Is tilting ever a good idea?

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alex123711
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Is tilting ever a good idea?

Post by alex123711 »

E.g tilting to small, mid, large cap etc. I think I read small cap has outperformed long term, though who knows if it will continue to do so.
UpperNwGuy
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Re: Is tilting ever a good idea?

Post by UpperNwGuy »

I suspect tilting is only a good idea over short periods of time and that total market is the best approach for a lifetime of investing. And, no, I don't have data to support this opinion, so please don't ask me for it.
bh1
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Re: Is tilting ever a good idea?

Post by bh1 »

Makes sense to underinvest (short) those areas that affect your income. If you work for an airline, invest less in airlines. If you live in California, avoid California-heavy companies. This prevents the double-wammy of losing both your investments and your income at the same time.

Other than that, no? Small cap would be expected to have higher returns to match higher risk, but that doesn't directly imply that small cap should be a larger part of your portfolio.
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whodidntante
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Re: Is tilting ever a good idea?

Post by whodidntante »

I invest in factors other than the market factor if that's what you mean. But please don't do so based on something you think you read. It requires incredible discipline and conviction. Investing in the market factor also requires discipline and conviction, but not as much because you won't feel as bad being down 30% if a bunch of other people you know are also down 30%.
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Re: Is tilting ever a good idea?

Post by Normchad »

I’m guessing a lot of us are tilting to US, without considering it a tilt.
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Re: Is tilting ever a good idea?

Post by KlangFool »

OP,

I keep 10% in SmallCapValue and 10% in Intermediate Term Treasury as part of my mini-Larry portfolio. It is part of the Barbell Investment Strategy. It works very well with rebalancing in a volatile market.

https://www.investopedia.com/articles/i ... rategy.asp

Don't try this unless you believe in it. And, you can rebalance and maintain the AA in a volatile market.

KlangFool
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Re: Is tilting ever a good idea?

Post by alex_686 »

The idea that the market weighted cap is the most efficient (highest risk/return profile) portfolio is non-existent. I could spend days tearing it apart at almost every direction.

So there are 2 legs to this.

First, the market weighted cap portfolio is conceptionally simple, historically pretty efficient, and cheap to run.

Second, the market is a complex dynamic thing, which means that the optimal strategy is also dynamic. Yes, small and value have outperformed in the past, but this does not mean they will do so in the future. In fact, I strong suspect that they won't.

For the record I don't think it is every a good idea to create a "set it and forget it" portfolio. Your IPS should be updated every year. My asset allocation has evolved as my skill and wisdom have increased. I only tilt in the direction if I am highly confident that it is aligned with my goals, market expectations and risk tolerance. However, if forced to create a "set it and forget it" I would choose a mark cap weighted portfolio.
Last edited by alex_686 on Fri Nov 11, 2022 11:14 pm, edited 1 time in total.
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Apathizer
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Re: Is tilting ever a good idea?

Post by Apathizer »

Whether it's a good idea is largely subjective, but I do think there's a good argument for it. For instance, small value stocks have both potential for higher return and risk of under-performance compared to large growth. The expected average annual return range for SV might be something like 2-15%, whereas for the MCW TSM might be something like 4-10%. Since there's no evidence clairvoyance is real, these are educated guesstimates based on historical return and the best understanding of how markets work.

I think factor tilting is a good idea since it provides more diverse sources of potential return that probably have a fairly low correlation with the TSM, but the trade-off is more risk of under-performance. This is the most reasonably explanation to consider factor slants I know of.
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Re: Is tilting ever a good idea?

Post by bh1 »

alex_686 wrote: Fri Nov 11, 2022 10:41 pm The idea that the market weighted cap is the most efficient (highest risk/return profile) portfolio is non-existent.
I've never read any efficiency arguments for cap weight. I am sure that someone out there somewhere is minting some now. I cap weight because, by definition, it is the average weight of all investors. It may not be optimal in any sense, but it isn't likely to be optimally bad in any sense either.

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Trance
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Re: Is tilting ever a good idea?

Post by Trance »

Historically small and mid cap beat large, and value beat growth and mix. Of course the last 15 years or so large cap domestic growth has soundedly beaten everything. I've come to accept that these things fluctuate. There will be decades where large wins then decades when the small/mid caps win. Times where growth will win and then value will win. And this is most obvious with international vs domestic. So at the end of the day tilting just feels like market timing to me.

I'd rather give up on tilting and chasing the dragon which is alpha when I can just own everything and rely on market beta. Makes it much less work and prevents me from making mistakes.
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Re: Is tilting ever a good idea?

Post by AlohaJoe »

Normchad wrote: Fri Nov 11, 2022 9:22 pm I’m guessing a lot of us are tilting to US, without considering it a tilt.
Exactly. Everyone here tilts.

