Great example of someone who should have never invested in factors

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Noobvestor
Posts: 5701
Joined: Mon Aug 23, 2010 1:09 am

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

Post by Noobvestor »

EFF_fan81 wrote: Mon Mar 30, 2020 5:04 pm
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?
The long answer: Google Fama French factor model

The short answer: the theory goes that small and value are distinct risk factors that explain a portion of market returns. So by tilting toward small and value, you diversify an otherwise beta-oriented stock allocation. There is a lot more to it, but that's the TL;DR
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
JamesDean44
Posts: 180
Joined: Sat Jan 13, 2018 7:36 pm

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

Post by JamesDean44 »

EFF_fan81 wrote: Mon Mar 30, 2020 5:04 pm
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?
https://www.google.com/url?sa=t&source= ... 5607370111

Obviously just a starting point for consideration.
randomguy
Posts: 9208
Joined: Wed Sep 17, 2014 9:00 am

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

Post by randomguy »

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?
Historical data. Seriously anyone that has looked at things like portfolio visualizer and seen the 13.5% return versus 10.5% sees the benefit. The next step though of realizing you might need to wait 10-20 years for the benefit to show up is the tough one. And all during those years there will be people talking about how the SV no longer works and all the while you are underperforming the market.

Take our 1990 investor. In 1999 after 10 years in TSM has returned 17% to SV 14%. Clearly SV doesn't work right? Should just go TSM. In 2009 the numbers were TSM 8%. SV 11%. I.e. the investor got exactly the level of outperformance that you would expect.

Obviously there is no guarantee that we will ever have outperformance again. But so far it has always happened. You will find 10 year periods where TSM outperforms. Not many 20 years (I want to say there was 1). And there are zero 30 year ones I am aware of.
Random Walker
Posts: 4714
Joined: Fri Feb 23, 2007 8:21 pm

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

Post by Random Walker »

EFF_fan81 wrote: Mon Mar 30, 2020 5:04 pm
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?
Because the TSM exposure to the small value stocks is exactly by definition offset by exposure to large growth stocks. There is no net exposure to the size or value factors. Need to look at diversification across unique sources of risk.

Dave
wickywack
Posts: 90
Joined: Thu Jun 11, 2015 8:09 am

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

Post by wickywack »

Random Walker wrote: Mon Mar 30, 2020 6:30 pm
EFF_fan81 wrote: Mon Mar 30, 2020 5:04 pm
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?
Because the TSM exposure to the small value stocks is exactly by definition offset by exposure to large growth stocks. There is no net exposure to the size or value factors. Need to look at diversification across unique sources of risk.

Dave
Larry Swedroe is usually careful in his wording: risk factor diversification is *different* from the traditional asset class diversification.

As I understand it, you optimize for one or the other, but not really both at the same time. Which you pick should depend on your belief in risk factor premiums: will they persist in your investing horizon, will they have sufficient returns, and will they remain relatively uncorrelated to the market? If you're not confident in the arguments in favor of these premiums, you probably want to avoid risk factor diversification and stick with the traditional definition.
User avatar
vineviz
Posts: 8495
Joined: Tue May 15, 2018 1:55 pm

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

Post by vineviz »

wickywack wrote: Mon Mar 30, 2020 7:13 pm
Random Walker wrote: Mon Mar 30, 2020 6:30 pm
EFF_fan81 wrote: Mon Mar 30, 2020 5:04 pm
Random Walker wrote: Mon Mar 30, 2020 4:44 pm
vineviz wrote: Mon Mar 30, 2020 4:25 pm

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?
Because the TSM exposure to the small value stocks is exactly by definition offset by exposure to large growth stocks. There is no net exposure to the size or value factors. Need to look at diversification across unique sources of risk.

Dave
Larry Swedroe is usually careful in his wording: risk factor diversification is *different* from the traditional asset class diversification.

As I understand it, you optimize for one or the other, but not really both at the same time. Which you pick should depend on your belief in risk factor premiums: will they persist in your investing horizon, will they have sufficient returns, and will they remain relatively uncorrelated to the market? If you're not confident in the arguments in favor of these premiums, you probably want to avoid risk factor diversification and stick with the traditional definition.
Risk is the ONLY thing you can diversify.

Asset class diversification is just an imprecise approximation of risk factor diversification.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
wickywack
Posts: 90
Joined: Thu Jun 11, 2015 8:09 am

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

Post by wickywack »

vineviz wrote: Mon Mar 30, 2020 7:25 pm
wickywack wrote: Mon Mar 30, 2020 7:13 pm
Random Walker wrote: Mon Mar 30, 2020 6:30 pm
EFF_fan81 wrote: Mon Mar 30, 2020 5:04 pm
Random Walker wrote: Mon Mar 30, 2020 4:44 pm

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?
Because the TSM exposure to the small value stocks is exactly by definition offset by exposure to large growth stocks. There is no net exposure to the size or value factors. Need to look at diversification across unique sources of risk.

Dave
Larry Swedroe is usually careful in his wording: risk factor diversification is *different* from the traditional asset class diversification.

As I understand it, you optimize for one or the other, but not really both at the same time. Which you pick should depend on your belief in risk factor premiums: will they persist in your investing horizon, will they have sufficient returns, and will they remain relatively uncorrelated to the market? If you're not confident in the arguments in favor of these premiums, you probably want to avoid risk factor diversification and stick with the traditional definition.
Risk is the ONLY thing you can diversify.

Asset class diversification is just an imprecise approximation of risk factor diversification.
If you don't believe in risk factors (other than market), then risk factor diversification collapses to asset class diversification. :-)
rkhusky
Posts: 10909
Joined: Thu Aug 18, 2011 8:09 pm

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

Post by rkhusky »

randomguy wrote: Mon Mar 30, 2020 5:50 pm
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?
Historical data. Seriously anyone that has looked at things like portfolio visualizer and seen the 13.5% return versus 10.5% sees the benefit. The next step though of realizing you might need to wait 10-20 years for the benefit to show up is the tough one. And all during those years there will be people talking about how the SV no longer works and all the while you are underperforming the market.

Take our 1990 investor. In 1999 after 10 years in TSM has returned 17% to SV 14%. Clearly SV doesn't work right? Should just go TSM. In 2009 the numbers were TSM 8%. SV 11%. I.e. the investor got exactly the level of outperformance that you would expect.

