Why don't you factor tilt?

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Cannibly
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Why don't you factor tilt?

Post by Cannibly »

This is to those Bogleheads who stick pretty closely to a globally diversified portfolio of stocks and bonds (indexed) and have decided not to factor tilt - no extra value, no extra growth, REITs, commodities, high-yield bonds, and no managed funds either. After reading many posts since joining a few months ago, the primary reasons I have seen for avoiding any factoring and managed funds and sticking with some version of a Bogleheads 3-fund or 4-fund include:

-- Simplicity
-- To avoid tinkering
-- The potential for extra return is just not worth it (I like the "the extra juice is not worth the squeeze" analogy)
-- Easier to stick to it and maintain discipline
-- The market return is just fine with you

Is there something I missed - your personal reasons - that's not covered in some way by what I listed?

As I have noted in previous posts, we're late 60's, retired, no debt, COLA indexed pension that covers living expenses, only one of us taking SS now and the other will at 70, more than we'll likely ever need in sheltered retirement and emergency funds. Retirement funds are 60/40 Vanguard LifeStrategy Moderate Growth style. We had a small position in Vanguard Managed Allocation Fund (about 5% of our total) but moved that to LSMG in the interest of what I outlined above. I ask the question to get a little more information from experienced investors. Thanks.
dbr
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Re: Why don't you factor tilt?

Post by dbr »

Because I don't need to and I don't want to.

I can imagine lots of people that for some reason do want to. It is far less clear what it would take for someone to need to.
123
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Re: Why don't you factor tilt?

Post by 123 »

Been there, done that. Experience tells me it isn't worth the bother. Reluctant to make a wrong decision.

Why would I want the market to beat me?
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dbr
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Re: Why don't you factor tilt?

Post by dbr »

Another comment is that if the objective of tilting is to increase the return of the portfolio then for a person allocating to stocks and bonds an alternative choice to increase expected return is to allocate more to stocks and less to bonds. Comparing tilting to that option needs to invoke more subtle differences than just increasing return ala Fama French. A person might prefer more in stocks rather than seeking a harder to understand possible benefit from tilting. I am not confident I really understand the nuances of this approach once you get past parroted quips such as "more diversified." It takes a lot of work to figure out what the differences really are and how they relate to any specific goals.

I did once have Larry Swedroe agree that the "Larry" portfolio might offer a higher safe withdrawal rate than a market portfolio of equal expected return, but it is not convincing.
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Re: Why don't you factor tilt?

Post by Jack FFR1846 »

If you factor tilt, pick a stock, buy based on the letter "X" in the company name means that you know something that everyone else has overlooked and your thing is going to outperform the market. I know nuthin'. I saw an interview years ago where Jack Bogle was answering the question about small value. His answer was that over a decade ago, it was potentially a good sector to place a bet in. People all piled in which made SCV rise. Great for the first people in, but then became a poor investment and overpriced. That's a really popular segment even today, well over a decade after everyone "figured it out" and invested in it.

For me, if I were to tilt, I can't even think of what I would tilt towards. Perhaps large US stocks. Maybe I would revise my portfolio investment names and have US Stock, International stock, bonds and US savings bonds. Since I have a pretty big pile of paper US savings bonds (I think around $420k worth now), I could certainly call it a segment and tilt towards it. Nah. Too much work. I'll leave it with bonds and cash and let it be part of that 50.

Come to think of it, maybe I could re-write my history and claim to be a finance guru. While the market, bonds and SCV have all tanked this year, my iBonds have performed in a stellar way. Yah, that's the ticket. I predicted this and started buying my savings bonds in the 90's knowing that 2022 would be a down year.
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Apathizer
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Re: Why don't you factor tilt?

Post by Apathizer »

dbr wrote: Fri Sep 16, 2022 4:33 pm Another comment is that if the objective of tilting is to increase the return of the portfolio then for a person allocating to stocks and bonds an alternative choice to increase expected return is to allocate more to stocks and less to bonds. Comparing tilting to that option needs to invoke more subtle differences than just increasing return ala Fama French. A person might prefer more in stocks rather than seeking a harder to understand possible benefit from tilting. I am not confident I really understand the nuances of this approach once you get past parroted quips such as "more diversified." It takes a lot of work to figure out what the differences really are and how they relate to any specific goals.

I did once have Larry Swedroe agree that the "Larry" portfolio might offer a higher safe withdrawal rate than a market portfolio of equal expected return, but it is not convincing.
I would argue that regardless of bond allocation, Factor slants increase potential risk, but also potential return sources. We've seen it this year. While almost everything is down, small value is down much less than the overall market, and bonds are also down less than stocks.

Even though my portfolio is about 60% stocks and 40% bonds my Factor slants have saved me about 2% in losses this year. I know this won't be the case and sometimes factors will underperform the market, but being well diversified not just across different markets but across factors seems like to improve return consistency though of course not always.
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abc132
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Re: Why don't you factor tilt?

Post by abc132 »

- There is no uniform definition of small, value, or any of the factors.
- Factor proponents change their definition over time to have something that backtests better than what they actually did.
- Survivor bias is likely to be very big given the best recent performer is typically used as the base metric for what factors are doing.
- Factor proponents have constructed an argument in which they predict things but can not be proven wrong regardless of what happens.

I combine all of these things and see a poorly constructed argument.

Factors can change over time and can certainly diminish, disappear or even do the opposite of what they are predicted to do.

Factors that are somehow known to persist should already be priced into the market according to risk vs reward as should not be expected to provide much benefit beyond other forms of diversification. It's likely a zero sum game even though we will always be able to after the fact identify factors or make new definitions of factors that outperform.

I saved over 4% this year from rebalancing bonds-->stocks before bonds dropped but that doesn't mean I believe rebalancing is an effective way to improve my portfolio.
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Re: Why don't you factor tilt?

