"Alice's Adventures in Factorland"

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Taylor Larimore
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"Alice's Adventures in Factorland"

Post by Taylor Larimore » Thu Jun 27, 2019 11:28 am

Bogleheads:

Factor investors are having a difficult time. Small-cap value (factor) funds are heavily promoted by the fund industry as a way to increase portfolio returns. Nevertheless, small cap value funds have the worst 5-year returns of all Morningstar style categories.

Index Performance Return

Rob Arnott (Godfather of smart beta), and three other researchers, have written about their long-term study of "factors." You can read the study HERE. This is the Abstract:
Factor investing has failed to live up to its many promises. Its success is compromised by three problems that are often underappreciated by investors. First, many investors develop exaggerated expectations about factor performance as a result of data mining, crowding, unrealistic trading cost expectations, and other concerns. Second, for investors using naive risk management tools, factor returns can experience downside shocks far larger than would be expected. Finally, investors are often led to believe their factor portfolio is diversified. Diversification can vanish, however, in certain economic conditions, when factor returns become much more correlated. Factor investing is a powerful tool, but understanding the risks involved is essential before adopting this investment framework.
The Wisdom of Jack Bogle: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners."
The Three-Fund Portfolio

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

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Re: "Alice's Adventures in Factorland"

Post by willthrill81 » Thu Jun 27, 2019 11:38 am

But shouldn't we remember that, according to you, past performance is a terrible measure of strategy?
Taylor Larimore wrote:
Sun Jan 25, 2015 1:51 pm
American Association of Individual Investors: "Top Performance lists are dangerous."

Frank Armstrong, financial author: "Rating services such as Morningstar's 'Star Awards' or the 'Forbes Honor Roll' attest to the futility of applying past performance to tomorrow."

Arnott and Bernstein (2002, p. 64): “The investment management industry thrives on the expedient of forecasting the future by extrapolating the past."

Barra Research: "There is no persistence of equity fund performance."

Christine Benz, Morningstar Director of Personal Finance: "When we look at our data, at the factors that are most predictive of good performance going forward, low costs are a much better predictor than is great past performance."

Wm. Bernstein, author of The Four Pillars of Investing: "For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade."

Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."

Bogleheads' Guide to Investing: "Using past performance to pick tomorrow's winning mutual funds is such a bad idea that the government requires a statement similar to this: "Past performance is no guarantee of future performance." Believe it!"

Jack Brennan, former Vanguard CEO: "Fund ranking is meaningless when based primarily on past performance, as most are."

Burns Advisory tracked the performance of Morningstar's five-star rated stock funds beginning January 1, 1999. Of the 248 stock funds, just four still kept that rank after ten years.

Ben Carlson, author of A Wealth of Common Sense : "Dow Jones looked at nearly 2,900 active mutual funds. Only 2 funds in the top quartile stayed in the top quartile of performance over the next four 1-year periods."

Andrew Clarke, author: "By the time an investment reaches the top of the performance tables, there's a good chance that its run is over. The past is not prologue."

Jonathan Clements, author & former Wall Street Journal columnist: "Suppose you picked stock funds that ranked in their category's top 25% over the past five years. A regular updated study suggests that less than a quarter of these funds will remain in the top 25% over the next five years--even worse than the result you would expect based purely on chance."

Prof. John Cochrane, author: "Past performance has almost no information about future performance."

S.T.Coleridge: "History is a lantern over the stern. It shows where you've been but not where you're going"

Dow Jones Indices Report, June 2015: "The data shows a stronger likelihood for the best-performing funds to become the worst performing funds than vice versa." -- June 2016: "Only 3.7% of large-cap funds maintained top-half performance over five-consecutive 12-month periods. For midcap funds, the comparable figure was 5.79%, and for small-cap funds, it was 7.82%."

Charles D. Ellis, author of 16 financial books: "Sadly, investors who rely on performance records are relying on useless data."

Eugene Fama, Nobel Laureate: "Our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors."

Forbes (2/2/04 issue): "Over the past decade, Morningstar's five-star equity funds have earned an average 5.7% against a 10.3% return for the Wilshire 5000 (Total Stock Market)."

Gensler & Bear, co-authors of The Great Mutual Fund Trap: "Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998."

Ken Hebner's CGM Focus Fund was the top U.S. equity fund in 2007. In November 2009, it ranked in the bottom 1% of its category.

Mark Hulbert (12-31-2014): "Consider a hypothetical portfolio that each year followed the investment newsletter portfolio that, among the more than 500 tracked by The Hulbert Financial Digest, had the best record during the previous calendar year. Over the past 20 years, that portfolio would have been a disaster, producing an annualized loss of more than -17%."

Mark Hebner, President, Index Fund Advisors: "From 1998 through 2013 only about 8 funds remained in the top 100 the following year."

JPMorgan Chase claimed that 97% of their alternate-asset mutual funds beat their benchmark during the 10-year period ending December, 2013. Morningstar reported that only 33% beat their benchmark during the same period (past-performance calculations differ).

Arthur Levitt, SEC Commissioner: "A mutual fund's past performance, which is the first feature that investors consider when choosing a fund, doesn't predict future performance."

Peter Lynch's Fidelity Magellan Fund (FMAGX), once the world's largest and most successful mutual fund, is now (Feb. 9, 2018) in the bottom 11% of its category for 15-year annualized return

Burton Malkiel, author of the classic Random Walk Down Wall Street: "I have examined the lack of persistency in fund returns over periods from the 1960s through the early 2000s.--There is no persistency to good performance. It is as random as the market."

Mercer Investment Consulting from a study of over 12,000 institutional managers: "Excellent recent performance not only doesn't guarantee future results but generally leads to under-performance in the subsequent period."

Bill Miller, former manager of Legg Mason Value Trust (LMVTX), was the only manager to outperform The S&P 500 Index for 15 consecutive years. On 9/7/2016 Miller’s fund is in the bottom 1% for 15 year returns.

Mark Miller, financial author and journalist: "Only 7.33% of domestic equity funds that were in the top quartile of performance in March 2014 were still there two years later."

Morningstar: "Over the long term, there is no meaningful relationship between past and future fund performance."

Ron Ross, author of The Unbeatable Market: "Extensive studies by Davis, Brown & Groetzman, Ibbotson, Elton et al, all confirmed there is no significant persistence in mutual fund performance. -- Wall Street’s favorite scam is pretending that luck is skill.”

S&P Global: "There’s a stronger likelihood that a top performing fund will become one of the worst performers in a subsequent period than that it will stay a top performer."

Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."

