Investing or Speculation?

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Taylor Larimore
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Investing or Speculation?

Post by Taylor Larimore »

Bogleheads:

Most Bogleheads understand that buying a few individual stocks is risky and more akin to speculation than investing. However, many of us do not realize that buying fund styles is also risky (betting which style will outperform).

Below are the 2019 annual returns for all 16 U.S. Morningstar styles as of 12-27-2019. We can see the risk of betting on individual styles (factors).

36.56% Mid Growth
35.80% Growth
34.69% Large Growth
33.15% Large Core
33.09% Core
32.23% Large Cap
31.77% Mid Core
31.56% Market
31.13% Mid Cap
29.53% Small Core
28.04% Small Growth
25.99% Small Cap
25.91% Large Value
25.18% Value
24.57% Mid Value
19.74% Small Value (3% of market)

Index Style (Factor) Performance

Happy New Year!
Taylor
Jack Bogle's Words of Wisdom: "Don't look for the needle. Buy the haystack."
Last edited by Taylor Larimore on Thu Jan 02, 2020 4:46 am, edited 1 time in total.
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Re: Are You Investing or Speculating?

Post by Stinky »

Thanks Taylor.

2019 was yet another tough year for value stocks of all sizes.
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Re: Are You Investing or Speculating?

Post by gmaynardkrebs »

Taylor Larimore wrote: Wed Jan 01, 2020 10:19 pm Bogleheads:

Most Bogleheads understand that investing in individual stocks is speculating (betting which stock will outperform). Many of us do not understand that investing in individual mutual fund styles is also speculating (betting which style will outperform).

Below are the 2019 annual returns for all 16 Morningstar styles as of 12-27-2019. It is easy to see the risk of betting on individual styles (factors).

36.56% Mid Growth
35.80% Growth
34.69% Large Growth
33.15% Large Core
33.09% Core
32.23% Large Cap
31.77% Mid Core
31.56% Market
31.13% Mid Cap
29.53% Small Core
28.04% Small Growth
25.99% Small Cap
25.91% Large Value
25.18% Value
24.57% Mid Value
19.74% Small Value (3% of market)

Index Style (Factor) Performance

Happy New Year!
Taylor
Jack Bogle's Words of Wisdom: "Don't look for the needle. Buy the haystack."
Not diversifying is not the same as "speculation."
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Re: Are You Investing or Speculating?

Post by Stef »

More reasons to buy small value.

The evidence is clear.
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Re: Are You Investing or Speculating?

Post by jsprag »

Taylor Larimore wrote: Wed Jan 01, 2020 10:19 pm Most Bogleheads understand that investing in individual stocks is speculating (betting which stock will outperform). Many of us do not understand that investing in individual mutual fund styles is also speculating (betting which style will outperform).
Why stop there? Let’s also declare that betting on which market (domestic, intl. developed, emerging) will outperform is also speculating.
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Re: Are You Investing or Speculating?

Post by Stef »

jsprag wrote: Thu Jan 02, 2020 3:44 amWhy stop there? Let’s also declare that betting on which market (domestic, intl. developed, emerging) will outperform is also speculating.
Yes. Everyone who isn't buying Vanguard Total World Stock or who doesn't have a 55/45 US/international allocation today is totally speculating aswell. Why not just go to the casino instead?
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Re: Are You Investing or Speculating?

Post by lazyday »

jsprag wrote: Thu Jan 02, 2020 3:44 amWhy stop there? Let’s also declare that betting on which market (domestic, intl. developed, emerging) will outperform is also speculating.
I’d even say that investing 100% in one country or region is more speculative than investing in different factors.

With factor investing, at least you could argue that you are diversifying sources of return. If you can stick with it through decades of underperformance, and the theory holds up, then you might reduce your portfolio shortfall risk.

With regional or country bets, you are saying that you know better than the market.

By the way, I do both. I have almost all equity in non-US value. I admit that value might underperform for the rest of my life, and I admit that in avoiding US equity I am making a speculative bet. I wish all the US-only posters would admit that they are speculating, and stop telling new Bogleheads to do the same. I don't ask others to invest only in non-US.

If you don’t want to speculate, invest globally. If you don’t have a strong commitment to factor investing, consider Target Retirement, or for your equity, Total World Stock.
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Re: Investing or Speculation?

Post by columbia »

Quick addendum to the info in the OP:

Ex-US: 21.43%
Ex-US Developed: 22.05%
EM: 20.13%


In terms of the overall message, I’m perfectly comfortable with SP500. 👍🏻
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Re: Investing or Speculation?

Post by rascott »

SP600 Small Cap Value Index (what most here seem to use) was up 24.1% in 2019.

Why should bogleheads care what a group of actively managed funds returned?
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Re: Investing or Speculation?

Post by patrick013 »

Thanks ! Nothing better than a table of index returns.
age in bonds, buy-and-hold, 10 year business cycle
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Re: Investing or Speculation?

