TomCat96 wrote: ↑
Fri Aug 23, 2019 4:54 pm
willthrill81 wrote: ↑
Fri Aug 23, 2019 3:34 pm
I think that I might finally be wrapping my head around the source of many of the ongoing debates about various issues on this forum, including 'best diversifiers', 'TSM vs. factors', etc. I believe that investors' underlying goal may explain a lot of this and be useful for understanding both our own investing behavior and others'.
Much of one's investing preferences seems to come down to whether someone is content with 'good enough' or wants to 'optimize'.
I come from a school of practicality. While I can be highly theoretical, such theories were generalizations of my experiences. Those generalizations have given me an intuition for what is "good enough" concerning diversification.
I think people on this website argue the market, and the efficiency of it, but purely from an academic standpoint. It becomes a game of trading hits from schools of thought.
But my experience has taught me, if you trade in very thin markets (for example collectibles), and then you trade in thicker markets, ascending up the latter until you hit equities, you get a good idea and feel for markets. You get a good idea for "what is efficiency?" or "what is diversification?" beyond just the academic literature. Once you get a feel for those things, you can get a feel for what is "good enough"
How does the academic literature define "good enough?" It doesn't. You have to learn it. I believe you can of course supplement experience with lots of data and backtesting.
I asked myself given the market portfolio, can I do better? The boglehead answer is no. They drop it and leave it at that. That is dogma. And you're a naughty boy if you transgress.
Here's what I asked myself.
Given the market portfolio, can I do better? If I can do better, what am I giving up? Quantify it. Quantify exactly how much you are giving up
by deviating from the market portfolio. Quantify exactly how much you are gaining
by deviating from the market portfolio. Recycle. Run the numbers again. Do it again, over and over and over.
You need to give yourself some serious legitimate options to work with, each complete with data driven assessments as to what you are gaining and what you are losing. Gains are of course gains, but with what consistency? Losses come in the risk and volatility department, but how relevant are the economic conditions that may have caused those losses in the past?
The question is not to accede to dogma, but to find its exact boundaries and limits.
The dogmatic are people-based. They want agreement. They want to find others like minded.
The data driven are neutral. It doesn't matter where the boundary lies. If you say the truth is over there, then the salient question is not whether the truth is over there, but to find where the truth ends--to not seek agreement as a cause to rally around, but to simply accept the truth, move on and find the next truth.
Some stocks do better than the market. But all data seems to show they cannot be picked with any good semblance of long term consistency.
I don't have to regurgitate Taylor's long list.
What then about picking diversified sectors? Biotech? Tech? Health care?
Again, the data seems to suggest that the "increased diversification" of picking by sector still isnt enough. It still doesn't do as well as the market, and is plagued by long periods of underperformance and volatility. On this aspect, I found myself in agreement with Mr. Larimore.
What about Factors? Moving up the chain now---large cap, midcap value, mid cap growth, small cap value, etc.
Personally I saw something there, some data I liked, but it wasn't sufficiently compelling for me. Perhaps if I had done more research.
I did not find anything to prove Mr. Swedroe wrong. But...the formulation of a strategy how to best accommodate such data, was beyond the scope of what I wanted to do given the risks and rewards.
I went up the chain one level closer to the market portfolio--Essentially a tilted up mid and small cap mix(market weighed), which places me at 100% US as well.
In this sense, my conclusion was a bit of a hybrid between Mr. Swedroes factors and Mel's unloved midcaps --"a simplified portfolio" broadly diversifying their ideas.
I think it was moderator prudent who posted something interesting hinting that over some long term period, the extra premium from such a mix resulted in a portfolio that was double the market portfolio. Another posted countered saying that the extra gains were minute, less than an extra percent a year.
Having run the data myself, I knew that both were true (for the most part). Even a small excess gain compounded for decades can result in a portfolio of a dramatically different size at the finish line.
There was a series of optimizations, and finally, a point where i folded my hands and said "good enough"