Sequoia Fund was the top performing large-cap growth fund at the end of 2015 according to Morningstar. On 4/21/2017 it ranked in the bottom 1% for five year returns.

Standard & Poor's Persistence Scorecard (Dec-2014): "The data show a stronger likelihood for the best-performing funds to become the worst-performing funds than vice versa. Of 421 funds that were in the bottom quartile, 14.45% moved to the top quartile over the five year horizon, while 27.08% of the 421 funds that were in the top quartile moved into the bottom quartile during the same period."

Larry Swedroe, author of many finance books: "The 44 Wall Street Fund was the top performing fund over the decade of the 1970s. It ranked as the single worst performing fund of the 1980's losing 73%. -- If you are going to use past performance to predict the future winners, the evidence is strong that your approach is highly likely to fail."

David Swensen, Yale's Chief Investment Officer: "Chasing performance is the biggest mistake investors make. If anything, it is a perverse indicator."

Tweddell & Pierce, co-authors of Winning With Mutual Funds: "Numerous studies have shown that using superior past performance is no better than random selection."

Eric Tyson, author of Mutual Funds for Dummies (2010 edition): "Of the number one top-performing stock and bond funds in each of the last 20 years, a whopping 80% of them subsequently performed worse than the average fund in their peer group over the next 5 to 10 years! Some of these former #1 funds actually went on to become the worst-performing funds in their particular category."

Value Line selected Garret Van Wagoner "Mutual fund Manager of the Year" in 1999. In August 2009, Van Wagoner's Emerging Growth Fund was the worst performing U.S. stock fund over the past 10 years.

Vanguard Study: "Persistence of performance among past winners is no more predictable than a flip of a coin."

Jason Zweig, author and Wall Street Journal columnist: "Buying funds based purely on their past performance is one of the stupidest things an investor can do."
What experts say about other important topics

Best wishes.
Taylor
Further, examine the chart below. One of the portfolios is TSM, the other is the U.S. equity split according to Paul Merriman's Ultimate Buy-and-Hold portfolio. Does anyone care to say that either is a clear and obvious 'winner' or 'loser'?

Image
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "Alice's Adventures in Factorland"

Post by Kenkat » Thu Jun 27, 2019 11:52 am

Since 2000:

Total Stock Index: $10,000 becomes $28,785, 5.60% CAGR
Small Cap Value Index: $10,000 becomes $56,351, 9.31% CAGR

What does the future hold? That we do not know.

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Re: "Alice's Adventures in Factorland"

Post by willthrill81 » Thu Jun 27, 2019 11:55 am

Over the last five years, large-cap growth has significantly outperformed TSM. Perhaps LCG should replace TSM in the 3-fund portfolio? :?:
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "Alice's Adventures in Factorland"

Post by Random Walker » Thu Jun 27, 2019 12:10 pm

Kenkat wrote:
Thu Jun 27, 2019 11:52 am
Since 2000:

Total Stock Index: $10,000 becomes $28,785, 5.60% CAGR
Small Cap Value Index: $10,000 becomes $56,351, 9.31% CAGR

What does the future hold? That we do not know.
I think it is very important to point out that this result uses data that begins about 8 years after Fama French published their famous paper. It is effectively out of sample supportive data. I suppose it’s only fair to also appreciate this is after the big tech bubble crash too.

Dave

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Re: "Alice's Adventures in Factorland"

Post by Random Walker » Thu Jun 27, 2019 12:13 pm

Taylor Larimore wrote:
Thu Jun 27, 2019 11:28 am
Bogleheads:

Factor investors are having a difficult time. Small-cap value (factor) funds are heavily promoted by the fund industry as a way to increase portfolio returns. Nevertheless, small cap value funds have the worst 5-year returns of all Morningstar style categories.

Index Performance Return

Rob Arnott (Godfather of smart beta), and three other researchers, have written about their long-term study of "factors." You can read the study HERE. This is the Abstract:
Factor investing has failed to live up to its many promises. Its success is compromised by three problems that are often underappreciated by investors. First, many investors develop exaggerated expectations about factor performance as a result of data mining, crowding, unrealistic trading cost expectations, and other concerns. Second, for investors using naive risk management tools, factor returns can experience downside shocks far larger than would be expected. Finally, investors are often led to believe their factor portfolio is diversified. Diversification can vanish, however, in certain economic conditions, when factor returns become much more correlated. Factor investing is a powerful tool, but understanding the risks involved is essential before adopting this investment framework.
The Wisdom of Jack Bogle: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners."
The Three-Fund Portfolio

Best wishes.
Taylor
I only read the above abstract, not the paper. It seems though that the abstract is more pointing out problems with investor’s education, expectations, and understanding of how markets behave than the factors themselves.

Dave

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Re: "Alice's Adventures in Factorland"

Post by garlandwhizzer » Thu Jun 27, 2019 12:27 pm

Great post,Taylor. I believe the 3 things that Arnott points out are serious considerations regarding future expected factor returns.

Garland Whizzer

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Re: "Alice's Adventures in Factorland"

Post by nedsaid » Thu Jun 27, 2019 1:27 pm

Taylor Larimore wrote:
Thu Jun 27, 2019 11:28 am
Bogleheads:

Factor investors are having a difficult time. Small-cap value (factor) funds are heavily promoted by the fund industry as a way to increase portfolio returns. Nevertheless, small cap value funds have the worst 5-year returns of all Morningstar style categories.

Index Performance Return

Rob Arnott (Godfather of smart beta), and three other researchers, have written about their long-term study of "factors." You can read the study HERE. This is the Abstract:
Factor investing has failed to live up to its many promises. Its success is compromised by three problems that are often underappreciated by investors. First, many investors develop exaggerated expectations about factor performance as a result of data mining, crowding, unrealistic trading cost expectations, and other concerns. Second, for investors using naive risk management tools, factor returns can experience downside shocks far larger than would be expected. Finally, investors are often led to believe their factor portfolio is diversified. Diversification can vanish, however, in certain economic conditions, when factor returns become much more correlated. Factor investing is a powerful tool, but understanding the risks involved is essential before adopting this investment framework.
The Wisdom of Jack Bogle: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners."
The Three-Fund Portfolio

Best wishes.
Taylor
Taylor, the S&P 500 had negative returns through much of the 2000's, in fact the index was flat from 2000-2012. I am sure that the S&P 500 Indexes would have made the worst performance lists depending upon when you looked. The thing is, Bogleheads of all people, should know that these secular bear markets happen. We have had a few that I can think of: 1929-1946, 1968-1984, 2000-2012. Flat markets with bear markets in between.

