access to known factors the way TSM accesses market beta. When looking at the behavior of equity portfolios, market beta explains about 2/3. Adding small and value gets you to about 90%. The remaining factors take it up to about 95% . Passive asset class funds simply access these explanatory factors.

Dave
How is a rules based strategy not active? Has DFA not added additional screens over the years, is that a passive decision?

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Wed Jun 20, 2018 8:44 am

JohnDindex wrote:
Wed Jun 20, 2018 8:30 am
Random Walker wrote:
Wed Jun 20, 2018 7:49 am
Bgf,
Not sure what you mean by old school, but if you mean active, these passive asset class funds are certainly not that. There is no market timing or specific stock picking. It’s formulaic. These funds simply provide access to the factors identified by academics to explain equity returns. They are not so much looking to beat the market as they are looking to provide access to known factors the way TSM accesses market beta. When looking at the behavior of equity portfolios, market beta explains about 2/3. Adding small and value gets you to about 90%. The remaining factors take it up to about 95% . Passive asset class funds simply access these explanatory factors.

Dave
How is a rules based strategy not active? Has DFA not added additional screens over the years, is that a passive decision?
Yes they have added momentum and profitability screens over the years. In that respect any decision could be considered “active”. But, as academics have identified the independent explanatory sources of portfolio returns, what was once alpha gets turned into a new beta. DFA and other passive factor fund providers have simply incorporated the new data into their passive funds. Market beta is one factor. Size, value, momentum, profitability are other betas. They can all be accessed passively. It’s most efficient to access them in a single fund when possible. So I would strongly argue that DFA funds provide access to well known factors in a passive fashion. Once again, formulaic without market timing or individual security selection.

Dave

P.S. Larry Swedroe describes the conversion of alpha into beta in his book The Incredible Shrinking Alpha.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by vineviz » Wed Jun 20, 2018 8:50 am

nedsaid wrote:
Wed Jun 20, 2018 8:03 am
First, can an individual factor tilt with the "right" funds as well as an advisor can? Or at least close enough?
Obviously it depends on the investor, but I'd say yes it is definitely possible using the funds and tools available today.
nedsaid wrote:
Wed Jun 20, 2018 8:03 am
Case in point was the Vanguard Small Value Index ETF that I purchased upon recommendation from Paul Merriman's former firm. Right after that, I saw threads that said the Vanguard Small Value Index had too many Mid-Caps and wasn't valuey enough. DFA and Bridgeway were much better supposedly. Frustration as what were the "right" funds yesterday are not the "right" funds today.
This seems to be a nearly universal experience for investors: the battle between "good enough" and "better". It's not specific to factor investing. As with all investment choices we can make, just because fund X or Y is "better" optimized in a particular way than fund Z, that DOES NOT mean that X or Y are bad choices. Or even that Z is better for you.

If you want your portfolio to constantly reflect the best available knowledge and research, it probably requires a level of activity above what the Bogleheads guidelines would suggest. However, professional advisors come in many different levels of competence. There are certainly talented and intelligent advisors out there, but having an advisor provides no guarantee that you'll receive anything except a bill for their services.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Broken Man 1999 » Wed Jun 20, 2018 8:52 am

KyleAAA wrote:
Mon Jun 18, 2018 3:25 pm
wolf359 wrote:
Mon Jun 18, 2018 11:55 am
I agree with the article's conclusion that so far, results have supported his book's contention that:
1) passive beats active; and
2) tilting towards size and/or value is superior to Total Stock Market.

What I'm unclear about in his article is that he also pushes the case that using DFA funds to tilt is superior to using Vanguard funds to tilt (although he does point out that both fund families are acceptable and recommended.)

His performance numbers indicate that DFA outperforms Vanguard funds during that timeframe, but I can't tell if he accounted for advisory fees during that outperformance. Use of DFA funds requires you to have an advisor. Depending upon your advisor's fees, DFA would have to outperform Vanguard by the amount of those fees just to break even.

This has been a sticking point for me. I've been staying with Vanguard and have been happy with the results. Partly this is because I think the cost of using DFA funds is at least 1% AUM, and I'm unclear what other benefits I'd get from having that advisor (it would have to be more than just giving me access to an additional fund family.)

I'm not sure I have enough assets (outside of 401-ks) to even interest an advisor in my case.

I wouldn't reduce exposure to factors because I believe that factor funds are more efficient. Since the persistence of the premiums is not as great as the market premium, I will still maximize exposure to each of the factors I am targeting, hoping for outperformance. I am still saving/investing sufficiently to achieve my goals within an acceptable timeframe if the tilts are ineffective. The purpose of the tilts is to improve performance and the likelihood that I'll achieve my goals faster.
I use DFA funds in my 401k without needing to go through an advisor. It's also not difficult to get DFA access without paying anywhere near 1%.



