Larry Swedroe: The Battle Of Passive Strategies

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Random Walker
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Wed Jun 20, 2018 9:47 am

vineviz wrote:
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.
How has a home biased Japan investor done the last few decades with his TSM portfolio? I don’t know specifically, but I think he would have been better off diversifying beyond the single source of return, market beta. Market beta can potentially do poorly for a very long time. I agree that the longer one’s timeframe, the more likely it is to “work out”. Contrary to what most people here believe, I think diversification across factors is more important when the timeframe is shorter. For example in the critical years immediately preceding retirement and in early retirement, where sequence of returns risk is huge, diversification across independent sources of return can help a lot.

Dave

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by indexonlyplease » Wed Jun 20, 2018 1:06 pm

Random Walker wrote:
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, 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
You are so correct. I will never know as much as a DFA advisor would. And don't want to learn all that much just the basic. Also, spending the last 3 years on this site I learned I really know very little. All the things you mention above are all important. Now that I am retired I really don't want to spend that much time learning. Example would be my last post. I am trying to figure out how to start spending my investments in 6 years and making sure they last for life.

Thanks for the reply. You really made me think about DFA again.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by indexonlyplease » Thu Jun 21, 2018 7:20 am

Random Walker wrote:
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.

Dave
Can you send the threads on using the advisor.

Also, how would someone like me with the 50/50 AA 3 fund be able to compare the portfolio from a DFA advisor. Meaning would if be worth it for me to move my taxed deferred account over to DFA.

If I remember the DFA (Index Fund Advisors) They use a portfolio and the only decision was your AA. Not sure if this is the same for each advisor.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by indexonlyplease » Thu Jun 21, 2018 7:30 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.




Can you explain this last paragraph for me. I am having a little tough time with factors, factor funds, market premium and tilts. Is this the 3 fund or another type of investing.

Thanks

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Rick Ferri » Thu Jun 21, 2018 8:02 am

Factor investing is complex and the “optimal” way to do it is always changing because there is no optimal way that can be known in advance.

That being said, it’s all to common for advisers to relentlessly push complex investment strategies such as “optimal factor allocation” because it makes the adviser sound like they’re smart and that brings in business to their firm.

In truth, doing these strategies through an adviser cost more money. Even if it works the net-of-fee result to an investor isn’t any better than a total market index fund.

What’s the right answer? If you really understand factors and are committed to a strategy for at least 25 years, then do factors. For everyone eles, buy a few low cost market-tracking index funds and fahgetaboutit.
Last edited by Rick Ferri on Thu Jun 21, 2018 8:24 am, edited 1 time in total.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

Random Walker
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Thu Jun 21, 2018 8:22 am

indexonlyplease wrote:
Thu Jun 21, 2018 7:20 am
Random Walker wrote:
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.

Dave
Can you send the threads on using the advisor.

Also, how would someone like me with the 50/50 AA 3 fund be able to compare the portfolio from a DFA advisor. Meaning would if be worth it for me to move my taxed deferred account over to DFA.

If I remember the DFA (Index Fund Advisors) They use a portfolio and the only decision was your AA. Not sure if this is the same for each advisor.
viewtopic.php?t=213282


viewtopic.php?t=218193

viewtopic.php?t=200213

I’m sure you can find more. I’ve discussed it more than a few times. People have once or twice asked me for my portfolio results or to compare my portfolio to a VG one. It’s not really that easy, doable, or meaningful. The asset allocation may be completely different. There’s no telling what changes I would have made along the DIY all VG path, or whether I would have stuck to a plan. My asset allocation has changed in ways I couldn’t have imagined a decade ago. Literally! It’s just a completely different path. Larry Swedroe has written a few essays on choosing an advisor that are an excellent starting point.

http://www.etf.com/sections/features/53 ... nopaging=1

https://www.cbsnews.com/news/11-princip ... n-advisor/

Dave

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by wolf359 » Thu Jun 21, 2018 10:55 am

indexonlyplease wrote:
Thu Jun 21, 2018 7:30 am
wolf359 wrote:
Mon Jun 18, 2018 11:55 am
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.




Can you explain this last paragraph for me. I am having a little tough time with factors, factor funds, market premium and tilts. Is this the 3 fund or another type of investing.

