"Beware of Sci-Fi Portfolios"

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CyclingDuo
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Re: "Beware of Sci-Fi Portfolios"

Post by CyclingDuo »

Allan Roth wrote: Sat May 15, 2021 5:32 pmA Jack Bogle Total Market free lunch is based on arithmetic. When you add one or two extra digits to expense ratios, you go against arithmetic. Read the very short and simple paper below. A low cost total stock market portfolio must beat the average active dollar invested in US stocks.
Loved reading your article at the link that Taylor posted. As I was reading about it, I was thinking about some of the complexity that public institutions take with their investments - not to mention some of the complexity we have going on in our taxable and inherited IRA accounts.

For instance, I always review our state pension's annual report out of interest due to my wife's upcoming pension and my curiosity of wanting to know how the pension fund is performing. Although it is performing close to - albeit slightly below - their chosen benchmark (TUCS with over $1B in assets), no surprise due to fees, active management, alternatives, and the rest of the mixed bag investments the fund invests in, when compared to our streamlined and low cost 2nd Grader's/Three Funder in our 403b/457b/401k's made up of Vanguard Index Funds as well as our own children's IRA's and 401k's - the pension fund seems to be chasing a lot of complexity and performance without being rewarded for it. Perhaps I am wrong in that assessment, but suffice it to say our state raised the contribution requirements from both members and employers to keep it afloat and make up for any prior shortfall. :mrgreen:

For those interested, here is a link to some of the versions of the Second Grader Portfolio:

https://www.portfolioeinstein.com/allan ... portfolio/

https://www.aarp.org/money/investing/in ... -hard.html

Market Watch Lazy Portfolios (note that the 2nd Grader in this link has a lower allocation to bonds which is a more aggressive positioning and hence has higher returns shown in the list compared to the other Lazy Portfolios shown):

Image
https://www.marketwatch.com/lazyportfolio%20

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Re: "Beware of Sci-Fi Portfolios"

Post by LadyGeek »

The wiki has some background info (and more examples): Lazy portfolios
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nedsaid
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Re: "Beware of Sci-Fi Portfolios"

Post by nedsaid »

Random Walker wrote: Sun May 16, 2021 6:07 am
Alchemist wrote: Sun May 16, 2021 3:20 am Set aside the Alternatives and even the Factor Funds for a moment.

Any advisor that puts their clients in a 15 fund portfolio with an average ER or 1.05% plus their advisor fee; is not a good advisor. Certainly not one that is boglehead friendly.

Just to break even the portfolio will have to outperform by at least 2%
That average ER is not accurate. In a portfolio such as Alan describes the biggest allocations go to the cheapest funds for a typical investor. The much more expensive and esoteric funds have much smaller allocations. Thus the overall weighted expense ratio for the portfolio is much less.

Dave
Alan Roth did not show the weightings of the portfolio, the weighted expense ratio of the portfolio, and its performance. He also didn't say that Buckingham is a Fiduciary and that Larry Swedroe had a substantial investment in these funds. Stone Ridge employees had substantial investments in the interval funds.

There are things with the Buckingham Portfolio that can be criticized. First, one could say that a similar portfolio could have been built with cheaper funds. Second, one could criticize the use of Alternative Investments. Third, one could say that the theory behind the portfolio was wrong. There was no intent here to deceive.

I did like the theory behind the Alternatives and my thought when these were introduced was that these concepts were worth a try. The Alts were limited to 20% to 25% of portfolios and four Alts were used. One would think that the combination would do at least as well as bonds. It turned out that one of the Alts did very well and the other three were disappointments. One of the four was folded into another Stone Ridge fund.

A big lesson here is that what looks great in theory doesn't always work out in actual practice. All of this has been discussed in detail and I raised many of these points myself. My biggest concern was that retail investors tend to be "late to the party" and arrive after the excess returns have already been harvested by others. Costs are a factor and the competition for talent is another. I wondered if such providers like AQR and Stone Ridge could attract the best minds in the business.

We all have experienced investments that did not work out. The most famous investors had their clunkers.

As far as Mr. Roth, I have enjoyed reading his writings over the years. He is well regarded here and that is well deserved. When you write a lot, some of your writings will be better than others. I regard this article as one of his weakest. It was a rant and his comparison of Buckingham to stock brokers was not accurate. He can do a lot better than this.
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Re: "Beware of Sci-Fi Portfolios"

Post by nedsaid »

alex345 wrote: Sun May 16, 2021 7:00 am If the article title was "beware of high expense ratio portfolios" I think I'd agree. Calling it science fiction is an obvious stretch. We don't have all the facts since the weights are not included so objective analysis can't really be done.
The article was over the top.
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Re: "Beware of Sci-Fi Portfolios"

Post by Elysium »

Taylor,

I think the article is being charitable by calling these Sci-Fi portfolios, any portfolio that includes funds listed below should be called highway robbery:

Stone Ridge Reinsurance Risk Prem Interval SSRIX 2.28
Cliffwater Corporate Lending CCLFX 2.39
Stone Ridge Alternative Lending Risk Premium LENDX 5.03

There is no science here, but there is art, the art of changing money from unsuspecting investors to unscrupulous advisors.
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Re: "Beware of Sci-Fi Portfolios"

Post by nisiprius »

alex345 wrote: Sun May 16, 2021 7:00 am If the article title was "beware of high expense ratio portfolios" I think I'd agree. Calling it science fiction is an obvious stretch. We don't have all the facts since the weights are not included so objective analysis can't really be done.
However, Random Walker has very kindly posted his own portfolio, which he says is "basically the exact portfolio that Alan describes." By the way, I really appreciate Random Walker's willingness to engage sincerely in these discussions.

In context, I don't think there's any reason to think that the portfolio Allan Roth dislikes is very different in weight.

I have taken the great liberty of calculating the average expense ratio for the portfolio Random Walker described. See footnote for details.

The average is 0.73%, counting the bond ladder as a 0% ER. If you want to omit the bond ladder, multiply this and all remaining numbers by 1.334; 25% of his money is in a bond ladder, and 75% a portfolio of mutual and interval funds with a weighted average 0.96% ER.

However, if we see where this expense ratio comes from, it's obvious that we can classify the holdings into three categories:

--the bond ladder
--what I'll call "straightforward" funds from DFA and Bridgeway
--what I'll call "sophisticated" mutual funds and interval funds from Stone Ridge, Cliffwater, and AQR.

25% of the portfolio is the bond ladder with 0% ER
53% is in straightforward mutual funds, which collectively have a weighted ER 0f 0.394%
22% is in sophisticated mutual funds and interval funds, with a weighted ER of 2.351%

Without the sophisticated funds, the weighted average ER would only be 0.30%.

So the inclusion of these four sophisticated funds, even though they are only 22% of the portfolio, has more than doubled the overall expense ratio.

Since Allan Roth has more or less said that DFA funds are OK with him, basically the whole argument boils down to the four sophisticated funds, LENDX, CCLFX, SRRIX, and QSPRX as about a quarter of the portfolio.

Image

*In cases where he lists several funds, e.g. "DFA Int SV, DFA World ex US Targeted Value, DFA Int Vector (Int SV) 12.5%" I've used the average of the expense ratios of the funds he mentions; in no case were there huge differences. For example, those three have ERs of 0.36%, 0.49%, 0.55%. In every case I've simply used the listed "expense ratios," often from bloomberg.com. I mention that because Larry Swedroe has argued that the SEC regulations for stating expense ratios are unfair and misleading, and also that the expense ratio for long-short funds should be mentally divided by two because you are paying for factor exposure and long-short give you double the factor exposure for your money. I have counted his bond ladder at a 0% expense ratio; there may be transaction costs but transaction costs are not included in expense ratios. I have not included the advisory fee he may be paying, on the assumption that he thinks the advisor's advisory service is worth what he pays. I assume that "Clearwater" is a typo for Cliffwater, and that the fund is CCLFX.
Last edited by nisiprius on Sun May 16, 2021 10:48 am, edited 1 time in total.
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Re: "Beware of Sci-Fi Portfolios"

Post by BogleFan510 »

Very interesting thread. Thanks to all participants.

