Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

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Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by Random Walker » Tue Jun 04, 2019 7:59 pm

https://alphaarchitect.com/2019/06/04/t ... -all-over/

When one writes as much as Larry does, some essays are clearly going to be more significant than others. This one is BIG! Especially true for anyone interested in value. Larry starts out looking at the potentially analogous famous “death of equities”. Next he reviews some past history of value since the famous Fama French publication. I like the title of that section:”Been There, Done That”. He has a detailed reminder that a decade is a short period of time when looking at financial data. Last sections review risk based and behavior based support for the value premium, a highly plausible explanation of value’s recent underperformance revolving around economic growth and interest rates, and a look at whether value is overcrowded based on relative valuations. Strongly recommend.

Dave

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by SimpleGift » Tue Jun 04, 2019 10:46 pm

Larry's discussion of how low inflation, low global growth and low interest rates favor longer duration growth stocks, rather than shorter duration value stocks, made the most sense to me (chart below). This echoes Bill Bernstein's article, Who Killed Value?, which elaborates on the relationship between inflation rates and the value premium.
  • Image
    NOTE: Chart shows rolling 10-year annual data, since 1966.
    Data sources: Value premiums from French ; inflation rates from Shiller
Since the world seems to be rather stuck in a low growth, low inflation mode these days, it's hard to be optimistic for the near-term future of the value premium — at least until GDP growth rates and inflation expectations are higher.
Last edited by SimpleGift on Tue Jun 04, 2019 10:50 pm, edited 1 time in total.

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by stlutz » Tue Jun 04, 2019 10:48 pm

Recent value underperformance is nothing like the late 90s. Actually value has done just fine. Historically value outperformance has been driven more by down markets than up markets, so some amount of underperformance during a major up market is not unexpected.

This isn't a returns problem; it's an expectations problem.

There has only been "death" of value if you've been living under the [unrealistic] expectation that value would outperform growth by several percentage points per year.

If one continues to have unrealistic expectations, I'd expect that they will continue to be disappointed.

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by Forester » Wed Jun 05, 2019 3:39 am

S&P 600 Small Cap Value uses P/E & P/S in addition to book value. SC Growth is up around 300% over the last ten years, SC Value is up 240%, hardly horrific.

Probably using book value alone would play into the Value & Inflation narrative.

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by Random Walker » Thu Jun 06, 2019 8:35 am

Just thought I’d give this thread a bump. This essay is an important one.

Dave

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by azanon » Thu Jun 06, 2019 8:48 am

Random Walker wrote:
Thu Jun 06, 2019 8:35 am
Just thought I’d give this thread a bump. This essay is an important one.

Dave
Great article Dave, thanks!

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Thu Jun 06, 2019 8:59 am

Larry has been on fire lately, he has been putting out fine articles as well as some fine posts here at Bogleheads. Essentially, he has been arguing that investors should be diversifying across factors and that investors who invest only in the "Total" indexes for their stock allocations are invested in only one factor and that is beta. I want exposure to at least Size and Value in addition to Beta. What I tried to say in an essay where I imagined Mr. Bogle having been born in Japan rather than the United States is that in a backhand sort of way that he admitted that valuations matter and that the future expected returns of cheap stocks are higher than the future expected returns of expensive stocks. So he sort of made a factors argument by projecting the future estimated returns projections for the US Stock Market. In 1999, he projected returns from bonds to be 6%-7% and returns for stocks to be 2% for the next decade. He swapped a bunch of his stocks for bonds and admitted this at a Morningstar Conference.

I have been warning about High Tech and how the S&P 500 is top heavy with it. This certainly has propelled the S&P 500's and the Growth Index superior performance compared to the Value Index. In fact, the underperformance of Value relative to Growth might be due entirely to the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google). I also argued that there were a lot of parallels between 1999 and today though there are a few differences as well. But history rhymes but doesn't repeat. Those who argue that factors are dead and that the "Total" indexes are the way to go may be victims to recency bias regarding the High Tech sector and the FAANG stocks.

I think Larry is right here.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Thu Jun 06, 2019 9:32 am

There is a counterargument here, and intellectual honesty compels me to say it, it is that not much of anything save for nominal US Treasuries and certain US Agency Bonds would have saved you from the bear market and financial crisis of 2008-2009. Value stocks crashed along with everything else in the financial crisis, and even crashed harder, the reason being is that many of the Value stocks were in the financial sector. So nothing works all of the time. Heck even TIPS and Investment Grade Corporate Bonds fell by 10%-12% during the crisis but much better than 50% plus losses in stocks.

I still like cheaper stocks but depending upon market/economic conditions, cheaper stocks can crash too. Each bear market is different as the causes of each is different. Value would have saved you in 2000-2002 but not during 2008-2009. Just thought I would mention that.
A fool and his money are good for business.

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by SimpleGift » Thu Jun 06, 2019 9:43 am

It's worth noting that the original Fama-French study on the value premium covered the years 1963-1990:
  • • From 1963-1990, inflation averaged 5.4% and the value premium was 6.4%.
    • Over the past 15 years, inflation has averaged 2.1% and the value premium was 0.3%.
So I believe we're in a macroeconomic environment today that's very different from the one studied by Fama and French. In fact, if they'd conducted their research in recent years, they'd have not found much of a value premium at all.

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by azanon » Thu Jun 06, 2019 9:48 am

nedsaid wrote:
Thu Jun 06, 2019 9:32 am
There is a counterargument here, and intellectual honesty compels me to say it, it is that not much of anything save for nominal US Treasuries and certain US Agency Bonds would have saved you from the bear market and financial crisis of 2008-2009. Value stocks crashed along with everything else in the financial crisis, and even crashed harder, the reason being is that many of the Value stocks were in the financial sector. So nothing works all of the time. Heck even TIPS and Investment Grade Corporate Bonds fell by 10%-12% during the crisis but much better than 50% plus losses in stocks.

I still like cheaper stocks but depending upon market/economic conditions, cheaper stocks can crash too. Each bear market is different as the causes of each is different. Value would have saved you in 2000-2002 but not during 2008-2009. Just thought I would mention that.
I really appreciate that article opening with the history lesson of the markets from 68'-82'.

Incidentally, I've been wondering to myself will I see another similar period like that one during my lifetime, where a bear market lasts so long, than the overall general consensus gets so negative on stocks as to consider them poor investments. For stocks to under-perform for 14 years would be a really long time, and that would be an interesting thing to witness first-hand instead of just knowing about it from history. It would so greatly contrast the sense I get now which is that a significant majority outright believe or act like they believe that stocks are, matter-of-fact, superior to all other investments, even on a risk-adjusted basis.

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by Random Walker » Thu Jun 06, 2019 10:09 am

azanon wrote:
Thu Jun 06, 2019 9:48 am
nedsaid wrote:
Thu Jun 06, 2019 9:32 am
There is a counterargument here, and intellectual honesty compels me to say it, it is that not much of anything save for nominal US Treasuries and certain US Agency Bonds would have saved you from the bear market and financial crisis of 2008-2009. Value stocks crashed along with everything else in the financial crisis, and even crashed harder, the reason being is that many of the Value stocks were in the financial sector. So nothing works all of the time. Heck even TIPS and Investment Grade Corporate Bonds fell by 10%-12% during the crisis but much better than 50% plus losses in stocks.

I still like cheaper stocks but depending upon market/economic conditions, cheaper stocks can crash too. Each bear market is different as the causes of each is different. Value would have saved you in 2000-2002 but not during 2008-2009. Just thought I would mention that.
I really appreciate that article opening with the history lesson of the markets from 68'-82'.

Incidentally, I've been wondering to myself will I see another similar period like that one during my lifetime, where a bear market lasts so long, than the overall general consensus gets so negative on stocks as to consider them poor investments. For stocks to under-perform for 14 years would be a really long time, and that would be an interesting thing to witness first-hand instead of just knowing about it from history. It would so greatly contrast the sense I get now which is that a significant majority outright believe or act like they believe that stocks are, matter-of-fact, superior to all other investments, even on a risk-adjusted basis.
Wasn’t 2000-2012 one of those extended periods? I certainly lived through that. When you live through it day to day, I don’t know that one really appreciates that it’s happening. We are constantly looking forward, and when we do look at results we look at today, last week, last few months, maybe last couple years. Each day seems to be a new adventure in the stock market, so days in the middle of a time period like that likely feel very much like individual days now.