So to say that Small/Value stinks because it trails other stock categories over 5 years is just silly, quite frankly, you ought to know better. The S&P 500 had a few really bad years during the 2000's, should I have concluded that index investing doesn't work? Should I have told people to sell their S&P 500 and Total Stock Market funds? Having International Stocks and tilts towards such things as REITs, Mid/Small-Cap, and Value was not such a bad idea. Value just crushed the S&P 500 from about 2000-2007.

Actually, I recently compared Large Value, Large Growth, Small Value, Small Growth with the S&P 500 using Vanguard indexes over a 10 year period, the time period since the 2008-2009 financial crisis. The S&P 500 underperformed all of them except for Large Value. Would I have said that the S&P 500 didn't "work" over that 10 year period? Did I ever advocate that people sell their S&P 500 funds?

I agree with another poster, Taylor acts like he has a big short on Small Value. He just cranks out post after post every time a factors thread pops up. I also have pointed out the Total Market and S&P 500 Indexes are top heavy with High Tech and Internet, these sectors have been driving the performance of the broad indexes. If Value starts outperforming the indexes again, should I chase Taylor all over the forum and tell him that indexing doesn't work anymore? This is just simply recency bias.

Taylor and his 3 fund portfolio actually has a sizable tilt towards High Tech/Internet just as it had in the late 1990's. He is tilted Large Growth, High Tech/Internet, and the FAANG stocks but won't admit to it. Pretty much High Tech/Internet/FAANG is the sole reason that factors don't "work" anymore.

Value has actually performed fairly well, it is that it hasn't performed as well as the broad S&P 500 and Total Market Indexes. Foggy memory recalls Value Index returned 14% a year compared to the S&P 500 returning 15% a year compared to 16% a year for the Growth Index over 10 years. These things happen, Value and Growth have taken turns leading the market.

I will stick to the advice I have always given here. Factor tilt if you believe in the Academic Research or use a simpler 3-4 fund Index strategy if you do not. Simple as that. I never have said that the 3 fund portfolio doesn't work and I have never said that it isn't a good portfolio. There are good reasons why some folks around here factor tilt. Also want to point out that it doesn't take complex portfolios to do so, I recently showed someone how to Small/Value tilt with 4 funds.

Arnott called factors a powerful tool but also warned investors to be aware of the risks. He also discussed in the short paragraph that in crisis correlations tend to go to 1. Factors would have helped a lot from 2000-2002 but didn't help in 2008-2009. Nothing works all the time and I have posted on these topics pretty extensively.
A fool and his money are good for business.

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Re: "Alice's Adventures in Factorland"

Post by chisey » Thu Jun 27, 2019 1:51 pm

nedsaid wrote:
Thu Jun 27, 2019 1:27 pm
So to say that Small/Value stinks because it trails other stock categories over 5 years is just silly, quite frankly, you ought to know better. The S&P 500 had a few really bad years during the 2000's, should I have concluded that index investing doesn't work? Should I have told people to sell their S&P 500 and Total Stock Market funds? Having International Stocks and tilts towards such things as REITs, Mid/Small-Cap, and Value was not such a bad idea. Value just crushed the S&P 500 from about 2000-2007.
No matter how many times he is called out for it violating his own mantra that past returns do not predict future returns, Taylor will continue to beat this drum until SCV outperforms again. Even then I imagine he is likely to keep cherry picking data to support his total market argument.

I think Taylor believes that the message is more important than the facts. And, for a certain target audience, that may be true.

I'll side with the facts, though I don't begrudge Taylor his reminders about simplicity.

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Re: "Alice's Adventures in Factorland"

Post by willthrill81 » Thu Jun 27, 2019 1:53 pm

chisey wrote:
Thu Jun 27, 2019 1:51 pm
nedsaid wrote:
Thu Jun 27, 2019 1:27 pm
So to say that Small/Value stinks because it trails other stock categories over 5 years is just silly, quite frankly, you ought to know better. The S&P 500 had a few really bad years during the 2000's, should I have concluded that index investing doesn't work? Should I have told people to sell their S&P 500 and Total Stock Market funds? Having International Stocks and tilts towards such things as REITs, Mid/Small-Cap, and Value was not such a bad idea. Value just crushed the S&P 500 from about 2000-2007.
No matter how many times he is called out for it violating his own mantra that past returns do not predict future returns, Taylor will continue to beat this drum until SCV outperforms again. Even then I imagine he is likely to keep cherry picking data to support his total market argument.
When someone points out that LCG is beating TSM, for instance, he says that past performance is bogus. But when recent past performance favors TSM, he is quick to point that out. It's classic confirmation bias.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "Alice's Adventures in Factorland"

Post by Dialectical Investor » Thu Jun 27, 2019 1:56 pm

Taylor Larimore wrote:
Thu Jun 27, 2019 11:28 am
Bogleheads:

Factor investors are having a difficult time. Small-cap value (factor) funds are heavily promoted by the fund industry as a way to increase portfolio returns. Nevertheless, small cap value funds have the worst 5-year returns of all Morningstar style categories.

Index Performance Return

Rob Arnott (Godfather of smart beta), and three other researchers, have written about their long-term study of "factors." You can read the study HERE. This is the Abstract:
Factor investing has failed to live up to its many promises. Its success is compromised by three problems that are often underappreciated by investors. First, many investors develop exaggerated expectations about factor performance as a result of data mining, crowding, unrealistic trading cost expectations, and other concerns. Second, for investors using naive risk management tools, factor returns can experience downside shocks far larger than would be expected. Finally, investors are often led to believe their factor portfolio is diversified. Diversification can vanish, however, in certain economic conditions, when factor returns become much more correlated. Factor investing is a powerful tool, but understanding the risks involved is essential before adopting this investment framework.
The Wisdom of Jack Bogle: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners."
The Three-Fund Portfolio

Best wishes.
Taylor
Given equal bond allocations, a US-only factor investor who holds a fund such as Vanguard Small-Cap Value or iShares S&P Small-Cap 600 Value, two common holdings around here, is currently outperforming an investor who uses the Three-Fund Portfolio and utilizes your recommended 20% allocation to international stocks. That is, over the past 5 years, a time-frame which you frequently cite as of late. I take it that you think this, too, should inform investors' portfolio allocations, and that you recommend changing the international stock allocation to zero, since Three-Fund Portfolio investors are having a difficult time?