Post by abuss368 »

Taylor Larimore wrote: Wed Jan 01, 2020 10:19 pm Bogleheads:

Most Bogleheads understand that buying a few individual stocks is risky and more akin to speculation than investing. However, many of us do not realize that buying fund styles is also risky (betting which style will outperform).

Below are the 2019 annual returns for all 16 U.S. Morningstar styles as of 12-27-2019. We can see the risk of betting on individual styles (factors).

36.56% Mid Growth
35.80% Growth
34.69% Large Growth
33.15% Large Core
33.09% Core
32.23% Large Cap
31.77% Mid Core
31.56% Market
31.13% Mid Cap
29.53% Small Core
28.04% Small Growth
25.99% Small Cap
25.91% Large Value
25.18% Value
24.57% Mid Value
19.74% Small Value (3% of market)

Index Style (Factor) Performance

Happy New Year!
Taylor
Jack Bogle's Words of Wisdom: "Don't look for the needle. Buy the haystack."
Thanks Taylor. Mr. Bogle could not be more right - buy the haystack!
Last edited by abuss368 on Thu Jan 02, 2020 5:25 pm, edited 1 time in total.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Are You Investing or Speculating?

Post by jsprag »

Stef wrote: Thu Jan 02, 2020 4:04 am
jsprag wrote: Thu Jan 02, 2020 3:44 amWhy stop there? Let’s also declare that betting on which market (domestic, intl. developed, emerging) will outperform is also speculating.
Yes. Everyone who isn't buying Vanguard Total World Stock or who doesn't have a 55/45 US/international allocation today is totally speculating aswell.
Two thoughts embedded in my previous response; I’ll unpack them for clarity...

First, speculation and investment are differentiated by motivation and behavior, not what instruments are employed. One could speculate on the movement of broad market funds, just as one could invest in a single firm.

Second is a commentary on the thought process which leads down the road of ”Tilting from market weight towards x is speculation when x is sector or style, but definitely not speculation when x is region”.

(See also: any of the domestic vs. intl holy wars that flare up weekly around here.)

Maybe we could avoid the use of prejudicial labels entirely, particularly if the labels are imprecisely defined or inconsistently applied.
Stef wrote: Thu Jan 02, 2020 4:04 am Why not just go to the casino instead?
Because that’s just gambling with no expectation of a positive return.
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Re: Are You Investing or Speculating?

Post by MotoTrojan »

jsprag wrote: Thu Jan 02, 2020 3:44 am
Taylor Larimore wrote: Wed Jan 01, 2020 10:19 pm Most Bogleheads understand that investing in individual stocks is speculating (betting which stock will outperform). Many of us do not understand that investing in individual mutual fund styles is also speculating (betting which style will outperform).
Why stop there? Let’s also declare that betting on which market (domestic, intl. developed, emerging) will outperform is also speculating.
+1. I think I’m speculating less than a 100% US market investor.

50% US large (value tilt but large core)
20% US small value
30% Ex-US developed small value
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Re: Investing or Speculation?

Post by Stef »

I was joking.

I don't know why a SCV tilt would be speculating. There is enough data to support it.
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Re: Are You Investing or Speculating?

Post by columbia »

MotoTrojan wrote: Thu Jan 02, 2020 5:18 pm
jsprag wrote: Thu Jan 02, 2020 3:44 am
Taylor Larimore wrote: Wed Jan 01, 2020 10:19 pm Most Bogleheads understand that investing in individual stocks is speculating (betting which stock will outperform). Many of us do not understand that investing in individual mutual fund styles is also speculating (betting which style will outperform).
Why stop there? Let’s also declare that betting on which market (domestic, intl. developed, emerging) will outperform is also speculating.
+1. I think I’m speculating less than a 100% US market investor.

50% US large (value tilt but large core)
20% US small value
30% Ex-US developed small value
Be careful: the global cap jihadists might come after you. ;)
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Re: Are You Investing or Speculating?

Post by dual »

Stef wrote: Thu Jan 02, 2020 4:04 am
jsprag wrote: Thu Jan 02, 2020 3:44 amWhy stop there? Let’s also declare that betting on which market (domestic, intl. developed, emerging) will outperform is also speculating.
Yes. Everyone who isn't buying Vanguard Total World Stock or who doesn't have a 55/45 US/international allocation today is totally speculating aswell. Why not just go to the casino instead?
The investment world is much larger than the stock market. If you do not invest in gold or other commodities or real estate or ... you are speculating. :greedy
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Re: Investing or Speculation?

Post by Triple digit golfer »

The more I read, learn, and see posts on Bogleheads, the more I believe that, like the best workout routine is the one you'll stick with, the same can be said for an investment plan.

A person does high intensity interval cardio might scoff at the guy jogging slowly on the treadmill watching TV or scrolling through his phone, but both will be much healthier and in better physical shape than the person who doesn't work out at all or works out inconsistently and doesn't stick to their plan.

Pick any reasonable allocation and stick to your plan for decades. Whether it's 100% 500 index or a 50/50 stock/bond allocation with all SCV or emerging markets, if you stick to it for decades and keep contributing throughout, you will do better than the person who keeps fidgeting and changing courses at every news report about the markets or the people who sit on cash waiting for market corrections before investing.
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Re: Investing or Speculation?