Post by JakeyLee »

Cannibly, I don’t. But full disclosure… it’s because I still don’t fully grasp it. I’ve read a few threads in the last few years regarding factor tilt. But like so many concepts, it’s a concept that makes me feel “over my head”. Which sucks, by the way.

Financial planning has got to be the only worthwhile endeavor that has me feeling lost at times. I’m financially secure right now. I’ve directed all
My own finances for almost 40 years. I’ve theoretically amassed enough assets through simple index investing to outlast me, and make nieces and nephews very happy upon my demise. But there’s so much I’ve theoretically left on the table. Meh, it’s what it feels like anyway. This is not a rant. Just being honest about so many things I do not know. But here I am. Still trying to learn.
rockstar
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Re: Why don't you factor tilt?

Post by rockstar »

Lack of disclosure. I have no clue how the factors are determined and calculated.
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asset_chaos
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Re: Why don't you factor tilt?

Post by asset_chaos »

Factors are identifiable risk sources that earn a return over the risk free return. Market is a factor for stocks and term and credit are bond factors. Factor premiums may be earned by bearing extra risk. Most people will need to take some investing risk to meet their investing goals, and for stocks the most basic and least costly risk factor to invest in is the market factor. Most people neither want nor need to take the extra risk of other stock factors in order to achieve their investing goals. If you individually---relative to the average investor---are less exposed or sensitive to risk factors other than the market, then it could be worthwhile for you to bear extra risk and perhaps reap factor premiums. If you're closer to the average investor, which is most people, then you don't want the extra risk.
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UpperNwGuy
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Re: Why don't you factor tilt?

Post by UpperNwGuy »

Why would I bother to factor tilt?
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Re: Why don't you factor tilt?

Post by JakeyLee »

JakeyLee wrote: Fri Sep 16, 2022 6:04 pm Cannibly, I don’t. But full disclosure… it’s because I still don’t fully grasp it. I’ve read a few threads in the last few years regarding factor tilt. But like so many concepts, it’s a concept that makes me feel “over my head”. Which sucks, by the way.

Financial planning has got to be the only worthwhile endeavor that has me feeling lost at times. I’m financially secure right now. I’ve directed all
My own finances for almost 40 years. I’ve theoretically amassed enough assets through simple index investing to outlast me, and make nieces and nephews very happy upon my demise. But there’s so much I’ve theoretically left on the table. Meh, it’s what it feels like anyway. This is not a rant. Just being honest about so many things I do not know. But here I am. Still trying to learn.
I just realized this response is fairly useless and certainly not actionable. So let me summarize . “I don’t . I don’t because complicating my plan seems to encourage me to make behavioral mistakes. In addition, the bulk of Bogle’s simple investing ideas/concepts has proved to be wildly successful for me. But I acknowledge that there’s concepts I still need to learn/adopt. So I appreciate these important questions and the ensuing wealth of information ..”.
Marseille07
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Re: Why don't you factor tilt?

Post by Marseille07 »

Cannibly wrote: Fri Sep 16, 2022 4:04 pm This is to those Bogleheads who stick pretty closely to a globally diversified portfolio of stocks and bonds (indexed) and have decided not to factor tilt - no extra value, no extra growth, REITs, commodities, high-yield bonds, and no managed funds either. After reading many posts since joining a few months ago, the primary reasons I have seen for avoiding any factoring and managed funds and sticking with some version of a Bogleheads 3-fund or 4-fund include:

-- Simplicity
-- To avoid tinkering
-- The potential for extra return is just not worth it (I like the "the extra juice is not worth the squeeze" analogy)
-- Easier to stick to it and maintain discipline
-- The market return is just fine with you

Is there something I missed - your personal reasons - that's not covered in some way by what I listed?

As I have noted in previous posts, we're late 60's, retired, no debt, COLA indexed pension that covers living expenses, only one of us taking SS now and the other will at 70, more than we'll likely ever need in sheltered retirement and emergency funds. Retirement funds are 60/40 Vanguard LifeStrategy Moderate Growth style. We had a small position in Vanguard Managed Allocation Fund (about 5% of our total) but moved that to LSMG in the interest of what I outlined above. I ask the question to get a little more information from experienced investors. Thanks.
I think your list is pretty good. Basically it's not worth chasing extra return that may or may not exist, and you would diverge from the US TSM return, which isn't desirable.
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ososnilknarf
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Re: Why don't you factor tilt?

Post by ososnilknarf »

For me it is the simple reason that no one knows what "factors" are going to outperform, so you may or may not do better than the market average. I'd rather not have to manage trying to figure out *when* and *what* to tilt in and out of.
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Re: Why don't you factor tilt?

Post by ruralavalon »

Cannibly wrote: Fri Sep 16, 2022 4:04 pm This is to those Bogleheads who stick pretty closely to a globally diversified portfolio of stocks and bonds (indexed) and have decided not to factor tilt - no extra value, no extra growth, REITs, commodities, high-yield bonds, and no managed funds either. After reading many posts since joining a few months ago, the primary reasons I have seen for avoiding any factoring and managed funds and sticking with some version of a Bogleheads 3-fund or 4-fund include:

-- Simplicity
-- To avoid tinkering
-- The potential for extra return is just not worth it (I like the "the extra juice is not worth the squeeze" analogy)
-- Easier to stick to it and maintain discipline
-- The market return is just fine with you

Is there something I missed - your personal reasons - that's not covered in some way by what I listed?

