Great example of someone who should have never invested in factors

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Rick Ferri
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Great example of someone who should have never invested in factors

Post by Rick Ferri »

A Boglehead posted on Mon Mar 23, 2020 11:47 am:

"I did not listen to the buy and hold don't sell low crowd at the beginning of this crisis and I am extremely happy I did not. I dumped half my small value while TLH after the first week of losses. I should have liquidated it all, but still have significant holdings in DFA target value I."

This is a great example of someone who is not fully committed to a life-long small-value factor strategy and should never have invested in these factors to begin with. Underperformance is permanently locked-in when capitulation occurs - and it will occur.

If you do not understand what you are buying and are not 100% committed to a factor-tilt strategy for decades, you will eventually sell when it underperforms and then your portfolio will permanently underperform the market. In retrospect, this person should have only owned a total stock market index fund.

Complexity is risk. You're seeing it here in realtime.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
columbia
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Re: Great example of someone who should have never invested in factors

Post by columbia »

What’s the main information driver of people deciding to get into these funds?
Advisors? Financial writers? Top level advertising from brokerages?

Larry Swedroe and Paul Merriman are at least very consistent with their messages on the need for holding for life. Most others are not, I suspect.

Mr. Bogle saw through all of this, of course. 👍🏻
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Ramjet
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Re: Great example of someone who should have never invested in factors

Post by Ramjet »

Amen.
nif
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Re: Great example of someone who should have never invested in factors

Post by nif »

Hopefully they TLH into the total market index and learn from this lesson.
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Re: Great example of someone who should have never invested in factors

Post by livesoft »

Only the folks who are salivating now about all the good prices to BUY small-cap-value index funds RIGHT NOW should try the tilting thing. It is not just that you DON"T SELL, but you have to be committed to BUY, too!
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vineviz
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Re: Great example of someone who should have never invested in factors

Post by vineviz »

columbia wrote: Mon Mar 30, 2020 8:22 am What’s the main information driver of people deciding to get into these funds?
Advisors? Financial writers? Top level advertising from brokerages?

Larry Swedroe and Paul Merriman are at least very consistent with their messages on the need for holding for life. Most others are not, I suspect.

Mr. Bogle saw through all of this, of course. 👍🏻
No doubt the industry is full of sales pitches akin to "buy this: just look how well it's done over the past 3 years" but I don't think the explanation necessarily NEEDS professionals to push that kind of narrative: humans are built on cognitive and emotional biases that lead to errors like that every day.

In fact, even if the messaging is overwhelmingly and consistently on point (aka "if you tilt to SCV you MUST be sure you can commit to hold through thick and thin") the fact is that human nature is such that people are much more likely to RESPOND to that messaging after periods of recent outperformance.

A related arena to SCV is the superior diversification benefits of long-term US Treasuries vs. short- or intermediate term bonds. A small minority of Bogleheads have been making the case for LTTs for several years, largely to ridicule or simply silence. Fast-forward to 2020 and a bear market, and all of a sudden that same advice is being embraced MUCH more enthusiastically by some people. The information hasn't changed, but the emotional resonance of that information sure has.
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vineviz
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Re: Great example of someone who should have never invested in factors

Post by vineviz »

livesoft wrote: Mon Mar 30, 2020 8:49 am Only the folks who are salivating now about all the good prices to BUY small-cap-value index funds RIGHT NOW should try the tilting thing. It is not just that you DON"T SELL, but you have to be committed to BUY, too!
+1
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
columbia
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Re: Great example of someone who should have never invested in factors

Post by columbia »

livesoft wrote: Mon Mar 30, 2020 8:49 am Only the folks who are salivating now about all the good prices to BUY small-cap-value index funds RIGHT NOW should try the tilting thing. It is not just that you DON"T SELL, but you have to be committed to BUY, too!
I am definitely not salivating.

Well, maybe for another cinnamon roll to round out breakfast. 😀
Random Walker
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Re: Great example of someone who should have never invested in factors

Post by Random Walker »

columbia wrote: Mon Mar 30, 2020 8:22 am What’s the main information driver of people deciding to get into these funds?
Advisors? Financial writers? Top level advertising from brokerages?

Larry Swedroe and Paul Merriman are at least very consistent with their messages on the need for holding for life. Most others are not, I suspect.

Mr. Bogle saw through all of this, of course. 👍🏻
I would HOPE the main driver is education about the academic literature. An advisor can be the educator, but ultimately it’s the client’s money and the client’s responsibility to get educated one way or the other so he can stick to the plan.

Dave
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Re: Great example of someone who should have never invested in factors

Post by james22 »

Just wait until TIM outperforms TSM for a couple years.
dbr
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Re: Great example of someone who should have never invested in factors

Post by dbr »

I can remember having the impression in past years that this forum had a definite undercurrent that people who did not tilt were a little bit stupid somehow. The message to stick with the plan was always front and center, but the underlying message was to do it.

