Larry Swedroe: investing Uncomfortably

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Random Walker
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Larry Swedroe: investing Uncomfortably

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https://www.etf.com/sections/features-a ... omfortably

Active management, hedge funds, market timing are not a winning formula. Passively and doggedly spreading one’s bets across the factors that have been shown to provide returns over time can be a winning formula. Conventional investors effectively place all their bets in the single factor, market beta. The goal of investing is to meet one’s personal goals. So while psychologically it may be comfortable to have a conventional portfolio, failing conventionally may not allow one to reach his goals. A more robust portfolio can potentially be built by diversifying across uncorrelated sources of return. This requires putting aside several very human behavioral errors: tracking error regret, myopic loss aversion, recency bias. Successful investing may very well require being uncomfortable.

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Re: Larry Swedroe: investing Uncomfortably

Post by minimalistmarc »

I didn’t understand the article.

Can somebody please tell me if there was anything actionable for bogleheads?
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Re: Larry Swedroe: investing Uncomfortably

Post by HomerJ »

How exactly does factor investing remove "human behavioral errors: tracking error regret, myopic loss aversion, recency bias."

All of those things occur with factor investing as well.

Personally, I think they would happen MORE with an "unconventional portfolio" because one is more likely to second-guess their decisions.
So while psychologically it may be comfortable to have a conventional portfolio
Being comfortable psychologically with your portfolio is EXACTLY how one has the best chance of removing human behavioral errors.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: Larry Swedroe: investing Uncomfortably

Post by magneto »

"(It’s uncertainty that leads one to conclude the prudent strategy is to diversify across as many factors as we can identify that meet all the criteria established.)"

Seems we might be back to total market?
Although rebalancing to advantage, as with any segmented portfolio, could arise?

This current factor fad seems like active in sheep's clothing (certainly momentum, aka 'market timing', can often become active on steroids).
This too shall pass?
'There is a tide in the affairs of men ...', Brutus (Market Timer)
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Re: Larry Swedroe: investing Uncomfortably

Post by Random Walker »

I think the point is that people may feel more comfortable “failing conventionally”: their own portfolio tanks when everyone else’s does as well. But failing conventionally, may well still be failing! In the effort to meet our financial goals, diversifying across sources of return may increase the likelihood of succeeding. But this sort of diversification requires having a portfolio very different from a TSM portfolio. As Larry wrote, a typical 60/40 portfolio has almost 90% of its risk wrapped up in the single factor, market beta. Diversifying across geographies and into factors requires fortitude to accept deviating from what everyone else is doing.
Over the last decade the “conventional” portfolios dominated by large growth and market beta have done tremendously. A factor investor has lagged behind. Under this circumstance a factor investor, affected by recency bias or tracking error regret, has the potential to toss out a well reasoned plan. Whether one is a conventional 60/40 TSM investor or a super unconventional 1/n factorhead, he needs to be aware of the human foibles: tracking error regret, recency bias, myopic loss aversion.

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Re: Larry Swedroe: investing Uncomfortably

Post by CaliJim »

Random Walker wrote: Wed Jan 02, 2019 12:00 pm https://www.etf.com/sections/features-a ... omfortably

Active management, hedge funds, market timing are not a winning formula. Passively and doggedly spreading one’s bets across the factors that have been shown to provide returns over time can be a winning formula. Conventional investors effectively place all their bets in the single factor, market beta. The goal of investing is to meet one’s personal goals. So while psychologically it may be comfortable to have a conventional portfolio, failing conventionally may not allow one to reach his goals. A more robust portfolio can potentially be built by diversifying across uncorrelated sources of return. This requires putting aside several very human behavioral errors: tracking error regret, myopic loss aversion, recency bias. Successful investing may very well require being uncomfortable.

Dave
Dave
thanks for posting the link
good to know that nothing much has changed w/ regard to the research about active vs passive in the last few years.
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Re: Larry Swedroe: investing Uncomfortably

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Random Walker wrote: Wed Jan 02, 2019 2:03 pmWhether one is a conventional 60/40 TSM investor or a super unconventional 1/n factorhead, he needs to be aware of the human foibles: tracking error regret, recency bias, myopic loss aversion.
This I agree with.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: Larry Swedroe: investing Uncomfortably

Post by HomerJ »

I think the point is that people may feel more comfortable “failing conventionally”: their own portfolio tanks when everyone else’s does as well. But failing conventionally, may well still be failing! In the effort to meet our financial goals, diversifying across sources of return may increase the likelihood of succeeding.
Just one more note. So far, a 60/40 U.S. portfolio hasn't ever failed over the long-term. The success rate, so far, is 100%.

So I'm not sure why I need to increase my likelihood of succeeding.

Of course, that's just "so far". I suppose it could fail going forward. But so could factor investing. Pretty hard to calculate the odds in any case.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: Larry Swedroe: investing Uncomfortably

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IMO the weakness in the factor (value) argument is the factors are based upon past correlations holding true in the future (i.e. folks value vs. growth stocks in a similar way as in the past (so the factor can revert). Fundamental factors (such as beta) are based upon fundamental differences in the securities & do not change with time. Bonds are first claims against firm cash flows & thus should have lower returns than equity claims which have lower priority claims. In the end I know fundamental factors will revert due to economics. Non-fundamental factors reversion are based more upon taste than economics thus IMO not comparable to fundamental factors & with less certainty will revert. Looking at historical data can be misleading here as we have only gone through a few value/growth cycles where folks have invested in a factor way.