Dave

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by Random Walker » Thu Jun 06, 2019 10:14 am

SimpleGift wrote:
Thu Jun 06, 2019 9:43 am
It's worth noting that the original Fama-French study on the value premium covered the years 1963-1990:
  • • From 1963-1990, inflation averaged 5.4% and the value premium was 6.4%.
    • Over the past 15 years, inflation has averaged 2.1% and the value premium was 0.3%.
So I believe we're in a macroeconomic environment today that's very different from the one studied by Fama and French. In fact, if they'd conducted their research in recent years, they'd have not found much of a value premium at all.
Maybe so. This brings up a good point on how to evaluate any postential source of risk/return. As you said, FF original study 1963-1990. Then out of sample evidence was developed. Think FF went back and looked at prior time period starting in 1926, then other studies looked at value premium in other geographic markets, and more studies have displayed value across different asset classes. Out of sample tests are critical.

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by azanon » Thu Jun 06, 2019 10:15 am

Random Walker wrote:
Thu Jun 06, 2019 10:09 am
azanon wrote:
Thu Jun 06, 2019 9:48 am
nedsaid wrote:
Thu Jun 06, 2019 9:32 am
There is a counterargument here, and intellectual honesty compels me to say it, it is that not much of anything save for nominal US Treasuries and certain US Agency Bonds would have saved you from the bear market and financial crisis of 2008-2009. Value stocks crashed along with everything else in the financial crisis, and even crashed harder, the reason being is that many of the Value stocks were in the financial sector. So nothing works all of the time. Heck even TIPS and Investment Grade Corporate Bonds fell by 10%-12% during the crisis but much better than 50% plus losses in stocks.

I still like cheaper stocks but depending upon market/economic conditions, cheaper stocks can crash too. Each bear market is different as the causes of each is different. Value would have saved you in 2000-2002 but not during 2008-2009. Just thought I would mention that.
I really appreciate that article opening with the history lesson of the markets from 68'-82'.

Incidentally, I've been wondering to myself will I see another similar period like that one during my lifetime, where a bear market lasts so long, than the overall general consensus gets so negative on stocks as to consider them poor investments. For stocks to under-perform for 14 years would be a really long time, and that would be an interesting thing to witness first-hand instead of just knowing about it from history. It would so greatly contrast the sense I get now which is that a significant majority outright believe or act like they believe that stocks are, matter-of-fact, superior to all other investments, even on a risk-adjusted basis.
Wasn’t 2000-2012 one of those extended periods? I certainly lived through that. When you live through it day to day, I don’t know that one really appreciates that it’s happening. We are constantly looking forward, and when we do look at results we look at today, last week, last few months, maybe last couple years. Each day seems to be a new adventure in the stock market, so days in the middle of a time period like that likely feel very much like individual days now.

Dave
I don't recall a protracted period where the general population regarded stocks as a poor investment during that period. Maybe history makes 68'-82' sound worse than it really was, and those individuals that believed that were outliers like they would have been in 2000-2012?

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by Random Walker » Thu Jun 06, 2019 10:23 am

azanon wrote:
Thu Jun 06, 2019 10:15 am
Random Walker wrote:
Thu Jun 06, 2019 10:09 am
azanon wrote:
Thu Jun 06, 2019 9:48 am
nedsaid wrote:
Thu Jun 06, 2019 9:32 am
There is a counterargument here, and intellectual honesty compels me to say it, it is that not much of anything save for nominal US Treasuries and certain US Agency Bonds would have saved you from the bear market and financial crisis of 2008-2009. Value stocks crashed along with everything else in the financial crisis, and even crashed harder, the reason being is that many of the Value stocks were in the financial sector. So nothing works all of the time. Heck even TIPS and Investment Grade Corporate Bonds fell by 10%-12% during the crisis but much better than 50% plus losses in stocks.

I still like cheaper stocks but depending upon market/economic conditions, cheaper stocks can crash too. Each bear market is different as the causes of each is different. Value would have saved you in 2000-2002 but not during 2008-2009. Just thought I would mention that.
I really appreciate that article opening with the history lesson of the markets from 68'-82'.

Incidentally, I've been wondering to myself will I see another similar period like that one during my lifetime, where a bear market lasts so long, than the overall general consensus gets so negative on stocks as to consider them poor investments. For stocks to under-perform for 14 years would be a really long time, and that would be an interesting thing to witness first-hand instead of just knowing about it from history. It would so greatly contrast the sense I get now which is that a significant majority outright believe or act like they believe that stocks are, matter-of-fact, superior to all other investments, even on a risk-adjusted basis.
Wasn’t 2000-2012 one of those extended periods? I certainly lived through that. When you live through it day to day, I don’t know that one really appreciates that it’s happening. We are constantly looking forward, and when we do look at results we look at today, last week, last few months, maybe last couple years. Each day seems to be a new adventure in the stock market, so days in the middle of a time period like that likely feel very much like individual days now.

Dave
I don't recall a protracted period where the general population regarded stocks as a poor investment during that period. Maybe history makes 68'-82' sound worse than it really was, and those individuals that believed that were outliers like they would have been in 2000-2012?
I don’t know the specific history, but knowing the volatility of equities, I would expect there were a variety of good years and bad years, and always looking forward, investors didn’t really appreciate what they were in the middle of. Although I’m sure they felt the grind of the 72-74 bear.

Dave

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Thu Jun 06, 2019 1:43 pm

Random Walker wrote:
Thu Jun 06, 2019 10:09 am
azanon wrote:
Thu Jun 06, 2019 9:48 am
nedsaid wrote:
Thu Jun 06, 2019 9:32 am
There is a counterargument here, and intellectual honesty compels me to say it, it is that not much of anything save for nominal US Treasuries and certain US Agency Bonds would have saved you from the bear market and financial crisis of 2008-2009. Value stocks crashed along with everything else in the financial crisis, and even crashed harder, the reason being is that many of the Value stocks were in the financial sector. So nothing works all of the time. Heck even TIPS and Investment Grade Corporate Bonds fell by 10%-12% during the crisis but much better than 50% plus losses in stocks.

I still like cheaper stocks but depending upon market/economic conditions, cheaper stocks can crash too. Each bear market is different as the causes of each is different. Value would have saved you in 2000-2002 but not during 2008-2009. Just thought I would mention that.
I really appreciate that article opening with the history lesson of the markets from 68'-82'.

Incidentally, I've been wondering to myself will I see another similar period like that one during my lifetime, where a bear market lasts so long, than the overall general consensus gets so negative on stocks as to consider them poor investments. For stocks to under-perform for 14 years would be a really long time, and that would be an interesting thing to witness first-hand instead of just knowing about it from history. It would so greatly contrast the sense I get now which is that a significant majority outright believe or act like they believe that stocks are, matter-of-fact, superior to all other investments, even on a risk-adjusted basis.
Wasn’t 2000-2012 one of those extended periods? I certainly lived through that. When you live through it day to day, I don’t know that one really appreciates that it’s happening. We are constantly looking forward, and when we do look at results we look at today, last week, last few months, maybe last couple years. Each day seems to be a new adventure in the stock market, so days in the middle of a time period like that likely feel very much like individual days now.

Dave
Dave and Azanon, it would seem that during times of secular bear markets 1968-1984 and 2000-2012, that diversifying across factors would really help an investor. Shorter term, in a situation in 2008-2009, factor diversification did not and would not have helped you. A short-term shock to the markets has the potential for bringing everything down at the same time.

Another thing is that the magic diversifier that would save you from a bear market seems to change because each bear market has unique causes. Commodities would have been the magic bullet in 1973-74 because that bear market was caused by the oil shocks and commodities have a large energy component. Not sure this was really recession, just a slow growth economy and higher levels of inflation, hence the term Stagflation. 2000-2002 was simply the high tech and internet bubble bursting so the Mid-Caps/Small Caps, Value, REITs, and International would have helped. Heck, Precious Metals funds and commodities would have helped there too. It was the stock market that crashed but pretty much the economy chugged along save for a very mild recession in about 2001-2002. 2008-2009 was a systemic crisis that nearly brought down our whole financial system, so not much, save for nominal US Treasuries and certain US Agency Bonds would have saved you. In some cases, factors hurt rather than helped. We had a pretty severe recession there.

So pretty much what you do is diversify across stocks, bonds, cash. You diversify across geography, that is all over the world. You diversify across thousands of securities. You diversify across factors. Then you cross your fingers and hope it all works. My sense is that in shorter term bear markets that factors may or may not help you. During the long-term secular bear markets like 1968-1984 and 2000-2012, you have a good shot at better returns by diversifying across factors. Doing what Larry advises improves your odds but nothing is guaranteed. And yes, stocks are risky.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by larryswedroe » Thu Jun 06, 2019 2:55 pm

Nedsaid
Re this
Dave and Azanon, it would seem that during times of secular bear markets 1968-1984 and 2000-2012, that diversifying across factors would really help an investor. Shorter term, in a situation in 2008-2009, factor diversification did not and would not have helped you. A short-term shock to the markets has the potential for bringing everything down at the same time.
Factor diversification would not have helped in 2008 but would have helped massively in 200-02.

