Factor ETFs For Diversification Or “Diworsification”

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
Random Walker
Posts: 4189
Joined: Fri Feb 23, 2007 8:21 pm

Factor ETFs For Diversification Or “Diworsification”

Post by Random Walker » Sat May 18, 2019 1:53 pm

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

Found this article at ETF.com. Summarizes the dominance of US Large Cap / Tech over the last decade. Diversification across geography and factors has been a drag on returns over the last decade. Is it time to toss away factor investing? Or is an article like this a sign of capitulation on factors?

Personally I’ve mutated into a factorhead, and I’m not throwing in the towel. Moreover I think it’s important to appreciate that the point of factor investing to to diversify away from the market beta that dominates our portfolios. Since our portfolios are dominated by the market factor, when large growth / TSM does well, we’re doing pretty well too. The underperformance when TSM does well tends to not be as significant as the outperformance when the factors do well. The lack of correlation between factors should hopefully decrease the likelihood of negative returns over any time period.

Dave
Last edited by Random Walker on Sat May 18, 2019 2:59 pm, edited 2 times in total.

User avatar
nedsaid
Posts: 12773
Joined: Fri Nov 23, 2012 12:33 pm

Re: Factor ETFs For Diversification Or Diworsification”

Post by nedsaid » Sat May 18, 2019 2:08 pm

I have been like a broken record around here. Factor investing has not worked because of the High Tech Sector and the FAANG stocks. (skip) Factor investing has not worked because of the High Tech Sector and the FAANG stocks. (skip) Factor investing has not worked because of the High Tech Sector and the FAANG stocks. (skip) Factor investing has not worked because of the High Tech Sector and the FAANG stock. You get the idea. A big reason the 3 fund portfolio has done better than Small/Value tilted portfolios during the last decade. Good to see that I am not the only one saying this.


By the way, Factor investing has not worked because of the High Tech Sector and the FAANG stocks. :wink:
A fool and his money are good for business.

User avatar
Dialectical Investor
Posts: 527
Joined: Mon Dec 03, 2018 11:41 pm

Re: Factor ETFs For Diversification Or Diworsification”

Post by Dialectical Investor » Sat May 18, 2019 2:23 pm

If you started investing in factors such as small value due to outperformance in the post-publishing era, largely dominated by the popping of the late 1990s growth bubble, and you're questioning the prospective premium based on recent results, it's time to reconsider your strategy. And if you measure diversification by period-specific returns, you're just doing it wrong in general.

Topic Author
Random Walker
Posts: 4189
Joined: Fri Feb 23, 2007 8:21 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by Random Walker » Sat May 18, 2019 3:07 pm

Larry Swedroe continuously reminds us that “10 years is just noise in the financial data”. And Rick Ferri reminds us that if one is going to go the factor route, it’s a lifetime commitment. Alternative histories can always play out; I’m really interested to see how this history plays out.

Dave

User avatar
Forester
Posts: 556
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: Factor ETFs For Diversification Or “Diworsification”

Post by Forester » Sat May 18, 2019 4:05 pm

Strong US dollar
-US
-tech
-growth
-megacap

Weak US dollar
-US small cap
-ex-US
-value
-commodities, industrial

Dead Man Walking
Posts: 889
Joined: Wed Nov 07, 2007 6:51 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by Dead Man Walking » Sat May 18, 2019 4:22 pm

Random Walker wrote:
Sat May 18, 2019 3:07 pm
Larry Swedroe continuously reminds us that “10 years is just noise in the financial data”. And Rick Ferri reminds us that if one is going to go the factor route, it’s a lifetime commitment. Alternative histories can always play out; I’m really interested to see how this history plays out.

Dave
For some investors, a lifetime commitment may be close to the 10 years of noise to which Swedroe refers.

DMW

Topic Author
Random Walker
Posts: 4189
Joined: Fri Feb 23, 2007 8:21 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by Random Walker » Sat May 18, 2019 4:46 pm

Dead Man Walking wrote:
Sat May 18, 2019 4:22 pm
Random Walker wrote:
Sat May 18, 2019 3:07 pm
Larry Swedroe continuously reminds us that “10 years is just noise in the financial data”. And Rick Ferri reminds us that if one is going to go the factor route, it’s a lifetime commitment. Alternative histories can always play out; I’m really interested to see how this history plays out.

Dave
For some investors, a lifetime commitment may be close to the 10 years of noise to which Swedroe refers.

DMW
And that is a reason to diversify across the factors! Over any time period, the likelihood of a negative outcome is less with a 1/n portfolio diversified across factors than it is when invested in a single factor; and that includes market beta. Diversification actually becomes more important when one’s time frame is short.

Dave

garlandwhizzer
Posts: 2508
Joined: Fri Aug 06, 2010 3:42 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by garlandwhizzer » Sat May 18, 2019 8:02 pm

Factor investing comes from a model created by very bright people based on backtesting data. It attempts to define reality but is not reality itself. SCV has struggled for a decade or more. According to multi-factor theory when V struggles, MOM should take up the slack. That has not occurred in real MOM funds over the last decade. Having both of these factors did offer diversification to TSM but that diversification was in the wrong direction in both cases. These are the times that try the commitment of factor investors. A lot of folks will give up after a decade of underperformance. I don't know whether going forward factors will roar back and outperform or not. According to theory it should. In reality it may or may not over a particular investors time frame.

We have been in a slow growth, low inflation, low yield economy for a decade. In such a setting small struggling companies (SCV) have not done well historically. Big cap tech is the only place where there has been reliably robust growth both bottom line and top line during this FAANG dominance. In an environment where most companies are struggling to grow profits at all, investors are willing to pay considerable premiums for companies like the FAANGS. They have massive cash on the balance sheet, immense cash flow, and consistent robust growth of both revenues and profits. Would you rather own AMZN and pay an outrageous premium for it or buy a deep value regional bank selling at a low P/B whose future profit growth is challenged? Investors have clearly chosen AMZN, no contest. How long will tech dominance last? If and when FAANG top and bottom line growth slows considerably they will cease to be the market drivers. I don't know but I do believe that AI, the next tech revolution, will be upon us much sooner than many expect. It is likely that once again tech will reinvent itself with AI and quickly change the world just as the internet did.