Post by abuss368 »

I have Mr. Bogle's book "The Clash of the Cultures - Investment v. Speculation" on my book shelf. I am looking forward to reading the book.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Investing or Speculation?

Post by abuss368 »

Triple digit golfer wrote: Thu Jan 02, 2020 8:25 pm The more I read, learn, and see posts on Bogleheads, the more I believe that, like the best workout routine is the one you'll stick with, the same can be said for an investment plan.

A person does high intensity interval cardio might scoff at the guy jogging slowly on the treadmill watching TV or scrolling through his phone, but both will be much healthier and in better physical shape than the person who doesn't work out at all or works out inconsistently and doesn't stick to their plan.

Pick any reasonable allocation and stick to your plan for decades. Whether it's 100% 500 index or a 50/50 stock/bond allocation with all SCV or emerging markets, if you stick to it for decades and keep contributing throughout, you will do better than the person who keeps fidgeting and changing courses at every news report about the markets or the people who sit on cash waiting for market corrections before investing.
Well said and I could not agree more. An investor has to be able to stick with the plan in both good times and bad times. I learn this more and more the older I get. The financial crisis taught us that!
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Investing or Speculation?

Post by Nicolas »

Triple digit golfer wrote: Thu Jan 02, 2020 8:25 pm The more I read, learn, and see posts on Bogleheads, the more I believe that, like the best workout routine is the one you'll stick with, the same can be said for an investment plan.

A person does high intensity interval cardio might scoff at the guy jogging slowly on the treadmill watching TV or scrolling through his phone, but both will be much healthier and in better physical shape than the person who doesn't work out at all or works out inconsistently and doesn't stick to their plan.

Pick any reasonable allocation and stick to your plan for decades. Whether it's 100% 500 index or a 50/50 stock/bond allocation with all SCV or emerging markets, if you stick to it for decades and keep contributing throughout, you will do better than the person who keeps fidgeting and changing courses at every news report about the markets or the people who sit on cash waiting for market corrections before investing.
+1. Great post, and so true.
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Re: Investing or Speculation?

Post by abuss368 »

columbia wrote: Thu Jan 02, 2020 6:47 am Quick addendum to the info in the OP:

Ex-US: 21.43%
Ex-US Developed: 22.05%
EM: 20.13%


In terms of the overall message, I’m perfectly comfortable with SP500. 👍🏻
I could not agree more. Both Jack Bogle and Warren Buffett recommend a simple Total Stock (and S&P 500). Combined with bonds, an investor will have a portfolio that will never be below average.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Investing or Speculation?

Post by gmaynardkrebs »

abuss368 wrote: Thu Jan 02, 2020 9:09 pm
columbia wrote: Thu Jan 02, 2020 6:47 am Quick addendum to the info in the OP:

Ex-US: 21.43%
Ex-US Developed: 22.05%
EM: 20.13%


In terms of the overall message, I’m perfectly comfortable with SP500. 👍🏻
I could not agree more. Both Jack Bogle and Warren Buffett recommend a simple Total Stock (and S&P 500). Combined with bonds, an investor will have a portfolio that will never be below average.
Where is Garrison Keiller when we need him? I would not take consolation in losing 49% of my nest egg just because others have lost 50%. S&P500 looks quite overvalued to me. To each, its own.
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Re: Investing or Speculation?

Post by lazyday »

abuss368 wrote: Thu Jan 02, 2020 9:09 pmI could not agree more. Both Jack Bogle and Warren Buffett recommend a simple Total Stock (and S&P 500). Combined with bonds, an investor will have a portfolio that will never be below average.
A US-only portfolio has been below average before, and it will be below average again.
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Re: Investing or Speculation?

Post by abuss368 »

lazyday wrote: Fri Jan 03, 2020 4:36 am
abuss368 wrote: Thu Jan 02, 2020 9:09 pmI could not agree more. Both Jack Bogle and Warren Buffett recommend a simple Total Stock (and S&P 500). Combined with bonds, an investor will have a portfolio that will never be below average.
A US-only portfolio has been below average before, and it will be below average again.
That’s fine! I don’t need the best portfolio because I don’t know in advance. Investing is about achieving one’s goals. Total Stock will do that.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Investing or Speculation?

Post by Forester »

Diversification doesn't matter, until it does

Image
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Re: Investing or Speculation?

Post by 1130Super »

This is why I’m happy all my 401k fees are terrible (<1% ER) for everything except for a S&P 500 Fund (.15% ER) makes my decision easy
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Re: Investing or Speculation?

Post by Triple digit golfer »

Forester wrote: Fri Jan 03, 2020 7:17 am Diversification doesn't matter, until it does

Image
The S&P 500 is about 80% of the investable U.S. market. If it's down relative to a fund that invests in a tiny part of the market, that doesn't mean it isn't diversified.