Thanks
First, factors are optional. Don't invest in anything that you don't understand.

The 3-fund is an excellent strategy that will allow you to achieve your goals by providing market returns at very low cost. It's all you need, and you can stop right there if you want. Most of the return achieved by your portfolio can be explained by your asset allocation, that is, the amount you put in stocks versus bonds. If you understand the 3-fund, and you don't understand factors, invest in the 3-fund and stick with it.

Factors refers to additional ways that you might be able to "tilt" your portfolio. For example, the "size" factor means to buy stocks that are small, medium, or large. If you buy the S&P 500, you are buying large companies. If you buy Total Stock Market, you are buying ALL US companies, which include large, medium, and small, at the market weightings.

Studies showed that some factors, especially small and value, provide a better return than large blended funds. If you own VTSAX (Total Stock Market) and put 10% of your equities into Small Cap Value, you are said to be "tilting" to both small caps, and to value stocks. Your portfolio should mostly track the market, but you may "beat" the market slightly due to your SCV weighting. (For long periods of time, SCV also underperforms, so you will also underperform the market at times as well.)

What I was saying is that I am investing enough into the general market (using the 3-fund) that I will achieve my goals. The tilts I'm using are effectively with extra money. If they work and outperform, it's bonus returns. But if the factor doesn't pan out, or they underperform, I'll still be okay. I'm tilting to boost my return.

The statement about efficiency is that there is a strategy where you rely on the greater returns provided by a factor tilt to reduce your exposure to equities. If small cap value has a higher expected return, then you don't need to risk as much money in equities. My experience is that any given factor doesn't outperform all the time (meaning the extra return isn't as persistent as the return expected from holding stocks.) Therefore, I don't want to rely on those returns showing up, so I'll still keep maximizing my exposure to equities in general, and to a few factor tilts specifically.

Does that explanation help?

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by indexonlyplease » Thu Jun 21, 2018 11:49 am

wolf359 wrote:
Thu Jun 21, 2018 10:55 am
indexonlyplease wrote:
Thu Jun 21, 2018 7:30 am
wolf359 wrote:
Mon Jun 18, 2018 11:55 am
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.




Can you explain this last paragraph for me. I am having a little tough time with factors, factor funds, market premium and tilts. Is this the 3 fund or another type of investing.

Thanks
First, factors are optional. Don't invest in anything that you don't understand.

The 3-fund is an excellent strategy that will allow you to achieve your goals by providing market returns at very low cost. It's all you need, and you can stop right there if you want. Most of the return achieved by your portfolio can be explained by your asset allocation, that is, the amount you put in stocks versus bonds. If you understand the 3-fund, and you don't understand factors, invest in the 3-fund and stick with it.

Factors refers to additional ways that you might be able to "tilt" your portfolio. For example, the "size" factor means to buy stocks that are small, medium, or large. If you buy the S&P 500, you are buying large companies. If you buy Total Stock Market, you are buying ALL US companies, which include large, medium, and small, at the market weightings.

Studies showed that some factors, especially small and value, provide a better return than large blended funds. If you own VTSAX (Total Stock Market) and put 10% of your equities into Small Cap Value, you are said to be "tilting" to both small caps, and to value stocks. Your portfolio should mostly track the market, but you may "beat" the market slightly due to your SCV weighting. (For long periods of time, SCV also underperforms, so you will also underperform the market at times as well.)

What I was saying is that I am investing enough into the general market (using the 3-fund) that I will achieve my goals. The tilts I'm using are effectively with extra money. If they work and outperform, it's bonus returns. But if the factor doesn't pan out, or they underperform, I'll still be okay. I'm tilting to boost my return.

The statement about efficiency is that there is a strategy where you rely on the greater returns provided by a factor tilt to reduce your exposure to equities. If small cap value has a higher expected return, then you don't need to risk as much money in equities. My experience is that any given factor doesn't outperform all the time (meaning the extra return isn't as persistent as the return expected from holding stocks.) Therefore, I don't want to rely on those returns showing up, so I'll still keep maximizing my exposure to equities in general, and to a few factor tilts specifically.

Does that explanation help?
That was a great explanation. I understand the 3 fund with it's investing in the general market at market weighting. I now understand a little about factors and tilting. I have heard the term tilting on this blog many times. But like you state not enough to feel comfortable to konw what I am doing.