In addition it worked massively in 2008 IF you used the higher expected returns to lower equity exposure. Which is what I do and recommend most do, though using to try and achieve higher expected returns (if willing to take the risk) is also okay. See Reducing the Risk of Black Swans (:-))

Best wishes
Larry

PS_ given that there is strong evidence of factor momentum sadly if I had to bet SV likely will continue to underperform for while longer, but spreads are getting so wide that we are now approaching 1999 levels, and that looks bubble like to me. And spreads are the best predictor we have of future premia. Just sat through presentation from one of world's leading quant academic fund companies (CFM, French firm) and they see no evidence of crowding in anything except low vol. (note that they have several measures of crowding like spread, and margin debt, and correlation of returns within the long and short sides). No other factors of the ones we look at. Confirming what I have found

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Thu Jun 06, 2019 3:28 pm

Larry, I do want to say that the 3 fund folks are really crowing right now. It does get, frankly, to be a bit irritating. Bogleheads who ought to know better are engaging in recency bias. Everything learned about diversification is being forgotten and a certain unnamed author's book "All About Asset Allocation" may as well be in the Federal Witness Protection Program. Sort of like a factors, schmactors kind of attitude.

I suppose that my value oriented portfolio, though it did well, trailed the 3 fund portfolio in the 1990's. On the other hand, my peak to trough losses in the subsequent 2000-2002 bear market were 32%, not bad for an 80% stock/20% bond portfolio. I did a milder version of what Bogle did, I went from 94% stocks to 80% stocks just before the crash. I just refused to chase the hot High Tech stuff. My 32% loss even took into consideration the bath I took in Lucent Technologies and in Nortel. Not bad. I also rode Hewlett Packard up and rode it back down again. So despite a few portfolio disasters, my losses were muted. Lots of folks had portfolio losses of 50%, 75% or more depending upon how hard they chased the High Tech and Internet stocks, some of which were just pure speculation.

So pretty much, I didn't gain as much on the way up but things fell less hard on the way down. An 80% stock/20% bonds and cash portfolio should have fallen 38% peak to trough but my portfolio fell only 32%. I would say that my portfolio 2000-2007 was looking might fine.

So I have trailed the 3 fund portfolio again, but then again I am deliberately underweighting the FAANG stocks. I just don't chase the hot stuff. You just can't tell people that the S&P 500 is pretty top heavy with High Tech and Internet, probably 25% to 26% of the index. These sectors got up to 33% of the index in 1999. I guess all the folks crowing about the 3 fund today might be wondering what happened during the next bear. My suspicion is that folks will be looking at the factors again.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by azanon » Thu Jun 06, 2019 3:40 pm

nedsaid wrote:
Thu Jun 06, 2019 1:43 pm
Random Walker wrote:
Thu Jun 06, 2019 10:09 am
azanon wrote:
Thu Jun 06, 2019 9:48 am
nedsaid wrote:
Thu Jun 06, 2019 9:32 am
There is a counterargument here, and intellectual honesty compels me to say it, it is that not much of anything save for nominal US Treasuries and certain US Agency Bonds would have saved you from the bear market and financial crisis of 2008-2009. Value stocks crashed along with everything else in the financial crisis, and even crashed harder, the reason being is that many of the Value stocks were in the financial sector. So nothing works all of the time. Heck even TIPS and Investment Grade Corporate Bonds fell by 10%-12% during the crisis but much better than 50% plus losses in stocks.

I still like cheaper stocks but depending upon market/economic conditions, cheaper stocks can crash too. Each bear market is different as the causes of each is different. Value would have saved you in 2000-2002 but not during 2008-2009. Just thought I would mention that.
I really appreciate that article opening with the history lesson of the markets from 68'-82'.

Incidentally, I've been wondering to myself will I see another similar period like that one during my lifetime, where a bear market lasts so long, than the overall general consensus gets so negative on stocks as to consider them poor investments. For stocks to under-perform for 14 years would be a really long time, and that would be an interesting thing to witness first-hand instead of just knowing about it from history. It would so greatly contrast the sense I get now which is that a significant majority outright believe or act like they believe that stocks are, matter-of-fact, superior to all other investments, even on a risk-adjusted basis.
Wasn’t 2000-2012 one of those extended periods? I certainly lived through that. When you live through it day to day, I don’t know that one really appreciates that it’s happening. We are constantly looking forward, and when we do look at results we look at today, last week, last few months, maybe last couple years. Each day seems to be a new adventure in the stock market, so days in the middle of a time period like that likely feel very much like individual days now.

Dave
So pretty much what you do is diversify across stocks, bonds, cash. You diversify across geography, that is all over the world. You diversify across thousands of securities. You diversify across factors. Then you cross your fingers and hope it all works. My sense is that in shorter term bear markets that factors may or may not help you. During the long-term secular bear markets like 1968-1984 and 2000-2012, you have a good shot at better returns by diversifying across factors. Doing what Larry advises improves your odds but nothing is guaranteed. And yes, stocks are risky.
Ned, you probably just forgot, but I prefer taking diversification to a whole new level. I do enjoy the research on factors, and a value factor equity fund made the cut of the portfolio I use (namely VFVA), but I prefer the risk parity approach to further diversifying away from market beta which uses multiple "asset classes", instead of just constraining myself to equities and searching for intra-diversification there combined with T-notes.

As just a quick example, if my choices are a factor fund which drops me to say a 0.5-0.6 correlation vs. VTI or a Treasury STRIPS ETF with a -0.4 correlation vs. VTI, which do you think makes more sense? I think the latter. If you have 2 asset classes, both of which have a much higher expected return than cash, but negative correlations, then you have a wow effect in a portfolio.

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Thu Jun 06, 2019 4:29 pm

azanon wrote:
Thu Jun 06, 2019 3:40 pm
nedsaid wrote:
Thu Jun 06, 2019 1:43 pm
Random Walker wrote:
Thu Jun 06, 2019 10:09 am
azanon wrote:
Thu Jun 06, 2019 9:48 am
nedsaid wrote:
Thu Jun 06, 2019 9:32 am
There is a counterargument here, and intellectual honesty compels me to say it, it is that not much of anything save for nominal US Treasuries and certain US Agency Bonds would have saved you from the bear market and financial crisis of 2008-2009. Value stocks crashed along with everything else in the financial crisis, and even crashed harder, the reason being is that many of the Value stocks were in the financial sector. So nothing works all of the time. Heck even TIPS and Investment Grade Corporate Bonds fell by 10%-12% during the crisis but much better than 50% plus losses in stocks.

I still like cheaper stocks but depending upon market/economic conditions, cheaper stocks can crash too. Each bear market is different as the causes of each is different. Value would have saved you in 2000-2002 but not during 2008-2009. Just thought I would mention that.
I really appreciate that article opening with the history lesson of the markets from 68'-82'.

Incidentally, I've been wondering to myself will I see another similar period like that one during my lifetime, where a bear market lasts so long, than the overall general consensus gets so negative on stocks as to consider them poor investments. For stocks to under-perform for 14 years would be a really long time, and that would be an interesting thing to witness first-hand instead of just knowing about it from history. It would so greatly contrast the sense I get now which is that a significant majority outright believe or act like they believe that stocks are, matter-of-fact, superior to all other investments, even on a risk-adjusted basis.
Wasn’t 2000-2012 one of those extended periods? I certainly lived through that. When you live through it day to day, I don’t know that one really appreciates that it’s happening. We are constantly looking forward, and when we do look at results we look at today, last week, last few months, maybe last couple years. Each day seems to be a new adventure in the stock market, so days in the middle of a time period like that likely feel very much like individual days now.

Dave
So pretty much what you do is diversify across stocks, bonds, cash. You diversify across geography, that is all over the world. You diversify across thousands of securities. You diversify across factors. Then you cross your fingers and hope it all works. My sense is that in shorter term bear markets that factors may or may not help you. During the long-term secular bear markets like 1968-1984 and 2000-2012, you have a good shot at better returns by diversifying across factors. Doing what Larry advises improves your odds but nothing is guaranteed. And yes, stocks are risky.
Ned, you probably just forgot, but I prefer taking diversification to a whole new level. I do enjoy the research on factors, and a value factor equity fund made the cut of the portfolio I use (namely VFVA), but I prefer the risk parity approach to further diversifying away from market beta which uses multiple "asset classes", instead of just constraining myself to equities and searching for intra-diversification there combined with T-notes.