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Re: "Alice's Adventures in Factorland"

Post by Kenkat » Thu Jun 27, 2019 1:58 pm

Random Walker wrote:
Thu Jun 27, 2019 12:10 pm
Kenkat wrote:
Thu Jun 27, 2019 11:52 am
Since 2000:

Total Stock Index: $10,000 becomes $28,785, 5.60% CAGR
Small Cap Value Index: $10,000 becomes $56,351, 9.31% CAGR

What does the future hold? That we do not know.
I think it is very important to point out that this result uses data that begins about 8 years after Fama French published their famous paper. It is effectively out of sample supportive data. I suppose it’s only fair to also appreciate this is after the big tech bubble crash too.

Dave
Yes, agree. My point was only that you can pick a time period that can tell the story good or bad however you would like to, not to illustrate that one strategy is superior to the other under all circumstances.

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Re: "Alice's Adventures in Factorland"

Post by David Althaus » Thu Jun 27, 2019 2:55 pm

As stated here no one can predict the future. If you invest in SCV I'd ask myself some questions:

1. Since its past performance is pretty common knowledge has the premium been arbitraged away? If not arbitraged away am I willing to accept the higher risk associated with higher returns?
2. Will I get in at the correct time? If I do should I attribute it to skill or luck? If I get in at the incorrect time how will I feel about the underperformance? If I'm willing to stay the course WILL I stay the course?
3. Do I have enough birthdays remaining for this sector bet to play out so I can enjoy the extra return should they materialize?

At 72 I am content in the knowledge that with the three fund portfolio each year (at selected asset allocation) I will outperform about 70% of money managers, about 90% every five years, and about 95% every ten years. What's to not like about that?

All the best

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Re: "Alice's Adventures in Factorland"

Post by Carol88888 » Thu Jun 27, 2019 3:07 pm

Isn't the risk with factors the fact that some investors will not be able to tolerate the divergence from the broad indexes and sell out before the chosen factor has a chance to do well?

Often there's a change in style after a bear market hits and the previous winners are supplanted by another sector/factor. Since I don't know when that will come or what factor will be best, I can just choose a broad index.

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Re: "Alice's Adventures in Factorland"

Post by willthrill81 » Thu Jun 27, 2019 3:56 pm

David Althaus wrote:
Thu Jun 27, 2019 2:55 pm
As stated here no one can predict the future. If you invest in SCV I'd ask myself some questions:

1. Since its past performance is pretty common knowledge has the premium been arbitraged away? If not arbitraged away am I willing to accept the higher risk associated with higher returns?
No one knows one way or the other. Yet data have already been provided that since publication of the SCV premium, it has continued to exist.
David Althaus wrote:
Thu Jun 27, 2019 2:55 pm
2. Will I get in at the correct time? If I do should I attribute it to skill or luck? If I get in at the incorrect time how will I feel about the underperformance? If I'm willing to stay the course WILL I stay the course?
There's a lot going on there, but if you aren't committed to sticking with a factor(s) underperforming the market for at least a decade, then you shouldn't go in for them.
David Althaus wrote:
Thu Jun 27, 2019 2:55 pm
3. Do I have enough birthdays remaining for this sector bet to play out so I can enjoy the extra return should they materialize?
To be clear, factors are not the same as sectors.

No one knows if/when factor premia will materialize nor how long you will live.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "Alice's Adventures in Factorland"

Post by Robert T » Thu Jun 27, 2019 4:44 pm

.
The paper makes some good points.

It uses "out of sample" data from July 2003 to June 2018 (15 years) to show the diminished premiums over this period.

Looks okay to me:

July 2003 to June 2018: Annualized return / SD

..9.2 / 15.0 = 50:37:13 Vanguard TSM: Developed Mkt: EM
11.6 / 18.2 = 50:37:13 DFA US Small Value:International Small Value: Emerging Markets Value
10.8 / 14.9 = 42:31:11:16 DFA US Small Value:International Small Value: Emerging Markets Value: Vanguard Intermediate Treasury

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

Obviously no guarantees.

Robert
.

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Re: "Alice's Adventures in Factorland"

Post by nedsaid » Thu Jun 27, 2019 5:31 pm

chisey wrote:
Thu Jun 27, 2019 1:51 pm
nedsaid wrote:
Thu Jun 27, 2019 1:27 pm
So to say that Small/Value stinks because it trails other stock categories over 5 years is just silly, quite frankly, you ought to know better. The S&P 500 had a few really bad years during the 2000's, should I have concluded that index investing doesn't work? Should I have told people to sell their S&P 500 and Total Stock Market funds? Having International Stocks and tilts towards such things as REITs, Mid/Small-Cap, and Value was not such a bad idea. Value just crushed the S&P 500 from about 2000-2007.
No matter how many times he is called out for it violating his own mantra that past returns do not predict future returns, Taylor will continue to beat this drum until SCV outperforms again. Even then I imagine he is likely to keep cherry picking data to support his total market argument.

I think Taylor believes that the message is more important than the facts. And, for a certain target audience, that may be true.

I'll side with the facts, though I don't begrudge Taylor his reminders about simplicity.
The 3 fund portfolio is a perfectly fine portfolio. Folks need to realize that the Total Stock Market Index fund has just over 50% of its market weight in just 100 stocks. Total Stock Market is a perfectly fine investment but in reality it is a Mega-Cap Growth fund. I just believe that diversifying across factors makes a lot of sense. If we get into an extended period where Value outperforms Total Stock Market, I won't be out there saying that indexing doesn't work. Growth and Value take turns outperforming each other though the research says over long time periods that Value wins out. No guarantees obviously.
A fool and his money are good for business.

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Re: "Alice's Adventures in Factorland"

Post by Longtermgrowth » Thu Jun 27, 2019 5:48 pm

Maybe this is a buy signal for US small value :wink:

Can't kick international small value comparing to international large though, right? If Alice is diversified globally, she'll be just fine.

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Re: "Alice's Adventures in Factorland"

Post by larryswedroe » Thu Jun 27, 2019 5:51 pm

For those interested here's my review and thoughts on that paper
https://alphaarchitect.com/2019/04/16/t ... investing/
Best wishes
Larry

Helot
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Re: "Alice's Adventures in Factorland"

Post by Helot » Thu Jun 27, 2019 6:48 pm

David Althaus wrote:
Thu Jun 27, 2019 2:55 pm
3. Do I have enough birthdays remaining for this sector bet to play out so I can enjoy the extra return should they materialize?
This is the statement that perplexes me the most. Wouldn’t a multifactor portfolio provide exactly the type of equity diversification most required by those with short investment horizons? Neither an insult nor a jab, but an honest question that I always ponder when I consider the portfolios of my most elder family members.