What strikes me out of this dialog is how focused people become on academic research that essentially tries to attribute cause to an aggregate performace of very different businesses as a group. It reminds me of the story of blind men feeling an elephant.

As academics, we are looking for ideas that can be measured, are useful, and can drive a successful investment decision in an uncertain future. This seems very difficult in todays fast moving world.So we ask what available data can signal the root causes of the winning or losing in business?

This is in an environment where companies are constantly shifting strategies; and in some cases completely reenginering themselves. Early in my business school work, I researched a bunch of annual reports of about 30-40 companies for a data mining exercise. I noted that American Can became a large insurance player over a few decades. IBM was evolving into a professional services firm. How can one mine a data set seeking performance signals when even a single company is very difficult to understand. The most predictive element of the annual reports for future performance, that I found, was the location and style of the executive photo. It turns out smiling CEOs in color suggest they like their future prospects. Kind of like a 'tell' in poker.

Another experience that shaped my Bogleheads portfolio decision was spending the majority of my 30+ years of work advising senior management about how to leverage information technology to improve productivity and quality within their underlying businesses. In some cases, we tried to explain how the impact of a globally interconnected world with nearly infinite computing resources would lead the way for disintermediation or massive change within their industry. This was especially true for companies with large IT costs or opportunities, and for information intensive businesses, like financial services, media, entertainment, insurance, software, professional services, and even 'brick and morter' retail. Some of my clients successfully surfed this wave of change and are among the global top 10 companies from relatively small market caps. Others stumbled or survived, with their businesses, margins and cost structures very different now than they were. While I could not invest in my clients business, it was very hard for me to predict if they would be able to execute our plans, even after 3-6 month deep dives across their whole company, with the leadership team.

It seem to me that looking at old data sets to try to predict future economic activity in a world changing so quickly is a decreasingly useful effort, especially as companies look more and more like lottery tickets in terms of payoff for winning and less like bonds, depending in their asset base and industry models. What is more interesting to me us looking at what assets drive certain industries and whether they will demonstrate massive productivity gains around global change or look more bond-like as their physical assets are commoditized. Those are the factors I am interested in.

It was very hard to gather data as I recall from managing an industry benchmarking intiative for like 50+ large utilities who all agreed to share 'blind data' about costs, staffing and business processes. Good company data is very hard to collect, and a few bad executive choices can really impact performance, even in such a capital intensive, change resistant industry. Just look at how a few bad tech choices hit the recent gas pipelines of the east coast. Absent real useful datasets from fundamental research, arbitrary categories like 'tech', 'retail,' 'industrial', 'energy' seem very antique to me so what are we left with? Buy the market basket of lottery tickets at the lowest cost possible.
Last edited by BogleFan510 on Sun May 16, 2021 10:17 am, edited 4 times in total.
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Re: "Beware of Sci-Fi Portfolios"

Post by vineviz »

Allan Roth wrote: Sat May 15, 2021 5:32 pm
A Jack Bogle Total Market free lunch is based on arithmetic. When you add one or two extra digits to expense ratios, you go against arithmetic.
This so-called “free lunch” is available to all investors, not just those who choose “total market” funds.

A diligent investor can build a factor-aware portfolio for far less than the 100bps or whatever your client had been paying. Bogle’s “costs matter” arithmetic works for multifactor portfolios just as well as it does for single factor portfolios.

It’s not 1976 anymore.
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Random Walker
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Re: "Beware of Sci-Fi Portfolios"

Post by Random Walker »

nisiprius wrote: Sun May 16, 2021 9:36 am
alex345 wrote: Sun May 16, 2021 7:00 am If the article title was "beware of high expense ratio portfolios" I think I'd agree. Calling it science fiction is an obvious stretch. We don't have all the facts since the weights are not included so objective analysis can't really be done.
However, Random Walker has very kindly posted his own portfolio, which he says is "basically the exact portfolio that Alan describes." By the way, I really appreciate Random Walker's willingness to engage sincerely in these discussions.

In context, I don't think there's any reason to think that the portfolio Allan Roth dislikes is very different in weight.

I have taken the great liberty of calculating the average expense ratio for the portfolio Random Walker described. See footnote for details.

The average is 0.73%, counting the bond ladder as a 0% ER. If you want to omit the bond ladder, multiply this and all remaining numbers by 1.334; 25% of his money is in a bond ladder, and 75% a portfolio of mutual and interval funds with a weighted average 0.96% ER.

However, if we see where this expense ratio comes from, it's obvious that we can classify the holdings into three categories:

--the bond ladder
--what I'll call "straightforward" funds from DFA and Bridgeway
--what I'll call "sophisticated" funds from Stone Ridge, Cliffwater, and AQR.

25% of the portfolio is the bond ladder with 0% ER
53% is in straightforward funds, which collectively have a weighted ER 0f 0.394%
22% is in sophisticated, which a weighted ER of 2.351%

Without the sophisticated funds, the weighted average ER would only be 0.30%.

So the inclusion of these four sophisticated funds, even though they are only 22% of the portfolio, has more than doubled the overall expense ratio.

Since Allan Roth has more or less said that DFA funds are OK with him, basically the whole argument boils down to the four sophisticated funds, LENDX, CCLFX, SRRIX, and QSPRX as about a quarter of the portfolio.

Image

*In cases where he lists several funds, e.g. "DFA Int SV, DFA World ex US Targeted Value, DFA Int Vector (Int SV) 12.5%" I've used the average of the expense ratios of the funds he mentions; in no case were there huge differences. For example, those three have ERs of 0.36%, 0.49%, 0.55%. In every case I've simply used the listed "expense ratios," often from bloomberg.com. I mention that because Larry Swedroe has argued that the SEC regulations for stating expense ratios are unfair and misleading, and also that the expense ratio for long-short funds should be mentally divided by two because you are paying for factor exposure and long-short give you double the factor exposure for your money. I have counted his bond ladder at a 0% expense ratio; there may be transaction costs but transaction costs are not included in expense ratios. I have not included the advisory fee he may be paying, on the assumption that he thinks the advisor's advisory service is worth what he pays. I assume that "Clearwater" is a typo for Cliffwater, and that the fund is CCLFX.
I think this is a very fair and reasonable analysis. As Nisi notes, there is some wiggle room to disagree on the expense ratios of some of the funds: actual expenses differ, viewing these things as funds versus direct business participation,institutional share class, securities lending revenue, and different ways to look at leverage used. But definitely in the right ballpark I think. 0% expense ratio for the muni bond ladder is significant to me. When looking at expense ratios, I think it is important to think in both relative terms and absolute dollar terms. For example, a 0.4% ER is twice as big as 0.2% and could be considered obnoxious by Boglehead standards. But in absolute dollars, maybe not so much. Alternatively, In Common Sense On Mutual Funds though, if I remember, Bogle would look at expense ratios as a fraction of the investment returns. In a low expected return environment (perhaps we have one now), expense ratio differences can seem bigger. 0.5% looks a lot bigger when you’re earning 4% than when you’re earning 20%.

Nisi ignoring the advisory fee is mostly on target too I think, but the issue is a bit cloudy. Larry Swedroe would be the first to say that one should not hire an advisor just for fund access. But if the investor believes that some of the investments he is gaining access to through the advisor create a more efficient portfolio, then there is some overlap between the advisor and investment vehicle decisions. Lack of portfolio efficiency is a real cost, whether the investor realizes it or not.

Separate from the portfolio, the two biggest reasons I chose the advisor route were avoidance of behavioral errors and tax loss harvesting. At the time VG would not keep track of individual lots and I felt TLH done right could add about 0.5% annualized per year. Even though VG will now track cost basis on individual lots, I still would rather leave TLH decisions tot the advisor.

Dave
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Re: "Beware of Sci-Fi Portfolios"

Post by alex345 »

nisiprius wrote: Sun May 16, 2021 9:36 am
alex345 wrote: Sun May 16, 2021 7:00 am If the article title was "beware of high expense ratio portfolios" I think I'd agree. Calling it science fiction is an obvious stretch. We don't have all the facts since the weights are not included so objective analysis can't really be done.
However, Random Walker has very kindly posted his own portfolio, which he says is "basically the exact portfolio that Alan describes." By the way, I really appreciate Random Walker's willingness to engage sincerely in these discussions.