As I have noted in previous posts, we're late 60's, retired, no debt, COLA indexed pension that covers living expenses, only one of us taking SS now and the other will at 70, more than we'll likely ever need in sheltered retirement and emergency funds. Retirement funds are 60/40 Vanguard LifeStrategy Moderate Growth style. We had a small position in Vanguard Managed Allocation Fund (about 5% of our total) but moved that to LSMG in the interest of what I outlined above. I ask the question to get a little more information from experienced investors. Thanks.
I had a small-cap value tilt for many years. I used Vanguard Small-cap Value Index Fund (VSIAX), at 25% of my U.S. stocks. There has been little difference in returns compared to straight total stock market. Portfolio Visualizer, 2012-2022. I dropped that tilt, because it didn't seem to make me any money and also to simplify a bit.

I used Vanguard Real Estate Index Admiral (VGSLX) for many years, but dropped it just to simplify.

I do value simplicity lot.
Last edited by ruralavalon on Fri Sep 16, 2022 6:39 pm, edited 1 time in total.
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Apathizer
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Re: Why don't you factor tilt?

Post by Apathizer »

ososnilknarf wrote: Fri Sep 16, 2022 6:29 pm For me it is the simple reason that no one knows what "factors" are going to outperform, so you may or may not do better than the market average. I'd rather not have to manage trying to figure out *when* and *what* to tilt in and out of.
That's true but as others have pointed out the market Factor itself is a factor that has at times underperformed. 2000-09 returns for the total market were effectively zero while small value performed well. Until the last couple years the opposite was true for most of the last decade; the market outperformed small value.

I view Factor diversification as a hedge against potentially overvalued growth stocks. That had worked out well for me this year. I don't expect this will always happen but as long as this is fairly consistent light to moderate Factor slants make sense to me.
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Re: Why don't you factor tilt?

Post by Marseille07 »

Apathizer wrote: Fri Sep 16, 2022 6:38 pm That's true but as others have pointed out the market Factor itself is a factor that has at times underperformed. 2000-09 returns for the total market were effectively zero while small value performed well. Until the last couple years the opposite was true for most of the last decade; the market outperformed small value.

I view Factor diversification as a hedge against potentially overvalued growth stocks. That had worked out well for me this year. I don't expect this will always happen but as long as this is fairly consistent light to moderate Factor slants make sense to me.
Why do you need a hedge on top of already being 60/40? Too much hedging in my opinion.
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Re: Why don't you factor tilt?

Post by Apathizer »

Marseille07 wrote: Fri Sep 16, 2022 6:41 pm
Apathizer wrote: Fri Sep 16, 2022 6:38 pm That's true but as others have pointed out the market Factor itself is a factor that has at times underperformed. 2000-09 returns for the total market were effectively zero while small value performed well. Until the last couple years the opposite was true for most of the last decade; the market outperformed small value.

I view Factor diversification as a hedge against potentially overvalued growth stocks. That had worked out well for me this year. I don't expect this will always happen but as long as this is fairly consistent light to moderate Factor slants make sense to me.
Why do you need a hedge on top of already being 60/40? Too much hedging in my opinion.
Probability. It's less likely market, value, size, profitability, investment and bonds will all perform poorly than only the market and bonds will perform poorly. The fewer return sources the higher the likelihood of underperformance.
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Re: Why don't you factor tilt?

Post by Marseille07 »

Apathizer wrote: Fri Sep 16, 2022 6:58 pm Probability. It's less likely market, value, size, profitability, investment and bonds will all perform poorly than it is the market and bonds will perform poorly.
OK. It makes some sense I suppose, you're all-weathering the equities portion.
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Re: Why don't you factor tilt?

Post by whodidntante »

I don't not factor tilt. LOL.
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HomerJ
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Re: Why don't you factor tilt?

Post by HomerJ »

Cannibly wrote: Fri Sep 16, 2022 4:04 pm This is to those Bogleheads who stick pretty closely to a globally diversified portfolio of stocks and bonds (indexed) and have decided not to factor tilt - no extra value, no extra growth, REITs, commodities, high-yield bonds, and no managed funds either. After reading many posts since joining a few months ago, the primary reasons I have seen for avoiding any factoring and managed funds and sticking with some version of a Bogleheads 3-fund or 4-fund include:

-- Simplicity
-- To avoid tinkering
-- The potential for extra return is just not worth it (I like the "the extra juice is not worth the squeeze" analogy)
-- Easier to stick to it and maintain discipline
-- The market return is just fine with you
Those are pretty good reasons and it's why I don't bother.
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Re: Why don't you factor tilt?

Post by Apathizer »

Marseille07 wrote: Fri Sep 16, 2022 7:00 pm
Apathizer wrote: Fri Sep 16, 2022 6:58 pm Probability. It's less likely market, value, size, profitability, investment and bonds will all perform poorly than it is the market and bonds will perform poorly.
OK. It makes some sense I suppose, you're all-weathering the equities portion.
Exactly, though I'll admit as overall equity allocation decreases so do potential Factor benefits. At some point I probably won't have more than 50% equities, so using a single Auto rebalancing fund would be simpler it only slightly less diverse. When I get to the point I'm making regular withdrawals that's an option I'll definitely consider for at least part of my portfolio.
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Taylor Larimore
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Re: Why don't you factor tilt?

Post by Taylor Larimore »

Cannibly:

For many years I tried to "beat the market". When we moved to Vanguard in 1986 I immediately purchased 16 mutual funds for more "diversification." It took awhile, including reading more than 250 financial books, for me to realize what experts say: that a few total market index funds are all that is necessary, and that more funds are more likely to worsen results than improve results--besides, it is much easier and less expensive to own just 2 or 3 total market index funds.

The Three-Fund Portfolio

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Re: Why don't you factor tilt?