Obviously there is no guarantee that we will ever have outperformance again. But so far it has always happened. You will find 10 year periods where TSM outperforms. Not many 20 years (I want to say there was 1). And there are zero 30 year ones I am aware of.
Unfortunately things are different post-Fama French. People will need to give up on a factor before it has a chance to outperform again. All the talk about staying the course is counterproductive.
And if TSM and factor investing just trade places in outperformance every so often, what’s the point? You would have to trust to luck that the right horse is winning when you need it to.
User avatar
vineviz
Posts: 8495
Joined: Tue May 15, 2018 1:55 pm

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

Post by vineviz »

wickywack wrote: Mon Mar 30, 2020 7:38 pm
vineviz wrote: Mon Mar 30, 2020 7:25 pm
wickywack wrote: Mon Mar 30, 2020 7:13 pm
Random Walker wrote: Mon Mar 30, 2020 6:30 pm
EFF_fan81 wrote: Mon Mar 30, 2020 5:04 pm

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?
Because the TSM exposure to the small value stocks is exactly by definition offset by exposure to large growth stocks. There is no net exposure to the size or value factors. Need to look at diversification across unique sources of risk.

Dave
Larry Swedroe is usually careful in his wording: risk factor diversification is *different* from the traditional asset class diversification.

As I understand it, you optimize for one or the other, but not really both at the same time. Which you pick should depend on your belief in risk factor premiums: will they persist in your investing horizon, will they have sufficient returns, and will they remain relatively uncorrelated to the market? If you're not confident in the arguments in favor of these premiums, you probably want to avoid risk factor diversification and stick with the traditional definition.
Risk is the ONLY thing you can diversify.

Asset class diversification is just an imprecise approximation of risk factor diversification.
If you don't believe in risk factors (other than market), then risk factor diversification collapses to asset class diversification. :-)
The existence of a risk depends not at all on whether you believe in it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Random Walker
Posts: 4714
Joined: Fri Feb 23, 2007 8:21 pm

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

Post by Random Walker »

rkhusky wrote: Mon Mar 30, 2020 7:56 pm And if TSM and factor investing just trade places in outperformance every so often, what’s the point? You would have to trust to luck that the right horse is winning when you need it to.
The point is that if you don’t know which factor is going to win over any timeframe, it makes sense to diversify across the factors. TSM has net exposure to only a single equity factor, the market factor. I think diversification across uncorrelated sources of risk/return is always important, but likely more important when the timeframe is short.

Dave
User avatar
9-5 Suited
Posts: 639
Joined: Thu Jun 23, 2016 12:14 pm

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

Post by 9-5 Suited »

vineviz wrote: Mon Mar 30, 2020 8:54 am 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.
That emotional resonance will cut both ways. If the next recession is the result of a dollar crisis that comes with fast rising interest rates and loss of confidence in US debt, the short-term bond / CD advocates will have their day and the emotional resonance of at least one of the arguments in favor of LTT will go to zero.

But certainly this bear market has been a shining example of the diversification benefit of LTT.
typical.investor
Posts: 2398
Joined: Mon Jun 11, 2018 3:17 am

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

Post by typical.investor »

Rick Ferri wrote: Mon Mar 30, 2020 8:07 am
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
I question if it really is the complexity that is underlying cause. Plenty of total market funds are being abandoned too.

I see plenty of threads where the OP justifies adjusting their AA and selling out some total market threads because they "misjudged" their risk tolerance. And I see many responses saying definitely yes - you should do so. Bogle it is said in the responses did the same thing - never mind that Bogle sold at a high before a crash.

This seems like the garden variety "when there seems to be an immediate and real risk that equities will suffer a large drop and have trouble recovering" fear that causes people seek to reduce exposure. It just seems like people decide "at this time the risk is not worth it".

And similarly, maybe factors' relatively low returns are part of the thinking that is persuading many to abandon their tilts as they age in the name of "simplification", but that goes for Total Market funds too. Lots of people are abandoning international.

I do completely agree a life-long commitment is particularly required for factor investing. But I think anything that hasn't been the best in recent times is subject to questioning and potential liquidation. Why do you need anything other than the best? :twisted: Oh and should we throw long term treasuries into the mix. Countless threads on abandoning munis as a main holding and corporates.

In any case, I still believe that factor correlations can increase (dramatically) and that factor returns can be very un-normal for long periods. It's this reason why I don't accept factor investing as "diversification" as factor proponents claim. To me it seems as though factors are not truly independent but rather derive from something more fundamental such as the interplay between growth and inflation.
wickywack
Posts: 90
Joined: Thu Jun 11, 2015 8:09 am

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

Post by wickywack »

vineviz wrote: Mon Mar 30, 2020 8:09 pm
wickywack wrote: Mon Mar 30, 2020 7:38 pm
vineviz wrote: Mon Mar 30, 2020 7:25 pm
wickywack wrote: Mon Mar 30, 2020 7:13 pm
Random Walker wrote: Mon Mar 30, 2020 6:30 pm

Because the TSM exposure to the small value stocks is exactly by definition offset by exposure to large growth stocks. There is no net exposure to the size or value factors. Need to look at diversification across unique sources of risk.

Dave
Larry Swedroe is usually careful in his wording: risk factor diversification is *different* from the traditional asset class diversification.

As I understand it, you optimize for one or the other, but not really both at the same time. Which you pick should depend on your belief in risk factor premiums: will they persist in your investing horizon, will they have sufficient returns, and will they remain relatively uncorrelated to the market? If you're not confident in the arguments in favor of these premiums, you probably want to avoid risk factor diversification and stick with the traditional definition.
Risk is the ONLY thing you can diversify.

Asset class diversification is just an imprecise approximation of risk factor diversification.
If you don't believe in risk factors (other than market), then risk factor diversification collapses to asset class diversification. :-)
The existence of a risk depends not at all on whether you believe in it.
That might be getting too deep for me.

To put it differently, there are over a hundred factors in academic literature. Swedroe only invests in the ones he believes in. He's kind enough to share which ones those are, but it's up to each of us to make up our own minds. Swedroe's also suggested weighting your allocation based on your confidence in the factor going forward.