Perhaps not the best analogy, but if prices of milk, cheese, bread, eggs, fruits, vegetables, nuts, and meat are collectively up 10% and the price of organic, gluten-free quinoa is down 5%, I don't think many people would flock to organic, gluten-free quinoa. I think they'd likely just say that their grocery bill increased 10% because those items ARE the grocery bill, for all intents and purposes.
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Re: Investing or Speculation?

Post by HEDGEFUNDIE »

Triple digit golfer wrote: Fri Jan 03, 2020 10:20 am
Forester wrote: Fri Jan 03, 2020 7:17 am Diversification doesn't matter, until it does

Image
The S&P 500 is about 80% of the investable U.S. market. If it's down relative to a fund that invests in a tiny part of the market, that doesn't mean it isn't diversified.

Perhaps not the best analogy, but if prices of milk, cheese, bread, eggs, fruits, vegetables, nuts, and meat are collectively up 10% and the price of organic, gluten-free quinoa is down 5%, I don't think many people would flock to organic, gluten-free quinoa. I think they'd likely just say that their grocery bill increased 10% because those items ARE the grocery bill, for all intents and purposes.
Diversification has nothing to do with the number of stocks (or % of the market) you own, and everything to do with how those stocks perform relative to each other.

To correct your grocery analogy, do I have a diversified diet if I bought all 20 brands of crackers on the shelf? Or if I bought 10 items, one from each grocery department?
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Re: Investing or Speculation?

Post by Triple digit golfer »

HEDGEFUNDIE wrote: Fri Jan 03, 2020 10:25 am
Triple digit golfer wrote: Fri Jan 03, 2020 10:20 am
Forester wrote: Fri Jan 03, 2020 7:17 am Diversification doesn't matter, until it does

Image
The S&P 500 is about 80% of the investable U.S. market. If it's down relative to a fund that invests in a tiny part of the market, that doesn't mean it isn't diversified.

Perhaps not the best analogy, but if prices of milk, cheese, bread, eggs, fruits, vegetables, nuts, and meat are collectively up 10% and the price of organic, gluten-free quinoa is down 5%, I don't think many people would flock to organic, gluten-free quinoa. I think they'd likely just say that their grocery bill increased 10% because those items ARE the grocery bill, for all intents and purposes.
Diversification has nothing to do with the number of stocks (or % of the market) you own, and everything to do with how those stocks perform relative to each other.

To correct your grocery analogy, do I have a diversified diet if I bought all 20 brands of crackers on the shelf? Or if I bought 10 items, one from each grocery department?
To correct your grocery analogy, do I have a diversified diet if I bought only the most successful brands of milk, cheese, bread, eggs, fruits, vegetables, nuts and meat that collectively make up 80% of one's diet and grocery purchases?
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Re: Investing or Speculation?

Post by MotoTrojan »

abuss368 wrote: Fri Jan 03, 2020 7:03 am
lazyday wrote: Fri Jan 03, 2020 4:36 am
abuss368 wrote: Thu Jan 02, 2020 9:09 pmI could not agree more. Both Jack Bogle and Warren Buffett recommend a simple Total Stock (and S&P 500). Combined with bonds, an investor will have a portfolio that will never be below average.
A US-only portfolio has been below average before, and it will be below average again.
That’s fine! I don’t need the best portfolio because I don’t know in advance. Investing is about achieving one’s goals. Total Stock will do that.
Using logic that says you should be total world to justify a single country. What?
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Re: Investing or Speculation?

Post by HEDGEFUNDIE »

Triple digit golfer wrote: Fri Jan 03, 2020 10:28 am
HEDGEFUNDIE wrote: Fri Jan 03, 2020 10:25 am
Triple digit golfer wrote: Fri Jan 03, 2020 10:20 am
Forester wrote: Fri Jan 03, 2020 7:17 am Diversification doesn't matter, until it does

Image
The S&P 500 is about 80% of the investable U.S. market. If it's down relative to a fund that invests in a tiny part of the market, that doesn't mean it isn't diversified.

Perhaps not the best analogy, but if prices of milk, cheese, bread, eggs, fruits, vegetables, nuts, and meat are collectively up 10% and the price of organic, gluten-free quinoa is down 5%, I don't think many people would flock to organic, gluten-free quinoa. I think they'd likely just say that their grocery bill increased 10% because those items ARE the grocery bill, for all intents and purposes.
Diversification has nothing to do with the number of stocks (or % of the market) you own, and everything to do with how those stocks perform relative to each other.

To correct your grocery analogy, do I have a diversified diet if I bought all 20 brands of crackers on the shelf? Or if I bought 10 items, one from each grocery department?
To correct your grocery analogy, do I have a diversified diet if I bought only the most successful brands of milk, cheese, bread, eggs, fruits, vegetables, nuts and meat that collectively make up 80% of one's diet and grocery purchases?
You do, but that’s not what you’re getting with Total Stock Market.
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Re: Investing or Speculation?