So, yes I will stick with what I understand and beleivet this is the way for me. The 3 fund portfolio. I understand with the 3 funds I am willing to except what the market gives me.

Thank you very much. Helps me to confirm in staying the course with the 3 fund.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by HomerJ » Thu Jun 21, 2018 12:14 pm

vineviz wrote:
Tue Jun 19, 2018 9:10 am
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.
Heh... Man, that's a lot of precision.

The only works if the future is EXACTLY like the past. Not just a little bit like the past. Because you're going down to the hundredth decimal to create this "efficient" portfolio based on past results. And then you post that you can calculate risk precisely going forward.

I'm counting on the stock market going up over the long-term. I'm not counting on it going up the EXACT amount it went up in the past. Just up.

I'll get what I get, and I won't throw a fit.

You factor guys make this way too complicated. I guess it sells books.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by HomerJ » Thu Jun 21, 2018 12:28 pm

Rick Ferri wrote:
Thu Jun 21, 2018 8:02 am
Factor investing is complex and the “optimal” way to do it is always changing
That alone makes me steer clear
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by HomerJ » Thu Jun 21, 2018 12:34 pm

wolf359 wrote:
Thu Jun 21, 2018 10:55 am
indexonlyplease wrote:
Thu Jun 21, 2018 7:30 am
wolf359 wrote:
Mon Jun 18, 2018 11:55 am
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.




Can you explain this last paragraph for me. I am having a little tough time with factors, factor funds, market premium and tilts. Is this the 3 fund or another type of investing.

Thanks
First, factors are optional. Don't invest in anything that you don't understand.

The 3-fund is an excellent strategy that will allow you to achieve your goals by providing market returns at very low cost. It's all you need, and you can stop right there if you want. Most of the return achieved by your portfolio can be explained by your asset allocation, that is, the amount you put in stocks versus bonds. If you understand the 3-fund, and you don't understand factors, invest in the 3-fund and stick with it.

Factors refers to additional ways that you might be able to "tilt" your portfolio. For example, the "size" factor means to buy stocks that are small, medium, or large. If you buy the S&P 500, you are buying large companies. If you buy Total Stock Market, you are buying ALL US companies, which include large, medium, and small, at the market weightings.

Studies showed that some factors, especially small and value, provide a better return than large blended funds. If you own VTSAX (Total Stock Market) and put 10% of your equities into Small Cap Value, you are said to be "tilting" to both small caps, and to value stocks. Your portfolio should mostly track the market, but you may "beat" the market slightly due to your SCV weighting. (For long periods of time, SCV also underperforms, so you will also underperform the market at times as well.)

What I was saying is that I am investing enough into the general market (using the 3-fund) that I will achieve my goals. The tilts I'm using are effectively with extra money. If they work and outperform, it's bonus returns. But if the factor doesn't pan out, or they underperform, I'll still be okay. I'm tilting to boost my return.

The statement about efficiency is that there is a strategy where you rely on the greater returns provided by a factor tilt to reduce your exposure to equities. If small cap value has a higher expected return, then you don't need to risk as much money in equities. My experience is that any given factor doesn't outperform all the time (meaning the extra return isn't as persistent as the return expected from holding stocks.) Therefore, I don't want to rely on those returns showing up, so I'll still keep maximizing my exposure to equities in general, and to a few factor tilts specifically.

Does that explanation help?
This is a very good explanation. I can understand tilting part of your portfolio hoping to get a bigger return. Recognizing you might get less (so you don't tilt your entire portfolio), but likely to get more based on past results. That's not something I do, but I can understand it.

The whole "efficiency" thing, where one buys LESS equities in their allocation, COUNTING on the factors to pay off exactly as they did in the past and have higher returns to balance out your portfolio back to normal returns with supposedly less risk is just pure academic foolishness.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by indexonlyplease » Thu Jun 21, 2018 4:17 pm

Rick Ferri wrote:
Thu Jun 21, 2018 8:02 am
Factor investing is complex and the “optimal” way to do it is always changing because there is no optimal way that can be known in advance.