If you're not confident in anything besides market beta, invest in the market.
UpperNwGuy
Posts: 4547
Joined: Sun Oct 08, 2017 7:16 pm

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

Post by UpperNwGuy »

I am glad that I never invested in factors. If I had, I would be selling those funds at a loss right now. And I am positively not salivating at the chance to buy a fund that has performed poorly over the last decade just because it is "on sale."
typical.investor
Posts: 2398
Joined: Mon Jun 11, 2018 3:17 am

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

Post by typical.investor »

UpperNwGuy wrote: Mon Mar 30, 2020 9:22 pm I am glad that I never invested in factors. If I had, I would be selling those funds at a loss right now. And I am positively not salivating at the chance to buy a fund that has performed poorly over the last decade just because it is "on sale."
And maybe you are one of those who are:

1) reducing total US market exposure (misjudged risk tolerance)
2) reducing total Intl exposure (has underperformed for too long)
3) abandoning munis and corporates and Vanguard Total Bond (too much volatility/risk)
4) increasing long term treasuries (only thing that did well in this last crash)

People abandoning factor tilts is just another on the list of reactions to market turbulence/recent performance. I don't see evidence that factor tilters are doing this more than anyone else.
Last edited by typical.investor on Mon Mar 30, 2020 9:57 pm, edited 1 time in total.
User avatar
KEotSK66
Posts: 364
Joined: Wed Mar 11, 2020 7:03 pm

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

Post by KEotSK66 »

randomguy, good post

on another thread I came across part of a vg paper which in my reading was recommending a drawing TR investor tilt toward stock premiums rather than increasing income to improve positive cash flow

I can see that working but sometimes it's going to work as a result of annualized returns, iow the extra pcf is unpredictable

as one closing in on retirement the monthly basis dominates my planning. i want my extra positive cash flow on a monthly basis, smooth steady

operating with insufficient income at increased SD while waiting for the premium to show up goes against my plan
"i just got fluctuated out of $1,500", jerry
JamesDean44
Posts: 180
Joined: Sat Jan 13, 2018 7:36 pm

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

Post by JamesDean44 »

typical.investor wrote: Mon Mar 30, 2020 9:32 pm
UpperNwGuy wrote: Mon Mar 30, 2020 9:22 pm I am glad that I never invested in factors. If I had, I would be selling those funds at a loss right now. And I am positively not salivating at the chance to buy a fund that has performed poorly over the last decade just because it is "on sale."
And maybe you are one of those who are:

1) reducing total US market exposure (misjudged risk tolerance)
2) reducing total Intl exposure (has underperformed for too long)
3) abandoning munis and corporates and Vanguard Total Bond (too much volatility/risk)
4) increasing long term treasuries (only thing that did well in this last crash)

People abandoning factor tilts is just another on the list of reactions to market turbulence/recent performance. I don't see evidence that factor tilters are doing this more than anyone else.
I have no idea about UpperNwGuy's personal investing decisions, but the rest of this is well put.
randomguy
Posts: 9208
Joined: Wed Sep 17, 2014 9:00 am

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

Post by randomguy »

rkhusky wrote: Mon Mar 30, 2020 7:56 pm
randomguy wrote: Mon Mar 30, 2020 5:50 pm
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?
Historical data. Seriously anyone that has looked at things like portfolio visualizer and seen the 13.5% return versus 10.5% sees the benefit. The next step though of realizing you might need to wait 10-20 years for the benefit to show up is the tough one. And all during those years there will be people talking about how the SV no longer works and all the while you are underperforming the market.

Take our 1990 investor. In 1999 after 10 years in TSM has returned 17% to SV 14%. Clearly SV doesn't work right? Should just go TSM. In 2009 the numbers were TSM 8%. SV 11%. I.e. the investor got exactly the level of outperformance that you would expect.

Obviously there is no guarantee that we will ever have outperformance again. But so far it has always happened. You will find 10 year periods where TSM outperforms. Not many 20 years (I want to say there was 1). And there are zero 30 year ones I am aware of.
Unfortunately things are different post-Fama French. People will need to give up on a factor before it has a chance to outperform again. All the talk about staying the course is counterproductive.
And if TSM and factor investing just trade places in outperformance every so often, what’s the point? You would have to trust to luck that the right horse is winning when you need it to.
The point is making money. In 2009 would you have rather had 20 year performance of 8% (TSM) or 11% (SV)? You lose small when SV underperforms and win big when it outperforms.

As far as it not working, we are talking about a time period that is largely after they published. Why does it still work? Well why aren't you investing in SV? If everyone thinks it doesn't work, it will work. The question is how many people can execute the strategy (or any of the other factor ones). Are you willing to trail the markets for 10 years if it results in you having more money in 20? It is easy to say sure when you know the result. It is a lot harder when you have underperformed for 5 years. Think of how many are struggling to stay the course after a bad 2 months. Imagine when it gets to 3 or 4 years. You can read the threads about international investing for how hard most people find it to keep the faith when recent results are poor.
User avatar
nedsaid
Posts: 14188
Joined: Fri Nov 23, 2012 12:33 pm

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

Post by nedsaid »

Rick Ferri wrote: Mon Mar 30, 2020 8:07 am
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
I have small Mid/Small and Value tilts in my portfolio, your excellent book All About Asset Allocation was one of the influences that led me to a factor tilting strategy in the first place. I have to give credit (or blame) to Paul Merriman for learning about the academic research. For the record, I am sticking to my guns. I am sort of like Linus waiting in the pumpkin patch on Halloween night waiting for the Great Swedroe to deliver Small/Value premiums to all the good little boys and girls. Let's see what happens, the valuation gap between Value and Growth keeps growing and growing. The future expected returns from Small Value have got to be pretty high now.
A fool and his money are good for business.
User avatar
nedsaid
Posts: 14188
Joined: Fri Nov 23, 2012 12:33 pm

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

Post by nedsaid »

I think we are headed for the zero fund portfolio here at Bogleheads. Soon, the virtues of cash stuffed in mattresses will be extolled as the bond market has down some pretty weird things during the Coronavirus bear market. You can't even rely on boring old bonds anymore. Bogleheads gave up on REITs and TIPS awhile ago. They now have disavowed International Stocks. US Total Stock Market Index can't be far behind, what has it done for me lately anyways? The Nedsaid Cash Stuffed in Mattresses Mutual Fund, even with its 1.00% annual AUM fee is only down -0.15% this year. The Bogleheads, particularly Taylor Larimore will say that they can stuff their own mattresses with cash for free. It might be uncomfortable to sleep on but heh, zero volatility and zero correlation with stocks. What is not to like? The majesty of simplicity. You don't even have to pay for a safety deposit box for all that loot. It does make for a lumpy mattress though.
A fool and his money are good for business.
theorist
Posts: 765
Joined: Sat Sep 28, 2019 11:39 am

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

Post by theorist »

The “zero fund portfolio” IS the logical endpoint of the evolution we see in some threads here. 😈
UpperNwGuy
Posts: 4547
Joined: Sun Oct 08, 2017 7:16 pm

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

Post by UpperNwGuy »

typical.investor wrote: Mon Mar 30, 2020 9:32 pm
UpperNwGuy wrote: Mon Mar 30, 2020 9:22 pm I am glad that I never invested in factors. If I had, I would be selling those funds at a loss right now. And I am positively not salivating at the chance to buy a fund that has performed poorly over the last decade just because it is "on sale."
And maybe you are one of those who are:

1) reducing total US market exposure (misjudged risk tolerance)
2) reducing total Intl exposure (has underperformed for too long)
3) abandoning munis and corporates and Vanguard Total Bond (too much volatility/risk)
4) increasing long term treasuries (only thing that did well in this last crash)

People abandoning factor tilts is just another on the list of reactions to market turbulence/recent performance. I don't see evidence that factor tilters are doing this more than anyone else.
Wow... you just jumped to a whole bunch of wildly speculative conclusions about my investing life. I didn’t write that I was getting out of factors. I’ve never been invested in factors. As for that other stuff, I’ve made no changes to my investments since the crisis started other than to do one round of tax loss harvesting. The next time you want to give your laundry list of bad moves an investor can make, please don’t quote one of my posts.
typical.investor
Posts: 2398
Joined: Mon Jun 11, 2018 3:17 am

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

Post by typical.investor »

UpperNwGuy wrote: Tue Mar 31, 2020 3:32 am
typical.investor wrote: Mon Mar 30, 2020 9:32 pm
UpperNwGuy wrote: Mon Mar 30, 2020 9:22 pm I am glad that I never invested in factors. If I had, I would be selling those funds at a loss right now. And I am positively not salivating at the chance to buy a fund that has performed poorly over the last decade just because it is "on sale."
And maybe you are one of those who are:

1) reducing total US market exposure (misjudged risk tolerance)
2) reducing total Intl exposure (has underperformed for too long)
3) abandoning munis and corporates and Vanguard Total Bond (too much volatility/risk)
4) increasing long term treasuries (only thing that did well in this last crash)

People abandoning factor tilts is just another on the list of reactions to market turbulence/recent performance. I don't see evidence that factor tilters are doing this more than anyone else.
Wow... you just jumped to a whole bunch of wildly speculative conclusions about my investing life.
No, I didn't. Not at all. I suggested that there are other ways to bail out to due a difference in perceived risk. I reached no conclusion whatsoever about what you may or may not be doing.
UpperNwGuy wrote: Tue Mar 31, 2020 3:32 am I didn’t write that I was getting out of factors. I’ve never been invested in factors. As for that other stuff, I’ve made no changes to my investments since the crisis started other than one round of tax loss harvesting. The next time you want to give your laundry list of bad moves an investor can make, please don’t quote one of my posts.
If someone posts that they would bail out of factor funds, I don't see the issue with pointing out that investors bail out of lots of things. The point being that I don't see how factor funds are any different.

Good for you for staying the course. I really didn't mean to suggest you personally weren't, I only mean to suggest that there are many bailing out of various Total Market Funds too. It's not just factor funds that are being adjusted.
Last edited by typical.investor on Tue Mar 31, 2020 4:15 am, edited 1 time in total.
DonIce
Posts: 1127
Joined: Thu Feb 21, 2019 6:44 pm

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

Post by DonIce »

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.
In theory, yes. In reality, the most popular small cap value ETF, VBR, is 94% correlated with TSM. Very close to zero practical benefit compared to just investing in TSM.
rkhusky
Posts: 10909
Joined: Thu Aug 18, 2011 8:09 pm

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

Post by rkhusky »

randomguy wrote: Mon Mar 30, 2020 11:28 pm You can read the threads about international investing for how hard most people find it to keep the faith when recent results are poor.
I don't think most people are concerned with international. Especially people who use target date funds and total world funds. I've easily maintained my 30% allocation without a second thought.
afan
Posts: 5368
Joined: Sun Jul 25, 2010 4:01 pm

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

Post by afan »

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.
I tilt towards all factors, proven and unproven, known and unknown. New factors pop up all the time. Some that once appeared to be valid turned out to be proxies for something else. That new something else is probably a proxy for yet another unknown or unproven factor. One can constantly chase individual factors, revising the portfolio every time the supposedly optimal ones change. Or one can buy them all and consider the factor literature interesting without letting it affect one's asset allocation.

I find the cheapest way to do this is TSM.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
User avatar
Kenkat
Posts: 6862
Joined: Thu Mar 01, 2007 11:18 am
Location: Cincinnati, OH

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

Post by Kenkat »

typical.investor wrote: Mon Mar 30, 2020 9:15 pm
Rick Ferri wrote: Mon Mar 30, 2020 8:07 am
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
I question if it really is the complexity that is underlying cause. Plenty of total market funds are being abandoned too.

I see plenty of threads where the OP justifies adjusting their AA and selling out some total market threads because they "misjudged" their risk tolerance. And I see many responses saying definitely yes - you should do so. Bogle it is said in the responses did the same thing - never mind that Bogle sold at a high before a crash.

This seems like the garden variety "when there seems to be an immediate and real risk that equities will suffer a large drop and have trouble recovering" fear that causes people seek to reduce exposure. It just seems like people decide "at this time the risk is not worth it".

And similarly, maybe factors' relatively low returns are part of the thinking that is persuading many to abandon their tilts as they age in the name of "simplification", but that goes for Total Market funds too. Lots of people are abandoning international.

I do completely agree a life-long commitment is particularly required for factor investing. But I think anything that hasn't been the best in recent times is subject to questioning and potential liquidation. Why do you need anything other than the best? :twisted: Oh and should we throw long term treasuries into the mix. Countless threads on abandoning munis as a main holding and corporates.

In any case, I still believe that factor correlations can increase (dramatically) and that factor returns can be very un-normal for long periods. It's this reason why I don't accept factor investing as "diversification" as factor proponents claim. To me it seems as though factors are not truly independent but rather derive from something more fundamental such as the interplay between growth and inflation.
Good post; it’s especially good because I agree with it :wink:
User avatar
Kenkat
Posts: 6862
Joined: Thu Mar 01, 2007 11:18 am
Location: Cincinnati, OH

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

Post by Kenkat »

nedsaid wrote: Mon Mar 30, 2020 11:31 pm I am sort of like Linus waiting in the pumpkin patch on Halloween night waiting for the Great Swedroe to deliver Small/Value premiums to all the good little boys and girls. Let's see what happens, the valuation gap between Value and Growth keeps growing and growing. The future expected returns from Small Value have got to be pretty high now.
Just be sure you say WHEN the small/value premium comes, not IF. Otherwise, we’re doomed!
User avatar
vineviz
Posts: 8495
Joined: Tue May 15, 2018 1:55 pm

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

Post by vineviz »

afan wrote: Tue Mar 31, 2020 7:11 am I tilt towards all factors, proven and unproven, known and unknown. New factors pop up all the time. Some that once appeared to be valid turned out to be proxies for something else. That new something else is probably a proxy for yet another unknown or unproven factor. One can constantly chase individual factors, revising the portfolio every time the supposedly optimal ones change. Or one can buy them all and consider the factor literature interesting without letting it affect one's asset allocation.