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Re: Larry Swedroe: investing Uncomfortably

Post by Random Walker »

magneto wrote: Wed Jan 02, 2019 1:50 pm
This current factor fad seems like active in sheep's clothing (certainly momentum, aka 'market timing', can often become active on steroids).
This too shall pass?
What would it take for you to consider factors more than a fad? We have extensive historical data and out of sample tests provided by different time periods, different geographies, even different asset classses in some cases. I think Fama French’s Cross Section Of Expected Returns paper may well be the single most widely cited academic paper in the world. You might be correct that factor investing won’t work out in the future, but at what point does data carry enough weight?

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Re: Larry Swedroe: investing Uncomfortably

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Like all market information, this data nullifies itself by being publicly known and exploited. That's why I don't think it's enough. I also need data that the data is currently underexploited by today's market participants.

My only tilt is to emerging markets because there is strong evidence of continuing home country bias even by sophisticated institutional investors, and emerging markets are the ones with few home investors.
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Re: Larry Swedroe: investing Uncomfortably

Post by Random Walker »

bluquark wrote: Wed Jan 02, 2019 2:46 pm Like all market information, this data nullifies itself by being publicly known and exploited.
I certainly agree that markets are ruthlesssly efficient. Factors may well take haircuts. But if a factor is due to risk, then it's premium should not be eradicated. Behavioral factors are certainly much more susceptible to eradication, but even there, there are limits to arbitrage.

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Re: Larry Swedroe: investing Uncomfortably

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HomerJ wrote: Wed Jan 02, 2019 2:15 pm
Just one more note. So far, a 60/40 U.S. portfolio hasn't ever failed over the long-term. The success rate, so far, is 100%.

So I'm not sure why I need to increase my likelihood of succeeding.

Of course, that's just "so far". I suppose it could fail going forward. But so could factor investing. Pretty hard to calculate the odds in any case.
Currently we have high equity valuations and low interest rates. Expected returns on a 60/40 portfolio are at least very modest by historical standards.
Assume equity expected returns 5% and fixed income 2%: (0.6*.05)+((0.4*.02)=3.8%. Playing it pretty close with a 4% withdrawal rate.

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Re: Larry Swedroe: investing Uncomfortably

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packer16 wrote: Wed Jan 02, 2019 2:38 pm IMO the weakness in the factor (value) argument is the factors are based upon past correlations holding true in the future (i.e. folks value vs. growth stocks in a similar way as in the past (so the factor can revert). Fundamental factors (such as beta) are based upon fundamental differences in the securities & do not change with time. Bonds are first claims against firm cash flows & thus should have lower returns than equity claims which have lower priority claims. In the end I know fundamental factors will revert due to economics. Non-fundamental factors reversion are based more upon taste than economics thus IMO not comparable to fundamental factors & with less certainty will revert. Looking at historical data can be misleading here as we have only gone through a few value/growth cycles where folks have invested in a factor way.

Packer
I’m not sure what a fundamental factor is. If you mean fundamental research, I don’t think those investors would share a boglehead’s enthusiasm for market cap weighted index funds. If you mean that market beta, duration, and credit risk have a longer history as known factors I agree but momentum, value and quality are all based on the same data. Given the ongoing debate between risk and behavioral explanations for those factors I can understand being more cautious but I don’t think dismissing them is warranted by the evidence. In fact market beta underperforms for longer periods tha momentum for example.
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Re: Larry Swedroe: investing Uncomfortably

Post by KJVanguard »

I just read the entire article. Bottom line (or at least one line) seems to be get exposure to international stocks -- especially EM -- even though they have sucked so badly for so long.

I agree. Portfolio Watch tells me that I am 55% in foreign stock (of my equity holdings). This is high, but it's about what you would get if you held the cap weighted world. And I also have on over-sized portion in Emerging Markets.

My goal is to make money and support myself for the rest of my life. My goal is not to track the S&P 500 index.
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Re: Larry Swedroe: investing Uncomfortably

Post by reformed.trader »

Random Walker wrote: Wed Jan 02, 2019 3:00 pm
bluquark wrote: Wed Jan 02, 2019 2:46 pm Like all market information, this data nullifies itself by being publicly known and exploited.
I certainly agree that markets are ruthlesssly efficient. Factors may well take haircuts. But if a factor is due to risk, then it's premium should not be eradicated. Behavioral factors are certainly much more susceptible to eradication, but even there, there are limits to arbitrage.