In context, I don't think there's any reason to think that the portfolio Allan Roth dislikes is very different in weight.

I have taken the great liberty of calculating the average expense ratio for the portfolio Random Walker described. See footnote for details.

The average is 0.73%, counting the bond ladder as a 0% ER. If you want to omit the bond ladder, multiply this and all remaining numbers by 1.334; 25% of his money is in a bond ladder, and 75% a portfolio of mutual and interval funds with a weighted average 0.96% ER.

However, if we see where this expense ratio comes from, it's obvious that we can classify the holdings into three categories:

--the bond ladder
--what I'll call "straightforward" funds from DFA and Bridgeway
--what I'll call "sophisticated" funds from Stone Ridge, Cliffwater, and AQR.

25% of the portfolio is the bond ladder with 0% ER
53% is in straightforward funds, which collectively have a weighted ER 0f 0.394%
22% is in sophisticated, which a weighted ER of 2.351%

Without the sophisticated funds, the weighted average ER would only be 0.30%.

So the inclusion of these four sophisticated funds, even though they are only 22% of the portfolio, has more than doubled the overall expense ratio.

Since Allan Roth has more or less said that DFA funds are OK with him, basically the whole argument boils down to the four sophisticated funds, LENDX, CCLFX, SRRIX, and QSPRX as about a quarter of the portfolio.

Image

*In cases where he lists several funds, e.g. "DFA Int SV, DFA World ex US Targeted Value, DFA Int Vector (Int SV) 12.5%" I've used the average of the expense ratios of the funds he mentions; in no case were there huge differences. For example, those three have ERs of 0.36%, 0.49%, 0.55%. In every case I've simply used the listed "expense ratios," often from bloomberg.com. I mention that because Larry Swedroe has argued that the SEC regulations for stating expense ratios are unfair and misleading, and also that the expense ratio for long-short funds should be mentally divided by two because you are paying for factor exposure and long-short give you double the factor exposure for your money. I have counted his bond ladder at a 0% expense ratio; there may be transaction costs but transaction costs are not included in expense ratios. I have not included the advisory fee he may be paying, on the assumption that he thinks the advisor's advisory service is worth what he pays. I assume that "Clearwater" is a typo for Cliffwater, and that the fund is CCLFX.
Thanks for that estimate, IMO 0.73 is quite high of an expense ratio, with an advisor fee added onto it makes quite a hurdle to overcome.

I tilt to various risk factors, size, value, as well as having a tilt towards emerging markets. My AA target is
65% Equity:
25% US / 25% INTL. In each by style box: 50% in large row and 40% in value column. INTL is split 40% emerging / 60% developed
5% US REITs / 5% INTL RE equity.
2.5% precious metals/mining equities
2.5% energy equities

35% Non-equity:
17.5% TIAA Traditional
17.5% TIAA Real Estate

So I have some hints of the same types of factor exposure while having an overall ER of 0.23%, and half of that is solely due to TIAA real estate.
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Re: "Beware of Sci-Fi Portfolios"

Post by nisiprius »

vineviz wrote: Sun May 16, 2021 10:11 am
Allan Roth wrote: Sat May 15, 2021 5:32 pm
A Jack Bogle Total Market free lunch is based on arithmetic. When you add one or two extra digits to expense ratios, you go against arithmetic.
This so-called “free lunch” is available to all investors, not just those who choose “total market” funds.

A diligent investor can build a factor-aware portfolio for far less than the 100bps or whatever your client had been paying. Bogle’s “costs matter” arithmetic works for multifactor portfolios just as well as it does for single factor portfolios.

It’s not 1976 anymore.
Where can you find exposure to long-short alternatives, peer-to-peer lending, reinsurance, and whatever it is that CCLFX invests in for far less than 100 basis points?

There's a certain amount of arguing past each other here, and it's because... from my personal opinionated lens of Bogle-truth... Allan Roth is blaming "academia," but the holdings that are the problem are QSPRX, LENDX, CCLFX, and SRRIX.

You might argue that QSPRX, as a "quant' fund, is supported by academic research. I don't think it is. I think it is more accurate to say it is based on original methodologies developed by people familiar with academic research. But anyway. Put QSPRX aside. What about the others?

What are the factor loadings of LENDX and where can you get it for far less than 100 bps?

If you think that devoting about a quarter of the portfolio to QSPRX, LENDX, CCLFX, and SRRIX is supported by the best findings of the academic research you are familiar with, and that these asset classes form an essential part of any portfolio you support, then it is up to you: either defend their expenses, or tell us where to find the same exposure at a cost acceptable to you.

If you believe that these are dubious novelties, then I think your beef with Allan Roth is his blaming them on "academia."
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Re: "Beware of Sci-Fi Portfolios"

Post by hyperon »

nisiprius wrote: Sun May 16, 2021 10:44 am
vineviz wrote: Sun May 16, 2021 10:11 am
Allan Roth wrote: Sat May 15, 2021 5:32 pm
A Jack Bogle Total Market free lunch is based on arithmetic. When you add one or two extra digits to expense ratios, you go against arithmetic.
This so-called “free lunch” is available to all investors, not just those who choose “total market” funds.

A diligent investor can build a factor-aware portfolio for far less than the 100bps or whatever your client had been paying. Bogle’s “costs matter” arithmetic works for multifactor portfolios just as well as it does for single factor portfolios.

It’s not 1976 anymore.
Where can you find exposure to long-short alternatives, peer-to-peer lending, reinsurance, and whatever it is that CCLFX invests in for far less than 100 basis points?
I don't think anyone would suggest that the bolded investments above are part of what is accepted as a "multifactor" portfolio here.
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Re: "Beware of Sci-Fi Portfolios"

Post by YRT70 »

nisiprius wrote: Sun May 16, 2021 10:44 am
vineviz wrote: Sun May 16, 2021 10:11 am
Allan Roth wrote: Sat May 15, 2021 5:32 pm
A Jack Bogle Total Market free lunch is based on arithmetic. When you add one or two extra digits to expense ratios, you go against arithmetic.
This so-called “free lunch” is available to all investors, not just those who choose “total market” funds.

A diligent investor can build a factor-aware portfolio for far less than the 100bps or whatever your client had been paying. Bogle’s “costs matter” arithmetic works for multifactor portfolios just as well as it does for single factor portfolios.

It’s not 1976 anymore.
Where can you find exposure to long-short alternatives, peer-to-peer lending, reinsurance, and whatever it is that CCLFX invests in for far less than 100 basis points?
By doing it yourself? That's what I've been doing anyway. Here in Europe we have Mintos.com. I've been getting 8-10% interest on loans with a moderate risk profile (no free lunch of course).
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Re: "Beware of Sci-Fi Portfolios"

Post by Random Walker »

hyperon wrote: Sun May 16, 2021 11:01 am
nisiprius wrote: Sun May 16, 2021 10:44 am
vineviz wrote: Sun May 16, 2021 10:11 am
Allan Roth wrote: Sat May 15, 2021 5:32 pm
A Jack Bogle Total Market free lunch is based on arithmetic. When you add one or two extra digits to expense ratios, you go against arithmetic.
This so-called “free lunch” is available to all investors, not just those who choose “total market” funds.

A diligent investor can build a factor-aware portfolio for far less than the 100bps or whatever your client had been paying. Bogle’s “costs matter” arithmetic works for multifactor portfolios just as well as it does for single factor portfolios.

It’s not 1976 anymore.
Where can you find exposure to long-short alternatives, peer-to-peer lending, reinsurance, and whatever it is that CCLFX invests in for far less than 100 basis points?
I don't think anyone would suggest that the bolded investments above are part of what is accepted as a "multifactor" portfolio here.
At least the long-short is a big dose of multi factor: value and momentum.