Post by enad »

Cannibly wrote: Fri Sep 16, 2022 4:04 pm This is to those Bogleheads who stick pretty closely to a globally diversified portfolio of stocks and bonds (indexed) and have decided not to factor tilt - no extra value, no extra growth, REITs, commodities, high-yield bonds, and no managed funds either. After reading many posts since joining a few months ago, the primary reasons I have seen for avoiding any factoring and managed funds and sticking with some version of a Bogleheads 3-fund or 4-fund include:

-- Simplicity
-- To avoid tinkering
-- The potential for extra return is just not worth it (I like the "the extra juice is not worth the squeeze" analogy)
-- Easier to stick to it and maintain discipline
-- The market return is just fine with you

Is there something I missed - your personal reasons - that's not covered in some way by what I listed?

As I have noted in previous posts, we're late 60's, retired, no debt, COLA indexed pension that covers living expenses, only one of us taking SS now and the other will at 70, more than we'll likely ever need in sheltered retirement and emergency funds. Retirement funds are 60/40 Vanguard LifeStrategy Moderate Growth style. We had a small position in Vanguard Managed Allocation Fund (about 5% of our total) but moved that to LSMG in the interest of what I outlined above. I ask the question to get a little more information from experienced investors. Thanks.
Jack Bogle explained away your questions/concerns regarding factor, value, REIT, etc .. tilts at a speech he gave in Chicago at the Morningstar Investment Forum on June 26, 2002, titled The Telltale Chart.

After reading the speech you'll either ignore it and continue to do as you wish, or acknowledge it and reason that Jack knew far more about investing than any of us will ever know, and stick with a simple 2 or 3 Fund portfolio.

Disclaimer: I used a 15-fund widely diversified portfolio with all manner of tilts including Value, REIT, EM and factors much to my detriment.
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Re: Why don't you factor tilt?

Post by dogagility »

I believe the reasoning behind factor tilting is a result of torturing historical data until it confessed. The confession being that small and value (for example) performed better during some historical period. Therefore, small and value will outperform in the future too. It's a common data mining problem.

Ben Felix of Rational Reminder podcast fame is a sector investor and a very intelligent person. I very much enjoy the podcast. On a recent podcast (#213), they asked the question "Is sector investing worth it?". After going through the evidence, Ben asked himself that question. His answer was telling... "I don't know; I think so".

At the end of the day, I don't like to make speculative bets. Sector investing seems like speculation to me.
Last edited by dogagility on Fri Sep 16, 2022 8:20 pm, edited 1 time in total.
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Re: Why don't you factor tilt?

Post by LadyGeek »

This thread is now in the Investing - Theory, News & General forum (general discussion).
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Cannibly
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Re: Why don't you factor tilt?

Post by Cannibly »

Thank you all for the responses.

My investing journey likely mirrors many a Boglehead. I really appreciate Rick Ferri's Boglehead signature - "The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity" - because it so well captures my own path. I think KISS will remain our mantra as we ride our investment portfolio into the sunset, which I hope will be many years from now.
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Re: Why don't you factor tilt?

Post by Nathan Drake »

Marseille07 wrote: Fri Sep 16, 2022 6:21 pm
Cannibly wrote: Fri Sep 16, 2022 4:04 pm This is to those Bogleheads who stick pretty closely to a globally diversified portfolio of stocks and bonds (indexed) and have decided not to factor tilt - no extra value, no extra growth, REITs, commodities, high-yield bonds, and no managed funds either. After reading many posts since joining a few months ago, the primary reasons I have seen for avoiding any factoring and managed funds and sticking with some version of a Bogleheads 3-fund or 4-fund include:

-- Simplicity
-- To avoid tinkering
-- The potential for extra return is just not worth it (I like the "the extra juice is not worth the squeeze" analogy)
-- Easier to stick to it and maintain discipline
-- The market return is just fine with you

Is there something I missed - your personal reasons - that's not covered in some way by what I listed?

As I have noted in previous posts, we're late 60's, retired, no debt, COLA indexed pension that covers living expenses, only one of us taking SS now and the other will at 70, more than we'll likely ever need in sheltered retirement and emergency funds. Retirement funds are 60/40 Vanguard LifeStrategy Moderate Growth style. We had a small position in Vanguard Managed Allocation Fund (about 5% of our total) but moved that to LSMG in the interest of what I outlined above. I ask the question to get a little more information from experienced investors. Thanks.
I think your list is pretty good. Basically it's not worth chasing extra return that may or may not exist, and you would diverge from the US TSM return, which isn't desirable.
Diverging a bit from only US TSM would have been very desirable over the long term, and importantly over periods where US TSM has done very poorly
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Re: Why don't you factor tilt?

Post by HomerJ »

Nathan Drake wrote: Fri Sep 16, 2022 11:39 pm
Marseille07 wrote: Fri Sep 16, 2022 6:21 pm
Cannibly wrote: Fri Sep 16, 2022 4:04 pm This is to those Bogleheads who stick pretty closely to a globally diversified portfolio of stocks and bonds (indexed) and have decided not to factor tilt - no extra value, no extra growth, REITs, commodities, high-yield bonds, and no managed funds either. After reading many posts since joining a few months ago, the primary reasons I have seen for avoiding any factoring and managed funds and sticking with some version of a Bogleheads 3-fund or 4-fund include:

-- Simplicity
-- To avoid tinkering
-- The potential for extra return is just not worth it (I like the "the extra juice is not worth the squeeze" analogy)
-- Easier to stick to it and maintain discipline
-- The market return is just fine with you

Is there something I missed - your personal reasons - that's not covered in some way by what I listed?

As I have noted in previous posts, we're late 60's, retired, no debt, COLA indexed pension that covers living expenses, only one of us taking SS now and the other will at 70, more than we'll likely ever need in sheltered retirement and emergency funds. Retirement funds are 60/40 Vanguard LifeStrategy Moderate Growth style. We had a small position in Vanguard Managed Allocation Fund (about 5% of our total) but moved that to LSMG in the interest of what I outlined above. I ask the question to get a little more information from experienced investors. Thanks.
I think your list is pretty good. Basically it's not worth chasing extra return that may or may not exist, and you would diverge from the US TSM return, which isn't desirable.
Diverging a bit from only US TSM would have been very desirable over the long term, and importantly over periods where US TSM has done very poorly
Nope... over the long-term it doesn't matter. Over certain short-term periods, sure...