Dave
This is a great point. Think of stocks vs bonds. Its commonly accepted that stocks will outperform bonds over the long term, but this out performance isn't expected to go away just because everyone knows this.
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Re: Larry Swedroe: investing Uncomfortably

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Random Walker wrote: Wed Jan 02, 2019 2:39 pm
magneto wrote: Wed Jan 02, 2019 1:50 pm
This current factor fad seems like active in sheep's clothing (certainly momentum, aka 'market timing', can often become active on steroids).
This too shall pass?
What would it take for you to consider factors more than a fad? We have extensive historical data and out of sample tests provided by different time periods, different geographies, even different asset classses in some cases. I think Fama French’s Cross Section Of Expected Returns paper may well be the single most widely cited academic paper in the world. You might be correct that factor investing won’t work out in the future, but at what point does data carry enough weight?

Dave
A lengthy history of retail factor based funds will prove that factors are more than a fad. Real world performance is needed to convince the skeptics among us.

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Re: Larry Swedroe: investing Uncomfortably

Post by 2015 »

HomerJ wrote: Wed Jan 02, 2019 1:19 pm How exactly does factor investing remove "human behavioral errors: tracking error regret, myopic loss aversion, recency bias."

All of those things occur with factor investing as well.

Personally, I think they would happen MORE with an "unconventional portfolio" because one is more likely to second-guess their decisions.
So while psychologically it may be comfortable to have a conventional portfolio
Being comfortable psychologically with your portfolio is EXACTLY how one has the best chance of removing human behavioral errors.
I couldn't agree more. I don't think of anything as "data." The map is never the territory and it's all narrative as far as I'm concerned. The very last thing I'm going to do is thicken the behavioral error soup with more complexity while my fingers are crossed behind my back.
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Re: Larry Swedroe: investing Uncomfortably

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betablocker wrote: Wed Jan 02, 2019 6:12 pm
packer16 wrote: Wed Jan 02, 2019 2:38 pm IMO the weakness in the factor (value) argument is the factors are based upon past correlations holding true in the future (i.e. folks value vs. growth stocks in a similar way as in the past (so the factor can revert). Fundamental factors (such as beta) are based upon fundamental differences in the securities & do not change with time. Bonds are first claims against firm cash flows & thus should have lower returns than equity claims which have lower priority claims. In the end I know fundamental factors will revert due to economics. Non-fundamental factors reversion are based more upon taste than economics thus IMO not comparable to fundamental factors & with less certainty will revert. Looking at historical data can be misleading here as we have only gone through a few value/growth cycles where folks have invested in a factor way.

Packer
I’m not sure what a fundamental factor is. If you mean fundamental research, I don’t think those investors would share a boglehead’s enthusiasm for market cap weighted index funds. If you mean that market beta, duration, and credit risk have a longer history as known factors I agree but momentum, value and quality are all based on the same data. Given the ongoing debate between risk and behavioral explanations for those factors I can understand being more cautious but I don’t think dismissing them is warranted by the evidence. In fact market beta underperforms for longer periods than momentum for example.
By a fundamental factor is the factor cannot be changed over time. A stock is stock & a bond a bond. A "value" stock can become a "growth" stock and visa versa. The same is true for momentum. The returns for the non-fundamental factors are based upon past empirical returns not underlying economics or characteristics of the securities. Given that past empirical data with someone implementing these non-fundamental strategies is limited (maybe the past 20 years at most & only a few periods of out-performance/under-performance), the probability of these correlations happening by chance increases. You also have a measurement problem with value. Stocks with less growth should fundamentally less than those with high growth. However, all measures of cheapness of value I have seen do not include this factor in their estimation of cheapness.

The examples Larry gives is three instances of value doing better than beta. However, only one is during a period when factor investing was being used. So if you assume the market likes value vs. growth on 50/50 basis, then with only one trial you have at most a 75% confidence that value will work in the future. If we had more examples of markets where factor investing has been used over many non-fundamental cycles, then the case would be clearer. At this point you are making a "bet" that these non-fundamental factor correlations will continue. Just my 2 cents.

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Re: Larry Swedroe: investing Uncomfortably

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Random Walker wrote: Wed Jan 02, 2019 2:03 pm I think the point is that people may feel more comfortable “failing conventionally”: their own portfolio tanks when everyone else’s does as well. But failing conventionally, may well still be failing! In the effort to meet our financial goals, diversifying across sources of return may increase the likelihood of succeeding. But this sort of diversification requires having a portfolio very different from a TSM portfolio. As Larry wrote, a typical 60/40 portfolio has almost 90% of its risk wrapped up in the single factor, market beta. Diversifying across geographies and into factors requires fortitude to accept deviating from what everyone else is doing.
Dave
But if everybody diversified across all sources of return, wouldn't everybody be performing the same and therein still tank when everyone else's does as well? The premise of your paragraph above are that we should do something different from what everyone else is. Well, why should I do that, but everybody else shouldn't? And if everybody does it, don't we end up in the same place as we are in now?
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Re: Larry Swedroe: investing Uncomfortably

Post by fennewaldaj »

packer16 wrote: Wed Jan 02, 2019 10:15 pm

By a fundamental factor is the factor cannot be changed over time. A stock is stock & a bond a bond. A "value" stock can become a "growth" stock and visa versa.
Value seems like a slow motion trading strategy. Momentum seems like a straight up trading strategy. Small is pretty stable though.
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Re: Larry Swedroe: investing Uncomfortably