KyleAAA, Could you elaborate on the bolded and underlined part of your post?

Thanks!

Broken Man 1999
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by indexonlyplease » Wed Jun 20, 2018 8:53 am

I was with a DFA advisor for about 3 years. The cost was 1.3% for advisor fees and ers. I learned a lot from the advisor about passive investing. Then I found this site and bought into the 3 fund portfolio. I did not believe the fee was worth it any longer. Also, the money was in my 457 fund and I had to send the fees quarterly since the 457 fund does not allow advisor fees to be paid.

If I can find that paperwork I will be interested in what return I would of had compared to the 3 fund.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by JohnDindex » Wed Jun 20, 2018 9:00 am

Random Walker wrote:
Wed Jun 20, 2018 8:44 am
JohnDindex wrote:
Wed Jun 20, 2018 8:30 am
Random Walker wrote:
Wed Jun 20, 2018 7:49 am
Bgf,
Not sure what you mean by old school, but if you mean active, these passive asset class funds are certainly not that. There is no market timing or specific stock picking. It’s formulaic. These funds simply provide access to the factors identified by academics to explain equity returns. They are not so much looking to beat the market as they are looking to provide access to known factors the way TSM accesses market beta. When looking at the behavior of equity portfolios, market beta explains about 2/3. Adding small and value gets you to about 90%. The remaining factors take it up to about 95% . Passive asset class funds simply access these explanatory factors.

Dave
How is a rules based strategy not active? Has DFA not added additional screens over the years, is that a passive decision?
Yes they have added momentum and profitability screens over the years. In that respect any decision could be considered “active”. But, as academics have identified the independent explanatory sources of portfolio returns, what was once alpha gets turned into a new beta. DFA and other passive factor fund providers have simply incorporated the new data into their passive funds. Market beta is one factor. Size, value, momentum, profitability are other betas. They can all be accessed passively. It’s most efficient to access them in a single fund when possible. So I would strongly argue that DFA funds provide access to well known factors in a passive fashion. Once again, formulaic without market timing or individual security selection.

Dave

P.S. Larry Swedroe describes the conversion of alpha into beta in his book The Incredible Shrinking Alpha.
You can call it what you want, "formulaic" etc, but it is active IMO. We are all active somewhat IMO. I expect that owning companies will generate more return than lending money to companies or governments, and I very well may be wrong in my lifetime. Beyond that, I just don't know.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Wed Jun 20, 2018 9:04 am

vineviz wrote:
Wed Jun 20, 2018 8:50 am
nedsaid wrote:
Wed Jun 20, 2018 8:03 am
First, can an individual factor tilt with the "right" funds as well as an advisor can? Or at least close enough?
Obviously it depends on the investor, but I'd say yes it is definitely possible using the funds and tools available today.
nedsaid wrote:
Wed Jun 20, 2018 8:03 am
Case in point was the Vanguard Small Value Index ETF that I purchased upon recommendation from Paul Merriman's former firm. Right after that, I saw threads that said the Vanguard Small Value Index had too many Mid-Caps and wasn't valuey enough. DFA and Bridgeway were much better supposedly. Frustration as what were the "right" funds yesterday are not the "right" funds today.
This seems to be a nearly universal experience for investors: the battle between "good enough" and "better". It's not specific to factor investing. As with all investment choices we can make, just because fund X or Y is "better" optimized in a particular way than fund Z, that DOES NOT mean that X or Y are bad choices. Or even that Z is better for you.

If you want your portfolio to constantly reflect the best available knowledge and research, it probably requires a level of activity above what the Bogleheads guidelines would suggest. However, professional advisors come in many different levels of competence. There are certainly talented and intelligent advisors out there, but having an advisor provides no guarantee that you'll receive anything except a bill for their services.
To add to vineviz’ point. We all have a certain investing time span. We only have certain vehicles available to us when we start investing, and new (potentially better) ones will become available as we progress through our investing career. More often than not I think, unless the new investment represents a completely new alternative asset class, we are best served keeping current investments in the vehicle we already have and only putting new money in the newer vehicle. The incremental benefit of a new equity fund probably does not outweigh the tax hit from capital gains to make the change with funds already invested.

Dave

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by indexonlyplease » Wed Jun 20, 2018 9:10 am

I always read that picking a portfolio and sticking with it long term may be one of the best decisions an investor can make. But I constantly read here how so many believe there is a better way or think there is a better way. So, I may be confused at times and think there is a better portfolio. But then I go to the first line I typed.