Garland Whizzer

stlutz
Posts: 5465
Joined: Fri Jan 02, 2009 1:08 am

Re: Factor ETFs For Diversification Or “Diworsification”

Post by stlutz » Sat May 18, 2019 8:11 pm

By the way, Factor investing has not worked because of the High Tech Sector and the FAANG stocks
It all depends on what you mean by "worked".

Just to look at a bunch of iShares ETFs for the past 5 years.

Total Market: 10.57

Quality: 11.61
Momentum: 14.90
Small Value 7.17
Minimum Volatility: 12.73
-------------------------------------
Factor Fund Average: 11.60

So, the person who truly did diversify among factor strategies has in fact beat the market by about 1% over the past 5 years.

How is this not working?

a) Many here have advocated concentrating on one factor bet (small value), even claiming that only owning this small corner of the market (i.e. 3% of the overall market cap) is "more diversified" that if you added the other 97% of the market to your portfolio. This group hasn't lost money, but this concentrated big bet approach hasn't worked out well over the past 5 years.

b) There have also been claims that factor investing will give you several additional percentage points of return every year over a mere market portfolio. The person who had a reasonable expectation of what simple/simplistic stock selection strategies can do for you is actually quite satisfied.

If one uses a dictionary definition of diversification and has reasonable expectations, factor investing seems to be working out just fine.

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by vineviz » Sat May 18, 2019 9:24 pm

stlutz wrote:
Sat May 18, 2019 8:11 pm
a) Many here have advocated concentrating on one factor bet (small value), even claiming that only owning this small corner of the market (i.e. 3% of the overall market cap) is "more diversified" that if you added the other 97% of the market to your portfolio.
In truth, “small value” is NOT a “one factor bet”.

It may not be a “bet” at all, and it definitely isn’t one factor: it’s at least three (market beta, size, and value) and probably four (add quality if using the S&P 600 Value index).

I know of no one who has advocated holding a portfolio that is 100% small cap value, but it certainly is feasible that such a portfolio could be more diversified than one holding only a total stock market fund.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
Taylor Larimore
Advisory Board
Posts: 28817
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Factor ETFs For Diversification Or “Diworsification”

Post by Taylor Larimore » Sat May 18, 2019 9:40 pm

Random Walker wrote:
Sat May 18, 2019 3:07 pm
Larry Swedroe continuously reminds us that “10 years is just noise in the financial data”. And Rick Ferri reminds us that if one is going to go the factor route, it’s a lifetime commitment. Alternative histories can always play out; I’m really interested to see how this history plays out.
Random Walker:

Larry Swedroe works for BAM which supports more than 140 financial advisers. Jack Bogle who devoted his life to lowering costs and "give ordinary investors a fair shake" said this:
"By and large I do not approve of factor funds."
When in doubt, I must go with Jack.

Total Market Index Funds

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

fennewaldaj
Posts: 796
Joined: Sun Oct 22, 2017 11:30 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by fennewaldaj » Sat May 18, 2019 10:20 pm

While the relative performance of value products may have been disappointing in the last decade or so there absolute performance has been totally fine. I can't say that I really can get all that worked up by lagging a bit when the overall results are still good. Although I do use a small value tilt I am probably less convinced than some others that factors will continue to outperform (I would put odds of SV outperforming at ~65% if forced to make a stand). I figured if nothing else it will behave differently than large blend. If it performs worse in a relative sense but still performs well overall I can live with that.

User avatar
Forester
Posts: 556
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: Factor ETFs For Diversification Or “Diworsification”

Post by Forester » Sat May 18, 2019 10:27 pm

garlandwhizzer wrote:
Sat May 18, 2019 8:02 pm
Factor investing comes from a model created by very bright people based on backtesting data. It attempts to define reality but is not reality itself. SCV has struggled for a decade or more. According to multi-factor theory when V struggles, MOM should take up the slack. That has not occurred in real MOM funds over the last decade. Having both of these factors did offer diversification to TSM but that diversification was in the wrong direction in both cases. These are the times that try the commitment of factor investors. A lot of folks will give up after a decade of underperformance. I don't know whether going forward factors will roar back and outperform or not. According to theory it should. In reality it may or may not over a particular investors time frame.

We have been in a slow growth, low inflation, low yield economy for a decade. In such a setting small struggling companies (SCV) have not done well historically. Big cap tech is the only place where there has been reliably robust growth both bottom line and top line during this FAANG dominance. In an environment where most companies are struggling to grow profits at all, investors are willing to pay considerable premiums for companies like the FAANGS. They have massive cash on the balance sheet, immense cash flow, and consistent robust growth of both revenues and profits. Would you rather own AMZN and pay an outrageous premium for it or buy a deep value regional bank selling at a low P/B whose future profit growth is challenged? Investors have clearly chosen AMZN, no contest. How long will tech dominance last? If and when FAANG top and bottom line growth slows considerably they will cease to be the market drivers. I don't know but I do believe that AI, the next tech revolution, will be upon us much sooner than many expect. It is likely that once again tech will reinvent itself with AI and quickly change the world just as the internet did.

Garland Whizzer
SCV is neck-and-neck with Large Cap over the last 10 years, despite talk of "value is dead". Level pegging despite negative sentiment.

typical.investor
Posts: 1260
Joined: Mon Jun 11, 2018 3:17 am

Re: Factor ETFs For Diversification Or “Diworsification”

Post by typical.investor » Sat May 18, 2019 11:11 pm

stlutz wrote:
Sat May 18, 2019 8:11 pm
By the way, Factor investing has not worked because of the High Tech Sector and the FAANG stocks
It all depends on what you mean by "worked".

Just to look at a bunch of iShares ETFs for the past 5 years.

Total Market: 10.57

Quality: 11.61
Momentum: 14.90
Small Value 7.17
Minimum Volatility: 12.73
-------------------------------------
Factor Fund Average: 11.60

So, the person who truly did diversify among factor strategies has in fact beat the market by about 1% over the past 5 years.

How is this not working?