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Re: "Alice's Adventures in Factorland"

Post by petulant » Thu Jun 27, 2019 6:58 pm

Helot wrote:
Thu Jun 27, 2019 6:48 pm
David Althaus wrote:
Thu Jun 27, 2019 2:55 pm
3. Do I have enough birthdays remaining for this sector bet to play out so I can enjoy the extra return should they materialize?
This is the statement that perplexes me the most. Wouldn’t a multifactor portfolio provide exactly the type of equity diversification most required by those with short investment horizons? Neither an insult nor a jab, but an honest question that I always ponder when I consider the portfolios of my most elder family members.
Not if correlations are typically high and significant outperformance only shows up for 5-year periods once every 30 years.

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Re: "Alice's Adventures in Factorland"

Post by Random Walker » Thu Jun 27, 2019 7:34 pm

Helot wrote:
Thu Jun 27, 2019 6:48 pm
David Althaus wrote:
Thu Jun 27, 2019 2:55 pm
3. Do I have enough birthdays remaining for this sector bet to play out so I can enjoy the extra return should they materialize?
This is the statement that perplexes me the most. Wouldn’t a multifactor portfolio provide exactly the type of equity diversification most required by those with short investment horizons? Neither an insult nor a jab, but an honest question that I always ponder when I consider the portfolios of my most elder family members.
Exactly!!! When one’s time frame is short and no one knows which factors will perform well or poorly over any given time frame, is just the situation where diversifying across factors is perhaps most valuable. Diversification across sources of risk/return lessens sequence of return risk.

Dave

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Re: "Alice's Adventures in Factorland"

Post by asset_chaos » Thu Jun 27, 2019 7:56 pm

factor returns can experience downside shocks far larger than would be expected.
Doing worse in bad times. In a nutshell, that's the risk and why there're factor risk premia in the first place. If people don't understand that, then, yes, they've invested in something they don't understand and further don't understand if they're particularly exposed to or insulated from the extra risk that makes the factor. Investing in something you don't understand is always a prescription for a heightened probability of a bad outcome.
Regards, | | Guy

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Re: "Alice's Adventures in Factorland"

Post by Helot » Thu Jun 27, 2019 8:09 pm

Random Walker wrote:
Thu Jun 27, 2019 7:34 pm
Helot wrote:
Thu Jun 27, 2019 6:48 pm
David Althaus wrote:
Thu Jun 27, 2019 2:55 pm
3. Do I have enough birthdays remaining for this sector bet to play out so I can enjoy the extra return should they materialize?
This is the statement that perplexes me the most. Wouldn’t a multifactor portfolio provide exactly the type of equity diversification most required by those with short investment horizons? Neither an insult nor a jab, but an honest question that I always ponder when I consider the portfolios of my most elder family members.
Exactly!!! When one’s time frame is short and no one knows which factors will perform well or poorly over any given time frame, is just the situation where diversifying across factors is perhaps most valuable. Diversification across sources of risk/return lessens sequence of return risk.

Dave
This is exactly what I believe. I think it’s one of the strongest arguments for factor diversification especially as we age. Thanks for putting it so well! It’s what is forefront in my mind everytime I see the Callan Periodic Table of Returns:

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Re: "Alice's Adventures in Factorland"

Post by Fallible » Thu Jun 27, 2019 8:26 pm

So, after reading the "Alice's Adventures" Abstract (and Larry's Summary), it very much gets back to investors’ worst enemy: themselves. And that’s why a great concern about alternative investing is whether investors truly understand both risk and their abilities - in terms of valuable time, patience, and emotional control - to handle it. Since they often don't, myself included, there is Jack Bogle's "ultimate strategy for winners" - simply owning the market and holding it forever.

Thanks to Taylor for posting the "Adventures." :beer :moneybag
The first principle is that you must not fool yourself – and you are the easiest person to fool. ~Richard Feynman

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The Callan Periodic Table of Returns

Post by Taylor Larimore » Thu Jun 27, 2019 11:19 pm

helot:

Thank you for posting the Callan Periodic Table of Returns. To me, the Callan Table clearly shows that it makes more sense to simply own the TOTAL market than to try and guess which factor will be the best performer (risk and return) in the future.

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Best wishes.
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Re: "Alice's Adventures in Factorland"

Post by DecumulatorDoc » Fri Jun 28, 2019 6:27 am

Taylor Larimore wrote:
Thu Jun 27, 2019 11:28 am
Bogleheads:

Factor investors are having a difficult time. Small-cap value (factor) funds are heavily promoted by the fund industry as a way to increase portfolio returns. Nevertheless, small cap value funds have the worst 5-year returns of all Morningstar style categories.

Index Performance Return

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

Best wishes.
Taylor
Taylor, I would have to ask you, "What is a Boglehead?" You and I must have two very different definitions, based on your constant deprecation of those who have chosen to tilt to small cap value.

In the Introduction to this website, the very first line is: "Bogleheads® emphasize regular saving, broad diversification, and sticking to one's investment plan regardless of market conditions."

I have learned so much from this website over the last 10 years. I have read the recommended books and thousands of posts. I have been inspired by the leaders of this forum: you, Rick, Larry among many others. 10 years ago, after much study, my allocation based on what I've read and what I felt was right for me, included a modest tilt of 25% of US equities to SCV. This was a widely discussed and advocated investment theory on the Boglehead forum at that time. The reasons seemed convincing and justified and I chose to utilize it in my portfolio. I also realized the caveat of this investment style was that it was a lifelong committment.

I have had no problem staying the course over the last decade. But I have to admit that the constant badgering in your posts over the last few months, about the short term underperformance of SCV do not live up to my expectations of a Boglehead leader. Please allow us to continue our committment to our chosen path...allow us to be Bogleheads.

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Re: "Alice's Adventures in Factorland"

Post by larryswedroe » Fri Jun 28, 2019 7:32 am

Not if correlations are typically high and significant outperformance only shows up for 5-year periods once every 30 years.
And "it simply makes sense to own total market."

Here's a game of outfox the box that helps one think about this problem

So you have five boxes, each box has about the same expected Sharpe ratio, risk adjusted return. You don't know what's in boxes A, B, C, and D except that they have the same risk adjusted returns. And they all have the about same odds of having negative returns over the next 5, or 10 or 20 years. Do you gamble on picking one box, or outfox the box and refuse to choose, instead diversify across all the boxes?

When we don't know the future the logical decision is diversification, it's an admission we don't know. BTW, the same applies to the US vs diversify globally decision. Those who diversify globally admit they don't know. They want to minimize the risk of having all their eggs in the one basket that might do very poorly for the next few decades even.