Dave
hyperon
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Re: "Beware of Sci-Fi Portfolios"

Post by hyperon »

Random Walker wrote: Sun May 16, 2021 11:16 am
hyperon wrote: Sun May 16, 2021 11:01 am
nisiprius wrote: Sun May 16, 2021 10:44 am
vineviz wrote: Sun May 16, 2021 10:11 am
Allan Roth wrote: Sat May 15, 2021 5:32 pm
A Jack Bogle Total Market free lunch is based on arithmetic. When you add one or two extra digits to expense ratios, you go against arithmetic.
This so-called “free lunch” is available to all investors, not just those who choose “total market” funds.

A diligent investor can build a factor-aware portfolio for far less than the 100bps or whatever your client had been paying. Bogle’s “costs matter” arithmetic works for multifactor portfolios just as well as it does for single factor portfolios.

It’s not 1976 anymore.
Where can you find exposure to long-short alternatives, peer-to-peer lending, reinsurance, and whatever it is that CCLFX invests in for far less than 100 basis points?
I don't think anyone would suggest that the bolded investments above are part of what is accepted as a "multifactor" portfolio here.
At least the long-short is a big dose of multi factor: value and momentum.

Dave
Right, but the cheap implementation of the factors that I suspected Vineviz was referring to, e.g. Vanguard's VFMF Multifactor ETF or a combination of funds targeting small, value, momentum, profitability, ... , are not long-short.
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Re: "Beware of Sci-Fi Portfolios"

Post by Random Walker »

True. But important to appreciate that the factorhead is interested in diversifying away from what dominates most all of our long only equity portfolios, market beta. A pure long-short fund fits that role potentially very well. And in the bigger context of improving portfolio efficiency with uncorrelated assets, the alternatives potentially help achieve that goal too.

Dave
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Re: "Beware of Sci-Fi Portfolios"

Post by vineviz »

nisiprius wrote: Sun May 16, 2021 10:44 am
There's a certain amount of arguing past each other here, and it's because... from my personal opinionated lens of Bogle-truth... Allan Roth is blaming "academia," but the holdings that are the problem are QSPRX, LENDX, CCLFX, and SRRIX.
I agree entirely. I could have more specific, since I wasn’t considering those particular funds to be part of the hypothetical low cost “factor-aware” portfolio I mentioned.

The characterization of them as “dubious novelties” is one I can agree with. IMHO they are the most problematic part of the original portfolio but, as you suggest, are probably the funds LEAST well supported by scholars.

I understand the role they are intended to play in Buckingham’s models and am somewhat sympathetic with clients’ desire for funds like that, but I can’t imagine the possible financial benefits are likely to exceed the certain high costs.
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Re: "Beware of Sci-Fi Portfolios"

Post by hyperon »

Random Walker wrote: Sun May 16, 2021 11:31 am True. But important to appreciate that the factorhead is interested in diversifying away from what dominates most all of our long only equity portfolios, market beta. A pure long-short fund fits that role potentially very well. And in the bigger context of improving portfolio efficiency with uncorrelated assets, the alternatives potentially help achieve that goal too.

Dave
Apologies, my original post was opaque. I wasn't suggesting otherwise. I should have stayed out of it and let the adults handle things. :sharebeer
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Re: "Beware of Sci-Fi Portfolios"

Post by XacTactX »

nisiprius wrote: Sun May 16, 2021 10:44 am
vineviz wrote: Sun May 16, 2021 10:11 am
Allan Roth wrote: Sat May 15, 2021 5:32 pm
A Jack Bogle Total Market free lunch is based on arithmetic. When you add one or two extra digits to expense ratios, you go against arithmetic.
This so-called “free lunch” is available to all investors, not just those who choose “total market” funds.

A diligent investor can build a factor-aware portfolio for far less than the 100bps or whatever your client had been paying. Bogle’s “costs matter” arithmetic works for multifactor portfolios just as well as it does for single factor portfolios.

It’s not 1976 anymore.
Where can you find exposure to long-short alternatives, peer-to-peer lending, reinsurance, and whatever it is that CCLFX invests in for far less than 100 basis points?

There's a certain amount of arguing past each other here, and it's because... from my personal opinionated lens of Bogle-truth... Allan Roth is blaming "academia," but the holdings that are the problem are QSPRX, LENDX, CCLFX, and SRRIX.

You might argue that QSPRX, as a "quant' fund, is supported by academic research. I don't think it is. I think it is more accurate to say it is based on original methodologies developed by people familiar with academic research. But anyway. Put QSPRX aside. What about the others?

What are the factor loadings of LENDX and where can you get it for far less than 100 bps?

If you think that devoting about a quarter of the portfolio to QSPRX, LENDX, CCLFX, and SRRIX is supported by the best findings of the academic research you are familiar with, and that these asset classes form an essential part of any portfolio you support, then it is up to you: either defend their expenses, or tell us where to find the same exposure at a cost acceptable to you.

If you believe that these are dubious novelties, then I think your beef with Allan Roth is his blaming them on "academia."
LENDX holds a global portfolio of peer to peer lending notes from services like LendingClub. Prosper, and Funding Circle. You can make your own investment account and directly invest with these services. LENDX gives exposure to factors like term, default, and liquidity, but instead of lending money to businesses it lends money to consumers. The downside to this kind of direct investing is that it's hard to have global diversification in the same way that LENDX does, and there is loan selection risk, it's possible to pick loans that perform worse than average if you don't do your due diligence.

LendingClub and Prosper both charge around 1% of the payment made by the borrower. The cost is relatively high compared regular index funds. However, I would point out that these lending services are providing a middleman for investors and borrowers, and even with the 1% payment fee, these investments have returns similar to equities, with lower standard deviation, with a correlation to equities of about 0.5 or 0.6. Adding alt lending to a portfolio moves the efficient frontier up and to the left, it raises the risk-adjusted return of the portfolio
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Re: "Beware of Sci-Fi Portfolios"

Post by Thesaints »

What kind of "academia" bases their discoveries on backtesting ? Community college ?
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Re: "Beware of Sci-Fi Portfolios"

Post by nisiprius »

Thesaints wrote: Sun May 16, 2021 11:59 am What kind of "academia" bases their discoveries on backtesting ? Community college ?
C'mon. What would you call this (from Fama and French's 1992 paper):
A. Data

We use all nonfinancial firms in the intersection of (a) the NYSE, AMEX, and NASDAQ return files from the Center for Research in Security Prices (CRSP) and (b) the merged COMPUSTAT annual industrial files of income‐statement and balance‐sheet data, also maintained by CRSP. We exclude financial firms because the high leverage that is normal for these firms probably does not have the same meaning as for nonfinancial firms, where high leverage more likely indicates distress. The CRSP returns cover NYSE and AMEX stocks until 1973 when NASDAQ returns also come on line. The COMPUSTAT data are for 1962–1989. The 1962 start date reflects the fact that book value of common equity (COMPUSTAT item 60), is not generally available prior to 1962. More important, COMPUSTAT data for earlier years have a serious selection bias; the pre‐1962 data are tilted toward big historically successful firms.
We can play with the definition of "backtesting," I guess, but for the most part past data is the only grist the academics have for their mill. That, by the way, is one of the issues with what kind of "science" financial economics might be. It's mostly observational and descriptive. Experiments and the application of the "scientific method" aren't a big part of this kind of research.
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Re: "Beware of Sci-Fi Portfolios"

Post by Elysium »

Random Walker wrote: Sun May 16, 2021 10:33 am
Nisi ignoring the advisory fee is mostly on target too I think, but the issue is a bit cloudy. Larry Swedroe would be the first to say that one should not hire an advisor just for fund access. But if the investor believes that some of the investments he is gaining access to through the advisor create a more efficient portfolio, then there is some overlap between the advisor and investment vehicle decisions. Lack of portfolio efficiency is a real cost, whether the investor realizes it or not.

Separate from the portfolio, the two biggest reasons I chose the advisor route were avoidance of behavioral errors and tax loss harvesting. At the time VG would not keep track of individual lots and I felt TLH done right could add about 0.5% annualized per year. Even though VG will now track cost basis on individual lots, I still would rather leave TLH decisions tot the advisor.

