Larry Swedroe: Investing In Short Time Horizons

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Larry Swedroe: Investing In Short Time Horizons

Post by Random Walker » Fri Dec 21, 2018 9:24 am

https://www.etf.com/sections/index-inve ... nopaging=1

This essay is for anyone who has avoided factor investing because they feel they simply can’t wait through potentially long periods of under performance to ultimately experience the benefit. All factors, including market beta, can suffer long periods of under performance. Knowing this, it makes great sense to diversify across factors whether the time period is short or long.

In the US, value has under performed over the last decade. But it has provided a premium over the last decade internationally. Larry presents data that showing that in 3 of our countries longest periods of negative performance for market beta, size and value have been positive.

Long periods of poor market performance are preceded by strong bull markets where valuations increase. When valuations are high, future expected returns are lower. Moreover, the whole potential distribution of returns shifts left with worse bad outcomes and less good positive outcomes.

The last two tables in the article are most significant. The likelihood of any single factor providing a negative premium is very significant over shorter time periods and decreases with time. A portfolio diversified across factors is much less likely to have a negative outcome across all time periods than any single factor, and this most definitely includes market beta.

For anyone interested in going more in depth on this topic, I recommend Larry’s last two books: Reducing The Risk Of Black Swans and Your Only Guide To Factor Based Investing.

Dave

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Random Walker » Fri Dec 21, 2018 10:06 am

[Post removed by admin LadyGeek]

I provide links because I go looking for his articles at ETF.com. I wake up early west coast time and usually find them a few hours before my work day starts.

As I’ve said before, I am a client of his firm. If I thought Larry’s firm was promising to “beat the market”, I would not be one of their clients. I think the characterization of factor based investing as an attempt to “beat the market” is a misrepresentation of the philosophy. I view it as passively accessing the risk based and behavioral based sources of return that academic finance has identified over the last 50 or more years. I believe there is much more in common between Bogle and Swedroe than there is difference. By the way, did you see that John Bogle has written the foreword to the 20th anniversary collection of papers from AQR? I think a post was started on that yesterday.

Dave
Last edited by Random Walker on Fri Dec 21, 2018 10:19 am, edited 1 time in total.

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Random Walker » Fri Dec 21, 2018 10:29 am

And with regard to the post of mine above that you linked. I did not RECOMMEND DFA over Vanguard. I delineated some of the potential advantages of DFA over VG. Golly jeepers, how can someone write more mildly or even handedly than the way I delineated some of the differences?

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by WoodSpinner » Fri Dec 21, 2018 10:41 am

FWIW,

I for one value the discussions and ideas Larry (and you) have highlighted. Haven’t shifted my investments, but appreciate the diversity of thought and other approaches for managing risk.

No complaints here! Just thanks.

WoodSpinner

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Deadwood » Fri Dec 21, 2018 10:49 am

Thanks for posting links to Larry's articles. Always food for thought

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by skeptical » Fri Dec 21, 2018 10:51 am

Dave: Can you ELI5 (explain like I am five) why “diversifying across factors” is any different than simply holding Total World Market ? A corollary question is, How is it possible to diversify market beta risk by adding a factor when market beta is the sum of the factors of the market ?

The way I understand it:
You either diversify by holding Total Market, which diversifies across all sectors, countries, and factors.
Or you tilt by adding extra to a specific country, sector, or factor, believing that one part of the market (sector, country, or factor) will provide better returns than the rest of the market over the long run.

Of course, you can diversify market beta by adding unique asset classes such as bonds, gold, real estate, etc, but I do not see how you can diversify market beta by adding more of the stocks that are already in the market basket.

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Random Walker » Fri Dec 21, 2018 11:23 am

Skeptical,
Way better to read full books on the subject like those by Gibson and Swedroe. But I can give you an ultra short explanation. First of all, portfolios benefit from having uncorrelated components in them. With regard to equities, the size and value factors are truly unique and independent sources of risk/return from the market factor. People have different views about the underlying causes of those, but they are documented nonetheless (there is some argument over size). A total market portfolio has no net exposure to those factors. It has all the stocks, but it’s negative exposure to the factors exactly offsets it’s positive exposure.
Perhaps how the factors are defined will help. They are defined as long-short portfolios. For example the value factor is HmL, high minus low.

Top 30% book to market stocks - bottom 30% book to market stocks = HmL.

In the above equation the “stock” factor zeroes out, and all you’re left with is a separate entity: the value factor. It has turned out that on average and over time this value factor has been positive. Moreover it has been uncorrelated or negatively correlated with the market factor: unique and independent.

All of the factors: size, value, momentum, profitability/quality are defined as long-short portfolios that isolate them from the market factor. To gain NET exposure to any of them, by definition the investor needs to deviate from the market portfolio. In each case the positive exposure provided by the market portfolio is exactly offset by the negative exposure in the same market portfolio. It all centers on the fact that these factors are truly separate, unique, independent from market factor. Does that help? That’s pretty much the limits of my knowledge.