But we're long-term investors here.
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Re: Why don't you factor tilt?

Post by Nathan Drake »

HomerJ wrote: Fri Sep 16, 2022 11:47 pm
Nathan Drake wrote: Fri Sep 16, 2022 11:39 pm
Marseille07 wrote: Fri Sep 16, 2022 6:21 pm
Cannibly wrote: Fri Sep 16, 2022 4:04 pm This is to those Bogleheads who stick pretty closely to a globally diversified portfolio of stocks and bonds (indexed) and have decided not to factor tilt - no extra value, no extra growth, REITs, commodities, high-yield bonds, and no managed funds either. After reading many posts since joining a few months ago, the primary reasons I have seen for avoiding any factoring and managed funds and sticking with some version of a Bogleheads 3-fund or 4-fund include:

-- Simplicity
-- To avoid tinkering
-- The potential for extra return is just not worth it (I like the "the extra juice is not worth the squeeze" analogy)
-- Easier to stick to it and maintain discipline
-- The market return is just fine with you

Is there something I missed - your personal reasons - that's not covered in some way by what I listed?

As I have noted in previous posts, we're late 60's, retired, no debt, COLA indexed pension that covers living expenses, only one of us taking SS now and the other will at 70, more than we'll likely ever need in sheltered retirement and emergency funds. Retirement funds are 60/40 Vanguard LifeStrategy Moderate Growth style. We had a small position in Vanguard Managed Allocation Fund (about 5% of our total) but moved that to LSMG in the interest of what I outlined above. I ask the question to get a little more information from experienced investors. Thanks.
I think your list is pretty good. Basically it's not worth chasing extra return that may or may not exist, and you would diverge from the US TSM return, which isn't desirable.
Diverging a bit from only US TSM would have been very desirable over the long term, and importantly over periods where US TSM has done very poorly
Nope... over the long-term it doesn't matter. Over certain short-term periods, sure...

But we're long-term investors here.
It’s earned a significant premium over the long term, so for those willing to bear risk it certainly does matter.

It’s avoided negative real returns of up to 15 years unlike the US TSM, thus potentially allowing an investor to more easily “stay the course” if they care more about reliable positive progress rather than benchmark anchoring.
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Re: Why don't you factor tilt?

Post by Poe22 »

Apathizer wrote: Fri Sep 16, 2022 6:38 pm That's true but as others have pointed out the market Factor itself is a factor that has at times underperformed.
I do not believe you can call the market a factor. To me, the market is all there is, the whole universe of total supply and demand for stocks. Factors are just concentrated subsets of the market. So I'm not sure how factor investing is any different than stock picking at an index level. Not that that's necessarily a bad thing per se, it's just not for everyone's taste.
Marseille07 wrote: Fri Sep 16, 2022 7:00 pm
Apathizer wrote: Fri Sep 16, 2022 6:58 pm Probability. It's less likely market, value, size, profitability, investment and bonds will all perform poorly than it is the market and bonds will perform poorly.
OK. It makes some sense I suppose, you're all-weathering the equities portion.
That does not make sense to me. Imho, a total stock market is - by definition - as diversified as it gets. Unless I know how to better diversify our total market (which I certainly don't), I won't try.
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Re: Why don't you factor tilt?

Post by dcabler »

Cannibly wrote: Fri Sep 16, 2022 4:04 pm This is to those Bogleheads who stick pretty closely to a globally diversified portfolio of stocks and bonds (indexed) and have decided not to factor tilt - no extra value, no extra growth, REITs, commodities, high-yield bonds, and no managed funds either. After reading many posts since joining a few months ago, the primary reasons I have seen for avoiding any factoring and managed funds and sticking with some version of a Bogleheads 3-fund or 4-fund include:

-- Simplicity
-- To avoid tinkering
-- The potential for extra return is just not worth it (I like the "the extra juice is not worth the squeeze" analogy)
-- Easier to stick to it and maintain discipline
-- The market return is just fine with you

Is there something I missed - your personal reasons - that's not covered in some way by what I listed?

As I have noted in previous posts, we're late 60's, retired, no debt, COLA indexed pension that covers living expenses, only one of us taking SS now and the other will at 70, more than we'll likely ever need in sheltered retirement and emergency funds. Retirement funds are 60/40 Vanguard LifeStrategy Moderate Growth style. We had a small position in Vanguard Managed Allocation Fund (about 5% of our total) but moved that to LSMG in the interest of what I outlined above. I ask the question to get a little more information from experienced investors. Thanks.
If you're happy with your results, then why change? And that goes to whether you tilt or not.

A whole lotta bandwidth is used on this forum to discuss this subject and, surprise of surprises, no consensus is ever reached and with many people convinced that their view is not only the right choice, but right for everybody.

The list of possible reasons you gave above is a great list since much of it is behavioral. And that's totally fine since that's totally personal and a self-aware investor is a good thing, in my opinion.

As for me, I'm not a 3-funder at all as I don't start with a total market and work from there. Am I happy with the results I've gotten over the years? Yep. Do I think that what I do is what everybody else should do? No. Might have I done better with something else? Certainly. There's always another portfolio that I could find that would have done better in the past. Might there be a portfolio that will do better in the future? I'm certain of it, but I can't know what that is. Specifically, is there a chance that what I'm doing will underperform a 3 or 4 fund portfolio going forward? Yes, every chance. But I also believe that such underperformance, by way of what I've put together, is unlikely to be that large. And I can live with that if it happens. In fact, it's already happened and I'm living with it. And there have been times when it has outperformed. I'm also happy with that.