As just a quick example, if my choices are a factor fund which drops me to say a 0.5-0.6 correlation vs. VTI or a Treasury STRIPS ETF with a -0.4 correlation vs. VTI, which do you think makes more sense? I think the latter. If you have 2 asset classes, both of which have a much higher expected return than cash, but negative correlations, then you have a wow effect in a portfolio.
A Treasury STRIPS ETF makes sense, that is if you get decent return. I suppose that gets you maybe 3% today?

Money stuffed in my mattress has no correlation with stocks but that doesn't make it a good investment. I want non-correlation and I want return, not always easy to get, particularly if you want equity levels of return.

I suppose a Treasury STRIPS ETF gets you the return, the non-correlation of AQR Style Premia Fund I, with far less cost or bother. QSPIX from what I can see has returned from inception about the same as investment grade bonds.

I think Long Treasuries give you a similar non-correlation effect particularly in bear markets, except for 1973-74 Stagflation, almost the perfect diversifier to stocks. Just never had the heart to do this.

This stuff gets pretty esoteric to me and my brain just sort of goes into tilt mode particularly when I start thinking about all the stats that are involved. I think you can outsmart yourself because you never know what the big hedge funds are doing. Huge pools of money out there doing heaven knows what. But yes, your idea should work and it is a relatively simple thing to do.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by larryswedroe » Thu Jun 06, 2019 5:21 pm

nedsaid, every dog has its day (:-) This is LIKELY just another repeat of late 90s. But doesn't matter, one should never judge a strategy by outcome, called resulting, but only by its prudence before you know the outcome. And as Saint Jack said, relativity has no place in investing. So whether you are a TSMer (which is fine as long as you know the risks) or a tilter, you should never care how someone else's portfolio has done relative to yours. Only is yours the right one for you given the facts you know. BTW, ask Buffett if he would rather own TSM or value stocks? And he has underperformed not only S&P 500 for 10 years but also DFLVX for 10 years. Do you think he cares about relative performance and tracking error and going to change his strategy because of that?

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Thu Jun 06, 2019 6:27 pm

Larry, I do track things, after all I was an accountant by trade. Pretty much I compare my performance against the 3 fund portfolio, lazy portfolios on MarketWatch, and Moderate Allocation Funds. I pretty accurately know my returns but benchmarking isn't so easy because my asset allocation has fluctuated, I very rarely rebalanced until July 2013. Lazy portfolios and Moderate Allocation portfolios have pretty static asset allocations. A lot of eyeballing. I want to see whether or not I am in the ballpark. I have an entire thread devoted to it.

American Century did a review of my entire retirement portfolio, they rated me right square in the middle of the Moderate Risk category which is exactly where I want to be. My future estimated returns are projected at 5.7% with a standard deviation of 9.7%. Pretty much 46% US Stocks, 18% International Stocks, 34% Bonds and Cash, 2% International Bonds. I have 13% of my portfolio in individual stocks, very recognizable names, which are a subset of my US Stocks.

So I could estimate my future expected returns for US Stocks at 6%, International Stocks at 10%, and bonds at 2%. (.46 x 6) + (.18 x 10) + (.36 x 2) = 5.28%. My projections aren't far off from what American Century calculated.

What I find is that I have been underperforming the 3 fund portfolio but have tracked favorably with Vanguard Moderate Growth though I am invested a tad bit more aggressively. Not bad. I am in the ballpark. Probably on New Years Day I will do comparisons again. It is a lot of work.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by azanon » Thu Jun 06, 2019 6:31 pm

nedsaid wrote:
Thu Jun 06, 2019 4:29 pm
azanon wrote:
Thu Jun 06, 2019 3:40 pm
nedsaid wrote:
Thu Jun 06, 2019 1:43 pm
Random Walker wrote:
Thu Jun 06, 2019 10:09 am
azanon wrote:
Thu Jun 06, 2019 9:48 am


I really appreciate that article opening with the history lesson of the markets from 68'-82'.

Incidentally, I've been wondering to myself will I see another similar period like that one during my lifetime, where a bear market lasts so long, than the overall general consensus gets so negative on stocks as to consider them poor investments. For stocks to under-perform for 14 years would be a really long time, and that would be an interesting thing to witness first-hand instead of just knowing about it from history. It would so greatly contrast the sense I get now which is that a significant majority outright believe or act like they believe that stocks are, matter-of-fact, superior to all other investments, even on a risk-adjusted basis.
Wasn’t 2000-2012 one of those extended periods? I certainly lived through that. When you live through it day to day, I don’t know that one really appreciates that it’s happening. We are constantly looking forward, and when we do look at results we look at today, last week, last few months, maybe last couple years. Each day seems to be a new adventure in the stock market, so days in the middle of a time period like that likely feel very much like individual days now.

Dave
So pretty much what you do is diversify across stocks, bonds, cash. You diversify across geography, that is all over the world. You diversify across thousands of securities. You diversify across factors. Then you cross your fingers and hope it all works. My sense is that in shorter term bear markets that factors may or may not help you. During the long-term secular bear markets like 1968-1984 and 2000-2012, you have a good shot at better returns by diversifying across factors. Doing what Larry advises improves your odds but nothing is guaranteed. And yes, stocks are risky.
Ned, you probably just forgot, but I prefer taking diversification to a whole new level. I do enjoy the research on factors, and a value factor equity fund made the cut of the portfolio I use (namely VFVA), but I prefer the risk parity approach to further diversifying away from market beta which uses multiple "asset classes", instead of just constraining myself to equities and searching for intra-diversification there combined with T-notes.

As just a quick example, if my choices are a factor fund which drops me to say a 0.5-0.6 correlation vs. VTI or a Treasury STRIPS ETF with a -0.4 correlation vs. VTI, which do you think makes more sense? I think the latter. If you have 2 asset classes, both of which have a much higher expected return than cash, but negative correlations, then you have a wow effect in a portfolio.
A Treasury STRIPS ETF makes sense, that is if you get decent return. I suppose that gets you maybe 3% today?

Money stuffed in my mattress has no correlation with stocks but that doesn't make it a good investment. I want non-correlation and I want return, not always easy to get, particularly if you want equity levels of return.

I suppose a Treasury STRIPS ETF gets you the return, the non-correlation of AQR Style Premia Fund I, with far less cost or bother. QSPIX from what I can see has returned from inception about the same as investment grade bonds.

I think Long Treasuries give you a similar non-correlation effect particularly in bear markets, except for 1973-74 Stagflation, almost the perfect diversifier to stocks. Just never had the heart to do this.

This stuff gets pretty esoteric to me and my brain just sort of goes into tilt mode particularly when I start thinking about all the stats that are involved. I think you can outsmart yourself because you never know what the big hedge funds are doing. Huge pools of money out there doing heaven knows what. But yes, your idea should work and it is a relatively simple thing to do.
Yeah I’m counting on the non-correlation return, not just the 3% yield. Most investors insist on assets looking great in isolation, and so they’d never consider many of the assets I use because they don’t look great viewed that way. 5 year treasuries and most stocks look great judged on their own merit.

The Bridgewater style risk parity is actually not supposed to constantly envolve because it’s designed to not make bets. The portfolio of theirs that’d be impossible to imitate is their pure alpha fund which is the one I consider to be the real hedge fund.

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by larryswedroe » Thu Jun 06, 2019 7:10 pm

nedsaid, the question to ask yourself is what is the value of doing that comparison? If it is favorable you do nothing. If not do you change because of recency, or better what in the logic has caused you to change your opinion about the prudent strategy? Just asking because if nothing has changed why even bother? Can only cause angst and doubt which leads to bad decisions.
I'd say the same for TSMers, once you decide on strategy unless your assumptions change should not change the strategy--again, as Bogle said Relativism has no place in investing!!!! And if Jack said it it must be true (:-))
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by Random Walker » Thu Jun 06, 2019 7:37 pm

larryswedroe wrote:
Thu Jun 06, 2019 7:10 pm
nedsaid, the question to ask yourself is what is the value of doing that comparison? If it is favorable you do nothing. If not do you change because of recency, or better what in the logic has caused you to change your opinion about the prudent strategy? Just asking because if nothing has changed why even bother? Can only cause angst and doubt which leads to bad decisions.
I'd say the same for TSMers, once you decide on strategy unless your assumptions change should not change the strategy--again, as Bogle said Relativism has no place in investing!!!! And if Jack said it it must be true (:-))
Larry
Makes sense to me. I once made a comment that “passive DFA asset class funds sort of serve as their own indexes”, and I was lambasted for it. But it is essentially true; and it is true for any passive rules based fund that has targeted factor exposures to which it adheres. You basically choose a collection of factor exposures within a portfolio, and then get what you get. If you have deeper factor exposure than a given index, then you’ll do better when the factor does well and worse when the factor does poorly. I’m certain there are important details like some stock screens and tax management, but those I bet are icing compared to cake.