If one uses a dictionary definition of diversification and has reasonable expectations, factor investing seems to be working out just fine.
First, I don't think we can extrapolate from one fund company's returns to factor performance in general. For instance, are MTUM's returns representative of momentum funds in general?

Second, is it really the "factor diversification" that returned the improved performance? Or was it the negative loadings on size and value - i.e. it's simply been a large growth environment.

https://www.portfoliovisualizer.com/bac ... total3=100

Large growth (such as SCHG) did much better that the iShares factor portfolio and did it with a negative loading on size, negative loading on value, negative loading on quality and negative loading on low volatility. Its mom loading was near zero.

https://www.portfoliovisualizer.com/fac ... e&total1=0

I don't see that factor diversification drove the improved returns. I see larger growth portfolios doing better, and pretty much 3/4 of the iShare funds benefitted from that.

typical.investor
Posts: 1260
Joined: Mon Jun 11, 2018 3:17 am

Re: Factor ETFs For Diversification Or “Diworsification”

Post by typical.investor » Sat May 18, 2019 11:20 pm

Forester wrote:
Sat May 18, 2019 10:27 pm
garlandwhizzer wrote:
Sat May 18, 2019 8:02 pm
Factor investing comes from a model created by very bright people based on backtesting data. It attempts to define reality but is not reality itself. SCV has struggled for a decade or more. According to multi-factor theory when V struggles, MOM should take up the slack. That has not occurred in real MOM funds over the last decade. Having both of these factors did offer diversification to TSM but that diversification was in the wrong direction in both cases. These are the times that try the commitment of factor investors. A lot of folks will give up after a decade of underperformance. I don't know whether going forward factors will roar back and outperform or not. According to theory it should. In reality it may or may not over a particular investors time frame.

We have been in a slow growth, low inflation, low yield economy for a decade. In such a setting small struggling companies (SCV) have not done well historically. Big cap tech is the only place where there has been reliably robust growth both bottom line and top line during this FAANG dominance. In an environment where most companies are struggling to grow profits at all, investors are willing to pay considerable premiums for companies like the FAANGS. They have massive cash on the balance sheet, immense cash flow, and consistent robust growth of both revenues and profits. Would you rather own AMZN and pay an outrageous premium for it or buy a deep value regional bank selling at a low P/B whose future profit growth is challenged? Investors have clearly chosen AMZN, no contest. How long will tech dominance last? If and when FAANG top and bottom line growth slows considerably they will cease to be the market drivers. I don't know but I do believe that AI, the next tech revolution, will be upon us much sooner than many expect. It is likely that once again tech will reinvent itself with AI and quickly change the world just as the internet did.

Garland Whizzer
SCV is neck-and-neck with Large Cap over the last 10 years, despite talk of "value is dead". Level pegging despite negative sentiment.
I guess it depend on what you mean by neck-and-neck.

Jan 2009 - Apr 2019

Large cap 14.37%
Small value 13.82%
Large growth 16.12%

Sure seems like large tech companies are doing much better than small value to me. Returns of 2.3% per year better over a decade is probably where the sentiment stems from.

https://www.portfoliovisualizer.com/bac ... total3=100

User avatar
nedsaid
Posts: 12773
Joined: Fri Nov 23, 2012 12:33 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by nedsaid » Sat May 18, 2019 11:31 pm

stlutz wrote:
Sat May 18, 2019 8:11 pm
By the way, Factor investing has not worked because of the High Tech Sector and the FAANG stocks
It all depends on what you mean by "worked".

Just to look at a bunch of iShares ETFs for the past 5 years.

Total Market: 10.57

Quality: 11.61
Momentum: 14.90
Small Value 7.17
Minimum Volatility: 12.73
-------------------------------------
Factor Fund Average: 11.60

So, the person who truly did diversify among factor strategies has in fact beat the market by about 1% over the past 5 years.

How is this not working?

a) Many here have advocated concentrating on one factor bet (small value), even claiming that only owning this small corner of the market (i.e. 3% of the overall market cap) is "more diversified" that if you added the other 97% of the market to your portfolio. This group hasn't lost money, but this concentrated big bet approach hasn't worked out well over the past 5 years.

b) There have also been claims that factor investing will give you several additional percentage points of return every year over a mere market portfolio. The person who had a reasonable expectation of what simple/simplistic stock selection strategies can do for you is actually quite satisfied.

If one uses a dictionary definition of diversification and has reasonable expectations, factor investing seems to be working out just fine.
Well, it hasn't worked for me, at least since the 2008-2009 financial crisis. My New 'Doo thread is pretty much me crying in my root beer over two consecutive New Year's Days over my disappointing 2017 and 2018 performance. In 2017, particularly, my underperformance was caused by what I call factor drag. The account that caused the greatest relative underperformance in 2017 was the account that had the largest tilts to Small-Cap and Value. I also own funds that practice both earnings and price momentum.

In another thread, I looked at the 10-year performance of Large Growth, Large Value, the S&P 500, Small Value, and Small Growth using Vanguard Index funds. I used Admiral Shares for comparison. Large Growth did the best beating Large Value by 2% a year. In fact, Large Growth, Small Growth, and Small Value all beat the S&P 500 over that time period. Only Large Value trailed the S&P 500.

I joked that people ought to be selling their S&P 500 funds.

If you look at the iShares factor funds, they use different indexes so you would expect somewhat different results than I found. But your point is well taken, the factors are hardly dead.
A fool and his money are good for business.

User avatar
nedsaid
Posts: 12773
Joined: Fri Nov 23, 2012 12:33 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by nedsaid » Sat May 18, 2019 11:55 pm

Taylor Larimore wrote:
Sat May 18, 2019 9:40 pm
Random Walker:

Larry Swedroe works for BAM which supports more than 140 financial advisers. Jack Bogle who devoted his life to lowering costs and "give ordinary investors a fair shake" said this:
"By and large I do not approve of factor funds."
When in doubt, I must go with Jack.