Dave

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by nisiprius » Fri Dec 21, 2018 11:23 am

This essay is for anyone who has avoided factor investing because they feel they simply can’t wait through potentially long periods of under performance to ultimately experience the benefit.
If
  • You feel you simply can't wait through potentially long periods of under performance to ultimately experience the benefit, and
  • Factor investors will need to wait through potentially long periods of under performance to ultimately experience the benefit,
then it follows as a matter of simple logic that
  • You feel you simply can't be a factor investor.
If so, you should stick to your guns and not let someone talk you into something that is inappropriate for you. I think this is just part and parcel of Swedroe's maxim, "Do not take more risk than you have the ability, willingness, or need to take." The deviation of factor investing from the market is a form of risk. I don't think even the most enthusiastic factor investors will say that you need to take it. If you are not willing to take it, then you have disqualified yourself on two out of three.

As Jared Kizer has phrased it,
Any transparent strategy, which applies to everything outlined in this piece, is capable of extended periods of underperformance. There is nothing that preordains these strategies to work over any period of any length. Investors should either commit to these strategies over an extremely long time horizon or not tilt toward these factors at all.
Last edited by nisiprius on Fri Dec 21, 2018 11:30 am, edited 1 time in total.
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by vineviz » Fri Dec 21, 2018 12:23 pm

skeptical wrote:
Fri Dec 21, 2018 10:51 am
How is it possible to diversify market beta risk by adding a factor when market beta is the sum of the factors of the market ?
I think Dave did a pretty good job of laying out a basic answer to your question, but I want to add one thing to address the quoted sentence.

It's important to understand that market beta is not the sum of the factors of the market, but instead is one of the factors of the market.

Market beta is by far the single most explanatory factor, but it nonetheless can explain only partly explain the distribution of stock returns. Considering additional factors, as illustrated below by the coefficient of determination from regressions on nine S&P size/style indices, increases the cumulative explanatory power of the market model.

Image

The left-most column is market beta alone, with additional factors added one-by-one as the chart moves right.

A total stock market fund effectively neutralizes these additional factors: it zeroes them out.

By way of analogy, imagine that you are with a friend and you've lost your keys somewhere in a field. A factor-diversified portfolio would be akin to the two of you splitting up to look for the keys, one going left and then other going right. A total market portfolio would be be akin to both of you standing still in the exact middle field.
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Dottie57 » Fri Dec 21, 2018 12:53 pm

WoodSpinner wrote:
Fri Dec 21, 2018 10:41 am
FWIW,

I for one value the discussions and ideas Larry (and you) have highlighted. Haven’t shifted my investments, but appreciate the diversity of thought and other approaches for managing risk.

No complaints here! Just thanks.

WoodSpinner
I agree.

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Gemini » Fri Dec 21, 2018 1:26 pm

vineviz wrote:
Fri Dec 21, 2018 12:23 pm
skeptical wrote:
Fri Dec 21, 2018 10:51 am
How is it possible to diversify market beta risk by adding a factor when market beta is the sum of the factors of the market ?
I think Dave did a pretty good job of laying out a basic answer to your question, but I want to add one thing to address the quoted sentence.

It's important to understand that market beta is not the sum of the factors of the market, but instead is one of the factors of the market.

Market beta is by far the single most explanatory factor, but it nonetheless can explain only partly explain the distribution of stock returns. Considering additional factors, as illustrated below by the coefficient of determination from regressions on nine S&P size/style indices, increases the cumulative explanatory power of the market model.

Image

The left-most column is market beta alone, with additional factors added one-by-one as the chart moves right.

A total stock market fund effectively neutralizes these additional factors: it zeroes them out.

By way of analogy, imagine that you are with a friend and you've lost your keys somewhere in a field. A factor-diversified portfolio would be akin to the two of you splitting up to look for the keys, one going left and then other going right. A total market portfolio would be be akin to both of you standing still in the exact middle field.
This is an excellent explanation.

My problem as a DIY investor is that I have no way to effectively achieve an optimum factor portfolio as I don't have access to recommended funds. I am sure many others run into this same problem.

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Park » Fri Dec 21, 2018 1:28 pm

vineviz wrote:
Fri Dec 21, 2018 12:23 pm
skeptical wrote:
Fri Dec 21, 2018 10:51 am
How is it possible to diversify market beta risk by adding a factor when market beta is the sum of the factors of the market ?
I think Dave did a pretty good job of laying out a basic answer to your question, but I want to add one thing to address the quoted sentence.

It's important to understand that market beta is not the sum of the factors of the market, but instead is one of the factors of the market.

Market beta is by far the single most explanatory factor, but it nonetheless can explain only partly explain the distribution of stock returns. Considering additional factors, as illustrated below by the coefficient of determination from regressions on nine S&P size/style indices, increases the cumulative explanatory power of the market model.

Image

The left-most column is market beta alone, with additional factors added one-by-one as the chart moves right.

A total stock market fund effectively neutralizes these additional factors: it zeroes them out.

By way of analogy, imagine that you are with a friend and you've lost your keys somewhere in a field. A factor-diversified portfolio would be akin to the two of you splitting up to look for the keys, one going left and then other going right. A total market portfolio would be be akin to both of you standing still in the exact middle field.
With increasing factors, there is diminishing return. Assume that you can't go above 95.0%, when it comes to using factors to explain returns. Market beta alone explains 86.5% of the returns. That's a difference of 8.5%. Small and value gets you 82% of that 8.5%.