Dave

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Thu Jun 06, 2019 10:58 pm

Random Walker wrote:
Thu Jun 06, 2019 7:37 pm
larryswedroe wrote:
Thu Jun 06, 2019 7:10 pm
nedsaid, the question to ask yourself is what is the value of doing that comparison? If it is favorable you do nothing. If not do you change because of recency, or better what in the logic has caused you to change your opinion about the prudent strategy? Just asking because if nothing has changed why even bother? Can only cause angst and doubt which leads to bad decisions.
I'd say the same for TSMers, once you decide on strategy unless your assumptions change should not change the strategy--again, as Bogle said Relativism has no place in investing!!!! And if Jack said it it must be true (:-))
Larry
Makes sense to me. I once made a comment that “passive DFA asset class funds sort of serve as their own indexes”, and I was lambasted for it. But it is essentially true; and it is true for any passive rules based fund that has targeted factor exposures to which it adheres. You basically choose a collection of factor exposures within a portfolio, and then get what you get. If you have deeper factor exposure than a given index, then you’ll do better when the factor does well and worse when the factor does poorly. I’m certain there are important details like some stock screens and tax management, but those I bet are icing compared to cake.

Dave
What is the value of doing comparisons? Well, it certainly isn't competing against other Bogleheads. It is a matter of knowing that what I am doing is based upon sound principles. It is also a matter of knowing if my results are within the range of acceptable performance. Also want to know how I can improve and refine my approach. Hard to do without some kind of benchmarking.

If I am taking moderate risk, I want to have some idea of how I am doing compared to other moderate portfolios. Sort of like getting your vital signs checked. Fortunately I have been in the ballpark. So I should be satisfied with how I have done.

I also realize that markets are dynamic. There are timeless principles that never change. There are fundamental changes in the markets and economy and investors need to adapt. But hard to know what are eternal principles and what things are no longer true because of change. For example, maintaining a portfolio of blue chip stocks with low turnover and with dividend reinvestment was the optimal way to invest at one time. Today, there are better and more efficient ways to invest with low cost index and factor products. So one needs to evaluate what one is doing from time to time.

As far as certain funds being their own index, lots of truth to that. This is literally true with Fidelity, which in certain cases uses their own proprietary index. With factors, you get what you get though the search is always on for even better factor products. Lots of folks committed to factors wonder if they are in the right product. Hence all the discussion about the Vanguard Small Cap Value Index and disagreement over if this loads enough on Small and Value. As for me, I did the best I could with what I knew at the time.

Larry and Dave, I don't think investors should obsess over comparisons. But at some point an evaluation has to be made. Seeing that I am doing most of this on my own, I have to act as my own fiduciary. This isn't a matter of proving to anyone here that I am a better investor than somebody else. Just have to be the best me that I can be.

I also feel pretty strongly to holding to your basic convictions and staying true to who you are as an investor. Hence my frequent advice to new investors to write up an Investment Policy Statement.
I am still the Value oriented, low turnover, lower cost investor that I was 30 years ago. So in many respects, I have always been a Boglehead.
Last edited by nedsaid on Thu Jun 06, 2019 11:11 pm, edited 2 times in total.
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What am I missing???????????

Post by Socrates » Thu Jun 06, 2019 11:03 pm

IJS

3 year returns 10.82

10 yr returns 15.89


small value is dead yet international and bonds return almost nothing?????? :confused
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Re: What am I missing???????????

Post by fennewaldaj » Thu Jun 06, 2019 11:10 pm

Socrates wrote:
Thu Jun 06, 2019 11:03 pm
IJS

3 year returns 10.82

10 yr returns 15.89


small value is dead yet international and bonds return almost nothing?????? :confused
I have brought up a similar point. I am not sure why I should care that value is under performing when the actual returns are still good. Large value has had decent enough returns too.

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by Socrates » Thu Jun 06, 2019 11:12 pm

I have brought up a similar point. I am not sure why I should care that value is under performing when the actual returns are still good. Large value has had decent enough returns too.
agreed on both :sharebeer
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Fri Jun 07, 2019 3:47 pm

I wanted to point out that the news and opinion aggregator Real Clear has linked this article on their Real Clear Investing page. So Larry has received a bit of recognition here having his article linked on a well traveled website. I think he has had a couple other articles linked here in the past. It is a real honor for someone who writes regular columns.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by Random Walker » Fri Jun 07, 2019 6:33 pm

Didn’t know realclear had an Investing/markets page. Thanks for that info. Another place to look up essays

Dave

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by larryswedroe » Fri Jun 07, 2019 6:56 pm

nedsaid, FWIW, if you are an active investor then you should compare to passive benchmarks to see if the activity was adding value, If you are a passive investor, deciding on an AA and adhering to it using structured portfolios that you believe had the right AA for you and the funds follow that systematic approach to implement your strategy, what is the purpose of some comparison? If you are comparing to some other AA benchmark, like TSM, then you should have used that in first place. And vice versa. Otherwise you are likely to be guilty of resulting and end up being a performance chaser. For passive investors their own portfolios should be their own benchmarks, or other funds with the same loadings on factors. Now you can measure using attribution analysis the individual performance of each fund to determine if it was doing what it should be doing. As long as that is the case there should be no reason to change your portfolio unless some of your underlying assumptions have changed, in which case you should change.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Fri Jun 07, 2019 9:38 pm

larryswedroe wrote:
Fri Jun 07, 2019 6:56 pm
nedsaid, FWIW, if you are an active investor then you should compare to passive benchmarks to see if the activity was adding value, If you are a passive investor, deciding on an AA and adhering to it using structured portfolios that you believe had the right AA for you and the funds follow that systematic approach to implement your strategy, what is the purpose of some comparison? If you are comparing to some other AA benchmark, like TSM, then you should have used that in first place. And vice versa. Otherwise you are likely to be guilty of resulting and end up being a performance chaser. For passive investors their own portfolios should be their own benchmarks, or other funds with the same loadings on factors. Now you can measure using attribution analysis the individual performance of each fund to determine if it was doing what it should be doing. As long as that is the case there should be no reason to change your portfolio unless some of your underlying assumptions have changed, in which case you should change.
Best wishes
larry
Larry, I benchmark my portfolio vs. the Taylor Larimore 3 fund portfolio. So lets say my asset class mix is 47% US Stocks, 18% International Stocks, and 35% Bonds; I will calculate the returns of my portfolio vs. the blended return of the 3 fund. This tells me whether I am getting any premium above a 3 fund portfolio. Get an idea of whether my tilts are working or not.

So for example, I had a 47% US Stock/19% International Stock/34% bond portfolio in 2017. My portfolio returned 15.01% and a similarly constructed 3 fund portfolio returned 16.39%. Furthermore, I did analysis account by account figuring out which accounts had a drag on performance. I then did some rather unsophisticated factor analysis largely because I didn't want to enter everything into Portfolio Visualizer. I have a lot of stuff and I don't think it would have all fit. My conclusion was that my underperformance was due to factor drag both on the equity and on the fixed income side. For example, on the fixed income side my TIPS and GNMAs underperformed Total Bond. Fees were obviously a factor but American Century, the bulk of my active funds, had a pretty good year.

In 2018, my mix was almost the same 47% US Stock/18% International Stock/35% Bonds. My returns were -6.35% and a similar 3 fund portfolio would have lost -5.075%. Didn't do all the analysis that I did for 2017, but American Century had a bad year in 2018, particularly with fixed income. 2017 was a relatively good year for that fund group. Looked like factor drag and some fee drag as well.

I benchmark the active stuff with real life passive index funds and I look at the factors by comparing my factor index funds with the broad indexes. So for example, how did my Small Value Index ETF perform compared to Total Stock Market. So lots of eyeballing. My math is not particularly sophisticated, my eyes glazed over even in college when I took stats, trig, and calculus. I did get to understand algebra pretty well which helped me with Excel spreadsheets. But a quant I am not.

I have calculated year by year returns and have a spreadsheet where I calculate growth of $10,000 and Compound Annual Rate of Return. There is an online calculator that I use for CAGR, if I have the growth of $10,000 numbers then calculating CAGR is easy. I can calculate CAGR on Excel as well. But again, I am just not a quant. A former defense contractor engineer told me that accountants are not good mathematicians and I think he is right. I am an accountant.

So my analysis is pretty good but lots of eyeballing and trying not to be exact with this. What I want is a sense if I am in the ballpark or not. Not sophisticated enough to do factor attribution and I am not even sure what regressions are, if a math geek could explain it to me that would be great. I have an idea of what factor loadings are but don't really know what the numbers mean. I know that factor loadings measure how efficiently one captures factor characteristics. For example, DFA historically has done a better job of capturing factors than Vanguard. From what I am reading Vanguard is coming up with good factor products too. Another thing Larry, is that I think in narrative form, telling a story, rather than getting too buried in the math. I certainly use math in my analysis but report the results in a story form.