Those who think about the short horizon risk have it exactly backwards as the shorter the horizon the greater the variance in returns of the various boxes. You want to minimize the variance as it minimizes the risk of your owning the really poor performing one. Especially when sequence risk matters.

As I have shown there are three 13 years or longer periods when S&P underperformed totally riskless tbills and even inflation. And don't believe that is the case for value stocks. And note they all came after high valuations (which we have today).

Best wishes
Larry
Last edited by larryswedroe on Fri Jun 28, 2019 7:55 am, edited 1 time in total.

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Re: "Alice's Adventures in Factorland"

Post by larryswedroe » Fri Jun 28, 2019 7:40 am

Decumulator
Couple of thoughts to help you.

First, if memory serves Rick Ferri himself had in his portfolios a tilt like you to SV and used the DFA fund.

Second, I continue to point out because while Taylor likes to point out that in US SV has underperformed in last 10 years, he and others ignore the fact that it has outperformed internationally! Why don't they show ALL the facts.

So during one of the worst periods ever for a value tilt, there was almost no harm for a globally diversified portfolio. Last 10 years DISVX outperformed VTMGX by 1.1% and over last 15 it's 1.7%. And in EM value underperformance (DFEVX vs VEIEX) has been all of 0.1% but over last 15 it outperformed by 1.4%.

Hope that helps you stay the course
Larry

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Re: "Alice's Adventures in Factorland"

Post by DecumulatorDoc » Fri Jun 28, 2019 8:25 am

larryswedroe wrote:
Fri Jun 28, 2019 7:40 am
Decumulator
Couple of thoughts to help you.

First, if memory serves Rick Ferri himself had in his portfolios a tilt like you to SV and used the DFA fund.

Second, I continue to point out because while Taylor likes to point out that in US SV has underperformed in last 10 years, he and others ignore the fact that it has outperformed internationally! Why don't they show ALL the facts.

So during one of the worst periods ever for a value tilt, there was almost no harm for a globally diversified portfolio. Last 10 years DISVX outperformed VTMGX by 1.1% and over last 15 it's 1.7%. And in EM value underperformance (DFEVX vs VEIEX) has been all of 0.1% but over last 15 it outperformed by 1.4%.

Hope that helps you stay the course
Larry
Larry, thank you for taking the time to respond. Your leadership is respected by so many.

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Re: The Callan Periodic Table of Returns

Post by rascott » Fri Jun 28, 2019 8:35 am

Taylor Larimore wrote:
Thu Jun 27, 2019 11:19 pm
helot:

Thank you for posting the Callan Periodic Table of Returns. To me, the Callan Table clearly shows that it makes more sense to simply own the TOTAL market than to try and guess which factor will be the best performer (risk and return) in the future.

Image
The Wisdom of Jack Bogle: Don't look for the needle. Buy the haystack.
Best wishes.
Taylor

That's a great table and actually reinforces my belief in owning as many of those asset classes as possible....rather than dumping it all in the dark blue box like what occurs when one buys the cap weighted TSMI.

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Re: "Alice's Adventures in Factorland"

Post by Random Walker » Fri Jun 28, 2019 9:00 am

It would be super interesting to see a version of the Callan table looking specifically at the factors, styles, and alternatives.

Dave

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Re: "Alice's Adventures in Factorland"

Post by bertilak » Fri Jun 28, 2019 9:31 am

willthrill81 wrote:
Thu Jun 27, 2019 11:38 am
But shouldn't we remember that, according to you, past performance is a terrible measure of strategy?
Sometimes the reason for pointing out past performance is to show what was the then-unknown future when many investment strategies were originally proposed. If they didn't live up to their promises then will they do so now? It makes one question those strategies.

Total Stock Market (TSM) indexing is not a strategy for beating the market, it is the market -- the thing all the strategies are trying to beat. They do beat TSM occasionally, but not consistently nor reliably. Past performance can be a perfectly good measure of a strategy's success if not a predictor of the market's future. It is this predictive aspect that is bogus ("terrible?") not the measurement aspect. It is instructive to see how well an investment strategy "measured up" to its promise.

That's what I get from Taylor's posts.
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Re: "Alice's Adventures in Factorland"

Post by willthrill81 » Fri Jun 28, 2019 9:34 am

bertilak wrote:
Fri Jun 28, 2019 9:31 am
willthrill81 wrote:
Thu Jun 27, 2019 11:38 am
But shouldn't we remember that, according to you, past performance is a terrible measure of strategy?
Sometimes the reason for pointing out past performance is to show what was the then-unknown future when many investment strategies were originally proposed. If they didn't live up to their promises then will they do so now? It makes one question those strategies.
But, as noted above, since the Fama-French study, SCV has beaten TSM resoundedly.

I'm sorry, but Taylor's posts are clear evidence of confirmation bias. When the 3-fund is beating a factor-tilted portfolio, he comments on the past performance. But when the inverse is true, he says that past performance should not be referenced. This has been pointed out by many posters.
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Re: "Alice's Adventures in Factorland"

Post by DaufuskieNate » Fri Jun 28, 2019 9:42 am

bertilak wrote:
Fri Jun 28, 2019 9:31 am
Total Stock Market (TSM) indexing is not a strategy for beating the market, it is the market -- the thing all the strategies are trying to beat.
Personally, I'm not trying to beat TSM in my portfolio strategy. I'm trying to earn a return that meets my personal long term needs with a risk level that allows me to stay the course. TSM is just one possible fund that can be considered in trying to meet these goals. The strategy that makes sense to me is to include multiple potential sources of return in my portfolio. The overall return of the portfolio is the only thing that matters to me. Why should I care how my portfolio return compares to one particular U.S. equity fund? TSM certainly does not represent anything close to the full range of portfolio options available, so from my perspective it is not "the market" and is not something I am trying to beat.

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Re: "Alice's Adventures in Factorland"

Post by WhyNotUs » Fri Jun 28, 2019 9:43 am

nedsaid wrote:
Thu Jun 27, 2019 1:27 pm

I will stick to the advice I have always given here. Factor tilt if you believe in the Academic Research or use a simpler 3-4 fund Index strategy if you do not. Simple as that. I never have said that the 3 fund portfolio doesn't work and I have never said that it isn't a good portfolio. There are good reasons why some folks around here factor tilt. Also want to point out that it doesn't take complex portfolios to do so, I recently showed someone how to Small/Value tilt with 4 funds.
This seems like a very succinct statement of countless lines of past text, well said Nedsaid.
I own the next hot stock- VTSAX

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Re: "Alice's Adventures in Factorland"

Post by stan1 » Fri Jun 28, 2019 10:03 am

nedsaid wrote:
Thu Jun 27, 2019 1:27 pm
I will stick to the advice I have always given here. Factor tilt if you believe in the Academic Research or use a simpler 3-4 fund Index strategy if you do not. Simple as that. I never have said that the 3 fund portfolio doesn't work and I have never said that it isn't a good portfolio. There are good reasons why some folks around here factor tilt. Also want to point out that it doesn't take complex portfolios to do so, I recently showed someone how to Small/Value tilt with 4 funds.
And we've even had some consistency on domestic SCV implementation. I didn't randomly buy an S&P 600 Value indexed ETF (IJS) back in 2008 and since then more VIOV for a lower expense ratio. I read this website, the Altruist website back when it was maintained, books, etc. Eleven years later the S&P Value Index is still viewed as a low cost way to get value, size and light quality/profitability screens.