Post by james22 »

packer16 wrote: Wed Jan 02, 2019 2:38 pmIMO the weakness in the factor (value) argument is the factors are based upon past correlations holding true in the future (i.e. folks value vs. growth stocks in a similar way as in the past (so the factor can revert).
IMO the weakness in your argument is the dismissal of the risk-based or behavioral explanations for factor persistence into the future.
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Re: Larry Swedroe: investing Uncomfortably

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All I am pointing out is that behavioral based explanations will & should be arbitraged away on average over time. Now there will never be absolute arbitrage but over time the amount of arbitrage anyone can take advantage of post fee on a diversified basis will be close to zero or negative. Also, I just do not think we have enough data to scientifically state that non-fundamental factors are fundamental building blocks of risk model as some posit. IMO the disappointment over the appearance of the value premium is an example of something that may be more based upon chance than a reversion to the mean. This should not be controversial as this is the opinion of Bogle & what is expected from an efficient market.

As to risk based arguments, I believe they are true but value is not a proxy for risk as it is not fundamental to firm or security. It may be a proxy for something else perhaps operational & financial leverage but IMO if you want to take those risks you should take them directly via firms with those characteristics versus indirectly via value.

I would categorize small as fundamental factor versus value & momentum which are much dependent upon the stock price.

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Re: Larry Swedroe: investing Uncomfortably

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reformed.trader wrote: Wed Jan 02, 2019 8:00 pm
Random Walker wrote: Wed Jan 02, 2019 3:00 pm
bluquark wrote: Wed Jan 02, 2019 2:46 pm Like all market information, this data nullifies itself by being publicly known and exploited.
I certainly agree that markets are ruthlesssly efficient. Factors may well take haircuts. But if a factor is due to risk, then it's premium should not be eradicated. Behavioral factors are certainly much more susceptible to eradication, but even there, there are limits to arbitrage.

Dave
This is a great point. Think of stocks vs bonds. Its commonly accepted that stocks will outperform bonds over the long term, but this out performance isn't expected to go away just because everyone knows this.
This is true. But the equity premium has a much better claim to being a true risk premium than do factors like size, value and momentum. The equity premium (the direction, but not the magnitude) emerges directly from basic economic theory. It's easy to understand why stocks should pay more than bonds. But it's not easy to understand why size, value, and momentum factors should pay more. People seem to have characterized these as risk factors because they appear to provide excess returns, which seem backwards to me. I do tilt towards small cap and value, but I think of the excess expected returns, if any, as potential mispricing rather than risk premia (and so have lower confidence in them than the equity premium).
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Re: Larry Swedroe: investing Uncomfortably

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Random Walker wrote: Wed Jan 02, 2019 2:03 pm I think the point is that people may feel more comfortable “failing conventionally”: their own portfolio tanks when everyone else’s does as well.
In my case, my worry is that these factors will not persist. I have read Larry's arguments; I've read many of his articles and a couple of his books. I've also asked him a couple of questions by PM. At times I find the arguments compelling, and a few days later I'm second-guessing myself. For example, the fact that a small-cap has out-performed in the past does not mean that it will out-perform in the future. Larry can come up with very plausible sounding risk stories as to why various factors have a risk associated. But in the end, this is just a human making educated guesses. We never know whether investors are actually thinking about those risks and then, through their collective action, forcing companies with those risks to pay a premium. I am also not confident that "diversifying across factors" is the most logical way to understand risk and diversification. I recognize the point about getting different sources of risk, but buying a company that is risky for two reasons does not seem more diversified than buying a company that is risky for only one reason. I just don't buy that argument.

In the end, I found Larry's arguments persuasive enough to have a "tilt" in my portfolio. My equities are 60/40 US/Intl and my US equities are 60/40 Total Market / Small Cap Value. That means that in total, 24% of my equities are in small cap value. That's about the largest chunk that I feel comfortable with. But for the rest of my portfolio I have focused on other diversification arguments. I view this as diversifying away the risk that Larry might be wrong. For example, my International equities have a tilt toward emerging market stocks. I recently decided to add emerging market bonds because they seem like a very different asset: it is exposed to different countries (EM stocks is mainly Asia; EM bonds are mainly not Asia), and truly unique risks.
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Re: Larry Swedroe: investing Uncomfortably

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HomerJ wrote: Wed Jan 02, 2019 2:15 pm Just one more note. So far, a 60/40 U.S. portfolio hasn't ever failed over the long-term. The success rate, so far, is 100%.