My individual stocks are benchmarked vs. Total Stock Market Index and use 15 year rolling periods because long term is really all that matters. I also benchmark them vs. Vanguard Value Index since they are value oriented stocks. Also check them against the DFA Large Value product. It gives me an idea of factor loading.

I have an entire thread where I discuss my portfolio and analyzing it using Morningstar tools, benchmark against indexes, eyeball. Lots of discussion there and I lay it all out in depth. Don't expect you to look at it as I don't expect you to be my financial advisor. But seeing that you had some interest, I went into a little bit of detail about how I evaluate my own portfolio.

I have done eyeballing for years. Part of my retirement has been at American Century for years. By eyeballing, I noticed that their earnings acceleration discipline seemed to work best for their mid-cap funds so I owned two such funds and enjoyed some great performance. Their earnings acceleration discipline wasn't working in Large Cap so I switched to their Quant funds that try to improve on indexes. I was very satisfied for years with their Value and Fixed Income disciplines. So stuff like that. What I have noticed in recent years is that their Large Value, Mid-Growth, Fixed Income, and Quant funds have slipped. Ironically, their Large Growth earnings acceleration funds have done well beating the S&P 500 but still trailing the Vanguard Growth index. So evaluating whether to stay with American Century or move on.

I did find that Indexing was more efficient than active management and the bulk of my new monies for investment have gone into index funds or ETFs over the last 20 years. I have de-emphasized my individual stocks and active funds. Did that sort of stuff by eyeballing and comparison. Have done that for many years.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by Watty » Fri Jun 07, 2019 11:53 pm

azanon wrote:
Thu Jun 06, 2019 10:15 am
I don't recall a protracted period where the general population regarded stocks as a poor investment during that period. Maybe history makes 68'-82' sound worse than it really was, and those individuals that believed that were outliers like they would have been in 2000-2012?
I was just getting out of college then but the ten years before 82' were likely worse than the numbers would imply.

There was double digit inflation, oil embargos and gas lines, price controls, stagflation, and dropping the gold standard. That was a in addition to lots of political events.

It was a few years later but I bought my first house in 1986 and I was elated that interest rates dropped the day before my mortage rate locked and I was actually able to get a mortage for under 10%. It was 9.9%. Lenders were very picky about giving mortgages and even if you a good job and good credit getting approved for a mortage was not always certain.

It is just anecdotal but my recollection was that during the high inflation years stocks were not popular since they would have a hard time keeping up with inflation.

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by larryswedroe » Sat Jun 08, 2019 7:23 am

nedsaid, so what is the point of that 3 fund benchmark? Either you believe that the 3 fund portfolio is better choice for you or not. The problem is since all risk assets can underperform for very long time how long would you wait to decide to switch, since 10 years clearly not enough is 20? And for TSMers if waited say 10 years there would be many times, in fact most times, when it would have underperformed the tilted portfolio. What should cause a switch is only a change in your assumptions since both are "passive" strategies (no stock picking or market timing). BTW, small value has outperformed internationally last 15 years by even more vs VTGMX, which Taylor (who posts about the underperformance of US small value never mentioned, nor have other 3 fund fanatics (:-))
At 15 years it outperformed 7.17 vs 5.38 and same for EM
DFEVX 9.31 vs 7.85

So basically about offsetting underperformance in US for diversified portfolio, and this is one of the worst periods for US small value.

Do you think Buffett is comparing?
Larry

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Sat Jun 08, 2019 10:37 am

larryswedroe wrote:
Sat Jun 08, 2019 7:23 am
nedsaid, so what is the point of that 3 fund benchmark? Either you believe that the 3 fund portfolio is better choice for you or not. The problem is since all risk assets can underperform for very long time how long would you wait to decide to switch, since 10 years clearly not enough is 20? And for TSMers if waited say 10 years there would be many times, in fact most times, when it would have underperformed the tilted portfolio. What should cause a switch is only a change in your assumptions since both are "passive" strategies (no stock picking or market timing). BTW, small value has outperformed internationally last 15 years by even more vs VTGMX, which Taylor (who posts about the underperformance of US small value never mentioned, nor have other 3 fund fanatics (:-))
At 15 years it outperformed 7.17 vs 5.38 and same for EM
DFEVX 9.31 vs 7.85

So basically about offsetting underperformance in US for diversified portfolio, and this is one of the worst periods for US small value.

Do you think Buffett is comparing?
Larry
Larry, isn't the point of factor tilting to beat the 3 fund portfolio? How will I know if my strategy is working if I don't do some comparisons? How do I know how well I am doing? To say that my investments are their own benchmarks is a cop-out frankly. I do similar comparisons that you do in your articles, comparing my investments to DFA, Vanguard Indexes, and sometimes to Vanguard factor products. Being a student of the markets, these comparisons give me a sense of what is going on within those markets. I can get a sense of how the factors are performing.

I am almost 60 years old now and I have been investing for 35 years. Not going to change my approach now. I have a good sense of market history and believe that my choices will be vindicated. The point is that I have a long term view.

If I walked into your office on Monday morning with $10,000,000; you are going to make a case that you and Buckingham will do it all better and more efficiently than Vanguard and that your advisory service will add value. That persuasive case will involve comparisons. You aren't going to let me leave your office with that $10,000,000 without using every bit of your persuasive abilities. Don't worry Larry, I don't have $10,000,000; but just sayin'.

My investments have a Mid-Small Cap tilt and I have a Value tilt as well. I am not shocked that my portfolio has underperformed the 3 fund seeing that I deliberately underweight the High Tech sector and particularly the FAANG stocks. We have been in a Large Growth stock market for a decade now. This is the big reason that I do multiple comparisons. So in light of how my portfolio is constructed, the performance is not surprising.

As far as Buffett, from what I read his two main concerns are the intrinsic value and the cash flows generated by Berkshire-Hathaway. He knows that the markets will eventually correctly value his company but certainly in the back of his mind he is thinking about his stock's performance versus the S&P 500. Buffett certainly benchmarks B-H but he has a very long-term view. Not like Jack Welch who was obsessed with stock price and with managing earnings growth which might have eventually led to GE's downfall. Buffett has long term confidence in what he is doing, been at it a long time, I doubt he is going to change his stripes.

My problem, Larry is that I read too many of your articles, I do the same type of analysis that you do and now I am being chided for it. :wink:
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by DaufuskieNate » Sat Jun 08, 2019 10:55 am

The ultimate benchmark is whether your portfolio is earning the real rate of return over the long term that is required in your financial plan and is doing so in a way that allows you stay the course . A second benchmark is whether the specific funds you use are tracking with their stated objectives over the long term. Judging a portfolio against a totally different portfolio is like judging an apple on the basis of whether or not it tastes like an orange.

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by larryswedroe » Sat Jun 08, 2019 11:18 am

nedsaid
First, Dafuskie gave you the answer. Seriously what you are doing IMO is "resulting", either the strategy is right or wrong before you know the outcome.

Second, re this
Larry, isn't the point of factor tilting to beat the 3 fund portfolio?
No it is not. It is to diversify the sources of risk and cut tail (and sequence risk) giving you greater chance of achieving your goals. Now if the factor tilt is used to outperform yes, then you simply took more risk and the risks showed up and you did not get it. What if you compare stocks to five year treasuries from 66 -84 I think and they underperform for almost 20 years do you now believe your strategy is wrong and switch? And for 40 years US large growth and small growth underperform long term Treasuries, that's 40 years (69-08) do you abandon your strategy? Seriously, it's not a cop out. It's avoiding the mistake of resulting. Now active managers should be judged against passive benchmarks, and similar passive funds with same exposures, but not in your case. I would not compare TSM to a tilted portfolio either if I decided TSM was best for me, that would be the same mistake of resulting. Only time to compare is if your assumptions have changed and I cannot think of anything that would logically lead me to conclude that risky assets should have similar risk-adjusted returns so the right strategy is to diversify across as many as I can find. Now luckily in the zoo of 600 only need a few. And only a few other risk assets worth considering as available at reasonable fees. So don't need "complexity" but IMO can do better than just simple 3 fund portfolio in terms of reducing risks and having better chance of achieving goals, especially well at reducing this risk when in periods of high equity valuations.