Dave
I do not think ignoring the advisory fee is right, it should be counted. 1% on top of 0.73% is too much to pay for the kind of portfolio put together, that a prolific poster like Random Walker with his awareness of tools & resources can easily put together using low cost funds and ETFs in a few hours tops, then manage it by spending 30 minutes every month. That includes building the bond ladder and any TLH involved. This isn't rocket science for anyone who spends this much amount of time on Bogleheads.

All I can say is Random Walker is giving away thousands of dollars in advisory fees and additional expenses for no reason, other than may be some irrational fear that something awful might happen and these alternatives will come to save the day??? I really can't get my head around this, because I do not believe behavioral reasons such as "stay the course", or TLH are important factors for someone like him. These are excuses that an advisor would say, and I believe there are many investor who need those services, but RW is not one of them.

If he takes away those alternatives, the rest can be implemented for much lower cost, say 0.50% tops, and no advisor fees, that is about 1.23% an year extra, compounded over the years is hundreds of thousands of dollars on a couple of million. Why wouldn't you fire your advisor this week and DIY? What are they giving you that you would give up such large sums for? I really would like to know.

While I have these questions, I do commend you for opening up to such criticism by sharing your portfolio.
Last edited by Elysium on Sun May 16, 2021 12:11 pm, edited 2 times in total.
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Re: "Beware of Sci-Fi Portfolios"

Post by james22 »

“The Failure of Factor Investing was Predictable”

https://alphaarchitect.com/2019/01/28/t ... edictable/
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Re: "Beware of Sci-Fi Portfolios"

Post by afan »

XacTactX wrote: Sun May 16, 2021 11:45 am

LendingClub and Prosper both charge around 1% of the payment made by the borrower. ... even with the 1% payment fee, these investments have returns similar to equities, with lower standard deviation, with a correlation to equities of about 0.5 or 0.6. Adding alt lending to a portfolio moves the efficient frontier up and to the left, it raises the risk-adjusted return of the portfolio
Interesting. Where did you find the statistics on returns, correlations, SD and effect on the risk adjusted return of a portfolio? How far do they go back? Do they represent a weighted average of all financing done through these companies. Free of survivorship bias?
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
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Re: "Beware of Sci-Fi Portfolios"

Post by Thesaints »

nisiprius wrote: Sun May 16, 2021 12:04 pm
Thesaints wrote: Sun May 16, 2021 11:59 am What kind of "academia" bases their discoveries on backtesting ? Community college ?
C'mon. What would you call this (from Fama and French's 1992 paper):
A. Data

We use all nonfinancial firms in the intersection of (a) the NYSE, AMEX, and NASDAQ return files from the Center for Research in Security Prices (CRSP) and (b) the merged COMPUSTAT annual industrial files of income‐statement and balance‐sheet data, also maintained by CRSP. We exclude financial firms because the high leverage that is normal for these firms probably does not have the same meaning as for nonfinancial firms, where high leverage more likely indicates distress. The CRSP returns cover NYSE and AMEX stocks until 1973 when NASDAQ returns also come on line. The COMPUSTAT data are for 1962–1989. The 1962 start date reflects the fact that book value of common equity (COMPUSTAT item 60), is not generally available prior to 1962. More important, COMPUSTAT data for earlier years have a serious selection bias; the pre‐1962 data are tilted toward big historically successful firms.
We can play with the definition of "backtesting," I guess, but for the most part past data is the only grist the academics have for their mill. That, by the way, is one of the issues with what kind of "science" financial economics might be. It's mostly observational and descriptive. Experiments and the application of the "scientific method" aren't a big part of this kind of research.
I'd say proper "academia" is instead based on the understanding of financial "mechanisms", which can be verified through backtesting.
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Re: "Beware of Sci-Fi Portfolios"

Post by vineviz »

Elysium wrote: Sun May 16, 2021 12:09 pm I do not think ignoring the advisory fee is right, it should be counted. 1% on top of 0.73% is too much to pay for the kind of portfolio put together, that a prolific poster like Random Walker with his awareness of tools & resources can easily put together using low cost funds and ETFs in a few hours tops, then manage it by spending 30 minutes every month. That includes building the bond ladder and any TLH involved. This isn't rocket science for anyone who spends this much amount of time on Bogleheads.
This is exactly why the 1% should NOT automatically be counted as an investment expense: the 1% AUM fee is covering a wide range of financial planning services, of which the the actual portfolio management is a trivially small percentage.

Self-managing a portfolio and a wealth management relationship with a firm like Buckingham are, at best, imperfect substitutes. Much like comparing a Mercedes-Benz C-Class to a Honda Civic. However much you or I might find the Civic to be clearly preferred, there's no ambiguity that the average C-Class buyer is looking at their purchase as being something OTHER than basic transportation.
"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: "Beware of Sci-Fi Portfolios"

Post by XacTactX »

afan wrote: Sun May 16, 2021 12:17 pm
XacTactX wrote: Sun May 16, 2021 11:45 am

LendingClub and Prosper both charge around 1% of the payment made by the borrower. ... even with the 1% payment fee, these investments have returns similar to equities, with lower standard deviation, with a correlation to equities of about 0.5 or 0.6. Adding alt lending to a portfolio moves the efficient frontier up and to the left, it raises the risk-adjusted return of the portfolio
Interesting. Where did you find the statistics on returns, correlations, SD and effect on the risk adjusted return of a portfolio? How far do they go back? Do they represent a weighted average of all financing done through these companies. Free of survivorship bias?
- For returns you can do a backtest for all of the non-institutional loans that have been made at LendingClub with a grade of A, B, C, and D. The ROI for all the loans was 5.70%. If you add a filter to exclude renters, people with low income, and people who have applied for credit in the past 6 months, the ROI goes up to 6.64%. This was the recommendation that Larry Swedroe and Kevin Grogan made in Reducing the Risk of Black Swans. Screenshot here.

- For correlation and volatility Morgan Stanley has an article about alt lending and they say that correlation to equities is 0.46. It is similar to corporate bonds, corporate bonds have an 0.48 correlation to equities. Volatility was 5.24% and the S&P 500 had a volatility of 20.07%. The time period is only 3 years though, long term I think the volatility of the stock market will be closer to 15% and the alt lending fund will be slightly higher than 5.24%.Article here.

- LendingClub used to have a page where they let you drill down into all of the loans that have been issued but since they discontinued the service in 2020 I can't find it. If anyone can find that page I can compute the standard deviation and correlation to the stock market with Microsoft Excel
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Re: "Beware of Sci-Fi Portfolios"

Post by afan »

I don't see how that lets the AUM fee off the hook. The question is not why someone is paying it. The question is the cost. If you leave out the cost, then one may as well pay 5% or 15, since the fee does not "count".

I pay a lot of money each year to live in my house, to buy food, to cover insurance. What would an AUM adviser do for me that is worth anything vat all, let alone 1%?

What else is one getting in return for that 1%? Who needs 20 hours a year of financial advice? $1M portfolio, 1% of assets, $500/hour.

I doubt I have used 20 hours of advice in my life. Almost all of it was for estate planning advice from an attorney, which the AUM advisers do not include.

Not a rhetorical question. What does a 1% AUM adviser provide besides a few minutes a year overseeing a portfolio?
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
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Re: "Beware of Sci-Fi Portfolios"

Post by afan »

XacTactX wrote: Sun May 16, 2021 12:57 pm
afan wrote: Sun May 16, 2021 12:17 pm
XacTactX wrote: Sun May 16, 2021 11:45 am

LendingClub and Prosper both charge around 1% of the payment made by the borrower. ... even with the 1% payment fee, these investments have returns similar to equities, with lower standard deviation, with a correlation to equities of about 0.5 or 0.6. Adding alt lending to a portfolio moves the efficient frontier up and to the left, it raises the risk-adjusted return of the portfolio
Interesting. Where did you find the statistics on returns, correlations, SD and effect on the risk adjusted return of a portfolio? How far do they go back? Do they represent a weighted average of all financing done through these companies. Free of survivorship bias?
- For returns you can do a backtest for all of the non-institutional loans that have been made at LendingClub with a grade of A, B, C, and D. The ROI for all the loans was 5.70%. If you add a filter to exclude renters, people with low income, and people who have applied for credit in the past 6 months, the ROI goes up to 6.64%. This was the recommendation that Larry Swedroe and Kevin Grogan made in Reducing the Risk of Black Swans. Screenshot here.