So I'm not sure why I need to increase my likelihood of succeeding.
If the "long-term" is longer than when you need the money, that's a failure. If is always good to consider ways to improve the likelihood of succeeding. The likelihood of success is never 100%. (NOTE: This is not meant as an endorsement of factor investing).
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Re: Larry Swedroe: investing Uncomfortably

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bluquark wrote: Wed Jan 02, 2019 2:46 pm Like all market information, this data nullifies itself by being publicly known and exploited. That's why I don't think it's enough. I also need data that the data is currently underexploited by today's market participants.
No. That is only true if you think of factors as a market anomaly, or a mispricing. But it is not true if factors are a legitimate source of risk. If small-cap companies are legitimately riskier than large-cap companies, that fact will persist, and investors will rightfully demand greater return to compensate for that greater risk. Fama and French do not see factors as market anomalies; they see them as sources of risk. Then the argument is about risk, return, and diversification. If small-cap companies are 3% of the market, and they have additional return and volatility for reasons that are uncorrelated with what the rest of the market is doing, then the most efficient portfolio might not be the market portfolio but one that puts more than 3% of the equity in those small-cap companies.
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Re: Larry Swedroe: investing Uncomfortably

Post by gtwhitegold »

I agree. Any strategy could possibly fail. If you invested in 60/40 between S&P 500 and Total Bond Market and retired in January of 2000 or October of 2007, you could have been in for a very bumpy ride, likely resulting in failure.
danielc wrote: Thu Jan 03, 2019 6:57 am
HomerJ wrote: Wed Jan 02, 2019 2:15 pm Just one more note. So far, a 60/40 U.S. portfolio hasn't ever failed over the long-term. The success rate, so far, is 100%.

So I'm not sure why I need to increase my likelihood of succeeding.
If the "long-term" is longer than when you need the money, that's a failure. If is always good to consider ways to improve the likelihood of succeeding. The likelihood of success is never 100%. (NOTE: This is not meant as an endorsement of factor investing).
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Re: Larry Swedroe: investing Uncomfortably

Post by carolinaman »

I know Swedroe is a very smart guy but there are some skeptics about factor investing. This is link to Morningstar article from yesterday entitled "The Jury is Still Out on Factor Timing":
https://www.morningstar.com/articles/90 ... iming.html
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Re: Larry Swedroe: investing Uncomfortably

Post by reformed.trader »

Ben Mathew wrote: Thu Jan 03, 2019 3:44 am
reformed.trader wrote: Wed Jan 02, 2019 8:00 pm
Random Walker wrote: Wed Jan 02, 2019 3:00 pm
bluquark wrote: Wed Jan 02, 2019 2:46 pm Like all market information, this data nullifies itself by being publicly known and exploited.
I certainly agree that markets are ruthlesssly efficient. Factors may well take haircuts. But if a factor is due to risk, then it's premium should not be eradicated. Behavioral factors are certainly much more susceptible to eradication, but even there, there are limits to arbitrage.

Dave
This is a great point. Think of stocks vs bonds. Its commonly accepted that stocks will outperform bonds over the long term, but this out performance isn't expected to go away just because everyone knows this.
This is true. But the equity premium has a much better claim to being a true risk premium than do factors like size, value and momentum. The equity premium (the direction, but not the magnitude) emerges directly from basic economic theory. It's easy to understand why stocks should pay more than bonds. But it's not easy to understand why size, value, and momentum factors should pay more. People seem to have characterized these as risk factors because they appear to provide excess returns, which seem backwards to me. I do tilt towards small cap and value, but I think of the excess expected returns, if any, as potential mispricing rather than risk premia (and so have lower confidence in them than the equity premium).
Well I think the key word is IF there is a risk associated with factors. Value stocks tend to have more leverage and are in a more volatile/dying industry. It is also common sense that smaller stocks would be more risky(less assets, less capital markets access ect). As for others is not as clear, though its not just the left tail(buying whats cheap/small/has momentum) but avoiding the right tail. For example, low beta is only attractive in that you avoid the highest beta stocks(some theorize these are "lottery ticket" trades), while all other quantile shave roughly the same returns.

Its probably a mix of both mispricing and risk I imagine.
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Re: Larry Swedroe: investing Uncomfortably

Post by Random Walker »

Dead Man Walking wrote: Wed Jan 02, 2019 8:39 pm
Random Walker wrote: Wed Jan 02, 2019 2:39 pm
magneto wrote: Wed Jan 02, 2019 1:50 pm
This current factor fad seems like active in sheep's clothing (certainly momentum, aka 'market timing', can often become active on steroids).
This too shall pass?
What would it take for you to consider factors more than a fad? We have extensive historical data and out of sample tests provided by different time periods, different geographies, even different asset classses in some cases. I think Fama French’s Cross Section Of Expected Returns paper may well be the single most widely cited academic paper in the world. You might be correct that factor investing won’t work out in the future, but at what point does data carry enough weight?

Dave
A lengthy history of retail factor based funds will prove that factors are more than a fad. Real world performance is needed to convince the skeptics among us.

DMW
Fama French published in 1992-93. Larry Swedroe wrote his first book I think 1998. So size and value have been widely publicized since the 90’s. I think Larry has written essays on the performance of DFA funds since his book publication. I believe he wrote that DFA funds have beaten VG funds in every category 1998-present. When VG and DFA have funds in the same category, generally DFA has deeper exposure to the factors than VG.