I know when it comes to value, there's some uncertainty about the large value premium. I haven't seen data about the large momentum premium, the large quality premium or the large BAB premium. But I wouldn't be surprised if they're similar to the large value premium.

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Random Walker » Fri Dec 21, 2018 2:04 pm

Gemini wrote:
Fri Dec 21, 2018 1:26 pm
My problem as a DIY investor is that I have no way to effectively achieve an optimum factor portfolio as I don't have access to recommended funds. I am sure many others run into this same problem.
No one has an optimal portfolio. But there are many options available for the DIY investor. There are many factor oriented mutual funds and ETFs that DIY investors use, including some through Vanguard. Unfortunately I don’t know a lot about them. Maybe look up posts by Robert T.

Dave

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Random Walker » Fri Dec 21, 2018 2:07 pm

Park wrote:
Fri Dec 21, 2018 1:28 pm
With increasing factors, there is diminishing return. Assume that you can't go above 95.0%, when it comes to using factors to explain returns. Market beta alone explains 86.5% of the returns. That's a difference of 8.5%. Small and value gets you 82% of that 8.5%.

I know when it comes to value, there's some uncertainty about the large value premium. I haven't seen data about the large momentum premium, the large quality premium or the large BAB premium. But I wouldn't be surprised if they're similar to the large value premium.
Definitely decreasing marginal explanatory benefits from additional factors. People have questioned the size premium (I do believe in it though). One reason, as I see it, to emphasize small though, is that the other factors appear more pronounced in the smaller market caps.

Dave

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by retiringwhen » Fri Dec 21, 2018 2:08 pm

[ quoted post removed by admin LadyGeek]

RandomWalker is the only regular poster I know of on BH who regularly (nearly 100% of the time) references materials for an advisor he pays! (he is a client of Larry Swedroe and Buckingham Capital). He has clearly disclosed that relationship that in the past, but many folks do not know that. One way to for him to diffuse the concern may be to add a sentence at the bottom of every post of a Larry article as such.

I too find Larry's articles very interesting intellectually and they often challenge my assumptions, but in the end, I find the Factor-based approach to be yet another form of active management of a sort that cannot be in the end quantified in its value. I tried mixed active/passive arrangements with a slice and dice portfolio for most of my investing life with a mild value tilt for nearly 30 years (bailed this summer as I finally went 100% passive). Larry's articles keep this place from being an echo chamber. His best articles are usually about 85% aligned with much of the Boglehead philosophy and often provides excellent fodder for considering asset allocation, low costs, indexing, stay the course, etc... His weak articles sometimes sound like advisor/salesman pitches for factor-funds.

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by retiringwhen » Fri Dec 21, 2018 2:18 pm

vineviz wrote:
Fri Dec 21, 2018 12:23 pm
By way of analogy, imagine that you are with a friend and you've lost your keys somewhere in a field. A factor-diversified portfolio would be akin to the two of you splitting up to look for the keys, one going left and then other going right. A total market portfolio would be be akin to both of you standing still in the exact middle field.
How about I fix your analogy.

A total market approach to finding cars keys in a field is to hire 8000 "finders" to look in equal areas in the field. Essentially you'll always find them in the end and normally at exactly the same amount of effort.

A Factor-based approach is one where the person hiring the finders adjusts where to have the "finders" look, putting a more people in areas where historical data has said you may have lost your keys. Sometimes, you win at this, sometimes you'll find them right away, sometimes you'll extend the search by a significant period of time because some cat stole your keys and drug them into a shed no person ever goes into so you didn't send anyone to look until you exhausted every other option.

Embracing Factors depend completely on understanding and believing that past is prologue and you understand that relationship and the risk of under-performance.....

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Random Walker » Fri Dec 21, 2018 2:19 pm

[ quoted post removed by admin LadyGeek]

Find me other worthwhile short essays from other authors, and I’ll happily read and post as well. I’ve occassionally posted writings by Asness, Arnott, Roth. I just don’t come across much at all. And of course, I’d strongly encourage others to post writings they find valuable as well. If I had it my way, we’d have ongoing conversations about the classic Boglehead books. But I think most people are way more likely to read a 2 page essay than a 200 page book.

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Random Walker » Fri Dec 21, 2018 2:22 pm

retiringwhen wrote:
Fri Dec 21, 2018 2:18 pm

Embracing Factors depend completely on understanding and believing that past is prologue and you understand that relationship and the risk of under-performance.....
Past data is certainly important, but also need the forward looking intuitive risk based or behavioral based explanation to expect the premium to exist in the future.

Dave

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Crisium » Fri Dec 21, 2018 2:31 pm

I don't know if it's recency bias, but I'm sold for factors on International but not US. My IRA is with Schwab and I use the "Fundamental" variants of the International Small and EM funds as my sole ex-US positions there. I use their version of this for US Small as well, but that's only 25% of my US holdings with the rest in Total Market. With all the analysis of large cap US stocks I just don't think paying more ER for a factor version of large US stocks would pay off.

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by whodidntante » Fri Dec 21, 2018 2:38 pm

Dave should keep on posting. Some of us like these discussions.