There was a survey here once that showed more than half the respondents on this forum had some sort of small cap value tilt.

So, one answer to the question what causes people on this forum to do this is group think with the nuances lost somewhere.

I would have no idea how many people in the real world read Swedroe or Merriman and tilt or how many advisors put people in tilts. I notice Vanguard PAS doesn't do this. On the other hand there is a whole company, DFA, that has even developed the funds one can use and a corp of advisors to lead people into it. I can bet those advisors are adamant about sticking to the plan.
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JoMoney
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Re: Great example of someone who should have never invested in factors

Post by JoMoney »

Not all "factors" are the same. The "Quality" factor has held up pretty well in this panic, and the prior 2008-9 period. Vanguard's Div Appreciation index (VIG) uses a methodology that loads pretty high on "Quality".

At any rate, whatever strategy one goes with, you need a certain amount of fortitude to "stay the course" through the bad times. That goes for broad-market indexing too. It's not always easy to stick with a S&P 500 or Total Stock Market index when some other sector or style is zooming and advisers are preaching that one style or another has "persistent" out-performance across time.
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iceport
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Re: Great example of someone who should have never invested in factors

Post by iceport »

columbia wrote: Mon Mar 30, 2020 8:22 am What’s the main information driver of people deciding to get into these funds?
Advisors? Financial writers? Top level advertising from brokerages?
OMG! Are you kidding? You must have missed the era here on this very forum. Search here for "TrevH".

The site was plastered for years with his admonishments to tilt massively towards SCV. Not only did he relentlessly encourage everybody to chase the higher returns he would document with endless backtesting trials, but he would sell it all as a way to outperform with less risk! And he was firmly dug into the present tense: adding SCV *DOES* this, adding REITs *DOES* that, as if it were all absolutely certain that the patterns would continue indefinitely into the future.

And he was far from alone.

I wondered at the time whether unsuspecting folks were being encouraged to adopt a strategy whose risks they knew little about. Now, it seems, we might have the answer.
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Random Walker
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Re: Great example of someone who should have never invested in factors

Post by Random Walker »

JoMoney wrote: Mon Mar 30, 2020 9:20 am Not all "factors" are the same. The "Quality" factor has held up pretty well in this panic, and the prior 2008-9 period. Vanguard's Div Appreciation index (VIG) uses a methodology that loads pretty high on "Quality".
This sort of supports the argument for diversifying across uncorrelated factors. Don’t know which will perform well at any given time. The likelihood of a negative outcome over any given timeframe though is likely lessened when diversified across factors. Check out the two tables in Chapter 9 of Larry’s Factor Book.

Dave
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Re: Great example of someone who should have never invested in factors

Post by deltaneutral83 »

dbr wrote: Mon Mar 30, 2020 9:16 am .

So, one answer to the question what causes people on this forum to do this is group think with the nuances lost somewhere.

I would have no idea how many people in the real world read Swedroe or Merriman and tilt or how many advisors put people in tilts. I notice Vanguard PAS doesn't do this. On the other hand there is a whole company, DFA, that has even developed the funds one can use and a corp of advisors to lead people into it. I can bet those advisors are adamant about sticking to the plan.
If you're equities allocation is anything other than cap weighted TSM/Tot Intl you are tilting in some fashion. I would assume this is 90+% of investors. The specific tilts (and there seem to be hundreds of them) are not as relevant to me as the tilting itself. Small cap value gets the most ink, but there are plenty others (REITS for one).
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iceport
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Re: Great example of someone who should have never invested in factors

Post by iceport »

dbr wrote: Mon Mar 30, 2020 9:16 am I can remember having the impression in past years that this forum had a definite undercurrent that people who did not tilt were a little bit stupid somehow. The message to stick with the plan was always front and center, but the underlying message was to do it.

There was a survey here once that showed more than half the respondents on this forum had some sort of small cap value tilt.

So, one answer to the question what causes people on this forum to do this is group think with the nuances lost somewhere.
Exactly so, dbr!

And that's a polite description of what went on around here.
"Discipline matters more than allocation.” ─William Bernstein
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JoMoney
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Re: Great example of someone who should have never invested in factors

Post by JoMoney »

Random Walker wrote: Mon Mar 30, 2020 9:26 am
JoMoney wrote: Mon Mar 30, 2020 9:20 am Not all "factors" are the same. The "Quality" factor has held up pretty well in this panic, and the prior 2008-9 period. Vanguard's Div Appreciation index (VIG) uses a methodology that loads pretty high on "Quality".
This sort of supports the argument for diversifying across uncorrelated factors. Don’t know which will perform well at any given time. The likelihood of a negative outcome over any given timeframe though is likely lessened when diversified across factors. Check out the two tables in Chapter 9 of Larry’s Factor Book.