Total Market Index Funds

Best wishes.
Taylor
Well, Jack is a Saint in the community of Bogleheads. Larry needs his two Portfolio Performance Miracles to achieve such status and unfortunately the last decade hasn't been so good for tilting. So Sainthood for Larry is a ways off. Plus Taylor plays the Devil's advocate role. Indeed, Larry has committed a couple of trespasses here. Factors were sort of acceptable here but Alternatives got him into trouble. But hope (and factors) spring eternal. After all, General Electric is coming back. You just wait. :wink:
A fool and his money are good for business.

David Althaus
Posts: 119
Joined: Wed Feb 14, 2018 8:05 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by David Althaus » Sun May 19, 2019 8:26 am

Can anyone determine how long it takes to revert to the mean, or even worse, is the knowledge so common it has been arbitraged away? Waiting for that reversion to the mean can extend longer many retirees. As a 72 year old retiree the VTI based portfolio seems extremely sound and that beating many money managers over one, many more over five, and almost all over 10 year periods is what I should keep in mind. It's difficult enough waiting for VXUS to revert at this age.

If you're young enough, can wait long enough, are willing to accept the higher risk associated with higher returns, and are confident arbitrage has not taken away the premium go ahead.

All the best

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by vineviz » Sun May 19, 2019 9:15 am

David Althaus wrote:
Sun May 19, 2019 8:26 am
If you're young enough, can wait long enough, are willing to accept the higher risk associated with higher returns, and are confident arbitrage has not taken away the premium go ahead.
Taking more risk is one thing, but diversifying your sources of risk is a different thing.

Counterintuitively, the shorter your time horizon the MORE important diversification becomes.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Topic Author
Random Walker
Posts: 4189
Joined: Fri Feb 23, 2007 8:21 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by Random Walker » Sun May 19, 2019 9:25 am

vineviz wrote:
Sun May 19, 2019 9:15 am
David Althaus wrote:
Sun May 19, 2019 8:26 am
If you're young enough, can wait long enough, are willing to accept the higher risk associated with higher returns, and are confident arbitrage has not taken away the premium go ahead.
Taking more risk is one thing, but diversifying your sources of risk is a different thing.

Counterintuitively, the shorter your time horizon the MORE important diversification becomes.
Completely agree!

Dave

User avatar
Taylor Larimore
Advisory Board
Posts: 28817
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Diversification

Post by Taylor Larimore » Sun May 19, 2019 11:04 am

Bogleheads:

Stock diversification cannot take the place of bond diversification.

In the last U.S. bear market (2008), EVERY Vanguard stock fund had a loss.
Meanwhile, Vanguard Total Bond Market Index Fund had a 5% gain.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Topic Author
Random Walker
Posts: 4189
Joined: Fri Feb 23, 2007 8:21 pm

Re: Diversification

Post by Random Walker » Sun May 19, 2019 11:07 am

Taylor Larimore wrote:
Sun May 19, 2019 11:04 am
the shorter your time horizon the MORE important diversification becomes.
Bogleheads:

Stock diversification cannot take the place of bond diversification.

In the last U.S. bear market (2008), EVERY Vanguard stock fund had a loss.
Meanwhile, Vanguard Total Bond Market Index Fund had a 5% gain.

Best wishes.
Taylor
Also completely agree. Moreover, the best diversifier of equity risk, high quality bonds, are also the cheapest diversifier.

Dave

User avatar
nedsaid
Posts: 12773
Joined: Fri Nov 23, 2012 12:33 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by nedsaid » Sun May 19, 2019 11:09 am

Wanted to make clear that I am a fan of Larry Swedroe and have learned a lot from him. Indeed, I have just last night ordered two of his latest books on Amazon. It does seem that he fell out of favor here because of his advocacy for factor tilting and then for alternative investments. Also want to make it crystal clear that the simple 3 fund portfolio is a perfectly good portfolio. Since I started posting here in 2012, I have advocated for Small/Value tilted portfolios for those who believe in Academic Research and the simple 3 fund portfolio for those that don't. Best of luck to Taylor on his latest book on the 3 fund portfolio and I hope it does very well.
A fool and his money are good for business.

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Diversification

Post by vineviz » Sun May 19, 2019 11:17 am

Taylor Larimore wrote:
Sun May 19, 2019 11:04 am
Stock diversification cannot take the place of bond diversification.
Clearly true, but also somewhat irrelevant: diversifying between equity and bond holdings isn't mutually exclusive with diversifying within equity and bond holdings.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Notsobad
Posts: 46
Joined: Sat Sep 02, 2017 6:16 am

Re: Factor ETFs For Diversification Or “Diworsification”

Post by Notsobad » Sun May 19, 2019 11:25 am

And all of the above again explains why most of us are better in the simpler strategy of index funds for stocks and bonds. Otherwise we could become caught in the endless struggle for a “better” portfolio. To either beat market returns or feel more protected from volatility.

So we can’t beat the market but it means that we will not choose wrong and fall below it. And I can feel secure that my long term strategy is good enough.

User avatar
Taylor Larimore
Advisory Board
Posts: 28817
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Factor ETFs For Diversification Or “Diworsification”

Post by Taylor Larimore » Sun May 19, 2019 11:53 am

nedsaid wrote: I have advocated for Small/Value tilted portfolios for those who believe in Academic Research and the simple 3 fund portfolio for those that don't.
Nedsaid:

I have spent many year studying "Academic Research." One thing I learned is that much of "Academic Research" is paid by the investment industry for marketing purposes. Academic Research (good and bad) is also vulnerable to selective interpretation.

You say: "the simple 3 fund portfolio" is for those who don't believe in Academic Research." Sorry, but you are mistaken. This is what Nobel Laureate's (real Academics) say:
Eugene Fama: "Whether you decide to tilt toward value depends on whether you are willing to bear the associated risk...The market portfolio is always efficient...For most people, the market portfolio is the most sensible decision."

Harry Markowitz: "A foolish attempt to beat the market and get rich quickly will make one's broker rich and oneself much less so."

Paul Samuelson: "The most efficient way to diversify a stock portfolio is with a low-fee index fund. Statistically, a broadly based stock index fund will outperform most actively managed equity portfolios."

William Sharpe: "You may think your opinion is superior, but it pays to be humble, investing in the market rather than trying to beat it."