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by LadyGeek » Fri Dec 21, 2018 2:41 pm

I removed some off-topic posts which questioned Random Walker's motivation for posting Larry Swedroe's articles. As a reminder, see:General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.
That motivation has been explained. Please stay on-topic, which is to discuss the article.
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Larry Swedroe: Investing In Short Time Horizons

Post by retiringwhen » Fri Dec 21, 2018 2:43 pm

Random Walker wrote:
Fri Dec 21, 2018 2:22 pm
retiringwhen wrote:
Fri Dec 21, 2018 2:18 pm

Embracing Factors depend completely on understanding and believing that past is prologue and you understand that relationship and the risk of under-performance.....
Past data is certainly important, but also need the forward looking intuitive risk based or behavioral based explanation to expect the premium to exist in the future.

Dave
Better stated than my "believe". And this is in fact where I stumble. Momentum is the only factor that has real behavioral explanations that cannot be arbitraged away by excellent quants.

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Gemini » Fri Dec 21, 2018 2:45 pm

Random Walker wrote:
Fri Dec 21, 2018 2:04 pm
Gemini wrote:
Fri Dec 21, 2018 1:26 pm
My problem as a DIY investor is that I have no way to effectively achieve an optimum factor portfolio as I don't have access to recommended funds. I am sure many others run into this same problem.
No one has an optimal portfolio. But there are many options available for the DIY investor. There are many factor oriented mutual funds and ETFs that DIY investors use, including some through Vanguard. Unfortunately I don’t know a lot about them. Maybe look up posts by Robert T.

Dave
Yes I agree. I need to do a deep dive and explore.

Has anyone done this factor portfolio on the cheap w/o having to hire an advisor?

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by vineviz » Fri Dec 21, 2018 2:52 pm

Gemini wrote:
Fri Dec 21, 2018 1:26 pm
My problem as a DIY investor is that I have no way to effectively achieve an optimum factor portfolio as I don't have access to recommended funds. I am sure many others run into this same problem.
I pay a lot of attention to factor exposures in my portfolio and don't own a single DFA fund.

Vanguard S&P Small-Cap 600 Value ETF (VIOV) offers relatively low-cost exposure to the size, value, and quality factors for instance at 0.20% expense. SPDR® S&P 600 Small Cap Value ETF (SLYV) and iShares S&P Small-Cap 600 Value ETF (IJS) track the same index.

The Vanguard US Multifactor ETF (VFMF) is even less expensive at 0.18% and offers exposure to size, momentum, value, and quality factors.
"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: Investing In Short Time Horizons

Post by Park » Fri Dec 21, 2018 2:56 pm

retiringwhen wrote:
Fri Dec 21, 2018 2:43 pm
Random Walker wrote:
Fri Dec 21, 2018 2:22 pm
retiringwhen wrote:
Fri Dec 21, 2018 2:18 pm

Embracing Factors depend completely on understanding and believing that past is prologue and you understand that relationship and the risk of under-performance.....
Past data is certainly important, but also need the forward looking intuitive risk based or behavioral based explanation to expect the premium to exist in the future.

Dave
Better stated than my "believe". And this is in fact where I stumble. Momentum is the only factor that has real behavioral explanations that cannot be arbitraged away by excellent quants.
I share your concerns about premia being arbitraged away. OTOH, when I read about what was happening to value investors in 1997-1999, arbitrage is not straightforward. At that time, there were good value investors who were losing a considerable number of clients. IIRC, Joel Greenblatt has said that a portfolio manager who has underperformed for the last 3 years won't have new clients and will be losing existing clients. And in 1997-1999, investment professionals would have known about small value tilting.

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Random Walker » Fri Dec 21, 2018 3:04 pm

Park wrote:
Fri Dec 21, 2018 2:56 pm
I share your concerns about premia being arbitraged away. OTOH, when I read about what was happening to value investors in 1997-1999, arbitrage is not straightforward. At that time, there were good value investors who were losing a considerable number of clients. IIRC, Joel Greenblatt has said that a portfolio manager who has underperformed for the last 3 years won't have new clients and will be losing existing clients. And in 1997-1999, investment professionals would have known about small value tilting.
This is what makes investing so fascinating. No matter what computers, algorithms, gizmos achieve, there is still a tremendously human element to it. There are strong reasons to believe that behavioral anomalies, all well known, should be arbitraged away. Yet human greed and fear are tenaciously persistent, and there are clear limits to arbitrage. How it all balances out in the future is anyone’s guess!

Dave

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Gemini » Fri Dec 21, 2018 3:08 pm

vineviz wrote:
Fri Dec 21, 2018 2:52 pm
Gemini wrote:
Fri Dec 21, 2018 1:26 pm
My problem as a DIY investor is that I have no way to effectively achieve an optimum factor portfolio as I don't have access to recommended funds. I am sure many others run into this same problem.
I pay a lot of attention to factor exposures in my portfolio and don't own a single DFA fund.

Vanguard S&P Small-Cap 600 Value ETF (VIOV) offers relatively low-cost exposure to the size, value, and quality factors for instance at 0.20% expense. SPDR® S&P 600 Small Cap Value ETF (SLYV) and iShares S&P Small-Cap 600 Value ETF (IJS) track the same index.