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Re: "Alice's Adventures in Factorland"

Post by bertilak » Fri Jun 28, 2019 10:04 am

willthrill81 wrote:
Fri Jun 28, 2019 9:34 am
bertilak wrote:
Fri Jun 28, 2019 9:31 am
willthrill81 wrote:
Thu Jun 27, 2019 11:38 am
But shouldn't we remember that, according to you, past performance is a terrible measure of strategy?
Sometimes the reason for pointing out past performance is to show what was the then-unknown future when many investment strategies were originally proposed. If they didn't live up to their promises then will they do so now? It makes one question those strategies.

But, as noted above, since the Fama-French study, SCV has beaten TSM resoundedly.
I guess "resoundedly" is in the eye of the beholder: Morningstar chart (VISVX=SCV VTSAX=TSM).

Both have done quite well, but sliding the starting point of the chart can be instructive. More recent performance has favored TSM.
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Re: "Alice's Adventures in Factorland"

Post by aristotelian » Fri Jun 28, 2019 10:08 am

Taylor Larimore wrote:
Thu Jun 27, 2019 11:28 am
Bogleheads:

Factor investors are having a difficult time. Small-cap value (factor) funds are heavily promoted by the fund industry as a way to increase portfolio returns. Nevertheless, small cap value funds have the worst 5-year returns of all Morningstar style categories.
It can't be true that all factor investors are underperforming. Within the total stock market, if any factors are underperforming that must mean that other factors are overperforming. The factor investors are just choosing the wrong factors.

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Re: "Alice's Adventures in Factorland"

Post by bertilak » Fri Jun 28, 2019 10:16 am

aristotelian wrote:
Fri Jun 28, 2019 10:08 am
It can't be true that all factor investors are underperforming. Within the total stock market, if any factors are underperforming that must mean that other factors are overperforming. The factor investors are just choosing the wrong factors.
Ah! Is picking the right factors easier than picking the right stocks? Does timing matter?

"Too much monkey business for me to be involved in." (So says Chuck Berry.)
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Re: "Alice's Adventures in Factorland"

Post by willthrill81 » Fri Jun 28, 2019 10:16 am

bertilak wrote:
Fri Jun 28, 2019 10:04 am
willthrill81 wrote:
Fri Jun 28, 2019 9:34 am
bertilak wrote:
Fri Jun 28, 2019 9:31 am
willthrill81 wrote:
Thu Jun 27, 2019 11:38 am
But shouldn't we remember that, according to you, past performance is a terrible measure of strategy?
Sometimes the reason for pointing out past performance is to show what was the then-unknown future when many investment strategies were originally proposed. If they didn't live up to their promises then will they do so now? It makes one question those strategies.

But, as noted above, since the Fama-French study, SCV has beaten TSM resoundedly.
I guess "resoundedly" is in the eye of the beholder: Morningstar chart (VISVX=SCV VTSAX=TSM).

Both have done quite well, but sliding the starting point of the chart can be instructive. More recent performance has favored TSM.
From Jan., 1999, through May, 2019, all available data in Portfolio Visualizer, VISVX has beaten VTSMX by 2.59% annually. That's qualifies as 'resoundingly' in my book.

If we start paying attention to "recent performance," then we should have been telling people to buy gold in 2009 since it beat TSM hands down during the prior decade, not just the prior five years.
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Re: "Alice's Adventures in Factorland"

Post by Helot » Fri Jun 28, 2019 10:17 am

stan1 wrote:
Fri Jun 28, 2019 10:03 am
I read this website, the Altruist website back when it was maintained, books, etc.
As an aside, I believe the Altruist website is still current with recommendations regarding funds.

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Re: "Alice's Adventures in Factorland"

Post by nisiprius » Fri Jun 28, 2019 1:20 pm

DecumulatorDoc wrote:
Fri Jun 28, 2019 6:27 am
...Taylor, I would have to ask you, "What is a Boglehead?"...
John C. Bogle is on record with regard to tilts, in his essay, The Telltale Chart. You can disagree with Bogle about this--many people in the forum do--but it is pretty clear what Bogle's opinion was. He wrote:
Like Dr. Fama, I believe that the market portfolio is the most sensible decision.
Now, there are layers here. Is the market portfolio the most sensible decision? It can be debated. Is this an accurate statement of Dr. Fama's opinion? It can be debated. Is this consistent with Bogle's preference for a low or zero international stock allocation? It can be debated.

But did John C. Bogle believe that "the market portfolio is the most sensible decision?"

He said so.

Furthermore, he explicitly argued against small-cap tilts and value tilts.

In this essay, the takes up "1. Large-Cap Stocks vs. Small-Cap Stocks" and then considers "2. Value Stocks vs. Growth Stocks." In both cases, his opinion is that any differences between them are short-term and likely to be erased by "reversion to the mean."

In section 5, he considers factor investing (as known at the time), under the name "slice and dice:
...the idea is to garner excess returns by holding a portfolio that a) adds to the market portfolio those asset classes that are deemed likely to deliver superior returns; b) introduces assets having a low correlation with the stock market; and c) periodically rebalances each asset class to its original weight.

Let's quickly examine two such portfolios. First, a conventional one, one-quarter each in the S&P 500 Index, large value stocks, small value stocks, and stocks in the smallest two deciles—i.e. a portfolio that overweights value and small-cap shares.
This, too, he finds unconvincing.

We are free to ignore Bogle's opinions or say "Bogle was wrong about that," but we should try to be accurate about what his opinions were, and he was clearly a champion of total market indexing, and deeply skeptical of small and value tilting.

