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Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
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hdas
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Post by hdas » Sun Jan 26, 2020 3:21 pm

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nedsaid
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Re: Small Cap Value - Factor Timing vs Constant Exposure

Post by nedsaid » Sun Jan 26, 2020 3:48 pm

I would vote for constant exposure to a factor instead of factor timing. If you used a form of factor timing based upon valuation, this might be more about managing risks rather than improving returns. Another thing is that markets just are, they will do what they do and could care less about our portfolio models. Though Growth has been outperforming Value for a decade now, this trend shows no sign of abating. The market might seem due for a reversion of the mean back towards Value but don't seem to care. Trends can last a lot longer than we think. I could go for factor timing if it is understood as a tool for managing risks, no guarantees that it will enhance returns.
A fool and his money are good for business.

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hdas
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Post by hdas » Sun Jan 26, 2020 4:10 pm

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Horton
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Re: Small Cap Value - Factor Timing vs Constant Exposure

Post by Horton » Sun Jan 26, 2020 4:32 pm

Can you provide a legend for the first chart?

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hdas
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Post by hdas » Sun Jan 26, 2020 4:39 pm

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Elysium
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Re: Small Cap Value - Factor Timing vs Constant Exposure

Post by Elysium » Sun Jan 26, 2020 6:21 pm

Okay, I will bite, with a fair amount of trepidation :wink:

I have been closely following factors over my own investing lifespan, and having never forgotten Jack Bogle's findings from his books/writings. Whenever I heard the factor argument since '99 or so, I have also thought about Bogle's arguments that factors don't matter and staying the course is what mattered most. My experience has taught me this is the ultimate wisdom, because the market portfolio is a very powerful force to compete against, it doesn't give freedom for too many errors, a few small mistakes and you end up behind. Catch-up requires taking on more risks, more tinkering, opening chances for more failures.

That said, there is some evidence that if your must tilt between Factors and between US vs. Intl, then a momentum based tactical allocation may be better than a constant allocation. I have no proof for this, have never done it, except on the edges. But I suspect some sources I have come across may have done this fairly successfully over a 30 year period. It's debatable whether it is reliable or not, probably not, but it may be no more worse than having a constant factor allocation heavily into small/value, and/or Intl. I would just add that a valuation based model would not work, it has horrendously poor execution results, no one has ever been able to do this with any amount of success, but momentum may be slightly more reliable. Again, no proof, have never done it, will likely not do it, and wouldn't recommend, unless of course one is a heavy tilter then it may not hurt too much trying this method instead of constant allocation.

HippoSir
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Re: Small Cap Value - Factor Timing vs Constant Exposure

Post by HippoSir » Sun Jan 26, 2020 7:28 pm

Some ETFs to consider:

OMFL/OMFS: market cycle based timing, has done quite well (at least short term)
DYNF: iShares equivalent of the above, seems to take less dramatic tilts than OMFL/OMFS
MFUS: momentum based factor timing

The concept seems interesting and there's some evidence to say timing is possible, but I worry about even more turnover and difficulty benchmarking, so although I factor tilt, I just hold "normal" multifactor funds (VFMF for US, iShares multifactor for international).

fennewaldaj
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Re: Small Cap Value - Factor Timing vs Constant Exposure

Post by fennewaldaj » Sun Jan 26, 2020 10:26 pm

hdas wrote:
Sun Jan 26, 2020 4:10 pm
nedsaid wrote:
Sun Jan 26, 2020 3:48 pm
The market might seem due for a reversion of the mean back towards Value but don't seem to care.
What the chart above shows is that the mean is below, meaning value doesn't seem cheap yet.....This is all depending on your timeframe of reference, 10 years seems arbitrary. I opted for looking at the oldest live fund that was launched AFTER the anomalies were disseminated to the public. I don't think looking at data before 1992 is useful. Cheers :greedy
If you accept that there is a value premium then then it should not have to revert all that way to the mean (because in the long run value should outperform not perform the same). If you don't think there is a premium and that small value and large growth simply trade leadership I just don't see the point of investing in small value at all except maybe at major extremes. Just seems to difficult to get right. I agree that the older data is less useful but the problem is a 27 year sample is just too short for any conclusive judgement. Perhaps looking at value in other countries since 1992 could be useful?

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hdas
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Post by hdas » Mon Jan 27, 2020 10:33 am

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Stef
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Re: Small Cap Value - Factor Timing vs Constant Exposure

Post by Stef » Mon Jan 27, 2020 11:24 am

Isn't the timing portfolio just displaying the momentum factor?

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hdas
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Post by hdas » Mon Jan 27, 2020 11:58 am

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firebirdparts
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Re: Small Cap Value - Factor Timing vs Constant Exposure

Post by firebirdparts » Mon Jan 27, 2020 12:16 pm

In my opinion, the consequences of getting this right or wrong are pretty small, and so entertaining myself by investing in USA small caps with varying exposure seems pretty harmless. I have been looking at it 30 years, but I don't really worry about whether it's getting ahead or behind. The idea of a "permanent" small cap value premium seems to have been ruined by everybody believing in it. I might be wrong about that too.

If you like moving money around, this might be a good place to do that harmlessly.
A fool and your money are soon partners

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