The Vanguard US Multifactor ETF (VFMF) is even less expensive at 0.18% and offers exposure to size, momentum, value, and quality factors.
I believe I went with DLS over IJS after I did some digging for my INTL SCV.

I was considering VFMF for my backdoor Roth monies at VG. Right now, DW and I have them all in their SCV fund. I am debating if I should switch all of them out and go to VFMF. What say you?

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by vineviz » Fri Dec 21, 2018 3:21 pm

Gemini wrote:
Fri Dec 21, 2018 3:08 pm
I believe I went with DLS over IJS after I did some digging for my INTL SCV.

I was considering VFMF for my backdoor Roth monies at VG. Right now, DW and I have them all in their SCV fund. I am debating if I should switch all of them out and go to VFMF. What say you?
Hard to say without taking a look at the whole portfolio, but I can tell you that VFMF is my largest holding (18.5% of my portfolio) and the SPDR equivalent of VIOV is my second largest (17.5% of my portfolio).
"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: Investing In Short Time Horizons

Post by hdas » Fri Dec 21, 2018 3:26 pm

vineviz wrote:
Fri Dec 21, 2018 3:21 pm
Hard to say without taking a look at the whole portfolio, but I can tell you that VFMF is my largest holding (18.5% of my portfolio) and the SPDR equivalent of VIOV is my second largest (17.5% of my portfolio).
Interesting, would you mind sharing the rest of the composition of your portfolio?. Thanks :greedy
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Park » Fri Dec 21, 2018 3:47 pm

vineviz wrote:
Fri Dec 21, 2018 3:21 pm
Gemini wrote:
Fri Dec 21, 2018 3:08 pm
I believe I went with DLS over IJS after I did some digging for my INTL SCV.

I was considering VFMF for my backdoor Roth monies at VG. Right now, DW and I have them all in their SCV fund. I am debating if I should switch all of them out and go to VFMF. What say you?
Hard to say without taking a look at the whole portfolio, but I can tell you that VFMF is my largest holding (18.5% of my portfolio) and the SPDR equivalent of VIOV is my second largest (17.5% of my portfolio).
About VFMF, do you think it is possible to get exposure to the value and quality factors in US large caps?

About momentum exposure, DFA questions whether you can get it at all, other than as a secondary investment objective.

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by vineviz » Fri Dec 21, 2018 5:07 pm

Park wrote:
Fri Dec 21, 2018 3:47 pm
About VFMF, do you think it is possible to get exposure to the value and quality factors in US large caps?
VFMF allocates roughly 1/3 of its assets to large cap, 1/3 to mid cap, and 1/3 to small cap. This provides exposure to the size factor, but also allows the fund to generate exposure to factors in large caps as well. I consider VFMF to be a kind of a multifactor core fund, basically a replacement for a total stock market fund with the added bonus of also replacing the small cap "tilt". It's still a young fund, but it seems well designed to me.
Park wrote:
Fri Dec 21, 2018 3:47 pm
About momentum exposure, DFA questions whether you can get it at all, other than as a secondary investment objective.
I haven't read the report that article is referring to, but from the way it is described it sounds like DFA was looking at time-series momentum (aka "momentum-style") and not cross-sectional momentum (aka the "momentum factor".) Despite similar names, they are somewhat different phenomena. I think the research supporting the momentum factor is pretty solid, and good quantitative managers seem to have figured out ways to balance factor purity with trading costs. AQR has made this argument, and it seems persuasive on its face.

Even readily available vehicles like iShares Edge MSCI USA Momentum Fctr ETF (MTUM) have done a good job of capturing it, though I think that DFA is probably right that the investor is best off when momentum is used as part of a multifactor strategy. A single factor momentum fund, if optimized without constraints, can end up with serious negative loads on other factors and can derail a portfolio as a result.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Park
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Park » Fri Dec 21, 2018 5:41 pm

vineviz wrote:
Fri Dec 21, 2018 5:07 pm
Park wrote:
Fri Dec 21, 2018 3:47 pm
About VFMF, do you think it is possible to get exposure to the value and quality factors in US large caps?
VFMF allocates roughly 1/3 of its assets to large cap, 1/3 to mid cap, and 1/3 to small cap. This provides exposure to the size factor, but also allows the fund to generate exposure to factors in large caps as well. I consider VFMF to be a kind of a multifactor core fund, basically a replacement for a total stock market fund with the added bonus of also replacing the small cap "tilt". It's still a young fund, but it seems well designed to me.
Park wrote:
Fri Dec 21, 2018 3:47 pm
About momentum exposure, DFA questions whether you can get it at all, other than as a secondary investment objective.
I haven't read the report that article is referring to, but from the way it is described it sounds like DFA was looking at time-series momentum (aka "momentum-style") and not cross-sectional momentum (aka the "momentum factor".) Despite similar names, they are somewhat different phenomena. I think the research supporting the momentum factor is pretty solid, and good quantitative managers seem to have figured out ways to balance factor purity with trading costs. AQR has made this argument, and it seems persuasive on its face.

Even readily available vehicles like iShares Edge MSCI USA Momentum Fctr ETF (MTUM) have done a good job of capturing it, though I think that DFA is probably right that the investor is best off when momentum is used as part of a multifactor strategy. A single factor momentum fund, if optimized without constraints, can end up with serious negative loads on other factors and can derail a portfolio as a result.
I certainly could be wrong on the following, and I welcome data that is contrary to what I'm saying.