Dave
I guess, people will make a reason for whatever they want.
Whole lot easier, and lower cost, just to use a simple broad market fund.
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rascott
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Re: Great example of someone who should have never invested in factors

Post by rascott »

After doing some portfolio analysis several months back....I felt I was a bit too heavily tilted to SCV (and SC in general). I didn't do anything, however.

The market has a fixed that for me :D
JamesDean44
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Re: Great example of someone who should have never invested in factors

Post by JamesDean44 »

vineviz wrote: Mon Mar 30, 2020 8:54 am
livesoft wrote: Mon Mar 30, 2020 8:49 am Only the folks who are salivating now about all the good prices to BUY small-cap-value index funds RIGHT NOW should try the tilting thing. It is not just that you DON"T SELL, but you have to be committed to BUY, too!
+1
I for one am salivating.
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Re: Great example of someone who should have never invested in factors

Post by JamesDean44 »

vineviz wrote: Mon Mar 30, 2020 8:54 am
columbia wrote: Mon Mar 30, 2020 8:22 am What’s the main information driver of people deciding to get into these funds?
Advisors? Financial writers? Top level advertising from brokerages?

Larry Swedroe and Paul Merriman are at least very consistent with their messages on the need for holding for life. Most others are not, I suspect.

Mr. Bogle saw through all of this, of course. 👍🏻
No doubt the industry is full of sales pitches akin to "buy this: just look how well it's done over the past 3 years" but I don't think the explanation necessarily NEEDS professionals to push that kind of narrative: humans are built on cognitive and emotional biases that lead to errors like that every day.

In fact, even if the messaging is overwhelmingly and consistently on point (aka "if you tilt to SCV you MUST be sure you can commit to hold through thick and thin") the fact is that human nature is such that people are much more likely to RESPOND to that messaging after periods of recent outperformance.

A related arena to SCV is the superior diversification benefits of long-term US Treasuries vs. short- or intermediate term bonds. A small minority of Bogleheads have been making the case for LTTs for several years, largely to ridicule or simply silence. Fast-forward to 2020 and a bear market, and all of a sudden that same advice is being embraced MUCH more enthusiastically by some people. The information hasn't changed, but the emotional resonance of that information sure has.
Not to veer too far off the topic of the OP, but I totally agree with with this point about LTT. It is interesting to see. To a lesser extent, you see the same thing happening with respect to treasuries only versus total bond (i.e. seemingly more people switching--or discussing switching--from total bond/corporates to treasury only funds).
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Kenkat
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Re: Great example of someone who should have never invested in factors

Post by Kenkat »

Just wait until the factors turn positive again which (I believe) will happen at some point. Then we can look forward to all of the posters looking to pile back in to it. Gotta get me some of that. It’s happening now with bonds. Everyone wants to suddenly move to treasuries or to short term bonds and out of corporates. Yes, there are those who held these all along who can say this is nothing new, but many others are just piling in to what has done well recently. The theory has been validated! Jump aboard the train before it leaves the station. The concept of holding treasuries is valid, but it will underperform at some point and you’ve got to ride those things out.

When I used to post on the old Morningstar forums, in the late 90’s, the posts asking about dumping value funds - what’s wrong with Windsor II, for example - were deafening. Only a few posters were talking about value, EM, REIT, etc. Larry Swedroe being one of them. Then the tech crash happened, growth funds underperformed and then suddenly everyone’s a proponent of value, REIT, EM, etc. When those eventually lag, we are back full circle.

People have trouble sticking to a plan, any plan. I’ve had a fairly modest slant to my portfolio since the late 90s and I’ve always been fine with part underperforming while others outperform. It just goes with the territory in my mind. The fact that my value funds are down 10% more than my core blend/growth funds doesn’t bother me any more than the fact that my bonds are up 3% while my equities are down 20%+. That’s how it goes. It doesn’t lead me to say “I need more bonds in my portfolio”. But that’s how many people do react. And that’s really the risk with any strategy - you bail on it at the wrong time.

Queue the pop culture references:

- Same as it ever was; same as it ever was
- Tale as old as time; Tune as old as song
Last edited by Kenkat on Mon Mar 30, 2020 10:30 am, edited 1 time in total.
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Steve Reading
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Re: Great example of someone who should have never invested in factors

Post by Steve Reading »

Random Walker wrote: Mon Mar 30, 2020 9:26 am
This sort of supports the argument for diversifying across uncorrelated factors. Don’t know which will perform well at any given time. The likelihood of a negative outcome over any given timeframe though is likely lessened when diversified across factors. Check out the two tables in Chapter 9 of Larry’s Factor Book.

Dave
Oh come on Dave seriously?