Post by Triple digit golfer »

HEDGEFUNDIE wrote: Fri Jan 03, 2020 10:36 amYou do, but that’s not what you’re getting with Total Stock Market.
That is certainly debatable. I think Total Stock Market is as close as one could get if the goal is to invest the most heavily in the top companies in each industry.
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Re: Investing or Speculation?

Post by HEDGEFUNDIE »

Triple digit golfer wrote: Fri Jan 03, 2020 10:40 am
HEDGEFUNDIE wrote: Fri Jan 03, 2020 10:36 amYou do, but that’s not what you’re getting with Total Stock Market.
That is certainly debatable. I think Total Stock Market is as close as one could get if the goal is to invest the most heavily in the top companies in each industry.
You misunderstand me. That should not be the goal of any investor who seeks to be diversified.

In the investing world, industry sectors should not be considered the “milk, cheese, bread, eggs, fruits, vegetables, nuts and meat”. With the exception of maybe utilities, all sectors are highly correlated with other sectors and the market as a whole.

It’s like you thought you were eating a balanced, varied diet, but it turns out 80% of what you ate was processed from corn and soybeans.

Instead what truly diversifies a portfolio (the eggs, milk, cheese) is independent sources of risk. Which you can identify through factor regressions. And the market portfolio by definition is only exposed to one factor: market beta.
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Re: Investing or Speculation?

Post by Triple digit golfer »

HEDGEFUNDIE wrote: Fri Jan 03, 2020 10:47 am
Triple digit golfer wrote: Fri Jan 03, 2020 10:40 am
HEDGEFUNDIE wrote: Fri Jan 03, 2020 10:36 amYou do, but that’s not what you’re getting with Total Stock Market.
That is certainly debatable. I think Total Stock Market is as close as one could get if the goal is to invest the most heavily in the top companies in each industry.
You misunderstand me. That should not be the goal of any investor who seeks to be diversified.

In the investing world, industry sectors should not be considered the “milk, cheese, bread, eggs, fruits, vegetables, nuts and meat”. With the exception of maybe utilities, all sectors are highly correlated with other sectors and the market as a whole.

It’s like you thought you were eating a balanced, varied diet, but it turns out 80% of what you ate was processed from corn and soybeans.

Instead what truly diversifies a portfolio (the eggs, milk, cheese) is independent sources of risk. Which you can identify through factor regressions. And the market portfolio by definition is only exposed to one factor: market beta.
In your opinion, what is the most ideal, diversified portfolio? Costs and administration aside, how would it be constructed?
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Re: Investing or Speculation?

Post by HEDGEFUNDIE »

Triple digit golfer wrote: Fri Jan 03, 2020 11:32 am
HEDGEFUNDIE wrote: Fri Jan 03, 2020 10:47 am
Triple digit golfer wrote: Fri Jan 03, 2020 10:40 am
HEDGEFUNDIE wrote: Fri Jan 03, 2020 10:36 amYou do, but that’s not what you’re getting with Total Stock Market.
That is certainly debatable. I think Total Stock Market is as close as one could get if the goal is to invest the most heavily in the top companies in each industry.
You misunderstand me. That should not be the goal of any investor who seeks to be diversified.

In the investing world, industry sectors should not be considered the “milk, cheese, bread, eggs, fruits, vegetables, nuts and meat”. With the exception of maybe utilities, all sectors are highly correlated with other sectors and the market as a whole.

It’s like you thought you were eating a balanced, varied diet, but it turns out 80% of what you ate was processed from corn and soybeans.

Instead what truly diversifies a portfolio (the eggs, milk, cheese) is independent sources of risk. Which you can identify through factor regressions. And the market portfolio by definition is only exposed to one factor: market beta.
In your opinion, what is the most ideal, diversified portfolio? Costs and administration aside, how would it be constructed?
My thinking on diversification is heavily influenced by vineviz’s posts on the topic.
The Vanguard Total Stock Market Index fund contains almost entirely U.S. large cap stocks. It holds many of them, in many different sectors, in proportion to their market capitalization, but represents only a slice of the variety of investable companies. VTSMX has virtually no exposure to the risk and style factors (small companies, value companies, quality companies, low beta stocks, etc.) that economists have identified as offering excess returns or having relatively low correlations with large cap U.S. stocks.

Likewise, the Vanguard Total Bond Market Index fund represents an impressive portfolio, but it does not have the level of exposure to credit risk and term risk it needs in order to balance the stocks held in VTSMX.
In practice, I would hold an equal mix of market beta, low volatility, small size, quality, momentum, value, and term risk. All of which can be found cheaply in ETFs.
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Re: Investing or Speculation?

Post by DB2 »

Total Stock Market tracks incredibly close to the Dow. ~3600 stocks vs 30? But...

https://www.portfoliovisualizer.com/bac ... ion2_2=100
DB2
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Re: Investing or Speculation?

Post by DB2 »

HEDGEFUNDIE wrote: Fri Jan 03, 2020 1:12 pm
In practice, I would hold an equal mix of market beta, low volatility, small size, quality, momentum, value, and term risk. All of which can be found cheaply in ETFs.
If you have a list handy, I would be very curious to see the ETF break down, thanks!
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gmaynardkrebs
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Re: Investing or Speculation?