- For correlation and volatility Morgan Stanley has an article about alt lending and they say that correlation to equities is 0.46. It is similar to corporate bonds, corporate bonds have an 0.48 correlation to equities. Volatility was 5.24% and the S&P 500 had a volatility of 20.07%. The time period is only 3 years though, long term I think the volatility of the stock market will be closer to 15% and the alt lending fund will be slightly higher than 5.24%.Article here.

- LendingClub used to have a page where they let you drill down into all of the loans that have been issued but since they discontinued the service in 2020 I can't find it. If anyone can find that page I can compute the standard deviation and correlation to the stock market with Microsoft Excel
So one can select a subset of loans issued by Lending Club for which there are some short term days. No indication of independent source or survivorship bias.

The Morgan Stanley link concerns a single fund that started in 2018 and gives data into 2020. Far to short to draw any conclusions.

As far as I can tell, neither provides long term data, independent source, free of selection or survivorship bias.

At least at the moment, I would rate the returns, volatility and correlations with other assets as unknown.
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
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Re: "Beware of Sci-Fi Portfolios"

Post by Elysium »

vineviz wrote: Sun May 16, 2021 12:32 pm Self-managing a portfolio and a wealth management relationship with a firm like Buckingham are, at best, imperfect substitutes. Much like comparing a Mercedes-Benz C-Class to a Honda Civic. However much you or I might find the Civic to be clearly preferred, there's no ambiguity that the average C-Class buyer is looking at their purchase as being something OTHER than basic transportation.
Mercedes C-Class and Honda Civic, really? Even if I accept that analogy, Bogleheads are not Honda Civic, we are Mercedes E-Class, just because we do it ourselves doesn't mean we aren't doing wealth management right. So someone is pay 1% AUM for C-Class service, while E-Class is here for the taking. Collective resources and wisdom available here will top anything that BAM will provide.
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Re: "Beware of Sci-Fi Portfolios"

Post by vineviz »

Elysium wrote: Sun May 16, 2021 1:30 pm Collective resources and wisdom available here will top anything that BAM will provide.
Regardless of whether that is true, it misses the essential point: a client of a firm like BAM is not only buying a portfolio. They are buying a bundle of goods and service, some very tangible and some less so.

My guess is that their average client is very intelligent or, at the very least intelligent enough that a lack of "resources and wisdom" is not even close to the main reason they've engaged a financial advisor. Many of their clients could probably manage their own wealth quite well, but many of them would also fail miserably for reasons having nothing to do with wisdom or access to resources.
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Re: "Beware of Sci-Fi Portfolios"

Post by Beehave »

Lots of interesting discussion in this thread. But almost completely off-topic of Taylor's original post.

The words "worst" and "sci-fi" are the least important parts of the post, and the ones which have driven the discourse in this thread. Roth makes it clear that what's grossly sub-optimal in the the portfolio he criticizes are the fees for some of the funds and their lack of liquidity.

The illiquidity factor is particularly concerning. According to Vanguard
(see https://advisors.vanguard.com/insights/ ... orpremiums)
factor investing requires rebalancing for max effect. If, during a volatile time, some of your portfolio is inaccessible, your hands are tied at the most critical time.

Of course any investment or fund can be temporarily inaccessible. But a the total market index funds recommended by Taylor Lattimore and Alan Roth are much less likely candidates for inaccessability than a specialized factor fund would be.

Moreover, as Larry Swedroe points out, the factor investor must be prepared to stay the course through extended periods of underperformance. The three fund portfolio backed up (as Taylor has recommended) by an annuity (or pension) with rebalancing appropriate to the investor's interests provides for diversified "factor-enough" investing to make sense over time and encourage staying the course.
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Re: "Beware of Sci-Fi Portfolios"

Post by Allan Roth »

nisiprius wrote: Sun May 16, 2021 7:35 am On inspection, it is Taylor Larimore, not Allan Roth, who said it was "one of the worst" Roth had ever seen. I
I have sadly seen many portfolios worse than this including one that had expenses over 10 percent annually.
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Re: "Beware of Sci-Fi Portfolios"

Post by Random Walker »

Elysium wrote: Sun May 16, 2021 12:09 pm
Random Walker wrote: Sun May 16, 2021 10:33 am
Nisi ignoring the advisory fee is mostly on target too I think, but the issue is a bit cloudy. Larry Swedroe would be the first to say that one should not hire an advisor just for fund access. But if the investor believes that some of the investments he is gaining access to through the advisor create a more efficient portfolio, then there is some overlap between the advisor and investment vehicle decisions. Lack of portfolio efficiency is a real cost, whether the investor realizes it or not.

Separate from the portfolio, the two biggest reasons I chose the advisor route were avoidance of behavioral errors and tax loss harvesting. At the time VG would not keep track of individual lots and I felt TLH done right could add about 0.5% annualized per year. Even though VG will now track cost basis on individual lots, I still would rather leave TLH decisions tot the advisor.

Dave
I do not think ignoring the advisory fee is right, it should be counted. 1% on top of 0.73% is too much to pay for the kind of portfolio put together, that a prolific poster like Random Walker with his awareness of tools & resources can easily put together using low cost funds and ETFs in a few hours tops, then manage it by spending 30 minutes every month. That includes building the bond ladder and any TLH involved. This isn't rocket science for anyone who spends this much amount of time on Bogleheads.

All I can say is Random Walker is giving away thousands of dollars in advisory fees and additional expenses for no reason, other than may be some irrational fear that something awful might happen and these alternatives will come to save the day??? I really can't get my head around this, because I do not believe behavioral reasons such as "stay the course", or TLH are important factors for someone like him. These are excuses that an advisor would say, and I believe there are many investor who need those services, but RW is not one of them.

If he takes away those alternatives, the rest can be implemented for much lower cost, say 0.50% tops, and no advisor fees, that is about 1.23% an year extra, compounded over the years is hundreds of thousands of dollars on a couple of million. Why wouldn't you fire your advisor this week and DIY? What are they giving you that you would give up such large sums for? I really would like to know.

While I have these questions, I do commend you for opening up to such criticism by sharing your portfolio.
I would like to think I’m as rational and disciplined as you say. I think I am, but not positive. I did pass behavioral tests in 2000-01 and 2007-9 with a much higher equity allocation then. I wouldn’t pay 1% either. I think William Bernstein once wrote he thought 0.3-0.4% was reasonable. Of course he also wrote that by the time an individual could intelligently choose a good advisor, he could probably do the investing himself. No matter how disciplined I may or may not be, the advisor definitely adds an extra layer of protection from myself.
I enjoy investing and Bogleheads a lot, probably way too much. Having the advisor frees me up to enjoy the reading, thinking, discussing. I’m not using Bogleheads to tweak my portfolio. The wildly anti-BH portfolio has been an evolution. I’ve bought into the firms philosophy, understand it fairly well, trust them, and have run with it. The relationship has been a joy. I’m sure there are some significant psychological reasons for me staying on this path. I’m highly confident I’ll meet my goals, and ultimately that’s the point of investing.

Dave
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Re: "Beware of Sci-Fi Portfolios"

Post by anil686 »

Random Walker wrote: Sun May 16, 2021 3:32 pm
Elysium wrote: Sun May 16, 2021 12:09 pm
Random Walker wrote: Sun May 16, 2021 10:33 am
Nisi ignoring the advisory fee is mostly on target too I think, but the issue is a bit cloudy. Larry Swedroe would be the first to say that one should not hire an advisor just for fund access. But if the investor believes that some of the investments he is gaining access to through the advisor create a more efficient portfolio, then there is some overlap between the advisor and investment vehicle decisions. Lack of portfolio efficiency is a real cost, whether the investor realizes it or not.

Separate from the portfolio, the two biggest reasons I chose the advisor route were avoidance of behavioral errors and tax loss harvesting. At the time VG would not keep track of individual lots and I felt TLH done right could add about 0.5% annualized per year. Even though VG will now track cost basis on individual lots, I still would rather leave TLH decisions tot the advisor.