Dave
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Re: Larry Swedroe: investing Uncomfortably

Post by Taylor Larimore »

Random Walker wrote: Wed Jan 02, 2019 12:00 pm https://www.etf.com/sections/features-a ... omfortably

Active management, hedge funds, market timing are not a winning formula. Passively and doggedly spreading one’s bets across the factors that have been shown to provide returns over time can be a winning formula. Conventional investors effectively place all their bets in the single factor, market beta. The goal of investing is to meet one’s personal goals. So while psychologically it may be comfortable to have a conventional portfolio, failing conventionally may not allow one to reach his goals. A more robust portfolio can potentially be built by diversifying across uncorrelated sources of return. This requires putting aside several very human behavioral errors: tracking error regret, myopic loss aversion, recency bias. Successful investing may very well require being uncomfortable.

Dave
Bogleheads:

Factor investing, promoted by the investment industry using past-performance (?), is usually very expensive compared with total market investing.

The United States Securities and Exchange Commission warns: "Independent studies show fees and expenses can be a reliable predictor of mutual fund performance."

Jack Bogle wrote "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners."

The Three-Fund Portfolio

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Larry Swedroe: investing Uncomfortably

Post by columbia »

Sharpe since 1998:

DFA SCV: 0.47
VG SCV: 0.46

DFA has indeed delivered higher returns (and larger drawdowns), because it’s taking more risk.
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Re: Larry Swedroe: investing Uncomfortably

Post by Random Walker »

carolinaman wrote: Thu Jan 03, 2019 8:59 am I know Swedroe is a very smart guy but there are some skeptics about factor investing. This is link to Morningstar article from yesterday entitled "The Jury is Still Out on Factor Timing":
https://www.morningstar.com/articles/90 ... iming.html
I admittedly did not read the article, I’m just responding to the title. I don’t think any of the Bogleheads discussions regarding factors assume any ability to time the factors. That is an extraordinarily difficult game to play. I believe the Bogleheads tilted to factors have a chosen AA and stick to it without any market timing at all.

Dave
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Random Walker
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Re: Larry Swedroe: investing Uncomfortably

Post by Random Walker »

columbia wrote: Thu Jan 03, 2019 10:46 am Sharpe since 1998:

DFA SCV: 0.47
VG SCV: 0.46

DFA has indeed delivered higher returns (and larger drawdowns), because it’s taking more risk.
Yes, but that alone I not the issue. What matters is how the component funds mix in a portfolio. The Sharpe ratio of the portfolio matters more than the Sharpe of the components.

Dave
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Re: Larry Swedroe: investing Uncomfortably

Post by dcabler »

Random Walker wrote: Thu Jan 03, 2019 10:51 am
carolinaman wrote: Thu Jan 03, 2019 8:59 am I know Swedroe is a very smart guy but there are some skeptics about factor investing. This is link to Morningstar article from yesterday entitled "The Jury is Still Out on Factor Timing":
https://www.morningstar.com/articles/90 ... iming.html
I admittedly did not read the article, I’m just responding to the title. I don’t think any of the Bogleheads discussions regarding factors assume any ability to time the factors. That is an extraordinarily difficult game to play. I believe the Bogleheads tilted to factors have a chosen AA and stick to it without any market timing at all.

Dave
Just read the article - yep, it's about timing factors. So 2x the number of controversial BH subjects all rolled into one article. :D
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Re: Larry Swedroe: investing Uncomfortably

Post by billyo44 »

Taylor Larimore wrote: Thu Jan 03, 2019 10:45 am
Random Walker wrote: Wed Jan 02, 2019 12:00 pm https://www.etf.com/sections/features-a ... omfortably

Active management, hedge funds, market timing are not a winning formula. Passively and doggedly spreading one’s bets across the factors that have been shown to provide returns over time can be a winning formula. Conventional investors effectively place all their bets in the single factor, market beta. The goal of investing is to meet one’s personal goals. So while psychologically it may be comfortable to have a conventional portfolio, failing conventionally may not allow one to reach his goals. A more robust portfolio can potentially be built by diversifying across uncorrelated sources of return. This requires putting aside several very human behavioral errors: tracking error regret, myopic loss aversion, recency bias. Successful investing may very well require being uncomfortable.

Dave
Bogleheads:

Factor investing, promoted by the investment industry using past-performance (?), is usually very expensive compared with total market investing.

The United States Securities and Exchange Commission warns: "Independent studies show fees and expenses can be a reliable predictor of mutual fund performance."

Jack Bogle wrote "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners."

The Three-Fund Portfolio

Best wishes.
Taylor
Taylor:
Welcome back from your cruise...and for keeping us on the 'straight and narrow'. In the last 10 years, every time I have strayed with a small/speculative investment (i.e. VWEAX, individual stocks, some 'new strategy') it has cost me :moneybag .
Set a 'comfortable' allocation and stay the course.
Independence = Financial assets working for you versus you working for them. | "Own an Index Fund, Get a Life Outside of Finance, and Relax"...John C. Bogle
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Re: Larry Swedroe: investing Uncomfortably

Post by carolinaman »

dcabler wrote: Thu Jan 03, 2019 11:17 am
Random Walker wrote: Thu Jan 03, 2019 10:51 am
carolinaman wrote: Thu Jan 03, 2019 8:59 am I know Swedroe is a very smart guy but there are some skeptics about factor investing. This is link to Morningstar article from yesterday entitled "The Jury is Still Out on Factor Timing":
https://www.morningstar.com/articles/90 ... iming.html
I admittedly did not read the article, I’m just responding to the title. I don’t think any of the Bogleheads discussions regarding factors assume any ability to time the factors. That is an extraordinarily difficult game to play. I believe the Bogleheads tilted to factors have a chosen AA and stick to it without any market timing at all.