*Some factor outperforms*
Random Walker = This is exactly why you want to tilt to various different factors.
"Some factor underperforms*
Random Walker = See? If a factor underperforms, it must mean it's risky. So it must be good to allocate towards that risk as a diversification tool.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Great example of someone who should have never invested in factors

Post by Gufomel »

JamesDean44 wrote: Mon Mar 30, 2020 9:59 am
vineviz wrote: Mon Mar 30, 2020 8:54 am
columbia wrote: Mon Mar 30, 2020 8:22 am What’s the main information driver of people deciding to get into these funds?
Advisors? Financial writers? Top level advertising from brokerages?

Larry Swedroe and Paul Merriman are at least very consistent with their messages on the need for holding for life. Most others are not, I suspect.

Mr. Bogle saw through all of this, of course. 👍🏻
No doubt the industry is full of sales pitches akin to "buy this: just look how well it's done over the past 3 years" but I don't think the explanation necessarily NEEDS professionals to push that kind of narrative: humans are built on cognitive and emotional biases that lead to errors like that every day.

In fact, even if the messaging is overwhelmingly and consistently on point (aka "if you tilt to SCV you MUST be sure you can commit to hold through thick and thin") the fact is that human nature is such that people are much more likely to RESPOND to that messaging after periods of recent outperformance.

A related arena to SCV is the superior diversification benefits of long-term US Treasuries vs. short- or intermediate term bonds. A small minority of Bogleheads have been making the case for LTTs for several years, largely to ridicule or simply silence. Fast-forward to 2020 and a bear market, and all of a sudden that same advice is being embraced MUCH more enthusiastically by some people. The information hasn't changed, but the emotional resonance of that information sure has.
Not to veer too far off the topic of the OP, but I totally agree with with this point about LTT. It is interesting to see. To a lesser extent, you see the same thing happening with respect to treasuries only versus total bond (i.e. seemingly more people switching--or discussing switching--from total bond/corporates to treasury only funds).
This definitely applies to me. I spend a decent amount of time thinking about personal finance, but I don’t devote my life to it. So when I come to a forum like this or read financial articles, it’s easy to pick up on the high-level “rule of thumb” information and strategies. One of those (at least what I’ve picked up on) is stocks are for risk/return and bonds are for safety. From my observations, bonds in this context are generally referring to total bond market. So I constructed my portfolio AA on the basis of how much risk I wanted to take (stocks) and how much safety I needed (bonds). What I didn’t appreciate was the risky corporate portion inherent in a TBM fund. I’m sure this nuance has been discussed on the forum plenty, but to an casual observer like me it was not readily obvious. Often it’s not until you hit a crisis that you experience and pick up on the implications of these nuances. There was risk in my AA that I was not aware of when I formed it. When you discover new information in the midst of a crisis, that makes it difficult to “stay the course”. Because you realize the course you’re on is not exactly the one you thought you were on.

Ironically I’m perfectly content with my stock holdings in this crash (in fact have bought more), but been far more focused on fixed income because I realize now I knew almost nothing about it.
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Re: Great example of someone who should have never invested in factors

Post by Noobvestor »

I'm a little surprised at the ship-jumpers both for SCV and for various kinds of bonds. A simple look back at the 2000s would show you how SCV can outperform at times (while not at other times), and would definitely show in 08/09 how various types of bonds behaved - for bonds especially, this time is playing out a lot like the last one (TIPS crash temporarily in flight to quality + liquidity, Treasuries do well proportional to duration, and of course anything else with quality or liquidity issues goes down a bit but not as much as equities). Every crash is different, but I picked Treasuries in my portfolio in no small part after reviewing that crisis, and picked intermediate to balance deflation protection with interest rate risk.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: Great example of someone who should have never invested in factors

Post by Random Walker »

305pelusa wrote: Mon Mar 30, 2020 10:08 am
Random Walker wrote: Mon Mar 30, 2020 9:26 am
This sort of supports the argument for diversifying across uncorrelated factors. Don’t know which will perform well at any given time. The likelihood of a negative outcome over any given timeframe though is likely lessened when diversified across factors. Check out the two tables in Chapter 9 of Larry’s Factor Book.

Dave
Oh come on Dave seriously?

*Some factor outperforms*
Random Walker = This is exactly why you want to tilt to various different factors.
"Some factor underperforms*
Random Walker = See? If a factor underperforms, it must mean it's risky. So it must be good to allocate towards that risk as a diversification tool.
Yes seriously. If you haven’t seen those tables from Larry’s factor book, I’d be really interested to hear what you think after looking at them.

Dave
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Steve Reading
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Re: Great example of someone who should have never invested in factors

Post by Steve Reading »

Random Walker wrote: Mon Mar 30, 2020 11:10 am
305pelusa wrote: Mon Mar 30, 2020 10:08 am
Random Walker wrote: Mon Mar 30, 2020 9:26 am
This sort of supports the argument for diversifying across uncorrelated factors. Don’t know which will perform well at any given time. The likelihood of a negative outcome over any given timeframe though is likely lessened when diversified across factors. Check out the two tables in Chapter 9 of Larry’s Factor Book.