Best wishes
Larry

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by Random Walker » Sat Jun 08, 2019 11:21 am

Once you go passive, you simply get what you get based on the factor exposures. Even the simplest comparisons of a tilted portfolio to TSM quickly become nonsensical. If you compare two portfolios with the same bond allocation, you’re comparing portfolios with different expected return. If you pick two portfolios with the same expected return, the different bond allocations will affect the results tremendously. And then of course there are all the problems with specific time periods and length of time periods.
The most important result is meeting one’s own goals. Once one gets realistic about that, comparisons go out the window. If one takes Larry’s advice, and cuts both right and left tails (cut left more) by tilting big and concomitantly increasing safe bond allocation substantially, then you’ve rationally targeted your goals and narrowed the dispersion of potential outcomes around that goal. Once you go down that path and stay entirely passive, hard to do meaningful comparisons. Moreover, investing I think is about looking forward, not backward.

Dave

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by Wildebeest » Sat Jun 08, 2019 11:43 am

DaufuskieNate wrote:
Sat Jun 08, 2019 10:55 am
The ultimate benchmark is whether your portfolio is earning the real rate of return over the long term that is required in your financial plan and is doing so in a way that allows you stay the course . A second benchmark is whether the specific funds you use are tracking with their stated objectives over the long term. Judging a portfolio against a totally different portfolio is like judging an apple on the basis of whether or not it tastes like an orange.
Agreed.

What works for us is that I do not benchmark because we have only index funds and we do not rebalance anymore. So we check the accounts only at tax time.

I guess I am a contrarian at heart and I enjoy reading how poorly the Value and the non US and Emerging market do now. So may be I should benchmark but it is to much work and it would not change a thing. We are very much tilted to Small Value en Emerging market and I hope by having the DFA "index" funds and Vanguards index funds we will do great as long as we stay the course for the next 20-40 years. If not that is okay.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Sat Jun 08, 2019 1:12 pm

I had been on fire lately and pressed my luck by defending Rick Ferri on the definition of Beta. I was told that I didn't understand math, didn't understand logic, and didn't understand the English language. Then I told folks that I benchmarked my portfolio performance against the Taylor Larimore 3 fund portfolio. Boy, the dam broke and I am wrong about everything again. Don't know, it seems being right is more fun.

The point is that I benchmark my portfolio vs. the 3 fund portfolio but I also do other comparisons. I am moderate risk investor so I look at other moderate risk portfolios. I also do comparisons with factor indexes and factor products. The objective is to get a sense of whether I am performing well enough taking into account how I am invested. It is just that the 3 fund comparison is the easiest. I also do other comparisons. Even I know that if I don't invest like the 3 fund portfolio, that I shouldn't expect to perform like a 3 fund portfolio. But I have got to compare against something. I did compare with 3 main asset classes: US Stocks, US Bonds, International Stocks.

For heaven's sake, I spent lots of time over 2018 and 2019 New Years analyzing my results and I posted it. I am a Morningstar subscriber and I use their tools. But I don't have a staff of analysts to do all this for me. No mainframe in my bedroom closet, just a tower under my desk.

I remember asking Dave (Random Walker) how his portfolio was doing. He had made quite an intellectual commitment to factor investing and went to Buckingham to do it. There are advisory fees involved. So I asked him if he benchmarked his portfolio. He said that his funds were there own benchmarks. Well then, how do you compare against a 50/50 portfolio? He wasn't sure. Okay, did you get the diversification benefits that you wanted? Well, I think I got something but I can't really quantify it. Are the Alts doing for you what you expected? Not sure.

What I was expecting from Dave was a pretty good sense that he was getting both the performance and the diversification benefits he wanted. I was expecting that he would be checking results against balanced funds, moderate risk funds just to see if he was in the ballpark in terms of both performance and volatility. Dave did understand well the theory behind all of this, cutting tails and all of that, particularly the left tail, but I was disappointed that he didn't have any numbers or specifics. I will say that he is happy with what he has.

Again, my point is that you have to have some expectations of the relative performance of your portfolio compared to other approaches and you need some way to measure if you are doing well or not. And yes, you need an apples to apples comparison. What I was doing was apples to oranges and more detailed apples to apples comparison.

I realize that shorter term analysis has limited value and long term is what matters. But the short term can tell you a lot if your investments are behaving like one would expect. For example, if the Vanguard Small Value Index is up 5%, DFA Small Value is up 6%, and your Small Value product is down 2%, something is wrong. If you expect QSPIX to buffer down markets, if markets are down 20% and QSPIX is down 30%, there is a clink in the works. Doesn't mean necessarily something is wrong with QSPIX but it is a sign that maybe you need to do some checking.

There was a bond fund that I owned that was down 1.46% in 2018 when the US Bond Index was up 0.1%. Did some checking and found the fund had 7% in Emerging Markets of which 1.5% was in Hungarian Gov't bonds, 3% in Mexican Gov't bonds, and 2.1% in South African Gov't bonds. I was not pleased by this and gave feedback to the company. This was supposed to be a Core Bond fund but they were straying from their discipline. A few months later, those bonds I mentioned were mostly gone, wasn't because of my feedback, the managers realized they made a losing bet.

So this is what I mean by looking under the hood. I mostly do this myself so I have to be my own fiduciary.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Sat Jun 08, 2019 1:29 pm

Random Walker wrote:
Sat Jun 08, 2019 11:21 am
Once you go passive, you simply get what you get based on the factor exposures. Even the simplest comparisons of a tilted portfolio to TSM quickly become nonsensical. If you compare two portfolios with the same bond allocation, you’re comparing portfolios with different expected return. If you pick two portfolios with the same expected return, the different bond allocations will affect the results tremendously. And then of course there are all the problems with specific time periods and length of time periods.
The most important result is meeting one’s own goals. Once one gets realistic about that, comparisons go out the window. If one takes Larry’s advice, and cuts both right and left tails (cut left more) by tilting big and concomitantly increasing safe bond allocation substantially, then you’ve rationally targeted your goals and narrowed the dispersion of potential outcomes around that goal. Once you go down that path and stay entirely passive, hard to do meaningful comparisons. Moreover, investing I think is about looking forward, not backward.

Dave
I am old fashioned, as they say the proof of the pudding is in the eating. It may look good, it may smell good, but does it taste good?

My point is that if you compare your portfolio to let's say a 50% stock/50% bond portfolio, you ought to see from the numbers that by adding the alts that you indeed have less beta risk than a standard portfolio. You ought to see evidence that the risks of extreme outcomes have been cut. You should see from the behavior of the components of the portfolio that you are getting the expected performance and the diversification benefits. I am certain your advisor has done this for you.

The comparisons are flawed but it doesn't mean they are meaningless. That is really what I am trying to say. I don't expect this calculated out to the 25th decimal point but I do expect that you would have a good sense that your investments are doing what they are supposed to be doing.

If steam is pouring out of the hood of my car and my heat indicator is stuck on cold, I will assume that my instrument is broken. I will stop the car, pull up the hood to check what is going on, and if need be call AAA. I don't just blindly just drive on trying to see through all that steam. Lots of Bogleheads would say press on regardless until their engine block cracked. For heaven's sake, do a bit of double checking.

The thing is, the checking under the hood that I am talking about isn't difficult. Even I can do it. Larry in his numerous articles has shown us how.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Sat Jun 08, 2019 1:45 pm

DaufuskieNate wrote:
Sat Jun 08, 2019 10:55 am
The ultimate benchmark is whether your portfolio is earning the real rate of return over the long term that is required in your financial plan and is doing so in a way that allows you stay the course . A second benchmark is whether the specific funds you use are tracking with their stated objectives over the long term. Judging a portfolio against a totally different portfolio is like judging an apple on the basis of whether or not it tastes like an orange.
This is a very good answer. Larry made a good point about resulting. I am not changing course. The analysis of my performance went beyond just saying that I underperformed the 3 fund and therefore I am a bad investor. I went beyond that and analyzed factor by factor. Again, we have been in a Large Growth market so it should be no surprise that a 3 fund would outperform. The question is given what I have invested in, am I getting the results I should expect? The answer is Yes.
Last edited by nedsaid on Sat Jun 08, 2019 2:05 pm, edited 1 time in total.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by Random Walker » Sat Jun 08, 2019 1:50 pm

nedsaid wrote:
Sat Jun 08, 2019 1:29 pm
The comparisons are flawed but it doesn't mean they are meaningless. That is really what I am trying to say. I don't expect this calculated out to the 25th decimal point but I do expect that you would have a good sense that your investments are doing what they are supposed to be doing.
I agree. Something that impresses me is that even with my 40% equities / 36% bonds / 24% alternatives portfolio, just how much of the daily fluctuations are dominated by the general equity market.