From what I can see, if you want exposure to factors, you have to go small. Perhaps midcap will work, but I don't see it working in large caps. For funds that you don't need an advisor for, the factor funds for small caps are either small cap funds or small cap value. Small cap value will get you a long way in factor investing.

Whether factor investing, which includes small cap value, will be arbitraged away is a good question; I'll ignore it for now.

Another problem with small cap value is the lack of diversification; you're investing in a small part of the total market. And that's likely why many investors include total stock market or large value or small cap exposure to small cap value. I could see VFMF being a good substitute for what was described in the last sentence.

Good Listener
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Good Listener » Fri Dec 21, 2018 6:17 pm

A few questions/thoughts for Random Walker....
Whether I agree or disagree with you (although I dont know enough to do either), you present the information in a way indicating that you are very, very familiar and knowledgeable (I mean that as a compliment).

So why would you pay anybody to implement the style that you understand so well.

Second, regarding your statement, which is a dogma among many, that portfolios with uncorrelated assets ALWAYS outperform, I know there is retrospective data to show this. Retrospective data in my world is hypothesis-generating and not proof. Are you aware of any prospective looks at this.

palaheel
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by palaheel » Fri Dec 21, 2018 6:26 pm

whodidntante wrote:
Fri Dec 21, 2018 2:38 pm
Dave should keep on posting. Some of us like these discussions.
+1
Markets crash. Markets recover. Inflation takes your money FOREVER.

Topic Author
Random Walker
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Random Walker » Fri Dec 21, 2018 6:27 pm

Park wrote:
Fri Dec 21, 2018 5:41 pm

Another problem with small cap value is the lack of diversification; you're investing in a small part of the total market. And that's likely why many investors include total stock market or large value or small cap exposure to small cap value. I could see VFMF being a good substitute for what was described in the last sentence.
As Larry would say, “You need to look at diversification differently”. TSM has exposure to one factor, market beta. Most SV funds, like a TSM fund, have a market beta of about 1 as well. Additionally they load on size and value factors. So the SV fund is more diversified according to the equity factors shown to drive returns. Moreover, both TSM and SV funds easily effectively eliminate single stock risk, holding greater than 1000 stocks each usually.

Dave

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Random Walker
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Random Walker » Fri Dec 21, 2018 7:11 pm

Good Listener wrote:
Fri Dec 21, 2018 6:17 pm
A few questions/thoughts for Random Walker....
Whether I agree or disagree with you (although I dont know enough to do either), you present the information in a way indicating that you are very, very familiar and knowledgeable (I mean that as a compliment).

So why would you pay anybody to implement the style that you understand so well.

Second, regarding your statement, which is a dogma among many, that portfolios with uncorrelated assets ALWAYS outperform, I know there is retrospective data to show this. Retrospective data in my world is hypothesis-generating and not proof. Are you aware of any prospective looks at this.
Thanks for asking those questions. First as to why I’d pay an advisor. This is a laundry list in no particular order.

1. I’m about 90% taxable accounts. As I learned to appreciate value tilting, I became interested in tax managed value funds which I think were only available through DFA at the time. Please note, I agree with the idea that fund access is a poor reason to choose an advisor, but nonetheless that was the introduction to me thinking of changing from DIY to advisor. I thought tax managed, tax advantaged, and core funds would be worth something.

2. Tax loss harvesting. I had learned that aggressive TLH throughout the year using HIFO specific lot cost basis was worth about 0.5-0.7% per year annualized. At the time VG only offered average cost basis, and I knew I was not organized or compulsive enough to keep track of every fund purchase during my accumulation stage. I thought TLH alone would cover a substantial portion of my AUM fee.

3. Behavioral errors. All of us are subject to behavioral errors, and I thought an extra layer of protection between me and my money wasn’t a bad idea. Obviously I’m highly interested in investing. That could predispose me to sticking my spoon in the pot way too much. One big behavioral error can cost multiple years of AUM fees.

4. I really enjoy investing, and obviously from the number of posts I have on Bogleheads, I’m a little too obsessed by it. Using an advisor makes all my Boglehead time pretty much purely recreational. I’m not looking for advice on changing my portfolio. Using the advisor actually frees me up more to enjoy Bogleheads.

5. I was concerned about the “stuff I don’t even know that I don’t know”. Just today I benefitted from something in that category. A few weeks ago my advisor made a sale for TLH. He put the funds in another similar fund. Then today instead of simply waiting for the 30 day wash sale rule, he sold and put the money in a third similar fund to work around an ex dividend date. That’s something that never shows up on the score board, but is real money nonetheless. Another example of this is the newer alternative funds often discussed on this board. These didn’t exist when I made my decision and I never would have envisioned them as a possibility. About once every 3-5 years I seem to experience some benefit that I didn’t anticipate that virtually covers a yearly AUM fee.

6. My advisor manages a ladder of individual bonds at no extra expense. There are potential advantages to a ladder of individual bonds tailored to one’s tax situation over a bond fund. Moreover, no expense ratio on the bonds.