Dave
Oh come on Dave seriously?

*Some factor outperforms*
Random Walker = This is exactly why you want to tilt to various different factors.
"Some factor underperforms*
Random Walker = See? If a factor underperforms, it must mean it's risky. So it must be good to allocate towards that risk as a diversification tool.
Yes seriously. If you haven’t seen those tables from Larry’s factor book, I’d be really interested to hear what you think after looking at them.

Dave
Well I'm just poking fun that when you're biased to believe something, you'll take anything as evidence for it.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
MotoTrojan
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Re: Great example of someone who should have never invested in factors

Post by MotoTrojan »

vineviz wrote: Mon Mar 30, 2020 8:54 am
livesoft wrote: Mon Mar 30, 2020 8:49 am Only the folks who are salivating now about all the good prices to BUY small-cap-value index funds RIGHT NOW should try the tilting thing. It is not just that you DON"T SELL, but you have to be committed to BUY, too!
+1
+2. I’m gobbling them up.
dbr
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Re: Great example of someone who should have never invested in factors

Post by dbr »

MotoTrojan wrote: Mon Mar 30, 2020 11:31 am
vineviz wrote: Mon Mar 30, 2020 8:54 am
livesoft wrote: Mon Mar 30, 2020 8:49 am Only the folks who are salivating now about all the good prices to BUY small-cap-value index funds RIGHT NOW should try the tilting thing. It is not just that you DON"T SELL, but you have to be committed to BUY, too!
+1
+2. I’m gobbling them up.
Do you mean you are increasing your tilt or that you are rebalancing your allocation within stocks.
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Nestegg_User
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Re: Great example of someone who should have never invested in factors

Post by Nestegg_User »

Gufomel wrote: Mon Mar 30, 2020 10:31 am
JamesDean44 wrote: Mon Mar 30, 2020 9:59 am
vineviz wrote: Mon Mar 30, 2020 8:54 am
columbia wrote: Mon Mar 30, 2020 8:22 am What’s the main information driver of people deciding to get into these funds?
Advisors? Financial writers? Top level advertising from brokerages?

Larry Swedroe and Paul Merriman are at least very consistent with their messages on the need for holding for life. Most others are not, I suspect.

Mr. Bogle saw through all of this, of course. 👍🏻
No doubt the industry is full of sales pitches akin to "buy this: just look how well it's done over the past 3 years" but I don't think the explanation necessarily NEEDS professionals to push that kind of narrative: humans are built on cognitive and emotional biases that lead to errors like that every day.

In fact, even if the messaging is overwhelmingly and consistently on point (aka "if you tilt to SCV you MUST be sure you can commit to hold through thick and thin") the fact is that human nature is such that people are much more likely to RESPOND to that messaging after periods of recent outperformance.

A related arena to SCV is the superior diversification benefits of long-term US Treasuries vs. short- or intermediate term bonds. A small minority of Bogleheads have been making the case for LTTs for several years, largely to ridicule or simply silence. Fast-forward to 2020 and a bear market, and all of a sudden that same advice is being embraced MUCH more enthusiastically by some people. The information hasn't changed, but the emotional resonance of that information sure has.
Not to veer too far off the topic of the OP, but I totally agree with with this point about LTT. It is interesting to see. To a lesser extent, you see the same thing happening with respect to treasuries only versus total bond (i.e. seemingly more people switching--or discussing switching--from total bond/corporates to treasury only funds).
This definitely applies to me. I spend a decent amount of time thinking about personal finance, but I don’t devote my life to it. So when I come to a forum like this or read financial articles, it’s easy to pick up on the high-level “rule of thumb” information and strategies. One of those (at least what I’ve picked up on) is stocks are for risk/return and bonds are for safety. From my observations, bonds in this context are generally referring to total bond market. So I constructed my portfolio AA on the basis of how much risk I wanted to take (stocks) and how much safety I needed (bonds). What I didn’t appreciate was the risky corporate portion inherent in a TBM fund. I’m sure this nuance has been discussed on the forum plenty, but to an casual observer like me it was not readily obvious. Often it’s not until you hit a crisis that you experience and pick up on the implications of these nuances. There was risk in my AA that I was not aware of when I formed it. When you discover new information in the midst of a crisis, that makes it difficult to “stay the course”. Because you realize the course you’re on is not exactly the one you thought you were on.