I find the cheapest way to do this is TSM.
I see this misunderstanding perpetuated nowhere but on this forum.

A total stock market is a completely tilt-less investment. TSM is a perfectly reasonable approach to investing, but it is most definitely NOT a "tilt towards all factors".

It has exposure only to one factor, namely market beta, and by definition eschews all other equity tilts completely.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Random Walker
Posts: 4714
Joined: Fri Feb 23, 2007 8:21 pm

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

Post by Random Walker »

DonIce wrote: Tue Mar 31, 2020 4:08 am
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.
In theory, yes. In reality, the most popular small cap value ETF, VBR, is 94% correlated with TSM. Very close to zero practical benefit compared to just investing in TSM.
This is slightly out of my league, and probably right in Vinviz’s wheelhouse. But it’s not just about correlation, it’s about how big the moves are too. I think the relevant metric is covariance. The last few months are perfect example. TSM and SCV have tanked together, displaying very high correlation. But SCV has dropped by a lot more. It’s not just about direction relative to average returns, it’s also about absolute size of moves.

Dave
Last edited by Random Walker on Tue Mar 31, 2020 9:28 am, edited 1 time in total.
User avatar
JoMoney
Posts: 10515
Joined: Tue Jul 23, 2013 5:31 am

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

Post by JoMoney »

Couldn't help but notice that as of yesterday's close, the original small-value "factor" fund, DFA's DFSVX , has had total returns since inception below that of Vanguard's 500 index fund.
M* Chart 03/02/1993 - 03/30/2020
John C Bogle in The Telltale Chart wrote:... So reversion to the mean—RTM, the pervasive law of gravity that prevails in the financial markets—never stops. While its drumbeat is hardly regular, it never fails. For the returns of market sectors, of managed investment portfolios, and even of the market itself mysteriously return, over time, to norms of one kind or another.
http://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Random Walker
Posts: 4714
Joined: Fri Feb 23, 2007 8:21 pm

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

Post by Random Walker »

JoMoney wrote: Tue Mar 31, 2020 9:27 am Couldn't help but notice that as of yesterday's close, the original small-value "factor" fund, DFA's DFSVX , has had total returns since inception below that of Vanguard's 500 index fund.
M* Chart 03/02/1993 - 03/30/2020
John C Bogle in The Telltale Chart wrote:... So reversion to the mean—RTM, the pervasive law of gravity that prevails in the financial markets—never stops. While its drumbeat is hardly regular, it never fails. For the returns of market sectors, of managed investment portfolios, and even of the market itself mysteriously return, over time, to norms of one kind or another.
http://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf
I too strongly believe in reversion to the mean. But which mean? Just the mean of the whole market? Or should we expect riskier assets to have a higher expected mean return? Should we expect SCV, riskier than TSM, to revert to the same mean return as TSM, or revert to a higher average mean return?

Dave
MotoTrojan
Posts: 10726
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

DonIce wrote: Tue Mar 31, 2020 4:08 am
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.
In theory, yes. In reality, the most popular small cap value ETF, VBR, is 94% correlated with TSM. Very close to zero practical benefit compared to just investing in TSM.
Dispersion in returns is quite different from TSM. Less correlation will reduce volatility but I care about returns.
MotoTrojan
Posts: 10726
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

Random Walker wrote: Tue Mar 31, 2020 9:35 am
JoMoney wrote: Tue Mar 31, 2020 9:27 am Couldn't help but notice that as of yesterday's close, the original small-value "factor" fund, DFA's DFSVX , has had total returns since inception below that of Vanguard's 500 index fund.
M* Chart 03/02/1993 - 03/30/2020
John C Bogle in The Telltale Chart wrote:... So reversion to the mean—RTM, the pervasive law of gravity that prevails in the financial markets—never stops. While its drumbeat is hardly regular, it never fails. For the returns of market sectors, of managed investment portfolios, and even of the market itself mysteriously return, over time, to norms of one kind or another.
http://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf
I too strongly believe in reversion to the mean. But which mean? Just the mean of the whole market? Or should we expect riskier assets to have a higher expected mean return? Should we expect SCV, riskier than TSM, to revert to the same mean return as TSM, or revert to a higher average mean return?

Dave
Well said.
User avatar
nedsaid
Posts: 14188
Joined: Fri Nov 23, 2012 12:33 pm

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

Post by nedsaid »

Kenkat wrote: Tue Mar 31, 2020 8:00 am
nedsaid wrote: Mon Mar 30, 2020 11:31 pm I am sort of like Linus waiting in the pumpkin patch on Halloween night waiting for the Great Swedroe to deliver Small/Value premiums to all the good little boys and girls. Let's see what happens, the valuation gap between Value and Growth keeps growing and growing. The future expected returns from Small Value have got to be pretty high now.
Just be sure you say WHEN the small/value premium comes, not IF. Otherwise, we’re doomed!
Tracking error is not doom.
A fool and his money are good for business.
randomguy
Posts: 9208
Joined: Wed Sep 17, 2014 9:00 am

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

Post by randomguy »

JoMoney wrote: Tue Mar 31, 2020 9:27 am Couldn't help but notice that as of yesterday's close, the original small-value "factor" fund, DFA's DFSVX , has had total returns since inception below that of Vanguard's 500 index fund.
M* Chart 03/02/1993 - 03/30/2020
John C Bogle in The Telltale Chart wrote:... So reversion to the mean—RTM, the pervasive law of gravity that prevails in the financial markets—never stops. While its drumbeat is hardly regular, it never fails. For the returns of market sectors, of managed investment portfolios, and even of the market itself mysteriously return, over time, to norms of one kind or another.
http://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf
[/quote

And you also can't help but noticing that how for ~26/28 years, SV resulted in you having more money. Wouldn't you rather have more money for 26 years than 2? It also isn't shocking when you plot up a period with 2 large cap outperformance and 1 small cap outperformance, that the results look about the same. What will it look like when we have had 2 cycles of large cap outperformance and 2 of small? If the past holds at some point SV will outperform by enough so that the lines don't cross again.

If you believe in RTM, you should be loading up on SV. After all isn't it time for it to revert to it's higher mean return than TSM?