Post by gmaynardkrebs »

I am always impressed by the expertise evidenced in threads like this, but I think this point, made by "garland whizzer" below in an earlier thread, is worth considering in this context. Particularly the point that "risk is something else." [emphasis added in quote.]
garlandwhizzer wrote: Wed Jun 06, 2018 12:13 pm There is a big difference between risk and volatility. Academic theory can reduce volatility by optimizing diversification across various equity factors, exposure to INTL equity and bonds, using differing bond types and asset types in a mixture to optimize Sharpe ratio and reduce portfolio volatility based on academic backtesting. Risk is something else. It becomes most important when there is market panic in a severe crash like 1929-32 and recently 2007-9. When risk/panic rises to these massive levels, essentially all assets except high quality bonds trend toward a correlation of 100%. Beta, small, value, momentum, quality, even low volatility, as well as all INTL equity tend to tank simultaneously in that circumstance. Hiding out in equity diversifying factors or INTL simply doesn't work when you need it most. Value gets killed during crashes usually more so than beta. Momentum gets utterly destroyed in the recovery if long/short MOM is used. What has worked in these circumstances is one thing: US Treasuries and highest quality credit instruments. The most important aspect of severe risk control is quality bond exposure. Period. Other additions are optional.
There are some asset classes (commodities, MMF) which help a portfolio during an long term inflationary disaster but they come at a price, decreased expected long term portfolio returns. A diversified portfolio such as the one described may make the portfolio ride smoother with reduced volatility, but when it really matters in the case of a deep recession or depression, it won't bail you out. Likewise protection from inflation by diversifying into commodities for example does give some inflationary protection but it reduces long term portfolio returns. The things that protect you from recession/depression (quality bonds) get killed during inflation and the things that protect you from inflation (commodities, MMF) lose big time when the opposite (recession/depression) occurs. Each additional piece added to portfolio construction to reduce volatility comes at an price. Whether it's worth it or not is up to individual investor rather than some academic study that claims to have it all figured out.
Garland Whizzer
columbia
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Re: Investing or Speculation?

Post by columbia »

DB2 wrote: Fri Jan 03, 2020 2:06 pm
HEDGEFUNDIE wrote: Fri Jan 03, 2020 1:12 pm
In practice, I would hold an equal mix of market beta, low volatility, small size, quality, momentum, value, and term risk. All of which can be found cheaply in ETFs.
If you have a list handy, I would be very curious to see the ETF break down, thanks!
It involves an “optimal” mix based on back testing; ie a whole of speculating (as in predicting, not as in speculating as used in the financial realm).
HEDGEFUNDIE
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Re: Investing or Speculation?

Post by HEDGEFUNDIE »

DB2 wrote: Fri Jan 03, 2020 2:06 pm
HEDGEFUNDIE wrote: Fri Jan 03, 2020 1:12 pm
In practice, I would hold an equal mix of market beta, low volatility, small size, quality, momentum, value, and term risk. All of which can be found cheaply in ETFs.
If you have a list handy, I would be very curious to see the ETF break down, thanks!
US Small Value: IJS
Intl Small Value: AVDV
US Minimum Volatility: USMV
Intl Minimum Volatility: EFAV
US Momentum: MTUM
Term: EDV
guyinlaw
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Re: Investing or Speculation?

Post by guyinlaw »

Taylor Larimore wrote: Wed Jan 01, 2020 10:19 pm Bogleheads:

Most Bogleheads understand that buying a few individual stocks is risky and more akin to speculation than investing. However, many of us do not realize that buying fund styles is also risky (betting which style will outperform).

Below are the 2019 annual returns for all 16 U.S. Morningstar styles as of 12-27-2019. We can see the risk of betting on individual styles (factors).

36.56% Mid Growth
35.80% Growth
34.69% Large Growth
33.15% Large Core
33.09% Core
32.23% Large Cap
31.77% Mid Core
31.56% Market
31.13% Mid Cap
29.53% Small Core
28.04% Small Growth
25.99% Small Cap
25.91% Large Value
25.18% Value
24.57% Mid Value
19.74% Small Value (3% of market)

Index Style (Factor) Performance

Happy New Year!
Taylor
Jack Bogle's Words of Wisdom: "Don't look for the needle. Buy the haystack."
How about comparing these from (Jan 1972 - Dec 2019)?

CAGR Asset Class

10.44% US Stock Market
11.72% US Small Cap
13.92% US Small Cap Value

Would prefer looking at 1 year data or 49 year data?

https://www.portfoliovisualizer.com/bac ... ion3_3=100
Time is your friend; impulse is your enemy. - John C. Bogle
UpperNwGuy
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Re: Investing or Speculation?

Post by UpperNwGuy »

guyinlaw wrote: Fri Jan 03, 2020 2:37 pm
Taylor Larimore wrote: Wed Jan 01, 2020 10:19 pm Bogleheads:

Most Bogleheads understand that buying a few individual stocks is risky and more akin to speculation than investing. However, many of us do not realize that buying fund styles is also risky (betting which style will outperform).