That being said, it’s all to common for advisers to relentlessly push complex investment strategies such as “optimal factor allocation” because it makes the adviser sound like they’re smart and that brings in business to their firm.

In truth, doing these strategies through an adviser cost more money. Even if it works the net-of-fee result to an investor isn’t any better than a total market index fund.

What’s the right answer? If you really understand factors and are committed to a strategy for at least 25 years, then do factors. For everyone eles, buy a few low cost market-tracking index funds and fahgetaboutit.
Point well taken.

Thank You

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Thu Jun 21, 2018 9:47 pm

HomerJ wrote:
Thu Jun 21, 2018 12:28 pm
Rick Ferri wrote:
Thu Jun 21, 2018 8:02 am
Factor investing is complex and the “optimal” way to do it is always changing
That alone makes me steer clear
No plan is optimal. I think the goal is to build a portfolio that has a high likelihood of being close to some imaginary efficient frontier. As one considers adding an investment to a portfolio, he needs to ask himself why he’s considering the addition: is the change likely to move him incrementally towards an unknown northwest corner. The answer to that question depends on the expected return of the new investment, correlations to other portfolio components, volatility, when correlations tend to change, and costs. The best and cheapest equity diversifier is high quality bonds. From there on, every incremental portfolio improvement is of decreasing marginal benefit and increasing marginal cost. This same thought process applies to any potential portfolio addition: asset classes, styles, factors, alternatives. I started what I think is a significant thread on the subject a while back. The link is below.

viewtopic.php?t=231257

Dave

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by nedsaid » Sun Jun 24, 2018 12:07 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.
It is ironic that the Vanguard Small Cap Value Index has been outperforming the DFA Small Value fund over the last few years. So I am not looking so dumb after all. But this is hardly surprising as we have been in a Large Growth Market, the Vanguard Small Value Index has less Value loading and higher market cap than the DFA product. Larry Swedroe has sent me personal messages saying that Small Value has been doing well over the last year so perhaps the rumors of Small Value's death has been greatly exaggerated.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by larryswedroe » Sun Jun 24, 2018 8:17 am

fyi,
YTD, 1 year and 3 year returns for BOSVX (my firm's choice of preferred fund), DFSVX, VISVX and S&P
9.0, 7.9, 5.1,4.0
22.8, 20.6, 16.2, 15.4
11.8, 9.1, 9.8, 11.4

And internationally SV has outperformed over 1, 3, 5, 10, 15 years (just not ytd)


Best wishes
Larry

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by LadyGeek » Sun Jun 24, 2018 8:45 am

larryswedroe wrote:
Sun Jun 24, 2018 8:17 am
YTD, 1 year and 3 year returns for BOSVX (my firm's choice of preferred fund), DFSVX, VISVX and S&P
I formatted your returns:

Code: Select all

                  BOSVX      DFSVX    VISVX   S&P
YTD                9.0        7.9      5.1    4.0
1-year return     22.8       20.6     16.2   15.4
3-year return     11.8        9.1      9.8   11.4
==========

Can someone please explain why the Sharpe ratio is used for performance comparison? I'm reading criticisms (for example, Investopedia) that assumptions about the shape of the distribution may cause the results to be misinterpreted. Would the Sortino ratio be more appropriate?

Update: Larry has answered via PM. Paraphrasing:
The Sharpe Ratio assumes a normal distribution, while returns tend to show skewness and kurtosis.

The Sortino ratio shows downside volatility, no one cares about the upside.

The problem is that the Sharpe Ratio is best used in a PORTFOLIO context, not in individual fund comparisons. This is because the risk and return of a fund should be judged; not in isolation, but in how its addition impacts risk/return of the portfolio.

Additionally, once you get longer periods (such as a year or longer), returns tend to be not far from normal distribution (meaning log normal). And, the longer you go, the more normal they tend to look.
==========

As for the definition of factors, the wiki has some background info: Factors (finance) - Bogleheads
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Johnnie » Sun Jun 24, 2018 11:06 am

Paul Merriman has posted some new research on the frequency that different equity asset classes performed best in 1, 3, 5, 10, 20, 30 and 40 year periods.

Table here: https://paulmerriman.com/wp-content/upl ... risons.pdf
Article here: https://www.marketwatch.com/story/the-c ... 2018-06-06

The work was done by a fellow named Jeff Mattice using info from Dimensional Funds. The table identifies which fund or index was used in each class, and how far back the data for it goes.