In the end there is no way to prove any of this stuff. Returns aren't driven by mathematical formulas. Things change. Maybe small value is dead forever. But odds are that this time is no different than the past times people have said that. But just think about this conversation when you think about how SV keeps working. We have a 100 years of evidence that it works. But it is still easy to dismiss that evidence and say this time is different. As long as that happens, you can imagine it keep on working.
User avatar
JoMoney
Posts: 10515
Joined: Tue Jul 23, 2013 5:31 am

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

Post by JoMoney »

Random Walker wrote: Tue Mar 31, 2020 9:35 am
JoMoney wrote: Tue Mar 31, 2020 9:27 am Couldn't help but notice that as of yesterday's close, the original small-value "factor" fund, DFA's DFSVX , has had total returns since inception below that of Vanguard's 500 index fund.
M* Chart 03/02/1993 - 03/30/2020
John C Bogle in The Telltale Chart wrote:... So reversion to the mean—RTM, the pervasive law of gravity that prevails in the financial markets—never stops. While its drumbeat is hardly regular, it never fails. For the returns of market sectors, of managed investment portfolios, and even of the market itself mysteriously return, over time, to norms of one kind or another.
http://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf
I too strongly believe in reversion to the mean. But which mean? Just the mean of the whole market? Or should we expect riskier assets to have a higher expected mean return? Should we expect SCV, riskier than TSM, to revert to the same mean return as TSM, or revert to a higher average mean return?

Dave
Lots of risky investments bear no "risk premium". To expect that any risk inherently brings a return "premium" I think is a mistake.
I do believe there is some varying un-quantifiable "average return" that changes in different environments, but is a simple matter to capture as a commodity. To improve on that requires offering something more than being willing to take "risk", you have to bring something to the game that's extraordinary and scarce. Lots of businesses fail, not because they were unwilling to take risks, they just didn't offer something valuable that that the market couldn't get elsewhere. Willingness to take "risk" is cheap (walk in to any casino), above average information is not.
Last edited by JoMoney on Tue Mar 31, 2020 10:11 am, edited 1 time in total.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
Kenkat
Posts: 6862
Joined: Thu Mar 01, 2007 11:18 am
Location: Cincinnati, OH

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

Post by Kenkat »

nedsaid wrote: Tue Mar 31, 2020 9:49 am
Kenkat wrote: Tue Mar 31, 2020 8:00 am
nedsaid wrote: Mon Mar 30, 2020 11:31 pm I am sort of like Linus waiting in the pumpkin patch on Halloween night waiting for the Great Swedroe to deliver Small/Value premiums to all the good little boys and girls. Let's see what happens, the valuation gap between Value and Growth keeps growing and growing. The future expected returns from Small Value have got to be pretty high now.
Just be sure you say WHEN the small/value premium comes, not IF. Otherwise, we’re doomed!
Tracking error is not doom.
Linus : Hey, aren't you going to wait and greet the Great Swedroe? Huh? It won't be long now. If the Great Swedroe comes, I'll still put in a good word for you!
Linus : Good grief! I said "if"! I meant, "when" he comes!
Linus : I'm doomed. One little slip like that could cause the Great Swedroe to pass you by.
Linus : Oh, Great Swedroe, where are you?
DonIce
Posts: 1127
Joined: Thu Feb 21, 2019 6:44 pm

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

Post by DonIce »

Random Walker wrote: Tue Mar 31, 2020 9:24 am
DonIce wrote: Tue Mar 31, 2020 4:08 am
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.
In theory, yes. In reality, the most popular small cap value ETF, VBR, is 94% correlated with TSM. Very close to zero practical benefit compared to just investing in TSM.
This is slightly out of my league, and probably right in Vinviz’s wheelhouse. But it’s not just about correlation, it’s about how big the moves are too. I think the relevant metric is covariance. The last few months are perfect example. TSM and SCV have tanked together, displaying very high correlation. But SCV has dropped by a lot more. It’s not just about direction relative to average returns, it’s also about absolute size of moves.

Dave
Does this look meaningfully different to you? Right now is literally the only time in the last 15 years that VBR has behaved noticeably differently than VTI:

Image

Red = VBR
Blue = VTI
randomguy
Posts: 9208
Joined: Wed Sep 17, 2014 9:00 am

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

Post by randomguy »

nedsaid wrote: Tue Mar 31, 2020 9:49 am
Kenkat wrote: Tue Mar 31, 2020 8:00 am
nedsaid wrote: Mon Mar 30, 2020 11:31 pm I am sort of like Linus waiting in the pumpkin patch on Halloween night waiting for the Great Swedroe to deliver Small/Value premiums to all the good little boys and girls. Let's see what happens, the valuation gap between Value and Growth keeps growing and growing. The future expected returns from Small Value have got to be pretty high now.
Just be sure you say WHEN the small/value premium comes, not IF. Otherwise, we’re doomed!
Tracking error is not doom.
Definitely not doom but SV returns don't have to be high going forward. The other way to get outperformance is to have low TSM returns. Making 7.5% from 2000-9 was not great performance but it sure beat the -.25% of TSM. And of course it should be mentioned that almost all of that outperformance happened in 2 years (2000-1 17.7% to -10.8%).

People dream of SV (and pretty much any other strategy) having a steady 3%/year outperformance. That hasn't been how it has happened. Historically performance tends to follow or lag most of the time, and then you get those brief periods of outperformance. The time in between will really test your faith. And probably the part that makes it hardest is that people like to buy in when something has done well recently. Drink the SV koolaid when 5 year returns look good, and you are likely signing up for a period of underperformance.
User avatar
aj76er
Posts: 840
Joined: Tue Dec 01, 2015 11:34 pm
Location: Austin, TX

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

Post by aj76er »

nedsaid wrote: Tue Mar 31, 2020 12:05 am I think we are headed for the zero fund portfolio here at Bogleheads. Soon, the virtues of cash stuffed in mattresses will be extolled as the bond market has down some pretty weird things during the Coronavirus bear market. You can't even rely on boring old bonds anymore. Bogleheads gave up on REITs and TIPS awhile ago. They now have disavowed International Stocks. US Total Stock Market Index can't be far behind, what has it done for me lately anyways? The Nedsaid Cash Stuffed in Mattresses Mutual Fund, even with its 1.00% annual AUM fee is only down -0.15% this year. The Bogleheads, particularly Taylor Larimore will say that they can stuff their own mattresses with cash for free. It might be uncomfortable to sleep on but heh, zero volatility and zero correlation with stocks. What is not to like? The majesty of simplicity. You don't even have to pay for a safety deposit box for all that loot. It does make for a lumpy mattress though.
Don’t forget to couple the zero fund portfolio with a 0% safe withdrawal rate. Anything higher would simply be too risky!
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
User avatar
nedsaid
Posts: 14188
Joined: Fri Nov 23, 2012 12:33 pm

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

Post by nedsaid »