Dave

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Sat Jun 08, 2019 2:02 pm

Random Walker wrote:
Sat Jun 08, 2019 1:50 pm
nedsaid wrote:
Sat Jun 08, 2019 1:29 pm
The comparisons are flawed but it doesn't mean they are meaningless. That is really what I am trying to say. I don't expect this calculated out to the 25th decimal point but I do expect that you would have a good sense that your investments are doing what they are supposed to be doing.
I agree. Something that impresses me is that even with my 40% equities / 36% bonds / 24% alternatives portfolio, just how much of the daily fluctuations are dominated by the general equity market.

Dave
Regarding your comments about the daily fluctuations being dominated by the general equity market, perhaps you should get the advisor to run some quick numbers for you. You still have 40% stocks but as I recall half of your equities are Small/Value. You have good diversification across factors but you know, the markets do what they do, and investments don't have to behave according to expectations. But anyways, you have done all that is humanly possible to diversify across factors and cut the risk of extreme outcomes, particularly the negative ones. Really hard to wash that market beta out of your portfolio!

Comparisons are never exact. In comparing asset allocation to a more standard portfolio, you have essentially a 50% stock/50% bond portfolio. Pretty much I treat the alternatives as 50% equity risk and 50% fixed income, not an exact comparison but close enough. If you ran the stats, what I would expect would be similar returns but with less volatility, in other words a more efficient portfolio. If you get better returns AND less volatility, you have reached Nirvana. You go to the head of the class.

The comparisons aren't meant for precision but to give you a sense if what you are doing is working. And yes, I would expect variability in both performance and volatility from a standard 50/50 portfolio. So if Dave is up 12% with 9% standard deviation in a particular year and 50/50 is up 14% with 8% standard deviation, that doesn't mean Dave abandons his strategy. It just means he is in the ballpark. You aren't going to beat the 50/50 every year in volatility measurement but over longer time periods I would expect the Dave portfolio to be less volatile. You might not even beat the 50/50 in performance over long periods of time but if get that performance with less risk, that is all that matters.

Again, this is just eyeballing and a quick check. If something doesn't quite look right, call the advisor. Do some more checking. That is all I am saying. And yes, I do understand Larry's concerns about resulting.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Sat Jun 08, 2019 2:45 pm

One more thought about portfolio benchmarking. A big influence on my thinking on benchmarking against the 3 fund portfolio has to do with the Brinson, Beebower, and Hood study of pension fund returns. That 1986 study and a follow-up 1991 study showed that most of the variability in investment returns had to do with asset allocation. Security selection and market timing were lesser factors. It also showed that passive indexes were as good or better than active managers.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by larryswedroe » Sat Jun 08, 2019 6:27 pm

nedsaid
FWIW, there's nothing wrong with doing some comparison, but you have to ask what is the purpose of doing so? And we know such comparisons can easily lead to resulting

RE BBH, not really a great study to be citing. Example, two funds with EXACTLY the same AA and one is stock picker and other is indexer, 0% of the difference in returns is due to AA. And if you have two index funds then 100% of difference in returns is due to AA. The figure they came up with was so high because they looked at pension plans which had very similar AAs (like 60/40).

Also FWIW, while IN GENERAL I agree with Rick's comments on SMART beta, because almost all of it is nothing more than BETA, not smart or dumb just BETA, or exposure to a factor. But he is wrong clearly because he, like some others, throws the baby out with the bath water. I'm confident (least I hope so) that Rick would agree that adding say buy and hold ranges (which MSCI Indices finally did) is SMART BETA as it reduces turnover, trading costs and improves tax efficiency and also it avoids the total transparency that allows active managers to exploit dumb indices. Further, adding patient trading instead of being a forced taker of liquidity would be a "smart beta" strategy. And I would suggest that screening out securities with negative characteristics (such as lottery stocks) is SMART BETA. So I have to disagree with Rick because while he is right about the large majority of funds that are marketed as smart beta, not all are just marketing hype.

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Sat Jun 08, 2019 7:05 pm

I get your warnings about resulting. Not saying people should change strategies whenever they are disappointed with comparisons. I learned a lot doing analysis on my portfolio and I am glad that I did it. There are limitations to about anything. What I did was do some analysis and let it go wherever the evidence would lead even if I didn't like the results. I didn't. What I am trying to say is that we shouldn't make the opposite error of resulting and that is just ignoring contrary evidence.

I did read on Wikipedia that there were criticisms of the Brinson, Beebower, and Hood study. I do think it had value. One is that it cast doubt on active management as managers didn't do any better than passive indexes. I do believe that asset allocation is the most important investment decision and that it has the greatest effect on portfolio performance. One reason for this is that most of stock returns comes from the market factor, the other factors are important of course but less so. Here I am equating factors with security selection. BBH probably understated the effects of security selection but that was before the Fama/French 3 factor model was published in 1992. I would agree with BBH that market timing is a lesser factor in portfolio performance. The study, I think got the ball rolling though it wasn't the final word.

Won't get into a semantic battle over Smart Beta, I prefer to talk about factor tilting. Wall Street has a marketing machine and it is best not to listen to the hype. Using the wrong nomenclature is practically a capital offense around here. As far as Rick, his book "All About Asset Allocation" has been forgotten. Sort of like Mission Impossible message where the agent is warned that if captured that the Secretary will disavow all knowledge. The book has met that fate.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by heyyou » Sun Jun 09, 2019 5:21 am

While working, saving more will boost your portfolio balance. If retired, spending less will help your portfolio longevity. Yes, for calculations, assuming fixed conditions is easier to program, but being adaptive is far easier than trying to precisely allocate in order to get more from your assets.

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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by nedsaid » Sun Jun 09, 2019 11:05 am

Larry, those of us who diversify across factors set up our long-only portfolios and find that we are still very heavy on market beta. Random Walker (Dave) mentioned that with his alts that most of the movement in his portfolio still seem tied with the stock market. I think his portfolio construction was fine, Buckingham did everything humanly possible to avoid being to market beta dependent, but as I told him markets do what they do and asset classes often don't act according to our expectations. I can see why you are recommending the Style Premia (long-short & leveraged) fund for your clients as it tries to isolate the other factors and be market beta neutral. Most, if not all portfolios here are pretty dominated by market beta.

So I think without having thought about this too much beforehand, that all of my analysis was an attempt to compare with a portfolio where equity is 100% market beta factor. If I had to guess, despite my tilting efforts, my portfolio still derives its returns from market beta and the risk is probably mostly market beta. My factor diversification is probably not what I think it is. What I have learned is that the factors were a drag for a decade but that isn't surprising since we have been in a Large Growth market. I have faith the Small/Value effect will return but I wonder how much benefit that I will receive when it does.

It would seem to me that to get the proper factor diversification, one needs the Alts and probably a good helping, maybe 10%, of a Style Premia type of fund. It also seems like one needs to take more extreme tilts. My tilts have been rather cautious. No matter what you do, it seems to be that a long-only portfolio will be dominated by market beta both in terms of return and risk. One might need to get some long/shorts in there unless I went all-in on the equity side with Small-Value like the "Larry portfolio." I am beginning to wonder if this is a "go big or go home" type of thing. My problem is that I probably have been too timid.
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Re: Larry Swedroe: The Re-Death of Value, or Deja Vu All Over

Post by Day9 » Sun Jun 09, 2019 12:49 pm

nedsaid wrote:
Sun Jun 09, 2019 11:05 am
...It would seem to me that to get the proper factor diversification, one needs the Alts and probably a good helping, maybe 10%, of a Style Premia type of fund. It also seems like one needs to take more extreme tilts. My tilts have been rather cautious. No matter what you do, it seems to be that a long-only portfolio will be dominated by market beta both in terms of return and risk. One might need to get some long/shorts in there unless I went all-in on the equity side with Small-Value like the "Larry portfolio." I am beginning to wonder if this is a "go big or go home" type of thing. My problem is that I probably have been too timid.
You are probably right which is why Mr Swedroe has been talking about alts beyond the one you mentioned like Stone Ridge Reinsurance and Alternative Lending. But I also think you are right you can get there without these alts if you go all in on deep small value funds (e.g. DFA Small Value instead of DFA Core, Targeted Value, or Vector Equity), and also greatly reduce your overall stock allocation and greatly increase your safe bond allocation. Increasing duration risk loading and decreasing market beta gets you closer to a risk parity portfolio. Mr Swedroe has said on this forum that he has a very low stock allocation himself. At least having the market weight in international developed and emerging might help too since these probably have higher expected return (and risk) going forward so adding those to a home-biased portfolio while simultaneously reducing your overall stock allocation would achieve the same thing.

So I also get the sense it is "go big or go home" and also it is only for someone where a low stock/high bond allocation is appropriate (certain levels of need, ability, and willingness to take risk). If you have to be 80 stock / 20 bond, unleveraged, long only, then I can't see how to avoid the portfolio being dominated by market beta.
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