Dave
Just read the article - yep, it's about timing factors. So 2x the number of controversial BH subjects all rolled into one article. :D
These two excerpts from the Morningstar article got my attention:
"While each of these factors has a good long-term record, they all go through cycles of underperfor­mance. If timing really works, it could help mitigate this cyclicality, which is one of the biggest drawbacks to factor investing."

"A healthy dose of skepticism is in order. Much of the research done thus far (referring to factor timing) has come from practitioners, rather than academia, who work for asset managers with a vested interest in bringing new products to market. As with most financial research, data mining is also a risk because there are many variables researchers could have tested to find a predictive rela­tionship that worked in sample but may not work out of sample."
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Re: Larry Swedroe: investing Uncomfortably

Post by Random Walker »

This business about factor timing sort of brings up a relevant Bogleheads issue though. Some on this board view factor investing as active and others view it as passive. I think that an article highlighting difficulty in timing factors implicitly shows that one can be consistently passively exposed to them without any active effort to time the factors. Some very sophisticated strategies to gain exposure to factors can remain agnostic to market timing and security selection, and that is why I think factor investing can very fairly be described as passive; certainly closer in my mind to index investing than to active.

Dave
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Re: Larry Swedroe: investing Uncomfortably

Post by pkcrafter »

I'm guarded on Swedroe's recommendations over the recent past. Swedroe used to recommend indexing, now he doesn't. What's different? BAM (Buckingham Asset Management) and BAM alliance. Larry works for both and is on the board of directors (director of research}. Who are the partners in the BAM alliance? Buckingham Asset Management isn't new and Larry has worked for them since 1996, but the BAM alliance appears to be fairly new and that's what has caused the change in Larry's recommendations.

Who's in the Alliance?

http://www.bamadvisorservices.com/who-we-are/

Using Larry's recommendations will increase costs and take you out of the Bogleheads' strategy.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Larry Swedroe: investing Uncomfortably

Post by packer16 »

Random Walker wrote: Thu Jan 03, 2019 12:14 pm This business about factor timing sort of brings up a relevant Bogleheads issue though. Some on this board view factor investing as active and others view it as passive. I think that an article highlighting difficulty in timing factors implicitly shows that one can be consistently passively exposed to them without any active effort to time the factors. Some very sophisticated strategies to gain exposure to factors can remain agnostic to market timing and security selection, and that is why I think factor investing can very fairly be described as passive; certainly closer in my mind to index investing than to active.

Dave
How can factor investing be agnostic to security selection when that is the definition of value, you are selecting the group of stocks that have certain price/value characteristics. Then you are further refining the sample based upon stocks that you "know" will underperform (IPOs & bankrupt stocks for example). You can say that factor investing has a more diversified approach across sectors versus more concentrated security selection strategies.

Packer
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Last edited by hdas on Wed Jan 29, 2020 2:50 pm, edited 1 time in total.
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Re: Larry Swedroe: investing Uncomfortably

Post by dcabler »

Random Walker wrote: Thu Jan 03, 2019 12:14 pm This business about factor timing sort of brings up a relevant Bogleheads issue though. Some on this board view factor investing as active and others view it as passive. I think that an article highlighting difficulty in timing factors implicitly shows that one can be consistently passively exposed to them without any active effort to time the factors. Some very sophisticated strategies to gain exposure to factors can remain agnostic to market timing and security selection, and that is why I think factor investing can very fairly be described as passive; certainly closer in my mind to index investing than to active.

Dave
Makes me wonder if "active" and "passive" are overly broad terms now. Maybe more like: passive becomes "strictly adhered rules-based which can be managed by robots" and active becomes "human touch, whether it's heavy or light". On the other hand, what happens when AI's run the show and nobody can even figure out what the rules are?
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Re: Larry Swedroe: investing Uncomfortably

Post by danielc »

hdas wrote: Thu Jan 03, 2019 12:47 pm Yes, the question is why?, here are some reasonable hypothesis:

a.) They genuinely believe and have done their homework. They are trying to do their best for their clients.
b.) They have an undisclosed incentive to use this approach.
c.) They believe differentiating using factor based investing will help them raise AUM and it will be the 'wave of the future'.
d.) Increasing complexity is the only way they can maintain their fee structure and survive pressures of passive investing, robo, etc.
e.) Larry is a human who, with the best of intentions, can see the world through tinted glasses. I think that there is some human bias in which we tend to see the products that our company makes more positively than if we saw the same product being made by somebody else.