7. The advisor is academic and makes recommendations consistent with the evolution of investing. New investment vehicles are always coming out, and the decision whether to use them is difficult. This is especially true as the investor accumulates capital gains and there are tax consequences to making changes.

8. A huge part of investing is getting the asset allocation right. Using Monte Carlo Analysis, my advisor has helped guide me to a portfolio much less aggressive than I think I would have created on my own.

I did many spread sheets comparing my DIY VG path to what at the time was the Advisor DFA path. Honestly, I could have torqued the results any way I wanted to get the result I wanted (can you say behavioral bias?). Some of the potential benefits haven’t worked out the way I expected, and there have been benefits I never anticipated. There are no free lunches. Overall I’m happy with the decision. It’s like buying a used car; the more the buyer understands what he is and what he is not getting, the happier he will be. Taylor made a comment above about “promises of beating the market”. If I thought that is what the advisor was promising, I’d run fast. They did promise a more efficient portfolio, and I very much believ I have that; it does come at a cost. And costs are certain while potential advantages are just that, only potential. For me, the size of the potential advantages started to overwhelm the certain increased costs. In the past I even made a post on buying used cars and choosing advisors. Perhaps it’s worth a peek.

viewtopic.php?t=213282

Bottom line, I’m very happy. It’s allowed me to learn a ton about investing, practice what I learn, and yet be protected from tinkering too much.

Interested to hear your thoughts.

Dave

Topic Author
Random Walker
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Random Walker » Fri Dec 21, 2018 7:16 pm

Good Listener wrote:
Fri Dec 21, 2018 6:17 pm

Second, regarding your statement, which is a dogma among many, that portfolios with uncorrelated assets ALWAYS outperform, I know there is retrospective data to show this. Retrospective data in my world is hypothesis-generating and not proof. Are you aware of any prospective looks at this.
Im sorry if I misspoke. I wouldn’t intentionally say something so strong as “ALWAYS”. There is high likelihood that portfolios with more uncorrelated sources of return are more efficient, but not necessarily outperform. What an investment adds to a portfolio depends on expected return, correlations, volatility, when correlations tend to change, and of course COSTS.

Dave

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Random Walker
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Random Walker » Fri Dec 21, 2018 7:28 pm

Random Walker wrote:
Fri Dec 21, 2018 7:16 pm
Good Listener wrote:
Fri Dec 21, 2018 6:17 pm

Second, regarding your statement, which is a dogma among many, that portfolios with uncorrelated assets ALWAYS outperform, I know there is retrospective data to show this. Retrospective data in my world is hypothesis-generating and not proof. Are you aware of any prospective looks at this.
Im sorry if I misspoke. I wouldn’t intentionally say something so strong as “ALWAYS”. There is high likelihood that portfolios with more uncorrelated sources of return are more efficient, but not necessarily outperform. What an investment adds to a portfolio depends on expected return, correlations, volatility, when correlations tend to change, and of course COSTS.

Dave
With regard to prospective looks, realize that the initial Fama French data on size and value was published in 1992 and it looked at data I think from about 1963-about 1992 in the US. Subsequently the same factors were evaluated in US prior time period 1926-1962, and then in international markets. Larry Swedroe published his first book in 1998, and I think he has looked at the behavior of real portfolios post 1992 FF publication and post his 1998 publication to show the effectiveness of tilting. So there are definitely out of sample tests that have been performed.

Dave

Dead Man Walking
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Dead Man Walking » Sat Dec 22, 2018 2:45 am

Dave,

Please continue to post links to Larry Swedroe's articles. I'm too lazy to search for them!

DMW

Culbretd
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Culbretd » Sat Dec 22, 2018 5:47 am

I appreciate the articles too. Find them interesting.

Bongleur
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Bongleur » Sat Dec 22, 2018 9:34 am

Gack. The internet ate my post...
WRT to the article in the OP. So the 1% cost of obtaining "a portfolio that is equally weighted across the four factors of market beta, size, value and momentum " pays for:

1) the hope that this method is optimal
2) the expectation that it will have lower volatility, allowing you to sleep at night, and also reducing the chance of a bad sequence leading to portfolio faliure ?
2) or is it higher volatility but with returns that are more constantly as high as expected...

So you could compare the chance of failure of a Traditional AA having 1% compounded more money to the Swedroe AA having 1% less compounded.
Would not either have plenty of spending money if they succeed?

Does the Traditional have less chance of failure due to more money, or an increased chance due to a bad sequence in spite of more money?
How much less spending money does the Swedroe provide, in exchange for the benefits?

I just read thru another thread w/ yet another discussion of the value of sleeping at night and spending your time doing things other than managing your AA. For myself, I'm sitting on basically all cash & short term Treasury funds, with very little tax advantaged space. So I want to get my AA right the first time, since swapping funds will have a large tax bite.
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.

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Random Walker
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Random Walker » Sat Dec 22, 2018 10:40 am

retiringwhen wrote:
Fri Dec 21, 2018 2:43 pm
Better stated than my "believe". And this is in fact where I stumble. Momentum is the only factor that has real behavioral explanations that cannot be arbitraged away by excellent quants.
I think there is strong reason to believe any potential behavioral factor may well persist. There are limits to arbitrage, mainly on the short side. It is more costly to short and the risk is infinite. Moreover many large institutions are prevented from shorting by their charters.