The fact is, I don't often compare my portfolio with any other possible choices. Because the only thing that matters is whether I'm meeting my goals. And my goals aren't tied to somebody else's idea of what the "right" portfolio should be.

Cheers.
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Re: Why don't you factor tilt?

Post by typical.investor »

Cannibly wrote: Fri Sep 16, 2022 4:04 pm This is to those Bogleheads who stick pretty closely to a globally diversified portfolio of stocks and bonds (indexed) and have decided not to factor tilt - no extra value, no extra growth, REITs, commodities, high-yield bonds, and no managed funds either.
I do tilt and here is my performance for the record. As you can see, the biggest determinant to my portfolio was how much was allocated to stocks vs bonds and how much to US vs international. Relatively speaking, tilting has really made little difference in about 10 years since I took over from an advisor. About half my equities are in value funds. It's only been recently that US equity has outperformed the benchmarks. Prior to that value exposure was a drag.

MY LARGE CAP EQUITY 11.48%
S&P 500 11.43%
-----------------------------------


MY SMALL CAP EQUITY 8.54%
Russell 2000 7.11%
------------------------------------


MY INTERNATIONAL EQUITY 3.70%
MSCI EAFE 2.45%
------------------------------------


MY FIXED INCOME 1.96%
Bloomberg U.S. Aggregate Bond 1.34%
------------------------------------

I also am running a Hedgefundie type portfolio that has returned 8.00% (money was taken from large caps so this should be benchmarked to S&P500 or 11.43%)

*** notes:

1) bonds are a bit misleading since I use a large percent of municipals which aren't tax adjusted in the returns.
2) my holdings include emerging, but Schwab benchmarks international against the MSCI EAFE which is developed only.
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Re: Why don't you factor tilt?

Post by nisiprius »

Total market investing has always made perfect sense to me.

When I learned about factor tilting, it just didn't. It seemed like there might be something to it, and, then again, maybe not. I was very interested when I heard Eugene Fama, in a video interview:
Interviewer: Some people cite your research showing that value and small firms have higher average returns over time and they assume that you would recommend most investors have a big helping of small and value stocks in their portfolios. Is that a fair representation of your views?

Fama: Um, no. (Laughs) Basically this a risk story the way we tell it, so there is no optimal portfolio. The way I like to talk about it when I give presentations for DFA or other people is, in every asset pricing model, the market portfolio is always an efficient portfolio. It's always a relevant portfolio for an investor to hold. And investors can decide to tilt away from that based on their personal tastes. But that's what it amounts to. You can decide to tilt toward more value or smaller size based on your tastes for these dimensions of risk. But you needn't do it. You could also decide to go the other way. You could look at the premiums and say, no, I think I like the growth stocks better. Then, as long as you get a diversified portfolio of them, I can't argue with that either. So there's a whole multi-dimensional continuum here of efficient portfolios that anybody can decide to buy that I can't quarrel with. And I have no recommendations about because I think it's totally a matter of taste. If you eat oranges and I eat apples I can't really quarrel very much with that.
As best as I can determine, I don't have a taste for the dimensions of risk represented by small and value, and am happy to stick to the market portfolio, which Fama says is "always an efficient portfolio."

And it is interesting to me that, in all the things written and discussed about factor tilting, I can't ever recall seeing any methodology, questionnaires or anything else, to help investors understnand whether or not they have a taste for the small and value factors.
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Re: Why don't you factor tilt?

Post by dbr »

nisiprius wrote: Sat Sep 17, 2022 9:55 am Total market investing has always made perfect sense to me.

When I learned about factor tilting, it just didn't. It seemed like there might be something to it, and, then again, maybe not. I was very interested when I heard Eugene Fama, in a video interview:
Interviewer: Some people cite your research showing that value and small firms have higher average returns over time and they assume that you would recommend most investors have a big helping of small and value stocks in their portfolios. Is that a fair representation of your views?

Fama: Um, no. (Laughs) Basically this a risk story the way we tell it, so there is no optimal portfolio. The way I like to talk about it when I give presentations for DFA or other people is, in every asset pricing model, the market portfolio is always an efficient portfolio. It's always a relevant portfolio for an investor to hold. And investors can decide to tilt away from that based on their personal tastes. But that's what it amounts to. You can decide to tilt toward more value or smaller size based on your tastes for these dimensions of risk. But you needn't do it. You could also decide to go the other way. You could look at the premiums and say, no, I think I like the growth stocks better. Then, as long as you get a diversified portfolio of them, I can't argue with that either. So there's a whole multi-dimensional continuum here of efficient portfolios that anybody can decide to buy that I can't quarrel with. And I have no recommendations about because I think it's totally a matter of taste. If you eat oranges and I eat apples I can't really quarrel very much with that.
As best as I can determine, I don't have a taste for the dimensions of risk represented by small and value, and am happy to stick to the market portfolio, which Fama says is "always an efficient portfolio."

And it is interesting to me that, in all the things written and discussed about factor tilting, I can't ever recall seeing any methodology, questionnaires or anything else, to help investors understnand whether or not they have a taste for the small and value factors.
What on earth could be the meaning of a "taste for . . . (risk) factors?" Probably not being able to absorb that thought would be one reason factor investing never seized my imagination. The Fama-French model for stock returns is intellectually interesting because I like to contemplate statistical models. Note that model itself really doesn't say what a risk factor is other than a term in a regression the "explains" some return data.
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Re: Why don't you factor tilt?

Post by Marseille07 »

Poe22 wrote: Sat Sep 17, 2022 3:39 am That does not make sense to me. Imho, a total stock market is - by definition - as diversified as it gets. Unless I know how to better diversify our total market (which I certainly don't), I won't try.
I think their plan is to mix it up a bit so that while they still hold TSM, they tilt some SCV so that they can hedge some.