(Yes, I do know that the Vanguard Value Index fund was introduced on his watch, and that Morningstar puts the Wellington Fund, in which Bogle personally had a large holding, into the large value style box.)
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Re: "Alice's Adventures in Factorland"

Post by rascott » Fri Jun 28, 2019 1:36 pm

willthrill81 wrote:
Fri Jun 28, 2019 10:16 am
bertilak wrote:
Fri Jun 28, 2019 10:04 am
willthrill81 wrote:
Fri Jun 28, 2019 9:34 am
bertilak wrote:
Fri Jun 28, 2019 9:31 am
willthrill81 wrote:
Thu Jun 27, 2019 11:38 am
But shouldn't we remember that, according to you, past performance is a terrible measure of strategy?
Sometimes the reason for pointing out past performance is to show what was the then-unknown future when many investment strategies were originally proposed. If they didn't live up to their promises then will they do so now? It makes one question those strategies.

But, as noted above, since the Fama-French study, SCV has beaten TSM resoundedly.
I guess "resoundedly" is in the eye of the beholder: Morningstar chart (VISVX=SCV VTSAX=TSM).

Both have done quite well, but sliding the starting point of the chart can be instructive. More recent performance has favored TSM.
From Jan., 1999, through May, 2019, all available data in Portfolio Visualizer, VISVX has beaten VTSMX by 2.59% annually. That's qualifies as 'resoundingly' in my book.

If we start paying attention to "recent performance," then we should have been telling people to buy gold in 2009 since it beat TSM hands down during the prior decade, not just the prior five years.
$100k in a SCV index in Aug 2000 (when IJS started) would be worth about $461k today.

Or you could have $321k in the TSMI.

I'd say that is pretty resounding.... over nearly 2 decades.


As you noted, this was years after Fama/French was published. The same 2% or so premium that was found going back to the 1920s.

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Past Performance?

Post by Taylor Larimore » Fri Jun 28, 2019 2:03 pm

willthrill81 wrote:I'm sorry, but Taylor's posts are clear evidence of confirmation bias. When the 3-fund is beating a factor-tilted portfolio, he comments on the past performance. But when the inverse is true, he says that past performance should not be referenced.
willthrill81:

You completely misunderstand my posts about the current under-performance of factor-tilted portfolios.

I learned long-ago not to use past-performance for selecting funds. I have written countless posts stressing the futility of using past performance. This is the primary reason I post the under-performance of factor funds which are based primarily on past performance.

One of the most important advantages of total market index funds is that they never have below-average returns but are guaranteed to beat most investors.
Jack Bogle's Words of Wisdom: My judgment and my long experience have persuaded me that complex investment strategies are, finally, doomed to failure.
Best wishes.
Taylor
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Re: Past Performance?

Post by willthrill81 » Fri Jun 28, 2019 2:06 pm

Taylor Larimore wrote:
Fri Jun 28, 2019 2:03 pm
willthrill81 wrote:I'm sorry, but Taylor's posts are clear evidence of confirmation bias. When the 3-fund is beating a factor-tilted portfolio, he comments on the past performance. But when the inverse is true, he says that past performance should not be referenced.
willthrill81:

You completely misunderstand my posts about the current under-performance of factor-tilted portfolios.

I learned long-ago not to use past-performance for selecting funds. I have written countless posts stressing the futility of using past performance. This is the primary reason I post the under-performance of factor funds which are based primarily on past performance.
Then why do you regularly post the past performance of the 3-fund portfolio compared to several other portfolios?
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Re: "Alice's Adventures in Factorland"

Post by larryswedroe » Fri Jun 28, 2019 2:11 pm

Rascott
To reiterate my point that most keep forgetting about international markets and 9/1999 -5/19 DISVX outperformed Vanguard developed markets fund by 4.5% a year--20 years, And outperformed over last 10 and 15 as well (though underperformed recently) I would say that too is resounding. yet persistently ignored


And adding EM, 4/98-5/19 DFEVX outperformed VEIEX by 2.9% a year. Resounding again

Patience and discipline required whatever your strategy
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Re: Past Performance?

Post by vineviz » Fri Jun 28, 2019 2:36 pm

Taylor Larimore wrote:
Fri Jun 28, 2019 2:03 pm
willthrill81 wrote:I'm sorry, but Taylor's posts are clear evidence of confirmation bias. When the 3-fund is beating a factor-tilted portfolio, he comments on the past performance. But when the inverse is true, he says that past performance should not be referenced.
willthrill81:

You completely misunderstand my posts about the current under-performance of factor-tilted portfolios.

I learned long-ago not to use past-performance for selecting funds. I have written countless posts stressing the futility of using past performance. This is the primary reason I post the under-performance of factor funds which are based primarily on past performance.
Taylor,

With all due respect, I don't think willthrill81 misunderstood anything. There is an incredibly powerful inconsistency at play here.

The notion that past performance is not a valid reason for selecting some funds but is a valid reason for selecting other funds is transparently incongruent.

Whatever reason people might have for buying small cap value funds (or international funds, for that matter), I feel quite confident it is NOT because of 1, 3, or 5 year track records. So it seems to me (and maybe others) that primary outcome of repetitively bringing up the YTD or trailing one-year performance of these funds is to encourage people who already own them to abandon the course of their long-term investment plans.

If that's the goal, it doesn't seem very Boglehead-like. And if that's NOT the goal, then I hope you'll take a break to evaluate the actual (as opposed to intended) effect of your posts.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: "Alice's Adventures in Factorland"

Post by Fallible » Fri Jun 28, 2019 2:49 pm

There is good debate on this thread, but IMO, too often it is turning personal. Thus, a reminder that good debate is about the merits of an issue, about challenging an opponent's facts and logic, and not an opponent personally (such as supposed ulterior motives and cognitive states).

I hope this is not OT because I feel it is an important reminder.
The first principle is that you must not fool yourself – and you are the easiest person to fool. ~Richard Feynman

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Taylor Larimore
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Re: "Alice's Adventures in Factorland"

Post by Taylor Larimore » Fri Jun 28, 2019 3:42 pm

Fallible wrote:
Fri Jun 28, 2019 2:49 pm
There is good debate on this thread, but IMO, too often it is turning personal. Thus, a reminder that good debate is about the merits of an issue, about challenging an opponent's facts and logic, and not an opponent personally (such as supposed ulterior motives and cognitive states).

I hope this is not OT because I feel it is an important reminder.
Fallible:

Thank you for your important post.

I do have an ulterior motive: It is to perpetuate "The Wisdom of Jack Bogle."

Mr. Bogle recommended total market index funds for most investors. My 69 years investing convinces me that he was right.

I hope that my posts and my book recommending total market index funds (which most of the industry hates) will help both new and experienced investors.

Thank you, Jack!

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

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