SCV outperformed other asset classes more frequently than any other, even in one-year periods (23.9 percent of them). SCV really kills it for the longer periods (It was No. 1 in 33% of five-year periods, 45% of 10 year periods, 72% of 20 year periods and 94% of 40 year periods.)

There is also a table showing the frequency that the different asset classes were the year's worst over the same durations.


Kind of a long term "periodic table" summary.
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by LadyGeek » Sun Jun 24, 2018 12:40 pm

Johnnie wrote:
Sun Jun 24, 2018 11:06 am
Kind of a long term "periodic table" summary.
Here's the short-term summary: Callan periodic table of investment returns

(New investors should read this wiki article.)
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by phantom cosmonaut » Sun Jun 24, 2018 1:13 pm

LadyGeek wrote:
Sun Jun 24, 2018 8:45 am
larryswedroe wrote:
Sun Jun 24, 2018 8:17 am
YTD, 1 year and 3 year returns for BOSVX (my firm's choice of preferred fund), DFSVX, VISVX and S&P
I formatted your returns:

Code: Select all

                  BOSVX      DFSVX    VISVX   S&P
YTD                9.0        7.9      5.1    4.0
1-year return     22.8       20.6     16.2   15.4
3-year return     11.8        9.1      9.8   11.4

Lest we forget, Vanguard small value and Vanguard total market have both had better returns and lower risk than BOSVX since inception. The fund would have outperformed the Vanguard funds if it had similarly low fees, but all the outperformance and then some went to the managers. You also have to hire an advisor to gain access to the fund, which would have degraded performance even farther.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by phantom cosmonaut » Sun Jun 24, 2018 1:42 pm

LadyGeek wrote:
Sun Jun 24, 2018 8:45 am

Can someone please explain why the Sharpe ratio is used for performance comparison? I'm reading criticisms (for example, Investopedia) that assumptions about the shape of the distribution may cause the results to be misinterpreted. Would the Sortino ratio be more appropriate?
We're all familiar with the idea that its not just returns that matter, its return relative to risk. Otherwise owning more stock would always be better than owning bonds. The Sharp and Sortino ratios are just ways of comparing the returns of a fund to the risk of a fund.

One potential problem, that you point out, is that they both have an opinion about how to measure the "risk" of a fund. If you disagree with this way of measuring risk, those numbers will not be especially helpful. If you think that returns are not normally distributed, for example, both ways of measuring risk will misfire somewhat.

Another problem is that even if we all agreed that risk is what the Sharp ratio says it is (i.e. mean variance), the ratio also has an opinion about how much risk is worth taking for any additional unit of return. But this is obviously not something investors generally agree on. For you, it might be worth taking the chance of losing an extra -10% in a crash to get an extra 1% every year. For me, it might not be worth it.

Sharp ratios are perhaps helpful for back of the envelop comparisons of risk. They are fun to throw at people when arguing on the internet. But I'm not sure how useful they are for making actual investment decisions.

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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by LadyGeek » Sun Jun 24, 2018 3:21 pm

Thanks, that is helpful.
phantom cosmonaut wrote:
Sun Jun 24, 2018 1:42 pm
Sharp ratios are perhaps helpful for back of the envelop comparisons of risk. They are fun to throw at people when arguing on the internet. But I'm not sure how useful they are for making actual investment decisions.
You may be interested in this spreadsheet: Simba's backtesting spreadsheet, which uses several metrics in addition to the Sharpe and Sortino ratios mentioned here.

Feel free to join the on-going discussion thread: Simba's backtesting spreadsheet [a Bogleheads community project]
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Re: Larry Swedroe: The Battle Of Passive Strategies

Post by Random Walker » Sun Jun 24, 2018 3:21 pm

I think Sharpe ratios in isolation, looking at a single asset class or investment, are of significant but limited value. I think the real value of Sharpe ratios is in looking at how a portfolio’s Sharpe ratio changes when a new investment is added to the portfolio. How an investment affects a portfolio depends on its expected return, volatility, and correlations to other portfolio components. The new added investment’s effect on the portfolio can be seen in the Sharpe ratio.

Dave

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