Ironically I’m perfectly content with my stock holdings in this crash (in fact have bought more), but been far more focused on fixed income because I realize now I knew almost nothing about it.
Those few of us that didn't/don't do TBM are quite aware that it comprises of treasuries, corporate (of varying quality), munis, and MBS. I particularly want to avoid the mortgage backed securities right now as I know that they are going to be clobbered :shock: I prefer my corporate to be very high quality and had munis before retirement when I was in a much higher bracket (I have already rotated out of the last fund in November, having reduced them over the last few years). I also didn't go long term treasuries, as I didn't see any real yield for the extra term risk, so I stayed in intermediate treasury funds and individual treasuries. In recent times, CD's had better TEY without having term risk.... and those bought in last two years are still solid as they don't have such risk and maybe even more valuable on the secondary market now!

As to SCV.... nah, didn't tilt that way.... I preferred the mid-caps (which I had already started toward before hearing of Mel's preference towards them). As a retiree, I need the factor to show up within my remaining lifetime :? so quality, size, (and under current conditions, momentum) are more drivers of any tilt. I had REIT before but had been selling that off after its run-up, with the last of it sold in November, per my IPS.
Last edited by Nestegg_User on Mon Mar 30, 2020 11:52 am, edited 2 times in total.
MotoTrojan
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Re: Great example of someone who should have never invested in factors

Post by MotoTrojan »

dbr wrote: Mon Mar 30, 2020 11:40 am
MotoTrojan wrote: Mon Mar 30, 2020 11:31 am
vineviz wrote: Mon Mar 30, 2020 8:54 am
livesoft wrote: Mon Mar 30, 2020 8:49 am Only the folks who are salivating now about all the good prices to BUY small-cap-value index funds RIGHT NOW should try the tilting thing. It is not just that you DON"T SELL, but you have to be committed to BUY, too!
+1
+2. I’m gobbling them up.
Do you mean you are increasing your tilt or that you are rebalancing your allocation within stocks.
Just contributing to my overall allocation, but my recent buys have been US & ex-US small-value and have pushed my 50% US Large/Large-value allocation down to ~46% so I guess a mild over-rebalance :twisted:.
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nisiprius
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Re: Great example of someone who should have never invested in factors

Post by nisiprius »

There is a serious problem, and I have no idea how to solve it, in which nuanced and complicated true statements get converted into simplistic falsehood in the retelling. To take one example.

I've been criticized for criticizing Paul Merriman for statements like these:

From his personal website:

"Why everyone should invest in small-cap value funds"
"[Small-cap value is] The one asset class every investor needs"
"The One Fund Every Investor Should Own [either Vanguard Small-Cap Value Index ETF or WisdomTree Small-Cap Dividend ETF]"

Image

The excuse made on his behalf is that he didn't write the headlines himself. But he was happy enough to repeat them on his own personal website under his own personal control.

And reading through, let's say The One Asset Class Every Investor Needs I challenge you to find any language in that article suggesting, hinting, or even giving a disclaimer footnote that it might not literally be for every investor--or that investors that use it need to make a commitment in advance to a need for extra discipline and extra firm resolve to stay the course.

Can you find any such caution?
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Steve Reading
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Re: Great example of someone who should have never invested in factors

Post by Steve Reading »

nisiprius wrote: Mon Mar 30, 2020 11:52 am There is a serious problem, and I have no idea how to solve it, in which nuanced and complicated true statements get converted into simplistic falsehood in the retelling. To take one example.

I've been criticized for criticizing Paul Merriman for statements like these:

From his personal website:

"Why everyone should invest in small-cap value funds"
"[Small-cap value is] The one asset class every investor needs"
"The One Fund Every Investor Should Own [either Vanguard Small-Cap Value Index ETF or WisdomTree Small-Cap Dividend ETF]"

Image

The excuse made on his behalf is that he didn't write the headlines himself. But he was happy enough to repeat them on his own personal website under his own personal control.

And reading through, let's say The One Asset Class Every Investor Needs I challenge you to find any language in that article suggesting, hinting, or even giving a disclaimer footnote that it might not literally be for every investor--or that investors that use it need to make a commitment in advance to a need for extra discipline and extra firm resolve to stay the course.

Can you find any such caution?
I’ve read some of what Merriman has written. Even a podcast on SCV. I’m serious when I say a fair amount of BHs, you included, know more about investing that he does. Just my opinion.
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columbia
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Re: Great example of someone who should have never invested in factors

Post by columbia »

Timely tweet:




Larry Swedroe
@larryswedroe·
8m
In downturns, value/small tend to underperform. Both are riskier-fewer buffers to survive eco shocks. Drawdown now longest for value and third largest. It's really cheap, thus tempting to shift to value, but remember, tends to do poorly in bad times. Diversification is friend.
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Re: Great example of someone who should have never invested in factors

Post by JamesDean44 »