So, I have to keep believing my 3 fund is good enough.

I hope I am stating this correctly?

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by jeffyscott » Wed Jun 20, 2018 9:13 am

bgf wrote:
Wed Jun 20, 2018 7:21 am
what makes factor tilting any different from investing in old school mutual funds that we all shun?

is it just the fact that we can now get these funds for 0.5% expense ratios instead of 1.5% that they are deemed beneficial? as far as I can tell, any argument against an 'old school' mutual fund applies to a factor fund. you still have a guy thinking up a long term strategy to outperform the market and then executing it. he either will, or he won't.
Unlike some here (but certainly not all) I have never believed that a fund manager was a negative. I think some (not all) here would take an index fund with an ER of 0.1% over a managed fund with an ER of 0.05%.

I think many fund managers are capable of adding some value, most of them just charge too much and many of them trade too much. Most Vanguard managed funds do not fall in this category. I don't know if there have been any more recent studies of this, but long ago there were some that showed typical manager adding on the order of 0.5%, IIRC.

Similarly, I think other than cap weighting via alternative index or passive strategies can add value. And it may well be that most of the added value of a fund manager is/was really just the them doing the sort of things that are done under alternative weighting strategies, etc.
press on, regardless - John C. Bogle

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Wed Jun 20, 2018 9:18 am

indexonlyplease wrote:
Wed Jun 20, 2018 8:53 am
I was with a DFA advisor for about 3 years. The cost was 1.3% for advisor fees and ers. I learned a lot from the advisor about passive investing. Then I found this site and bought into the 3 fund portfolio. I did not believe the fee was worth it any longer. Also, the money was in my 457 fund and I had to send the fees quarterly since the 457 fund does not allow advisor fees to be paid.

If I can find that paperwork I will be interested in what return I would of had compared to the 3 fund.
I use an advisor. The DFA funds have an average ER of about 0.4%. The advisor AUM fee is 0.5%. I figure my do it yourself VG portfolio would have an ER of about 0.2%. So in total, 0.4%+0.5%-0.2%=extra cost for me to go advisor route=0.7%. When I added up all the potential advantages of going the advisor route, I thought 0.7% seemed very fair. Potential advantages included improved returns from DFA funds, more efficient portfolio, tax loss harvesting better than I could do on my own, avoidance of behavioral errors, individual bond ladder with no expense ratio, access to new potentially beneficial innovations I wouldn’t find on my own, tax managed value funds, international small value funds, Core funds. I also put a value to “stuff I dont know that I don’t know”. And I think there has been value added in that department as well.
And another big plus for me of going advisor route has been that all my Boglehead time is purely recreational. I can enjoy it more.

Dave
Last edited by Random Walker on Wed Jun 20, 2018 2:51 pm, edited 1 time in total.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by vineviz » Wed Jun 20, 2018 9:30 am

indexonlyplease wrote:
Wed Jun 20, 2018 9:10 am
I always read that picking a portfolio and sticking with it long term may be one of the best decisions an investor can make. But I constantly read here how so many believe there is a better way or think there is a better way. So, I may be confused at times and think there is a better portfolio. But then I go to the first line I typed.

So, I have to keep believing my 3 fund is good enough.

I hope I am stating this correctly?
My take on it is that most important thing an investor can do is to choose a portfolio that has a reasonable chance of doing two things:
  1. Allowing the investor to meet their financial goals;
  2. Allowing the investor to stick with it during market ups-and-downs.
I don't think there can be any serious debate about whether the typical 3-fund Boglehead portfolio meets the first condition. Depending on the allocation, of course, I can't see any reason that those three funds couldn't help any investor meet any reasonable financial goal. This condition is purely a mathematical one.

The second condition is more personal and behavioral. For my own investments, given how intently I consume financial theory and research, I am unlikely to be satisfied with a strict three-fund portfolio. Such a portfolio could undoubtedly allow me to meet my financial goals, but without style and risk factor tilts I'd always be worried that I was leaving money on the table (so to speak).

So, I'd say your first sentence is entirely right but that it doesn't necessarily contradict the second sentence. There are lots of tweaks one could make to a three-fund portfolio that have a small chance of having a big impact or a big chance of having a small impact, none of which are likely to severely impact the typical investor in retirement.

There are also some tweaks that have a big chance of having a big impact, but these tweaks (in my experience) almost always have negative - not positive - consequences. People have, unfortunately, routinely demonstrated an attraction to this class of tweak which is why avoiding ALL tweaks is such a good strategy.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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