Robert Shiller: "A portfolio approximating the market may be the most important portfolio."
Like you, I also hope my book The Boglehead's Guide to The Three-Fund Portfolio does well. All my royalties are paid directly to The John Bogle Center for Financial Literacy.

Best wishes.
Taylor
Last edited by Taylor Larimore on Sun May 19, 2019 12:42 pm, edited 1 time in total.
"Simplicity is the master key to financial success." -- Jack Bogle

staythecourse
Posts: 6993
Joined: Mon Jan 03, 2011 9:40 am

Re: Factor ETFs For Diversification Or “Diworsification”

Post by staythecourse » Sun May 19, 2019 12:07 pm

Nothing to add, but love the term, "Diworsification". Think I might have to steal that one!

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

User avatar
nedsaid
Posts: 12773
Joined: Fri Nov 23, 2012 12:33 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by nedsaid » Sun May 19, 2019 12:23 pm

Taylor, a whole lot of research out there is tainted and biased. Pretty much you want to look for who is paying for it. There is a fairly large number of scientific studies out there that have not been replicated when tested. It is an astonishingly high number.

As I recall, Fama and French as well as Jeremy Siegel, did their research first and later monetized it. Dimensional Fund Advisors was formed. Jeremy Siegel later had a relationship with Wisdom Tree. Even Burton Malkiel got involved with one of the robo-advisors. This is capitalism and is hardly a crime. But it does show that you have to take things with a grain of salt.

But it is one thing to say that academic research has its problems and another to say it is all rubbish. I don't question the integrity of Fama, French, Siegel, or Swedroe for that matter. In the case of Larry Swedroe, he has put his money where his mouth is. He might not be right but he has the courage of his convictions. The data is pretty compelling and our very own Siamond did work here on the forum and confirmed what the academics have been saying. We had quite the exchange on a thread regarding these topics.

Jack Bogle and Larry Swedroe had spirited exchanges over these topics, particularly Bogle's famous "Telltale Chart" speech given at a Morningstar Conference. I also recall that in Jack's final speech before the Bogleheads, he recalled posting an article and that his first response was a lengthy response from Larry telling him that he was all wrong. I got a big chuckle out of that because, I have been told by Larry himself that I was wrong about things so I knew exactly what he had experienced.

One reason that I bought into the Academic research is that it was consistent with what I observed regarding my own investments with my untrained eye. It also was consistent with human nature and human behavior. It is possible that the factors have gone away for good, with Artificial Intelligence, the algorithms, the Math PhD's and the fancy computers. My belief is that the factors are based not so much on risk factors but upon human behavior. Time will tell who is right and who is wrong.

So I have argued both sides of this and seen the strong and weak points. Not overly dogmatic about this, it is sort of that I lean towards one side rather than the other. Hence my rather cautious tilts. This isn't a hill that I am going to die on.
A fool and his money are good for business.

User avatar
nedsaid
Posts: 12773
Joined: Fri Nov 23, 2012 12:33 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by nedsaid » Sun May 19, 2019 12:25 pm

staythecourse wrote:
Sun May 19, 2019 12:07 pm
Nothing to add, but love the term, "Diworsification". Think I might have to steal that one!

Good luck.
Pretty sure that it came from Peter Lynch.
A fool and his money are good for business.

staythecourse
Posts: 6993
Joined: Mon Jan 03, 2011 9:40 am

Re: Factor ETFs For Diversification Or “Diworsification”

Post by staythecourse » Sun May 19, 2019 1:17 pm

nedsaid wrote:
Sun May 19, 2019 12:25 pm
staythecourse wrote:
Sun May 19, 2019 12:07 pm
Nothing to add, but love the term, "Diworsification". Think I might have to steal that one!

Good luck.
Pretty sure that it came from Peter Lynch.
Thanks now I know who to quote when I steal it. Surprised it came from him. Diversification was made big by MPT which really didn't take off until AFTER Lynch already became big in the 1990's.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

Angst
Posts: 2068
Joined: Sat Jun 09, 2007 11:31 am

Re: Diversification

Post by Angst » Sun May 19, 2019 2:39 pm

vineviz wrote:
Sun May 19, 2019 11:17 am
Taylor Larimore wrote:
Sun May 19, 2019 11:04 am
Stock diversification cannot take the place of bond diversification.
Clearly true, but also somewhat irrelevant: diversifying between equity and bond holdings isn't mutually exclusive with diversifying within equity and bond holdings.
The accuracy of the highlighted portion of your above statement notwithstanding, perhaps you're taking Taylor's statement too literally? I don't mean to speak for him, but Taylor's posts above clearly suggest to me he's not intending to compare diversifying one's Equity holdings vs. diversifying one's Bond holdings, he's comparing diversifying one's entire investment portfolio by diversifying within one's Equity holdings in that portfolio (using factors) vs. diversifying the entire investment portfolio by holding both Equity and Bonds (and perhaps increasing one's bonds portion).

garlandwhizzer
Posts: 2508
Joined: Fri Aug 06, 2010 3:42 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by garlandwhizzer » Sun May 19, 2019 2:45 pm

stultz wrote:
It all depends on what you mean by "worked".

Just to look at a bunch of iShares ETFs for the past 5 years.

Total Market: 10.57

Quality: 11.61
Momentum: 14.90
Small Value 7.17
Minimum Volatility: 12.73
-------------------------------------
Factor Fund Average: 11.60
Well since stultz chose iShares ETFs for these results, let's look at how iShares itself combined the factors in their multi-factor fund LRGF. LRGF has underperformed TSM for 1 MO, 3 MO, YTD, I YR, 3 YR, and since its inception almost 4 years ago. LRGF since its inception year 2015 has not only underperformed VTI by a wide margin (11.2%/yr versus 13.8%/yr), it has done so with a much deeper maximum drawdown (-16.1% versus -14.2%), a much worse single year drawdown (-9.6% versus -5.2%), a lower gain on its best year, and consequently a much worse Sharpe ratio (.87 versus 1.07). In short since its inception, LRGF hugely underperformed but did so with greater volatility, less downside protection relative to TSM in market declines, less upside in market advances, and a much lower risk adjusted return. Multi-factor funds in theory are supposed to outperform beta (the opposite has happened) and to do so with less volatility due to multi-factor diversification (the opposite has happened). The factor argument agrees that SCV may disappear for 15 years, but by using multiple factors you avoid this timing issue. In theory multi-factor shouldn't go into long term hibernation like SCV. The other factors should take up the slack. It should be less volatile, offer more downside protection, and outperform beta without waiting for 20 years to do so. The exact opposite has clearly happened over this time frame for LRGF. Factor adherents believe that will change in the future and in theory that should happen. But as we can see from this example theory and reality can turn out to be two very different things.