Below are the 2019 annual returns for all 16 U.S. Morningstar styles as of 12-27-2019. We can see the risk of betting on individual styles (factors).

36.56% Mid Growth
35.80% Growth
34.69% Large Growth
33.15% Large Core
33.09% Core
32.23% Large Cap
31.77% Mid Core
31.56% Market
31.13% Mid Cap
29.53% Small Core
28.04% Small Growth
25.99% Small Cap
25.91% Large Value
25.18% Value
24.57% Mid Value
19.74% Small Value (3% of market)

Index Style (Factor) Performance

Happy New Year!
Taylor
Jack Bogle's Words of Wisdom: "Don't look for the needle. Buy the haystack."
How about comparing these from (Jan 1972 - Dec 2019)?

CAGR Asset Class

10.44% US Stock Market
11.72% US Small Cap
13.92% US Small Cap Value

Would prefer looking at 1 year data or 49 year data?

https://www.portfoliovisualizer.com/bac ... ion3_3=100
I see what you did there. You picked a time period that included the 1970s.
dharrythomas
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Re: Investing or Speculation?

Post by dharrythomas »

gmaynardkrebs wrote: Fri Jan 03, 2020 2:16 pm I am always impressed by the expertise evidenced in threads like this, but I think this point, made by "garland whizzer" below in an earlier thread, is worth considering in this context. Particularly the point that "risk is something else." [emphasis added in quote.]
garlandwhizzer wrote: Wed Jun 06, 2018 12:13 pm There is a big difference between risk and volatility. Academic theory can reduce volatility by optimizing diversification across various equity factors, exposure to INTL equity and bonds, using differing bond types and asset types in a mixture to optimize Sharpe ratio and reduce portfolio volatility based on academic backtesting. Risk is something else. It becomes most important when there is market panic in a severe crash like 1929-32 and recently 2007-9. When risk/panic rises to these massive levels, essentially all assets except high quality bonds trend toward a correlation of 100%. Beta, small, value, momentum, quality, even low volatility, as well as all INTL equity tend to tank simultaneously in that circumstance. Hiding out in equity diversifying factors or INTL simply doesn't work when you need it most. Value gets killed during crashes usually more so than beta. Momentum gets utterly destroyed in the recovery if long/short MOM is used. What has worked in these circumstances is one thing: US Treasuries and highest quality credit instruments. The most important aspect of severe risk control is quality bond exposure. Period. Other additions are optional.
There are some asset classes (commodities, MMF) which help a portfolio during an long term inflationary disaster but they come at a price, decreased expected long term portfolio returns. A diversified portfolio such as the one described may make the portfolio ride smoother with reduced volatility, but when it really matters in the case of a deep recession or depression, it won't bail you out. Likewise protection from inflation by diversifying into commodities for example does give some inflationary protection but it reduces long term portfolio returns. The things that protect you from recession/depression (quality bonds) get killed during inflation and the things that protect you from inflation (commodities, MMF) lose big time when the opposite (recession/depression) occurs. Each additional piece added to portfolio construction to reduce volatility comes at an price. Whether it's worth it or not is up to individual investor rather than some academic study that claims to have it all figured out.
Garland Whizzer
+1

Volatility is a shallow measure of risk and is used by professors because it is easy to quantify while the deep risk is hard to quantify. The point about all correlations heading for one when things get bad (with the exception of the highest quality bonds), is a point worth keeping in the back of your mind.

The risk of permanent loss of capital is real, though we often ignore it here because our country hasn’t blown up recently.
3funder
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Re: Investing or Speculation?

Post by 3funder »

I would have said the following:

Investing in both value and growth stocks makes sense over time; therefore, investing in a total market stock index fund is the easiest way to benefit from the periodic outperformance of each while avoiding the need to take action based on guesswork or predictions.
guyinlaw
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Re: Investing or Speculation?

Post by guyinlaw »

UpperNwGuy wrote: Fri Jan 03, 2020 2:46 pm
guyinlaw wrote: Fri Jan 03, 2020 2:37 pm
Taylor Larimore wrote: Wed Jan 01, 2020 10:19 pm Bogleheads:

Most Bogleheads understand that buying a few individual stocks is risky and more akin to speculation than investing. However, many of us do not realize that buying fund styles is also risky (betting which style will outperform).

Below are the 2019 annual returns for all 16 U.S. Morningstar styles as of 12-27-2019. We can see the risk of betting on individual styles (factors).

36.56% Mid Growth
35.80% Growth
34.69% Large Growth
33.15% Large Core
33.09% Core
32.23% Large Cap
31.77% Mid Core
31.56% Market
31.13% Mid Cap
29.53% Small Core
28.04% Small Growth
25.99% Small Cap
25.91% Large Value
25.18% Value
24.57% Mid Value
19.74% Small Value (3% of market)

Index Style (Factor) Performance

Happy New Year!
Taylor
Jack Bogle's Words of Wisdom: "Don't look for the needle. Buy the haystack."
How about comparing these from (Jan 1972 - Dec 2019)?