Again, I'm not saying I do that, just trying to make some sense out of what they do.
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Re: Why don't you factor tilt?

Post by cjcerny »

Don’t factor tilt because the guy with his name on this website said it is pointless. 😁
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Re: Why don't you factor tilt?

Post by iim7V7IM7 »

No, I do not

1) Simplicity of portfolio management (by me or my wife if I die or can no longer manage)
2) Happy to just capture market beta with minimal costs
3) Unwilling to wait two or more decades to see the benefit that may or may not be realized
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Re: Why don't you factor tilt?

Post by Triple digit golfer »

Labels are arbitrary. Large, small, value, growth and so on. The one thing I am confident in is that equities will deliver acceptable long-term returns. I don't know which ones will perform well and when, but I am confident that as a whole, they'll deliver. So, my goal is to simply earn those returns, not to attempt to exceed them.

Therefore, I hold an equity portfolio that roughly matches the market capitalization of the entire world. Veering from that will cause me to under perform or outperform, and I don't want the risk of under performing. I sleep at night knowing that I'll earn my fair share, whatever it may be, doing what I'm doing.
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Re: Why don't you factor tilt?

Post by km91 »

Poe22 wrote: Sat Sep 17, 2022 3:39 am
Apathizer wrote: Fri Sep 16, 2022 6:38 pm That's true but as others have pointed out the market Factor itself is a factor that has at times underperformed.
I do not believe you can call the market a factor. To me, the market is all there is, the whole universe of total supply and demand for stocks. Factors are just concentrated subsets of the market. So I'm not sure how factor investing is any different than stock picking at an index level. Not that that's necessarily a bad thing per se, it's just not for everyone's taste.
Marseille07 wrote: Fri Sep 16, 2022 7:00 pm
Apathizer wrote: Fri Sep 16, 2022 6:58 pm Probability. It's less likely market, value, size, profitability, investment and bonds will all perform poorly than it is the market and bonds will perform poorly.
OK. It makes some sense I suppose, you're all-weathering the equities portion.
That does not make sense to me. Imho, a total stock market is - by definition - as diversified as it gets. Unless I know how to better diversify our total market (which I certainly don't), I won't try.
Yes, TSM is by definition diversified across all available stocks. The insight of factor investing is that stock returns are driven by more than just beta, the correlation to TSM, and that an investor can build a more robust equity return stream by diversifying TSM/beta with other supposed drivers of return. Why and if the additional drivers of return exist are uncertain. Some might say that size and value represent additional risks and an investor willing to take on these risks can expect to earn a premium for doing so. Other explanations might say that the factor returns arise due to investor preferences or bias. For example, investors might be willing to overpay for growth stocks for the lottery-like returns they offer, an investor who takes the other side of this trade and overweights to value stocks could be expected to earn a premium for "correcting" this irrational preference
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Re: Why don't you factor tilt?

Post by Robert T »

.
To me, people who don’t tilt their financial investments to risk factors ("factor tilt") must mean they are 100% t-bills – as per the Fama-French 1993 paper on common risk factors in the returns on stocks and bonds (i.e. no factor tilt = no tilt to overall equity market risk, term or default risk in fixed income, or risks related to size or value).

I don’t think that describes anyone on Bogleheads. Investors simply give different weights to each risk factor (that could include zero) in their individual portfolios (based on personal circumstances, tastes, and preferences).
.
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Re: Why don't you factor tilt?

Post by Nathan Drake »

cjcerny wrote: Sat Sep 17, 2022 10:19 am Don’t factor tilt because the guy with his name on this website said it is pointless. 😁
I think it's good to know the context and absolutes in which he spoke about such topics.

He thought most people would be incapable of staying the course in the markets so he wanted them to stay the course with a very basic and simple strategy. And there's nothing wrong with it.

But let's not proclaim that he thought anything other than the S&P 500 was "pointless".
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Re: Why don't you factor tilt?

Post by nisiprius »

John C. Bogle gave a sustained a detailed exposition of his views in, "The Telltale Chart," written in 2002 and updated with another decade of data in 2012, supporting is views with data and charts. I'm not sure he uses the word "pointless," but that's a better summary than "most people would not be capable of staying the course in it," which is not at all what he was saying. He covers half a dozen or so different strategies, including factor tilts, and suggests that they are all subject to mean reversion and don't provide sustained outperformance in the long run.

And he never claimed any special advantage to the S&P 500 index over the total market; on the contrary, he always espoused total market indexing, and Vanguard was a pioneer in offering total market index funds.
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Re: Why don't you factor tilt?

Post by nisiprius »

dbr wrote: Sat Sep 17, 2022 10:06 am
nisiprius wrote: Sat Sep 17, 2022 9:55 am Total market investing has always made perfect sense to me.

When I learned about factor tilting, it just didn't. It seemed like there might be something to it, and, then again, maybe not. I was very interested when I heard Eugene Fama, in a video interview:
Interviewer: Some people cite your research showing that value and small firms have higher average returns over time and they assume that you would recommend most investors have a big helping of small and value stocks in their portfolios. Is that a fair representation of your views?

Fama: Um, no. (Laughs) Basically this a risk story the way we tell it, so there is no optimal portfolio. The way I like to talk about it when I give presentations for DFA or other people is, in every asset pricing model, the market portfolio is always an efficient portfolio. It's always a relevant portfolio for an investor to hold. And investors can decide to tilt away from that based on their personal tastes. But that's what it amounts to. You can decide to tilt toward more value or smaller size based on your tastes for these dimensions of risk. But you needn't do it. You could also decide to go the other way. You could look at the premiums and say, no, I think I like the growth stocks better. Then, as long as you get a diversified portfolio of them, I can't argue with that either. So there's a whole multi-dimensional continuum here of efficient portfolios that anybody can decide to buy that I can't quarrel with. And I have no recommendations about because I think it's totally a matter of taste. If you eat oranges and I eat apples I can't really quarrel very much with that.
As best as I can determine, I don't have a taste for the dimensions of risk represented by small and value, and am happy to stick to the market portfolio, which Fama says is "always an efficient portfolio."