Dave
I do not think ignoring the advisory fee is right, it should be counted. 1% on top of 0.73% is too much to pay for the kind of portfolio put together, that a prolific poster like Random Walker with his awareness of tools & resources can easily put together using low cost funds and ETFs in a few hours tops, then manage it by spending 30 minutes every month. That includes building the bond ladder and any TLH involved. This isn't rocket science for anyone who spends this much amount of time on Bogleheads.

All I can say is Random Walker is giving away thousands of dollars in advisory fees and additional expenses for no reason, other than may be some irrational fear that something awful might happen and these alternatives will come to save the day??? I really can't get my head around this, because I do not believe behavioral reasons such as "stay the course", or TLH are important factors for someone like him. These are excuses that an advisor would say, and I believe there are many investor who need those services, but RW is not one of them.

If he takes away those alternatives, the rest can be implemented for much lower cost, say 0.50% tops, and no advisor fees, that is about 1.23% an year extra, compounded over the years is hundreds of thousands of dollars on a couple of million. Why wouldn't you fire your advisor this week and DIY? What are they giving you that you would give up such large sums for? I really would like to know.

While I have these questions, I do commend you for opening up to such criticism by sharing your portfolio.
I would like to think I’m as rational and disciplined as you say. I think I am, but not positive. I did pass behavioral tests in 2000-01 and 2007-9 with a much higher equity allocation then. I wouldn’t pay 1% either. I think William Bernstein once wrote he thought 0.3-0.4% was reasonable. Of course he also wrote that by the time an individual could intelligently choose a good advisor, he could probably do the investing himself. No matter how disciplined I may or may not be, the advisor definitely adds an extra layer of protection from myself.
I enjoy investing and Bogleheads a lot, probably way too much. Having the advisor frees me up to enjoy the reading, thinking, discussing. I’m not using Bogleheads to tweak my portfolio. The wildly anti-BH portfolio has been an evolution. I’ve bought into the firms philosophy, understand it fairly well, trust them, and have run with it. The relationship has been a joy. I’m sure there are some significant psychological reasons for me staying on this path. I’m highly confident I’ll meet my goals, and ultimately that’s the point of investing.

Dave
I think that is commendable. I know I can only stay the course with TSM and TR/LS funds in my tax advantaged accounts. I like to tinker way too much and it is not a good instinct to have. I know a lot is made of the 1% for an advisor but if that keeps one from capitulating when the strategy is underperforming for years or adjusting away from a well reasoned strategy, that is of benefit IMO. JMO though....
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Re: "Beware of Sci-Fi Portfolios"

Post by Allan Roth »

nedsaid wrote: Sun May 16, 2021 12:33 am As far as I know neither Buckingham or AQR or DFA are publicly owned to my knowledge. What Alan is implying here is just factually incorrect.
While I did not note the name of the advisor or the firm, my understanding of what you inferred from my article is incorrect. Buckingham notes: "Buckingham is a wholly owned subsidiary of Focus Operating, LLC, a wholly owned subsidiary of Focus Financial Partners, LLC. The sole managing member of Focus Financial Partners, LLC is Focus Financial Partners, Inc." The symbol is FOCS: https://ir.focusfinancialpartners.com/

If my understanding is wrong, please let me know. Thanks Nedsaid.
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Re: "Beware of Sci-Fi Portfolios"

Post by Random Walker »

anil686 wrote: Sun May 16, 2021 3:37 pm
Random Walker wrote: Sun May 16, 2021 3:32 pm
Elysium wrote: Sun May 16, 2021 12:09 pm
Random Walker wrote: Sun May 16, 2021 10:33 am
Nisi ignoring the advisory fee is mostly on target too I think, but the issue is a bit cloudy. Larry Swedroe would be the first to say that one should not hire an advisor just for fund access. But if the investor believes that some of the investments he is gaining access to through the advisor create a more efficient portfolio, then there is some overlap between the advisor and investment vehicle decisions. Lack of portfolio efficiency is a real cost, whether the investor realizes it or not.

Separate from the portfolio, the two biggest reasons I chose the advisor route were avoidance of behavioral errors and tax loss harvesting. At the time VG would not keep track of individual lots and I felt TLH done right could add about 0.5% annualized per year. Even though VG will now track cost basis on individual lots, I still would rather leave TLH decisions tot the advisor.

Dave
I do not think ignoring the advisory fee is right, it should be counted. 1% on top of 0.73% is too much to pay for the kind of portfolio put together, that a prolific poster like Random Walker with his awareness of tools & resources can easily put together using low cost funds and ETFs in a few hours tops, then manage it by spending 30 minutes every month. That includes building the bond ladder and any TLH involved. This isn't rocket science for anyone who spends this much amount of time on Bogleheads.

All I can say is Random Walker is giving away thousands of dollars in advisory fees and additional expenses for no reason, other than may be some irrational fear that something awful might happen and these alternatives will come to save the day??? I really can't get my head around this, because I do not believe behavioral reasons such as "stay the course", or TLH are important factors for someone like him. These are excuses that an advisor would say, and I believe there are many investor who need those services, but RW is not one of them.

If he takes away those alternatives, the rest can be implemented for much lower cost, say 0.50% tops, and no advisor fees, that is about 1.23% an year extra, compounded over the years is hundreds of thousands of dollars on a couple of million. Why wouldn't you fire your advisor this week and DIY? What are they giving you that you would give up such large sums for? I really would like to know.

While I have these questions, I do commend you for opening up to such criticism by sharing your portfolio.
I would like to think I’m as rational and disciplined as you say. I think I am, but not positive. I did pass behavioral tests in 2000-01 and 2007-9 with a much higher equity allocation then. I wouldn’t pay 1% either. I think William Bernstein once wrote he thought 0.3-0.4% was reasonable. Of course he also wrote that by the time an individual could intelligently choose a good advisor, he could probably do the investing himself. No matter how disciplined I may or may not be, the advisor definitely adds an extra layer of protection from myself.
I enjoy investing and Bogleheads a lot, probably way too much. Having the advisor frees me up to enjoy the reading, thinking, discussing. I’m not using Bogleheads to tweak my portfolio. The wildly anti-BH portfolio has been an evolution. I’ve bought into the firms philosophy, understand it fairly well, trust them, and have run with it. The relationship has been a joy. I’m sure there are some significant psychological reasons for me staying on this path. I’m highly confident I’ll meet my goals, and ultimately that’s the point of investing.

Dave
I think that is commendable. I know I can only stay the course with TSM and TR/LS funds in my tax advantaged accounts. I like to tinker way too much and it is not a good instinct to have. I know a lot is made of the 1% for an advisor but if that keeps one from capitulating when the strategy is underperforming for years or adjusting away from a well reasoned strategy, that is of benefit IMO. JMO though....
Hi, we are at opposite ends of the portfolio spectrum, but actually have a great deal in common. In investing, it is way more important to have a portfolio that you’ll stick with than it is to have the optimal portfolio. We have both chosen portfolios we’ll stick to. For you that means the rock solid low cost TSM approach. You won’t deviate because you know it’s the whole market. My approach seeks maximal diversification across unique sources of risk. I won’t deviate because from my point of view I’ve diversified as broadly as I can; there’s no where else for me to go. We’ve both chosen portfolios, that from our individual points of view, won’t subject us to our tinkering tendencies.

Dave
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Re: "Beware of Sci-Fi Portfolios"

Post by Kitty Telltales »

Beehave wrote: Sun May 16, 2021 2:43 pm Lots of interesting discussion in this thread. But almost completely off-topic of Taylor's original post.

The words "worst" and "sci-fi" are the least important parts of the post, and the ones which have driven the discourse in this thread. Roth makes it clear that what's grossly sub-optimal in the the portfolio he criticizes are the fees for some of the funds and their lack of liquidity.

The illiquidity factor is particularly concerning. According to Vanguard
(see https://advisors.vanguard.com/insights/ ... orpremiums)
factor investing requires rebalancing for max effect. If, during a volatile time, some of your portfolio is inaccessible, your hands are tied at the most critical time.