MotoTrojan wrote: Mon Mar 30, 2020 11:50 am
dbr wrote: Mon Mar 30, 2020 11:40 am
MotoTrojan wrote: Mon Mar 30, 2020 11:31 am
vineviz wrote: Mon Mar 30, 2020 8:54 am
livesoft wrote: Mon Mar 30, 2020 8:49 am Only the folks who are salivating now about all the good prices to BUY small-cap-value index funds RIGHT NOW should try the tilting thing. It is not just that you DON"T SELL, but you have to be committed to BUY, too!
+1
+2. I’m gobbling them up.
Do you mean you are increasing your tilt or that you are rebalancing your allocation within stocks.
Just contributing to my overall allocation, but my recent buys have been US & ex-US small-value and have pushed my 50% US Large/Large-value allocation down to ~46% so I guess a mild over-rebalance :twisted:.
I'm in the mild over-rebalance group too.
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Re: Great example of someone who should have never invested in factors

Post by AZAttorney11 »

I'm increasing my exposure to SCV at this time. Those who were surprised by the recent performance of SCV should never have tilted (as noted by several posters, including Rick).
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Re: Great example of someone who should have never invested in factors

Post by aristotelian »

How do you know it will outperform in the future? What good is a strategy that requires you to wait your whole lifetime to see it through? I don't like locking in losses either but to me the takeaway is more an indictment of factor investing than a particular investor.
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Re: Great example of someone who should have never invested in factors

Post by vineviz »

aristotelian wrote: Mon Mar 30, 2020 3:04 pm What good is a strategy that requires you to wait your whole lifetime to see it through?
EVERY investing strategy requires this of investors.
"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: Great example of someone who should have never invested in factors

Post by dbr »

vineviz wrote: Mon Mar 30, 2020 3:10 pm
aristotelian wrote: Mon Mar 30, 2020 3:04 pm What good is a strategy that requires you to wait your whole lifetime to see it through?
EVERY investing strategy requires this of investors.
I was also trying think how to convey this idea, but I think you put it succinctly.
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Re: Great example of someone who should have never invested in factors

Post by dbr »

vineviz wrote: Mon Mar 30, 2020 3:10 pm
aristotelian wrote: Mon Mar 30, 2020 3:04 pm What good is a strategy that requires you to wait your whole lifetime to see it through?
EVERY investing strategy requires this of investors.
I was also trying think how to convey this idea, but I think you put it succinctly. You could turn it around and suggest you have to wait a lifetime to see a non-tilted portfolio outperform. If you believe the Fama-French model the odds are slightly in favor of the tilted portfolio. If you don't believe that model, then presumably the odds are equal.
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Re: Great example of someone who should have never invested in factors

Post by billy269 »

Bought some more slyv and vbr in my retirement accounts today. At 40% off highs and a 30 year timeplan, stocking up and even increasing my tilt at this time.
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Re: Great example of someone who should have never invested in factors

Post by Kenkat »

Factor investing worked very well from 2000-2006 so it’s not like a period of outperformance hasn’t happened in recent memory.
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Re: Great example of someone who should have never invested in factors

Post by aristotelian »

vineviz wrote: Mon Mar 30, 2020 3:10 pm
aristotelian wrote: Mon Mar 30, 2020 3:04 pm What good is a strategy that requires you to wait your whole lifetime to see it through?
EVERY investing strategy requires this of investors.
I take your point but I dont think any rational person would follow a strategy that had no expected benefit during their lifetime. Stocks are virtually assured to outperform bonds over 30 year periods and pretty close over 15 years. I have no problem being committed to stocks for that kind of timeframe. I can reasonably expect to see the benefit several times over. I'm not sure what the numbers are like for SV, but if it is a smaller premium that is only guaranteed over a longer period of time, it may not be worth the risk.
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Re: Great example of someone who should have never invested in factors

Post by EFF_fan81 »

I've been on this forum for years, mostly as a lurker, and it's been interesting to watch the various slices and dices fall in and out of favor. Gold, REITs, Small, Value. And there does definitely seem to be a timing element with how these things wax and wane. I could say the same thing for international allocation (a 50/50 market weighting was very popular a few years ago and seems less popular now.)

My theory on the small / value premium has always been very simple. If it's extra return because of extra risk, I can achieve the same result with a slightly higher equity allocation. If it's extra return without extra risk, well then it will be arbitraged away soon enough. (Maybe it already has been.) If it's just about a tiny marginal gain from rebalancing asset classes with slightly different return profiles, well then if would only be willing to dedicate 5% or so of my portfolio for that, and not obsessively check, the juice is not worth the squeeze. So I've been boring old three fund for a long time.

I'm guessing for most DIY investors, the behavioral errors from slice and dice far exceed any potential benefit.