Dave

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Re: Larry Swedroe: Investing In Short Time Horizons

Post by Good Listener » Sat Dec 22, 2018 4:35 pm

Random Walker wrote:
Fri Dec 21, 2018 7:11 pm
Good Listener wrote:
Fri Dec 21, 2018 6:17 pm
A few questions/thoughts for Random Walker....
Whether I agree or disagree with you (although I dont know enough to do either), you present the information in a way indicating that you are very, very familiar and knowledgeable (I mean that as a compliment).

So why would you pay anybody to implement the style that you understand so well.

Second, regarding your statement, which is a dogma among many, that portfolios with uncorrelated assets ALWAYS outperform, I know there is retrospective data to show this. Retrospective data in my world is hypothesis-generating and not proof. Are you aware of any prospective looks at this.
Thanks for asking those questions. First as to why I’d pay an advisor. This is a laundry list in no particular order.

1. I’m about 90% taxable accounts. As I learned to appreciate value tilting, I became interested in tax managed value funds which I think were only available through DFA at the time. Please note, I agree with the idea that fund access is a poor reason to choose an advisor, but nonetheless that was the introduction to me thinking of changing from DIY to advisor. I thought tax managed, tax advantaged, and core funds would be worth something.

2. Tax loss harvesting. I had learned that aggressive TLH throughout the year using HIFO specific lot cost basis was worth about 0.5-0.7% per year annualized. At the time VG only offered average cost basis, and I knew I was not organized or compulsive enough to keep track of every fund purchase during my accumulation stage. I thought TLH alone would cover a substantial portion of my AUM fee.

3. Behavioral errors. All of us are subject to behavioral errors, and I thought an extra layer of protection between me and my money wasn’t a bad idea. Obviously I’m highly interested in investing. That could predispose me to sticking my spoon in the pot way too much. One big behavioral error can cost multiple years of AUM fees.

4. I really enjoy investing, and obviously from the number of posts I have on Bogleheads, I’m a little too obsessed by it. Using an advisor makes all my Boglehead time pretty much purely recreational. I’m not looking for advice on changing my portfolio. Using the advisor actually frees me up more to enjoy Bogleheads.

5. I was concerned about the “stuff I don’t even know that I don’t know”. Just today I benefitted from something in that category. A few weeks ago my advisor made a sale for TLH. He put the funds in another similar fund. Then today instead of simply waiting for the 30 day wash sale rule, he sold and put the money in a third similar fund to work around an ex dividend date. That’s something that never shows up on the score board, but is real money nonetheless. Another example of this is the newer alternative funds often discussed on this board. These didn’t exist when I made my decision and I never would have envisioned them as a possibility. About once every 3-5 years I seem to experience some benefit that I didn’t anticipate that virtually covers a yearly AUM fee.

6. My advisor manages a ladder of individual bonds at no extra expense. There are potential advantages to a ladder of individual bonds tailored to one’s tax situation over a bond fund. Moreover, no expense ratio on the bonds.

7. The advisor is academic and makes recommendations consistent with the evolution of investing. New investment vehicles are always coming out, and the decision whether to use them is difficult. This is especially true as the investor accumulates capital gains and there are tax consequences to making changes.

8. A huge part of investing is getting the asset allocation right. Using Monte Carlo Analysis, my advisor has helped guide me to a portfolio much less aggressive than I think I would have created on my own.

I did many spread sheets comparing my DIY VG path to what at the time was the Advisor DFA path. Honestly, I could have torqued the results any way I wanted to get the result I wanted (can you say behavioral bias?). Some of the potential benefits haven’t worked out the way I expected, and there have been benefits I never anticipated. There are no free lunches. Overall I’m happy with the decision. It’s like buying a used car; the more the buyer understands what he is and what he is not getting, the happier he will be. Taylor made a comment above about “promises of beating the market”. If I thought that is what the advisor was promising, I’d run fast. They did promise a more efficient portfolio, and I very much believ I have that; it does come at a cost. And costs are certain while potential advantages are just that, only potential. For me, the size of the potential advantages started to overwhelm the certain increased costs. In the past I even made a post on buying used cars and choosing advisors. Perhaps it’s worth a peek.

viewtopic.php?t=213282

Bottom line, I’m very happy. It’s allowed me to learn a ton about investing, practice what I learn, and yet be protected from tinkering too much.

Interested to hear your thoughts.

Dave
My thoughts are.....your reasoning process is clear and cannot be faulted at least by me. Thank you for the detailed response.

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matjen
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by matjen » Sun Dec 23, 2018 9:20 am

I always look forward to Random Walker's posts and Larry's articles. Keep up the good work Dave!!! :sharebeer
A man is rich in proportion to the number of things he can afford to let alone.

stufunds
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Re: Larry Swedroe: Investing In Short Time Horizons

Post by stufunds » Sun Dec 23, 2018 9:12 pm

I appreciate the link posts as well.

I read around 20% of Larry’s articles over the course of a year. I especially like his gurus’ sure things series. However, I don’t feel inclined to check ETF.com or Larry’s firm’s website on a daily basis.

The summaries and the subsequent Boglehead commentary help me to decide whether a given article is worth reading.
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