The three fund portfolio backed up (as Taylor has recommended) by an annuity (or pension) with rebalancing appropriate to the investor's interests provides for diversified "factor-enough" investing to make sense over time and encourage staying the course.
Patiently read through the entire thread too and your insights are the only actionable and most on topic. Perhaps you are reminding others to Beehave!
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Re: "Beware of Sci-Fi Portfolios"

Post by hyperon »

If you agree with the article, then sure.

If you do not agree with the article, then no.

I likewise have been closely monitoring the thread and have read most posts twice, patiently at that, and I personally see the "validity" of the article's message as being of greatest import.
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Re: "Beware of Sci-Fi Portfolios"

Post by Elysium »

vineviz wrote: Sun May 16, 2021 2:22 pm
Elysium wrote: Sun May 16, 2021 1:30 pm Collective resources and wisdom available here will top anything that BAM will provide.
Regardless of whether that is true, it misses the essential point: a client of a firm like BAM is not only buying a portfolio. They are buying a bundle of goods and service, some very tangible and some less so.

My guess is that their average client is very intelligent or, at the very least intelligent enough that a lack of "resources and wisdom" is not even close to the main reason they've engaged a financial advisor. Many of their clients could probably manage their own wealth quite well, but many of them would also fail miserably for reasons having nothing to do with wisdom or access to resources.
I wasn't addressing value of services provided by a firm to their average customer, my question was about one customer, Random Walker, who clearly can build & manage a portfolio at a much lower cost, and certainly will not fail for behavioral reasons. But, if you do want to talk about the average BAM customer, reports provided by RW himself proves they have an inability to stay the course regardless of having BAM advisor support. Many were "weak-hands" that folded when the market went down, even causing one interval fund to liquidate due to high redemptions. Anyhow, he has responded with his reasons to stay with the firm, and while I disagree with it, I will accept his personal choice.
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Re: "Beware of Sci-Fi Portfolios"

Post by vineviz »

Elysium wrote: Sun May 16, 2021 4:18 pm You are diverting by talking about value of services provided by a firm to their average customer, from my question to one customer, Random Walker, who clearly can build & manage a portfolio at a much lower cost, and certainly will not fail for behavioral reasons.
And again you miss the key point: a BAM client is never JUST buying a portfolio, so their fee is not JUST an investment expense.
"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: "Beware of Sci-Fi Portfolios"

Post by vineviz »

Beehave wrote: Sun May 16, 2021 2:43 pm Of course any investment or fund can be temporarily inaccessible. But a the total market index funds recommended by Taylor Lattimore and Alan Roth are much less likely candidates for inaccessability than a specialized factor fund would be.
There’s no theoretical reason this should be true, and we can see empirically that it has not been true.
"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: "Beware of Sci-Fi Portfolios"

Post by afan »

Well, some of these are interval funds, designed to be illiquid. I agree this is not a theoretical reason for them to be illiquid. Rather, it is baked into the terms under which one invests.
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
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Re: "Beware of Sci-Fi Portfolios"

Post by afan »

vineviz wrote: Sun May 16, 2021 4:26 pm

And again you miss the key point: a BAM client is never JUST buying a portfolio, so their fee is not JUST an investment expense.
OK. To repeat my question, what else are customers getting in return for their fees?
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
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Re: "Beware of Sci-Fi Portfolios"

Post by Rick Ferri »

Simplicity is the ultimate sophistication. :D
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Re: "Beware of Sci-Fi Portfolios"

Post by vineviz »

afan wrote: Sun May 16, 2021 5:07 pm
vineviz wrote: Sun May 16, 2021 4:26 pm

And again you miss the key point: a BAM client is never JUST buying a portfolio, so their fee is not JUST an investment expense.
OK. To repeat my question, what else are customers getting in return for their fees?
They are getting an ongoing professional relationship. The same thing that anyone who outsources any task they MIGHT dog themselves but don’t want to do.

That could be as simple as the client having someone to blame when markets go south, having someone to talk them out of their worst impulses, someone to bounce ideas off of, or just not having to worry about something they prefer not to worry about.

More tangible services might include tax preparation, estate planning, insurance analysis, etc.

I’m not recommending that anyone hire an advisor with an AUM fee any more than I’d suggest people go out to a fancy restaurant instead of cooking at home.

Rather, I’m merely pointing out that some people prefer dining out to cooking at home and that the value of the former can’t be evaluated by simply comparing the restaurant bill to the cost of the groceries.
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Re: "Beware of Sci-Fi Portfolios"

Post by willthrill81 »

If factors hadn't been lagging LCG and the like over the last few years, what is the likelihood that Allan would have written this article?

I'd say about zero.
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Re: "Beware of Sci-Fi Portfolios"

Post by Beehave »

vineviz wrote: Sun May 16, 2021 4:27 pm
Beehave wrote: Sun May 16, 2021 2:43 pm Of course any investment or fund can be temporarily inaccessible. But a the total market index funds recommended by Taylor Lattimore and Alan Roth are much less likely candidates for inaccessability than a specialized factor fund would be.
There’s no theoretical reason this should be true, and we can see empirically that it has not been true.
This Blackrock pdf analyzing the Covid-19 market meltdown seems to provide support for the idea that "off-the-beaten-track" funds are more susceptible to shut down. However, it also stresses that such occurrences are very rare. Pages 22 on of the following discuss samples of funds that shut temporarily:

https://www.blackrock.com/corporate/lit ... r-2020.pdf
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Re: "Beware of Sci-Fi Portfolios"

Post by nisiprius »

vineviz wrote: Sun May 16, 2021 4:27 pm
Beehave wrote: Sun May 16, 2021 2:43 pm Of course any investment or fund can be temporarily inaccessible. But a the total market index funds recommended by Taylor La[r]imore and Alan Roth are much less likely candidates for inaccessability than a specialized factor fund would be.
There’s no theoretical reason this should be true, and we can see empirically that it has not been true.
For the three interval funds, LENDX, CCLFX, SRRIX, we can see "empirically" that it is true simply by looking at the prospectus.

They are Faustian bargains that give investors access to asset classes which not be allowed in regular mutual funds or ETFs due to limited liquidity in the underlying assets themselves. Advocates claim that long-term investors don't need daily liquidity and that by forgoing it they receive an "illiquidity premium" on top of whatever intrinsic characteristics the underlying assets have.

With mutual funds, you have a right to daily liquidity. Not with these. They--I'm looking at CCLFX right now but if I recall correctly LENDX and SRRIX are just the same--make 1) quarterly, 2) repurchase "offers." You get four chances a year to sell. From the Prospectus:
Shares are an illiquid investment.
What about "shares are an illiquid investment" is hard to understand? It continues:
  • We do not intend to list the Shares on any securities exchange and we do not expect a secondary market in the Shares to develop.
  • You should generally not expect to be able to sell your Shares (other than through the limited repurchase process), regardless of how we perform.
  • Although we are required to and have implemented a Share repurchase program, only a limited number of Shares will be eligible for repurchase by us.
  • You should consider that you may not have access to the money you invest for an indefinite period of time.
  • An investment in the Shares is not suitable for you if you have foreseeable need to access the money you invest.
  • Because you will be unable to sell your Shares or have them repurchased immediately, you will find it difficult to reduce your exposure on a timely basis during a market downturn.
They further warn that
REPURCHASE OFFERS; LIMITED LIQUIDITY.... The Fund will offer to purchase only a small portion of its Shares each quarter, and there is no guarantee that Shareholders will be able to sell all of the Shares that they desire to sell in any particular repurchase offer.
That's not an empty warning, because the exact scenarios warned against actually occurred in the Stone Ridge SRRIX fund--it plunged, shareholders wanted out, the "repurchase offer" wasn't for as many shares as shareholders wanted to sell, the fund "gated," and they couldn't get their money.
Last edited by nisiprius on Sun May 16, 2021 6:28 pm, edited 1 time in total.
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Re: "Beware of Sci-Fi Portfolios"

Post by vineviz »

nisiprius wrote: Sun May 16, 2021 6:06 pm For the three interval funds, LENDX, CCLFX, SRRIX, we can see "empirically" that it is true simply by looking at the prospectus.
Again, not the funds I’m talking about.
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