I'm increasingly of the opinion that this theory could extend to the three fund vs. one fund debate as well. I am guessing many people would be best served by selecting the life strategy or target date retirement fund of their choice, setting an auto-contribution, disabling online access and then logging off and look at their annual statement once a year for five minutes until retirement.
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Re: Great example of someone who should have never invested in factors

Post by vineviz »

aristotelian wrote: Mon Mar 30, 2020 3:47 pmI take your point but I don't think any rational person would follow a strategy that had no expected benefit during their lifetime.
I agree, and thankfully no such thing is required of SCV investors.
aristotelian wrote: Mon Mar 30, 2020 3:47 pmStocks are virtually assured to outperform bonds over 30 year periods and pretty close over 15 years. I have no problem being committed to stocks for that kind of timeframe. I can reasonably expect to see the benefit several times over. I'm not sure what the numbers are like for SV, but if it is a smaller premium that is only guaranteed over a longer period of time, it may not be worth the risk.
Historically, if you look at rolling 15-year periods you'll find that large cap stocks beat Treasury bonds about 86% of the time and small cap value beat large cap value about 79% of the time. The base rates are about the same, in other words. The only difference I see is how recently each one has failed to achieve that success.
"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: Great example of someone who should have never invested in factors

Post by vineviz »

EFF_fan81 wrote: Mon Mar 30, 2020 3:55 pm My theory on the small / value premium has always been very simple. If it's extra return because of extra risk, I can achieve the same result with a slightly higher equity allocation.
Not exactly: it's a different risk, not just extra risk. You could get the same volatility as SCV by simply leveraging up the market portfolio, but you can't get the same diversification benefits by doing that.
"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: Great example of someone who should have never invested in factors

Post by Random Walker »

vineviz wrote: Mon Mar 30, 2020 4:25 pm
EFF_fan81 wrote: Mon Mar 30, 2020 3:55 pm My theory on the small / value premium has always been very simple. If it's extra return because of extra risk, I can achieve the same result with a slightly higher equity allocation.
Not exactly: it's a different risk, not just extra risk. You could get the same volatility as SCV by simply leveraging up the market portfolio, but you can't get the same diversification benefits by doing that.
Totally agree

Dave
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Re: Great example of someone who should have never invested in factors

Post by JamesDean44 »

Whenever someone asks me for advice about investing, I refer them to the Bogleheads wiki and the forum and recommend that they review the asset allocations of the Vanguard target date funds. I don't think that factor investing is for everyone. I think it is irresponsible to recommend factor investing without providing the background and further information. It is necessary to study the issues and develop a sufficient knowledge base to come to one's own conclusions. Otherwise, the investor won't have sufficient conviction to stay the course with a tilted portfolio. (I guess this is proportionately less true for very small tilts that won't make a meaningful difference anyways.) I think that the Bogleheads 3-fund approach (or a good, low-cost TDF) is best for the vast majority of investors given behavioral considerations. But even sticking to that strategy requires some education, understanding, and conviction.

Although this thread is aimed at factor investing, you could fill in the blank with many investment strategies. For the person currently switching from corporate bonds to treasuries, you could say that it is a great example of someone who should have never invested in corporate bonds (because they are selling low and buying high and didn't consider the risks of their bond funds appropriately). For the person currently switching from a 60/40 to a 40/60, you could say that is an example of someone who should have never been invested as aggressively in equities (because they are selling low and buying high and didn't consider the risks of their portfolio appropriately).

To state the obvious, a market downturn or a recession often forces folks to capitulate on their strategy. I think the basic advice is often the correct advice: stay the course and don't make dramatic moves in times of extreme market volatility.
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Re: Great example of someone who should have never invested in factors

Post by dbr »

My response to questions about factor investing goes along the lines of learn about the Fama-French model, read Swedroe's book and also Rick Ferri, and recognize that if you have to ask, you probably should not do it.

My disclaimer is that I don't invest in factors because I don't need to and I don't want to. I guess I am trying to say I don't have a dog in this fight.
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Re: Great example of someone who should have never invested in factors

Post by EFF_fan81 »

Random Walker wrote: Mon Mar 30, 2020 4:44 pm
vineviz wrote: Mon Mar 30, 2020 4:25 pm
EFF_fan81 wrote: Mon Mar 30, 2020 3:55 pm My theory on the small / value premium has always been very simple. If it's extra return because of extra risk, I can achieve the same result with a slightly higher equity allocation.
Not exactly: it's a different risk, not just extra risk. You could get the same volatility as SCV by simply leveraging up the market portfolio, but you can't get the same diversification benefits by doing that.
Totally agree

Dave
How is a portfolio that already includes small value stocks at market weights less diverse than one that has them at double or triple market rates?
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Re: Great example of someone who should have never invested in factors

Post by mrwalken »

One issue is that when you go down the slice and dice road, it's hard to get off that road. Especially if you have a bunch of taxable gains. I overestimated how interested I would be in investing initially, and now am stuck.

The worst part for me is that I had to buy VBR and VSS as ETF's when going down the slice and dice road. I have lost a lot of time and money dealing with the hassles of ETF's as compared to mutual funds.

All things considered, slice and dice was a terrible decision for me. And that's not just because the s&p has outperformed basically everything over the last several years.
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