Kenkat wrote: Tue Mar 31, 2020 10:09 am
nedsaid wrote: Tue Mar 31, 2020 9:49 am
Kenkat wrote: Tue Mar 31, 2020 8:00 am
nedsaid wrote: Mon Mar 30, 2020 11:31 pm I am sort of like Linus waiting in the pumpkin patch on Halloween night waiting for the Great Swedroe to deliver Small/Value premiums to all the good little boys and girls. Let's see what happens, the valuation gap between Value and Growth keeps growing and growing. The future expected returns from Small Value have got to be pretty high now.
Just be sure you say WHEN the small/value premium comes, not IF. Otherwise, we’re doomed!
Tracking error is not doom.
Linus : Hey, aren't you going to wait and greet the Great Swedroe? Huh? It won't be long now. If the Great Swedroe comes, I'll still put in a good word for you!
Linus : Good grief! I said "if"! I meant, "when" he comes!
Linus : I'm doomed. One little slip like that could cause the Great Swedroe to pass you by.
Linus : Oh, Great Swedroe, where are you?
Both you and I have had fun with this. It is possible that the Value premium is dead, that Artificial Intelligence, the Algorithms, flash trading, the Math PhDs, the Hedge Funds, etc. have killed it. I don't think so. I remember the "Death of Value" back in the late '90's. Let me think, was that the 1890's or the 1990's? So far back now that I can hardly remember it. Guess that shows how ancient I have become. The thing is, there are trends in the market. US vs. International, Large vs. Small, Growth vs. Value. Asset classes take turns outperforming each other. Hard to believe that the Large Growth trend in the US and International Stock Markets will continue forever.
A fool and his money are good for business.
User avatar
nedsaid
Posts: 14188
Joined: Fri Nov 23, 2012 12:33 pm

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

Post by nedsaid »

aj76er wrote: Tue Mar 31, 2020 10:29 am
nedsaid wrote: Tue Mar 31, 2020 12:05 am I think we are headed for the zero fund portfolio here at Bogleheads. Soon, the virtues of cash stuffed in mattresses will be extolled as the bond market has down some pretty weird things during the Coronavirus bear market. You can't even rely on boring old bonds anymore. Bogleheads gave up on REITs and TIPS awhile ago. They now have disavowed International Stocks. US Total Stock Market Index can't be far behind, what has it done for me lately anyways? The Nedsaid Cash Stuffed in Mattresses Mutual Fund, even with its 1.00% annual AUM fee is only down -0.15% this year. The Bogleheads, particularly Taylor Larimore will say that they can stuff their own mattresses with cash for free. It might be uncomfortable to sleep on but heh, zero volatility and zero correlation with stocks. What is not to like? The majesty of simplicity. You don't even have to pay for a safety deposit box for all that loot. It does make for a lumpy mattress though.
Don’t forget to couple the zero fund portfolio with a 0% safe withdrawal rate. Anything higher would simply be too risky!
Just as we are facing possible negative interest rates, we might be facing negative withdrawal rates. :wink: Pretty much we have to keep working and contributing to those retirement accounts right up until we die.
A fool and his money are good for business.
afan
Posts: 5368
Joined: Sun Jul 25, 2010 4:01 pm

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

Post by afan »

vineviz wrote: Tue Mar 31, 2020 8:08 am
afan wrote: Tue Mar 31, 2020 7:11 am I tilt towards all factors, proven and unproven, known and unknown. New factors pop up all the time. Some that once appeared to be valid turned out to be proxies for something else. That new something else is probably a proxy for yet another unknown or unproven factor. One can constantly chase individual factors, revising the portfolio every time the supposedly optimal ones change. Or one can buy them all and consider the factor literature interesting without letting it affect one's asset allocation.

I find the cheapest way to do this is TSM.
I see this misunderstanding perpetuated nowhere but on this forum.

A total stock market is a completely tilt-less investment. TSM is a perfectly reasonable approach to investing, but it is most definitely NOT a "tilt towards all factors".

It has exposure only to one factor, namely market beta, and by definition eschews all other equity tilts completely.
Remember that factor analysis of stock returns is never final.

Factors are derived from the behavior of markets. All factors are potential correlates of market behavior. Some work better than others.

Some appear to work well until better analysis or better data show that their explanatory values are low. Some appear to work poorly until better analysis or better data show their explanatory value to be high. Some go between high and low power as studies and data evolve.

Some factors are found to be proxies of others. Or at least so it may appear at any point in time.
The number of candidate factors can be larger than the number of portfolios, which is larger than the number of stocks.

When one defines a factor, one has also defined the inverse as everything that is excluded.

"Small" is a factor, as is "not small". "Quality" is a factor as is "not quality".

The only bounds on the number of possible factors is the ability to define and measure them. With current computer technology, the number of candiate factors should be infinite. At any given time, few of these will appear to have explanatory value. The elements of the set of candiate factors that appear to have value will vary over time.

At any time, the number of factors that appear to explain returns will be relatively small. But that need not mean that any of them are correct, that they are not proxies for unknown factors, or that that are not artifacts of problems with data or analysis.

Human cognition and current methods for analyzing factor analysis favor small numbers of factors. A model that "explains" stock returns with 1,000 factors would be viewed with skepticism. One would intuit that nearly all of the factors had such minor roles as to be lost in the noise. The model itself would appear to be an error of data mining. No one knows how many "true" factors there should be. One would also conclude that thousand-factor models are useless, no matter how well one might fit the data used. If there were consistent, reproducible, robust thousand-factor models that consistently outperformed far smaller models, one would conclude that factor analysis itself was useless. It could be both useless and return valid models that are too large and unwieldy to be of any value.

Consequently, popular models, distinguished from the unknowable "correct" factors, must be parsimonious, relatively easy to define, easy to test and survive application to subsets of the data. Ideally, they would retain their explanatory value when applied to new data sets.
Unfortunately, the world is running out of new datasets and applying models prospectively means waiting decades for sufficient new data to accumulate.

Excluding some factors or investing in their inverses will leave the investor without exposure to those omitted. Depending on how the omitted factors perform, this may be desirable, or not.
To be exposed to "small" and "not small" factors, one must invest in both.
This results in having no net exposure to size.
The same applies to any other factor.

One can get exposure to a subset of factors, which is what most tilters seem to want, without going to TSM. That is possible exactly because one decides to exclude a universe of factors that are not in the chosen set.

The alternative is to have exposure to all candidate factors that can be accessed with stock investing, whether or not previously defined or analyzed.