Garland Whizzer

User avatar
nedsaid
Posts: 12773
Joined: Fri Nov 23, 2012 12:33 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by nedsaid » Sun May 19, 2019 3:34 pm

garlandwhizzer wrote:
Sun May 19, 2019 2:45 pm
But as we can see from this example theory and reality can turn out to be two very different things.

Garland Whizzer
This was the essential argument that John Bogle made in his "Telltale Chart" speech. Pretty much, Small Value stocks might have outperformed over many years but for real life investors the tools for actually invest in those stocks were very limited. For example, Dimensional Fund Advisors didn't come into being until 1981. Even the S&P 500 Index wasn't available until 1976. If you knew way back in 1926 that Small Value stocks would outperform, wasn't much you could do about it but buy a bunch of small stocks individually. Back in 1926, analytic tools for individual investors were pretty limited.
A fool and his money are good for business.

staythecourse
Posts: 6993
Joined: Mon Jan 03, 2011 9:40 am

Re: Factor ETFs For Diversification Or “Diworsification”

Post by staythecourse » Sun May 19, 2019 3:39 pm

nedsaid wrote:
Sun May 19, 2019 3:34 pm
garlandwhizzer wrote:
Sun May 19, 2019 2:45 pm
But as we can see from this example theory and reality can turn out to be two very different things.

Garland Whizzer
This was the essential argument that John Bogle made in his "Telltale Chart" speech. Pretty much, Small Value stocks might have outperformed over many years but for real life investors the tools for actually invest in those stocks were very limited. For example, Dimensional Fund Advisors didn't come into being until 1981. Even the S&P 500 Index wasn't available until 1976. If you knew way back in 1926 that Small Value stocks would outperform, wasn't much you could do about it but buy a bunch of small stocks individually. Back in 1926, analytic tools for individual investors were pretty limited.
I thought the "Telltale Chart" was simple a graphic showing there are times TSM outperforms and then their are times small/ value outperform. To be honest that chart will ALWAYS be correct the only way it couldn't is if one outperformed and KEPT outperforming forever. Not sure in what world that would happen.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

User avatar
nedsaid
Posts: 12773
Joined: Fri Nov 23, 2012 12:33 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by nedsaid » Sun May 19, 2019 3:43 pm

staythecourse wrote:
Sun May 19, 2019 3:39 pm
nedsaid wrote:
Sun May 19, 2019 3:34 pm
garlandwhizzer wrote:
Sun May 19, 2019 2:45 pm
But as we can see from this example theory and reality can turn out to be two very different things.

Garland Whizzer
This was the essential argument that John Bogle made in his "Telltale Chart" speech. Pretty much, Small Value stocks might have outperformed over many years but for real life investors the tools for actually invest in those stocks were very limited. For example, Dimensional Fund Advisors didn't come into being until 1981. Even the S&P 500 Index wasn't available until 1976. If you knew way back in 1926 that Small Value stocks would outperform, wasn't much you could do about it but buy a bunch of small stocks individually. Back in 1926, analytic tools for individual investors were pretty limited.
I thought the "Telltale Chart" was simple a graphic showing there are times TSM outperforms and then their are times small/ value outperform. To be honest that chart will ALWAYS be correct the only way it couldn't is if one outperformed and KEPT outperforming forever. Not sure in what world that would happen.

Good luck.
I think what Bogle said was that real life Value funds did not perform as well as the performance statistics cited by the Academics. It was a fairly long speech but the "real life" argument was one of the points Bogle made.
A fool and his money are good for business.

staythecourse
Posts: 6993
Joined: Mon Jan 03, 2011 9:40 am

Re: Factor ETFs For Diversification Or “Diworsification”

Post by staythecourse » Sun May 19, 2019 4:45 pm

nedsaid wrote:
Sun May 19, 2019 3:43 pm
staythecourse wrote:
Sun May 19, 2019 3:39 pm
nedsaid wrote:
Sun May 19, 2019 3:34 pm
garlandwhizzer wrote:
Sun May 19, 2019 2:45 pm
But as we can see from this example theory and reality can turn out to be two very different things.

Garland Whizzer
This was the essential argument that John Bogle made in his "Telltale Chart" speech. Pretty much, Small Value stocks might have outperformed over many years but for real life investors the tools for actually invest in those stocks were very limited. For example, Dimensional Fund Advisors didn't come into being until 1981. Even the S&P 500 Index wasn't available until 1976. If you knew way back in 1926 that Small Value stocks would outperform, wasn't much you could do about it but buy a bunch of small stocks individually. Back in 1926, analytic tools for individual investors were pretty limited.
I thought the "Telltale Chart" was simple a graphic showing there are times TSM outperforms and then their are times small/ value outperform. To be honest that chart will ALWAYS be correct the only way it couldn't is if one outperformed and KEPT outperforming forever. Not sure in what world that would happen.

Good luck.
I think what Bogle said was that real life Value funds did not perform as well as the performance statistics cited by the Academics. It was a fairly long speech but the "real life" argument was one of the points Bogle made.
I linked the speech below. Basically, about RTM as I alluded to, but does discuss the issues of higher costs as you nicely mentioned. Great speech. Do miss his eloquent way of describing things. :( . The analogy of a "heart beat enveloped by cotton" was liquid gold!

https://www.vanguard.com/bogle_site/sp20020626.html
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

User avatar
nedsaid
Posts: 12773
Joined: Fri Nov 23, 2012 12:33 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by nedsaid » Sun May 19, 2019 5:55 pm

Here is a thread where Siamond, I, and others discussed the Telltale Chart and how best to present it. It went into a discussion of Bogle's speech and why Bogle was wrong and that Siamond did not want to get into a discussion of Small/Value tilting because his work showed that there was no reversion to the mean with Small Value. Anyways, a good thread and one worth revisiting.

viewtopic.php?f=10&t=225074

I found a post by Larry Swedroe explaining why Bogle was wrong.