EDIT: I've been informed that Larry doesn't actually work for DFA. I thought he did.
Last edited by danielc on Thu Jan 03, 2019 1:55 pm, edited 1 time in total.
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Re: Larry Swedroe: investing Uncomfortably

Post by danielc »

dcabler wrote: Thu Jan 03, 2019 12:50 pm Makes me wonder if "active" and "passive" are overly broad terms now. Maybe more like: passive becomes "strictly adhered rules-based which can be managed by robots" and active becomes "human touch, whether it's heavy or light". On the other hand, what happens when AI's run the show and nobody can even figure out what the rules are?
I can't imagine that a computer-driven day-trader would be considered "passive". Passive has to imply that you avoid doing stuff.
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Factor funds: Active or Passive?

Post by Taylor Larimore »

Random Walker wrote: Thu Jan 03, 2019 12:14 pm Some very sophisticated strategies to gain exposure to factors can remain agnostic to market timing and security selection, and that is why I think factor investing can very fairly be described as passive; certainly closer in my mind to index investing than to active.

Dave
Dave:

Sorry. Vanguard disagrees :
Factor-based funds are a form of active management.* They offer the potential to achieve specific risk and return objectives by purposely and explicitly "tilting" portfolios toward certain stock characteristics, like recent momentum, higher quality, or lower stock prices.

But they come with significantly more risk than you'd experience investing in the broader stock market.
*Underline mine.

https://investor.vanguard.com/etf/factor-funds

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Larry Swedroe: investing Uncomfortably

Post by Ben Mathew »

danielc wrote: Thu Jan 03, 2019 12:56 pm
dcabler wrote: Thu Jan 03, 2019 12:50 pm Makes me wonder if "active" and "passive" are overly broad terms now. Maybe more like: passive becomes "strictly adhered rules-based which can be managed by robots" and active becomes "human touch, whether it's heavy or light". On the other hand, what happens when AI's run the show and nobody can even figure out what the rules are?
I can't imagine that a computer-driven day-trader would be considered "passive". Passive has to imply that you avoid doing stuff.
I agree. Passive can't involve a lot of trading, whether by humans or computers.

Would also have to rule out long term stock picking (a la Warren Buffett) that does not involve heavy trading. That seems harder to define.
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Re: Larry Swedroe: investing Uncomfortably

Post by dcabler »

Ben Mathew wrote: Thu Jan 03, 2019 1:42 pm
danielc wrote: Thu Jan 03, 2019 12:56 pm
dcabler wrote: Thu Jan 03, 2019 12:50 pm Makes me wonder if "active" and "passive" are overly broad terms now. Maybe more like: passive becomes "strictly adhered rules-based which can be managed by robots" and active becomes "human touch, whether it's heavy or light". On the other hand, what happens when AI's run the show and nobody can even figure out what the rules are?
I can't imagine that a computer-driven day-trader would be considered "passive". Passive has to imply that you avoid doing stuff.
I agree. Passive can't involve a lot of trading, whether by humans or computers.

Would also have to rule out long term stock picking (a la Warren Buffett) that does not involve heavy trading. That seems harder to define.
Seems we evolved to categorize things despite ourselves. But I agree - it's difficult to call frequent trading "passive". Anyway, the current binary-only terms, "passive" and "active", don't seem to really fit the reality either - it seems to me to be either a spectrum or something multi-dimensional. At least we know what relatively cheap and expensive means when looking at e/r's.. :D
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Re: Factor funds: Active or Passive?

Post by reformed.trader »

Taylor Larimore wrote: Thu Jan 03, 2019 1:14 pm
Random Walker wrote: Thu Jan 03, 2019 12:14 pm Some very sophisticated strategies to gain exposure to factors can remain agnostic to market timing and security selection, and that is why I think factor investing can very fairly be described as passive; certainly closer in my mind to index investing than to active.

Dave
Dave:

Sorry. Vanguard disagrees :
Factor-based funds are a form of active management.* They offer the potential to achieve specific risk and return objectives by purposely and explicitly "tilting" portfolios toward certain stock characteristics, like recent momentum, higher quality, or lower stock prices.

But they come with significantly more risk than you'd experience investing in the broader stock market.
*Underline mine.

https://investor.vanguard.com/etf/factor-funds

Best wishes
Taylor
And Vanguard = God?

I assume Vanguard as well as 99% of boggleheads would say buying VOO is a passive investment, yet its actually an active decision to hold the largest 500 stocks in the US(which constantly changes). True passive investing would involve being invested in every asset in the world(and even that could be debated), which obviously isn't possible. So you have the draw the line somewhere, but its subjective.
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Re: Larry Swedroe: investing Uncomfortably

Post by Random Walker »

packer16 wrote: Thu Jan 03, 2019 12:38 pm
How can factor investing be agnostic to security selection when that is the definition of value, you are selecting the group of stocks that have certain price/value characteristics. Then you are further refining the sample based upon stocks that you "know" will underperform (IPOs & bankrupt stocks for example). You can say that factor investing has a more diversified approach across sectors versus more concentrated security selection strategies.

Packer
Factor investing can simply set up rules/metrics for equities to incorporate into their funds. Once an individual stock meets these criteria, the fund is totally indifferent as to what the individual stock is.

Dave
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