Exposure to all possible stock factors=exposure to none, other than beta.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
azanon
Posts: 2986
Joined: Mon Nov 07, 2011 10:34 am

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

Post by azanon »

Rick Ferri wrote: Mon Mar 30, 2020 8:07 am
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
I agree. Same goes for any portfolio that isn't a balanced fund, unless the mix of multiple funds/ETFs is being overseen and managed by a financial advisor. For example, paying that extra 5-10BP for, say, VG Lifestrategy or Target Retirement Funds over ETF components*, is the best money you'll ever spend (* Unless, again, the ETFs are being managed by a financial advisor, including Vanguard's own).
Last edited by azanon on Tue Mar 31, 2020 10:48 am, edited 2 times in total.
User avatar
nedsaid
Posts: 14188
Joined: Fri Nov 23, 2012 12:33 pm

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

Post by nedsaid »

randomguy wrote: Tue Mar 31, 2020 10:15 am
nedsaid wrote: Tue Mar 31, 2020 9:49 am
Kenkat wrote: Tue Mar 31, 2020 8:00 am
nedsaid wrote: Mon Mar 30, 2020 11:31 pm I am sort of like Linus waiting in the pumpkin patch on Halloween night waiting for the Great Swedroe to deliver Small/Value premiums to all the good little boys and girls. Let's see what happens, the valuation gap between Value and Growth keeps growing and growing. The future expected returns from Small Value have got to be pretty high now.
Just be sure you say WHEN the small/value premium comes, not IF. Otherwise, we’re doomed!
Tracking error is not doom.
Definitely not doom but SV returns don't have to be high going forward. The other way to get outperformance is to have low TSM returns. Making 7.5% from 2000-9 was not great performance but it sure beat the -.25% of TSM. And of course it should be mentioned that almost all of that outperformance happened in 2 years (2000-1 17.7% to -10.8%).

People dream of SV (and pretty much any other strategy) having a steady 3%/year outperformance. That hasn't been how it has happened. Historically performance tends to follow or lag most of the time, and then you get those brief periods of outperformance. The time in between will really test your faith. And probably the part that makes it hardest is that people like to buy in when something has done well recently. Drink the SV koolaid when 5 year returns look good, and you are likely signing up for a period of underperformance.
I don't know, 7.5% annual returns would look pretty good to me in an era of subdued inflation if not whiffs of deflation. I would accept that. You are correct in saying that relative and not absolute performance is the most important thing.
A fool and his money are good for business.
afan
Posts: 5368
Joined: Sun Jul 25, 2010 4:01 pm

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

Post by afan »

nedsaid wrote: Tue Mar 31, 2020 10:43 am Just as we are facing possible negative interest rates, we might be facing negative withdrawal rates. :wink: Pretty much we have to keep working and contributing to those retirement accounts right up until we die.
I hope to do exactly that. Of course, many people outlive their ability to work and are forced to retire. But I would prefer to die at the office.

Note that one can retire and still have negative withdrawal rates. All that requires is annual after tax income to exceed spending. At that point, one would be a net saver throughout retirement. As opposed to hoping not to retire, I plan to be a net saver throughout if retirement is imposed on me.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
User avatar
nedsaid
Posts: 14188
Joined: Fri Nov 23, 2012 12:33 pm

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

Post by nedsaid »

afan wrote: Tue Mar 31, 2020 10:48 am
nedsaid wrote: Tue Mar 31, 2020 10:43 am Just as we are facing possible negative interest rates, we might be facing negative withdrawal rates. :wink: Pretty much we have to keep working and contributing to those retirement accounts right up until we die.
I hope to do exactly that. Of course, many people outlive their ability to work and are forced to retire. But I would prefer to die at the office.

Note that one can retire and still have negative withdrawal rates. All that requires is annual after tax income to exceed spending. At that point, one would be a net saver throughout retirement. As opposed to hoping not to retire, I plan to be a net saver throughout if retirement is imposed on me.
I think I would rather ride off into the sunset rather than expiring at the office. Like the old soldier in General McArthur's speech to Congress, I will probably fade away.
A fool and his money are good for business.
Random Walker
Posts: 4714
Joined: Fri Feb 23, 2007 8:21 pm

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

Post by Random Walker »

JoMoney wrote: Tue Mar 31, 2020 10:08 am
Random Walker wrote: Tue Mar 31, 2020 9:35 am
JoMoney wrote: Tue Mar 31, 2020 9:27 am Couldn't help but notice that as of yesterday's close, the original small-value "factor" fund, DFA's DFSVX , has had total returns since inception below that of Vanguard's 500 index fund.
M* Chart 03/02/1993 - 03/30/2020
John C Bogle in The Telltale Chart wrote:... So reversion to the mean—RTM, the pervasive law of gravity that prevails in the financial markets—never stops. While its drumbeat is hardly regular, it never fails. For the returns of market sectors, of managed investment portfolios, and even of the market itself mysteriously return, over time, to norms of one kind or another.
http://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf
I too strongly believe in reversion to the mean. But which mean? Just the mean of the whole market? Or should we expect riskier assets to have a higher expected mean return? Should we expect SCV, riskier than TSM, to revert to the same mean return as TSM, or revert to a higher average mean return?

Dave
Lots of risky investments bear no "risk premium". To expect that any risk inherently brings a return "premium" I think is a mistake.
I do believe there is some varying un-quantifiable "average return" that changes in different environments, but is a simple matter to capture as a commodity. To improve on that requires offering something more than being willing to take "risk", you have to bring something to the game that's extraordinary and scarce. Lots of businesses fail, not because they were unwilling to take risks, they just didn't offer something valuable that that the market couldn't get elsewhere. Willingness to take "risk" is cheap (walk in to any casino), above average information is not.
To experience the benefits of an asset class, one needs to diversify within the asset class. There are typically only a few winners responsible for the performance of the asset class as a whole.

Dave
Random Walker
Posts: 4714
Joined: Fri Feb 23, 2007 8:21 pm

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

Post by Random Walker »

DonIce wrote: Tue Mar 31, 2020 10:13 am
Random Walker wrote: Tue Mar 31, 2020 9:24 am
DonIce wrote: Tue Mar 31, 2020 4:08 am
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.
In theory, yes. In reality, the most popular small cap value ETF, VBR, is 94% correlated with TSM. Very close to zero practical benefit compared to just investing in TSM.
This is slightly out of my league, and probably right in Vinviz’s wheelhouse. But it’s not just about correlation, it’s about how big the moves are too. I think the relevant metric is covariance. The last few months are perfect example. TSM and SCV have tanked together, displaying very high correlation. But SCV has dropped by a lot more. It’s not just about direction relative to average returns, it’s also about absolute size of moves.

Dave
Does this look meaningfully different to you? Right now is literally the only time in the last 15 years that VBR has behaved noticeably differently than VTI:

Image

Red = VBR
Blue = VTI
OUCH!
I was going to say that VBR doesn’t have strong enough factor loadings, and post a comparison with the DFA SCV fund, DFSVX. This is what I got.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

Heavier loadings and size and value hurt over this time frame.

Dave
Post Reply