Larry Swedroe said: Dated: September 8, 2011
The problem is that Bogle looked at one thing, the wrong thing, to draw a conclusion

He looked at active funds, which style drift, to show value doesn't outperform. Growth funds by value stocks and value funds by growth stocks and most value funds won't buy the really distressed stocks (they don't load heavily on the value factor).

That is how Bogle came to his conclusion, which clearly is wrong,
One only has to look at French's site which has the data to see that.

And value has outperformed not only in US but int'l and in emerging markets as well (not every single country, but certainly in total and in most--of course in some the value risks may have shown up and it could also be due to accounting differences)

Despite this mistake by Bogle this cannard keeps coming up, like something bad one ate.

I hope this is helpful

Best wishes
Larry
A fool and his money are good for business.

User avatar
packer16
Posts: 1278
Joined: Sat Jan 04, 2014 2:28 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by packer16 » Sun May 19, 2019 6:04 pm

Bogle has since changed is chart to include Vanguard Value/Growth funds he created & it shows the same trend. This is last years Boglehead conference video. I would not dismiss Bogle's comments as his wisdom is deeper than it first appears.

I am really questioning SCV tilting as you are taking on a real timing risk that may not be diversified away. I really wonder how many SCV tilters realize this risk they are taking on & the risk appears to vary based upon the version of SCV you use.

Packer
Buy cheap and something good might happen

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by vineviz » Sun May 19, 2019 6:12 pm

packer16 wrote:
Sun May 19, 2019 6:04 pm
I would not dismiss Bogle's comments as his wisdom is deeper than it first appears.
He was wise but he was also, on occasion, wrong.

The world is full of smart people, and it’s not reasonable to expect one person to be right on every topic.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
nedsaid
Posts: 12773
Joined: Fri Nov 23, 2012 12:33 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by nedsaid » Sun May 19, 2019 6:29 pm

The Small/Value tilting vs. Broad Index debates have raged on the forum for years and I don't think my arguments made here will settle them. We can't even agree that a premium exists, much less what causes that premium be it behavioral causes, risk, or some of each. Not sure we even agree on the data. We even argue over how well (or poorly) the Vanguard Indexes measure size and value. Vanguard Value Index isn't valuey enough and Vanguard Small-Value Index contains too many Mid-Caps. It is sort of a beauty is in the eye of the beholder thing. Then of course arguing over time periods and that conclusions are data period dependent.

This is why I say do the 3 fund if you don't believe the Academic Research and Factor Tilt if you do. It is sort of like the "Taste's Great" vs. "Less Filling" beer commercials than ran years ago. Or a "Yankees Fans" vs. "Red Sox Fans" rivalry. It seems that we enjoy arguing so much that it seems we have forgotten what we are arguing about. Just seems like if you are from Boston, you hate the Yankees even if you don't know why. It just is. It all boils down to whether or not you believe an investor can beat the market or not. Perhaps the factors are just statistical noise. Since reliable stock market information goes back only to about 1926, there is a pretty good argument that less than 100 years of data isn't enough to draw good conclusions about much of anything.
A fool and his money are good for business.

User avatar
Taylor Larimore
Advisory Board
Posts: 28817
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Never worry about under-performance again!

Post by Taylor Larimore » Sun May 19, 2019 7:07 pm

Bogleheads:

A big advantage of a total market index fund is that you will never worry about under-performing the market.

Currently, Total US Market's 5-year annualized return is 10.76%. Small Value's 5-year annualized return is 5.25%. This is serious under-performance -- especially for retirees.

https://news.morningstar.com/index/indexReturn.html

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Never worry about under-performance again!

Post by vineviz » Sun May 19, 2019 8:25 pm

Taylor Larimore wrote:
Sun May 19, 2019 7:07 pm
Currently, Total US Market's 5-year annualized return is 10.76%. Small Value's 5-year annualized return is 5.25%. This is serious under-performance -- especially for retirees.
Bogleheads,

These numbers aren’t quite what actual investors have realized: iShares S&P Small-Cap 600 Value ETF has produced a CAGR if 8.38% over the past five years: not poor by any measure. https://www.portfoliovisualizer.com/fun ... F17%2F2019

And because we are long-term investors, we can’t forget the 20.66% CAGR produced by iShares S&P Small-Cap 600 Value ETF over the previous 5 years.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

retiredflyboy
Posts: 204
Joined: Sun Dec 02, 2018 10:02 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by retiredflyboy » Sun May 19, 2019 10:22 pm

Total stock market index. Super low expenses, tax efficiency, diversification. Take the market return.
Facts are stubborn things. Everything works until it doesn’t.

pdavi21
Posts: 1268
Joined: Sat Jan 30, 2016 4:04 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by pdavi21 » Mon May 20, 2019 12:16 am

It's comical how much back-testing gets thrown into these factor discussions, but few logical explanations of why the factors are supposed to work.

Or maybe it's apt, considering Fama and French, and all the other factor discoveries, were based on back-testing and then "logically" explained after the fact.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

pdavi21
Posts: 1268
Joined: Sat Jan 30, 2016 4:04 pm

Re: Never worry about under-performance again!

Post by pdavi21 » Mon May 20, 2019 12:20 am

vineviz wrote:
Sun May 19, 2019 8:25 pm
Taylor Larimore wrote:
Sun May 19, 2019 7:07 pm
Currently, Total US Market's 5-year annualized return is 10.76%. Small Value's 5-year annualized return is 5.25%. This is serious under-performance -- especially for retirees.
Bogleheads,

These numbers aren’t quite what actual investors have realized: iShares S&P Small-Cap 600 Value ETF has produced a CAGR if 8.38% over the past five years: not poor by any measure. https://www.portfoliovisualizer.com/fun ... F17%2F2019

And because we are long-term investors, we can’t forget the 20.66% CAGR produced by iShares S&P Small-Cap 600 Value ETF over the previous 5 years.
All of VIOV's 7 investors are absolutely thrilled. :twisted:

Of course, it still lost to Total Market since inception and has done rather poorly lately. It might've been the worst small value fund to date for some in the accumulation phase starting at it's inception (because of the high investment price and poor recent performance).