And it is interesting to me that, in all the things written and discussed about factor tilting, I can't ever recall seeing any methodology, questionnaires or anything else, to help investors understnand whether or not they have a taste for the small and value factors.
What on earth could be the meaning of a "taste for . . . (risk) factors?" Probably not being able to absorb that thought would be one reason factor investing never seized my imagination. The Fama-French model for stock returns is intellectually interesting because I like to contemplate statistical models. Note that model itself really doesn't say what a risk factor is other than a term in a regression the "explains" some return data.
I don't know.

One guess, or possible explanation, is that some people have a tasted for positive skew, which is said to be shown growth stocks, and some for negative skew, said to be exhibited by value stocks.

Negative skew means small steady outperformance punctuated by short bursts of catastropic underperformance, and if so I will say unapologetically that to me that sucks, and I would not want it even if it were associated with long-term average outperformance.
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Re: Why don't you factor tilt?

Post by Nathan Drake »

nisiprius wrote: Sat Sep 17, 2022 11:51 am John C. Bogle gave a sustained a detailed exposition of his views in, "The Telltale Chart," written in 2002 and updated with another decade of data in 2012, supporting is views with data and charts. I'm not sure he uses the word "pointless," but that's a better summary than "most people would not be capable of staying the course in it," which is not at all what he was saying. He covers half a dozen or so different strategies, including factor tilts, and suggests that they are all subject to mean reversion and don't provide sustained outperformance in the long run.

And he never claimed any special advantage to the S&P 500 index over the total market; on the contrary, he always espoused total market indexing, and Vanguard was a pioneer in offering total market index funds.
He has charts in that 2002 report that clearly show sustained outperformance, have you read it? He tries to poke holes in them, but really exposes more holes into his own argument. And some of the things he brings up aren't really an issue in 2022 (trading costs, etc).

Didn't Bogle himself invest in the Wellington fund, which features a Value tilt?

Paul Merriman sat down with Bogle and said that the reason he doesn't like international or value isn't because he didn't feel they were good investments, but because he simply found that it would be more difficult for an average, unsophisticated investor to stick with over the long term.

So if you are an unsophisticated investor prone to behavioral bias, then there's no reason to factor tilt if it could be to your detriment. But if you are a bit more savvy, a more diversified factor portfolio is more likely to achieve your goals with less start date sensitivity, and a more optimal strategy to mitigate sequence risks.
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Re: Why don't you factor tilt?

Post by Marseille07 »

Nathan Drake wrote: Sat Sep 17, 2022 12:05 pm He has charts in that 2002 report that clearly show sustained outperformance, have you read it? He tries to poke holes in them, but really exposes more holes into his own argument. And some of the things he brings up aren't really an issue in 2022 (trading costs, etc).
If you roll a die 10000 times, some faces turn up more often than others. Calling this "sustained outperformance" is basically that.
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Re: Why don't you factor tilt?

Post by Nathan Drake »

Marseille07 wrote: Sat Sep 17, 2022 12:08 pm
Nathan Drake wrote: Sat Sep 17, 2022 12:05 pm He has charts in that 2002 report that clearly show sustained outperformance, have you read it? He tries to poke holes in them, but really exposes more holes into his own argument. And some of the things he brings up aren't really an issue in 2022 (trading costs, etc).
If you roll a die 10000 times, some faces turn up more often than others. Calling this "sustained outperformance" is basically that.
No it's not, this isn't the flip of a coin where the expected value is essentially 50:50

The outperformance of SCV is a global phenomenon with significant outperformance over the long term. Granted, it is taking on more risk to achieve that, just like investing US TSM is taking on more risk than bonds
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Re: Why don't you factor tilt?

Post by Marseille07 »

Nathan Drake wrote: Sat Sep 17, 2022 12:12 pm No it's not, this isn't the flip of a coin where the expected value is essentially 50:50

The outperformance of SCV is a global phenomenon with significant outperformance over the long term. Granted, it is taking on more risk to achieve that, just like investing US TSM is taking on more risk than bonds
I said die rolls, not coin flips.

Did you mean the sustained underperformance? https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: Why don't you factor tilt?

Post by lostdog »

Triple digit golfer wrote: Sat Sep 17, 2022 10:30 am Labels are arbitrary. Large, small, value, growth and so on. The one thing I am confident in is that equities will deliver acceptable long-term returns. I don't know which ones will perform well and when, but I am confident that as a whole, they'll deliver. So, my goal is to simply earn those returns, not to attempt to exceed them.

Therefore, I hold an equity portfolio that roughly matches the market capitalization of the entire world. Veering from that will cause me to under perform or outperform, and I don't want the risk of under performing. I sleep at night knowing that I'll earn my fair share, whatever it may be, doing what I'm doing.
+1

This is the perfect definition of investing enlightenment.
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Re: Why don't you factor tilt?

Post by Nathan Drake »

Marseille07 wrote: Sat Sep 17, 2022 12:16 pm
Nathan Drake wrote: Sat Sep 17, 2022 12:12 pm No it's not, this isn't the flip of a coin where the expected value is essentially 50:50

The outperformance of SCV is a global phenomenon with significant outperformance over the long term. Granted, it is taking on more risk to achieve that, just like investing US TSM is taking on more risk than bonds
I said die rolls, not coin flips.

Did you mean the sustained underperformance? https://www.portfoliovisualizer.com/bac ... ion2_2=100
Die rolls, coin flips. Doesn't matter. It's the same concept. There's an expected probability for whatever roll you have.

No, I mean outperformance of SCV vs US TSM:

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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