CAGR Asset Class

10.44% US Stock Market
11.72% US Small Cap
13.92% US Small Cap Value

Would prefer looking at 1 year data or 49 year data?

https://www.portfoliovisualizer.com/bac ... ion3_3=100
I see what you did there. You picked a time period that included the 1970s.
Thats all the data Available in portfolio visualizer. Is there something special about 1970s? If you have older data, please share..

The Jan 1972 - Dec 2019 data also show that US Small Cap Value has better risk adjusted returns that total market

CAGR - Sharpe ratio - Asset Class

10.44% - 0.42 - US Stock Market
11.72% - 0.43 - US Small Cap
13.92% - 0.56 - US Small Cap Value

Based on this data, SCV is less risky than total market, and tilting will not increase risk..
Time is your friend; impulse is your enemy. - John C. Bogle
Triple digit golfer
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Re: Investing or Speculation?

Post by Triple digit golfer »

guyinlaw wrote: Fri Jan 03, 2020 3:38 pmThats all the data Available in portfolio visualizer. Is there something special about 1970s? If you have older data, please share..

The Jan 1972 - Dec 2019 data also show that US Small Cap Value has better risk adjusted returns that total market

CAGR - Sharpe ratio - Asset Class

10.44% - 0.42 - US Stock Market
11.72% - 0.43 - US Small Cap
13.92% - 0.56 - US Small Cap Value

Based on this data, SCV is less risky than total market, and tilting will not increase risk..
How do you justify the statement that I bolded and underlined above?
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Barry Barnitz
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Contact:

Re: Investing or Speculation?

Post by Barry Barnitz »

Hi:

Here is a table of 2019 US stock market returns, as measured by various index providers:

Link: 2019 US stock market returns

regards,
Additional administrative tasks: Financial Page bogleheads.org. blog; finiki the Canadian wiki; The Bogle Center for Financial Literacy site; Wiki Bogleheads® España.
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iceport
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Re: Investing or Speculation?

Post by iceport »

Triple digit golfer wrote: Thu Jan 02, 2020 8:25 pm The more I read, learn, and see posts on Bogleheads, the more I believe that, like the best workout routine is the one you'll stick with, the same can be said for an investment plan.
.
.
.
Pick any reasonable allocation and stick to your plan for decades. Whether it's 100% 500 index or a 50/50 stock/bond allocation with all SCV or emerging markets, if you stick to it for decades and keep contributing throughout, you will do better than the person who keeps fidgeting and changing courses at every news report about the markets or the people who sit on cash waiting for market corrections before investing.
Man, Triple digit golfer, I couldn't agree with this more! Well said. :thumbsup

Glad to see it didn't take you as long to realize this as it took me.
"Discipline matters more than allocation.” ─William Bernstein
Triple digit golfer
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Re: Investing or Speculation?

Post by Triple digit golfer »

iceport wrote: Fri Jan 03, 2020 5:05 pm
Triple digit golfer wrote: Thu Jan 02, 2020 8:25 pm The more I read, learn, and see posts on Bogleheads, the more I believe that, like the best workout routine is the one you'll stick with, the same can be said for an investment plan.
.
.
.
Pick any reasonable allocation and stick to your plan for decades. Whether it's 100% 500 index or a 50/50 stock/bond allocation with all SCV or emerging markets, if you stick to it for decades and keep contributing throughout, you will do better than the person who keeps fidgeting and changing courses at every news report about the markets or the people who sit on cash waiting for market corrections before investing.
Man, Triple digit golfer, I couldn't agree with this more! Well said. :thumbsup

Glad to see it didn't take you as long to realize this as it took me.
Thanks in large part to the Bogleheads and a smaller but still important part to my college Finance professor, who I suspect is perhaps a Boglehead. 12 years plus and I haven't changed course.

Just noticed your signature. Fantastic! I may add one of something to the effect of what I said above that you quoted.
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gmaynardkrebs
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Re: Investing or Speculation?

Post by gmaynardkrebs »

Triple digit golfer wrote: Thu Jan 02, 2020 8:25 pm The more I read, learn, and see posts on Bogleheads, the more I believe that, like the best workout routine is the one you'll stick with, the same can be said for an investment plan.

A person does high intensity interval cardio might scoff at the guy jogging slowly on the treadmill watching TV or scrolling through his phone, but both will be much healthier and in better physical shape than the person who doesn't work out at all or works out inconsistently and doesn't stick to their plan.

Pick any reasonable allocation and stick to your plan for decades. Whether it's 100% 500 index or a 50/50 stock/bond allocation with all SCV or emerging markets, if you stick to it for decades and keep contributing throughout, you will do better than the person who keeps fidgeting and changing courses at every news report about the markets or the people who sit on cash waiting for market corrections before investing.
You will do a little better, due to lower costs. But correct me if I’m wrong, folks who say what you say also think that they will do “just fine” or some positive variant of that. I seriously question that at today’s valuations. To each its own.
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