EDIT: but good for withdrawal phase...should add that.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

User avatar
nedsaid
Posts: 12773
Joined: Fri Nov 23, 2012 12:33 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by nedsaid » Mon May 20, 2019 12:36 am

pdavi21 wrote:
Mon May 20, 2019 12:16 am
It's comical how much back-testing gets thrown into these factor discussions, but few logical explanations of why the factors are supposed to work.

Or maybe it's apt, considering Fama and French, and all the other factor discoveries, were based on back-testing and then "logically" explained after the fact.
Actually the why's of factor investing have been discussed a lot. With Value, many think it is fundamental risk. Value companies tend to be more highly leveraged and tend to have more volatile earnings. My thought is that Value works simply because there is less expectation built in, low expectations on Wall Street are easier to beat than high expectations. Value is also associated with negative momentum. Also people tend to gravitate towards recent performance and popularity. I think Value is largely behavioral and it is tied in to the old human emotions of greed and fear. Value does better when the economy is strong.

The Size premium works because of similar reasons to Value. More risky and less followed on Wall Street and less popular. Wall Street analysts are focused on Large Growth stocks. Smaller companies have more growth potential than larger companies.

Momentum is similar to Newtonian physics, what is in motion tends to stay in motion. It is a bandwagon effect as enthusiasm builds for a stock. But momentum only lasts for a while. Momentum is also subject to sharp reversals. Momentum exists on both the long and the short side.

Paradoxically, Quality/Profitability also works. Mainly because Wall Street loves consistency in earnings growth above all else. These companies have stronger balance sheets and more consistent earnings than Value stocks.

So there is a paradox here. Value works but the antithesis of Value which is Momentum and Quality/Profitability also work. But at different times and for different reasons.

So there are explanations as to why all this works.
A fool and his money are good for business.

pdavi21
Posts: 1268
Joined: Sat Jan 30, 2016 4:04 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by pdavi21 » Mon May 20, 2019 12:50 am

nedsaid wrote:
Mon May 20, 2019 12:36 am
pdavi21 wrote:
Mon May 20, 2019 12:16 am
It's comical how much back-testing gets thrown into these factor discussions, but few logical explanations of why the factors are supposed to work.

Or maybe it's apt, considering Fama and French, and all the other factor discoveries, were based on back-testing and then "logically" explained after the fact.
Actually the why's of factor investing have been discussed a lot. With Value, many think it is fundamental risk. Value companies tend to be more highly leveraged and tend to have more volatile earnings. My thought is that Value works simply because there is less expectation built in, low expectations on Wall Street are easier to beat than high expectations. Value is also associated with negative momentum. Also people tend to gravitate towards recent performance and popularity. I think Value is largely behavioral and it is tied in to the old human emotions of greed and fear.

The Size premium works because of similar reasons to Value. More risky and less followed on Wall Street and less popular. Wall Street analysts are focused on Large Growth stocks. Smaller companies have more growth potential than larger companies.

Momentum is similar to Newtonian physics, what is in motion tends to stay in motion. It is a bandwagon effect as enthusiasm builds for a stock. But momentum only lasts for a while. Value does better when the economy is strong.

Paradoxically, Quality/Profitability also works. Mainly because Wall Street loves consistency in earnings growth above all else. These companies have stronger balance sheets and more consistent earnings than Value stocks.

So there is a paradox here. Value works but the antithesis of Value which is Momentum and Quality/Profitability also work. But at different times and for different reasons.

So there are explanations as to why all this works.
Small growth funds have had more volatlity than small value in most cases. Not sure why I keep hearing that small value is riskier.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by vineviz » Mon May 20, 2019 1:03 am

pdavi21 wrote:
Mon May 20, 2019 12:50 am
Small growth funds have had more volatlity than small value in most cases. Not sure why I keep hearing that small value is riskier.
It could be in part that small growth funds haven’t actually exhibited more volatility than value funds.

It could be that “growth” isn’t a factor, and definitely isn’t the opposite of “value.

It could be that volatility isn’t the only way to measure risk.

Or maybe it’s all three.


It could be that
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

fennewaldaj
Posts: 796
Joined: Sun Oct 22, 2017 11:30 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by fennewaldaj » Mon May 20, 2019 1:06 am

pdavi21 wrote:
Mon May 20, 2019 12:50 am


Small growth funds have had more volatlity than small value in most cases. Not sure why I keep hearing that small value is riskier.
I think the idea is that value stocks have a risk that is not reflected by volatility. Could be something like all the this time it is different narratives end up being true and most of the value companies end up going out of business. That is the narrative that is pushed everytime growth does well. It may eventually end up being true. That is a real risk you are taking on with these companies.

pdavi21
Posts: 1268
Joined: Sat Jan 30, 2016 4:04 pm

Re: Factor ETFs For Diversification Or “Diworsification”

Post by pdavi21 » Mon May 20, 2019 1:16 am

vineviz wrote:
Mon May 20, 2019 1:03 am
pdavi21 wrote:
Mon May 20, 2019 12:50 am
Small growth funds have had more volatlity than small value in most cases. Not sure why I keep hearing that small value is riskier.
It could be in part that small growth funds haven’t actually exhibited more volatility than value funds.

It could be that “growth” isn’t a factor, and definitely isn’t the opposite of “value.

It could be that volatility isn’t the only way to measure risk.

Or maybe it’s all three.


It could be that
If you are only looking at SP 600 funds, value did have a slightly higher volatility. All other major passive value funds I can think of have had lower volatility.

Growth isn't a factor, but neither is value in my context. Value is a type of mutual fund. Growth is the opposite type of mutual fund in my context.

Which definition of risk supports the assertion that value funds are riskier? Losing?
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

Post Reply