Absolutely nobody here has the "market weight" of stocks vs. bonds (why would the fact that insurance companies are required by law to own bonds shape my own bond holdings?) or US bonds vs international bonds. They also (usually) don't even have US junk bonds or US municipals or US TIPS in market weight (Total Bond Market funds usually exclude them: "Provides broad exposure to the taxable investment-grade U.S. dollar-denominated bond market, excluding inflation-protected and tax-exempt bonds.").

They don't hold gold at its market weight. They don't hold Bitcoin at its market weight. They don't hold real estate at its market cap. They don't hold frontier markets (i.e. the ones that haven't even reached emerging markets yet) at their market cap.

Everyone tilts. Tilting for convenience (holding Bitcoin or Gold or frontier stocks or residential housing at their market weights is annoying) is a perfectly fine reason to tilt, after all.
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Re: Is tilting ever a good idea?

Post by Apathizer »

Trance wrote: Sat Nov 12, 2022 12:06 amI'd rather give up on tilting and chasing the dragon which is alpha when I can just own everything and rely on market beta. Makes it much less work and prevents me from making mistakes.
That's the best argument for just holding the market, and single automatic rebalancing funds make it pretty much foolproof. A target date fund really is just set it and forget it.
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inittowinit
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Re: Is tilting ever a good idea?

Post by inittowinit »

To the extent that there are portfolio tilts that can pay off over your investing lifetime, remember that you must also be able to maintain the tilted portfolio through potentially significant periods of underperformance. This can be psychologically challenging, and it is furthermore difficult to accurately predict today whether you will be able to do so over a long period of time, especially because you don't know what other information you may gain or what life events may befall you. You may find yourself in a situation where you decide you no longer believe in the benefits that you once perceived in the tilted portfolio, and if this realization coincides with a period of significant underperformance then exiting the position to establish a new (differently tilted or non-tilted) portfolio will force you to realize significant losses as part of the recalibration. The prospect of this loss can further complicate an already fraught decision-making process. As does the question of what new portfolio to pursue and whether you can expect to find yourself in a similar situation at some point in the future.

Going through this experience myself early in my investing career led me to embrace the simplicity of a 3-fund portfolio, primarily for its staying power (i.e. the ease with which I can stay the course with this portfolio).
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Re: Is tilting ever a good idea?

Post by dcabler »

There are endless debates on this topic and probably as many opinions are there are forum subscribers.

You can search for all of the debates on this topic using the google search box in the upper right hand corner.

Cheers.
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Re: Is tilting ever a good idea?

Post by nisiprius »

It is never a good idea to adopt a long-term investment strategy with a complicated rationale, if you are basing your decision only on "I think I read," and "people say," and article headlines such as

Image

You should not adopt a tilt without a reasonable amount of homework--and not just people name-dropping Fama and French. Advocates of tilting agree that it is really important to stay the course, probably even more important than in an untilted portfolio, and you are not likely to be able to do that if you haven't put in the time to acquire a lifetime-strong commitment to the strategy.

The Bogleheads' rationale is that you might as well not tilt, because over your future investing lifetime it is likely to do as well as anything else; because simplicity is a virtue; because staying the course is very important, and you probably won't do that if you keep earnestly seeking the optimum portfolio.

A valid rationale used to be that the funds needed to incorporate a tilt were meaningfully more expensive than straight total market funds, and thus tilted portfolios, even if superior before expenses, were unlikely to be superior after expenses. Nowadays I don't think this is valid (unless an added advisory fee is involved, in which case it is still an issue).

Let me turn it around. "Is tilting always a bad idea?" No.

I don't like John C. Bogle's sneaky language, "There are an infinite number of strategies worse than" 50% in a stock index fund and 50% in a bond index fund. I would like to state it in a long-winded and less memorable way.

There are an infinite number of strategies that represent small departures from a simple, untilted portfolio. Over any particular period of time, some will do better, some worse. My belief is that after expenses, over any given period of time, it is practically a coin flip whether they will do better. The intrinsic superiority or inferiority will not be strong enough to overcome the noise of luck. But if they are small departures, they won't be hugely different, so following one of them is unlikely to be a serious mistake. Conversely, not following them is unlikely to be a serious mistake.

Finally, even thirty years from now, when you know which portfolio did better, you still won't know whether it's because it was a better portfolio, or whether it was just the luck of the draw of that particular thirty-year period.

So you need to feel good about the strategy, because you will never actually know if it "worked."

There are investors for whom tilting is not a bad idea. But they are investors who have dug into it, including reading what skeptics have to say; have looked at the data themselves; and not getting all their information from self-interested parties.

(By the way, as you've probably gathered, I don't tilt myself).

P.S. If you are reading or listening to anything about tilting, if the presenter happens to mention that Fama is a Nobel laureate, then it's marketing and you should ignore it. (Yes, he's a Nobel laureate but not for the factor work).
Last edited by nisiprius on Sat Nov 12, 2022 10:55 am, edited 4 times in total.
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Re: Is tilting ever a good idea?

Post by livesoft »

I have a portfolio tilted to small-cap value for a long time now. I think I have done my homework, so it has been a very good idea for me.

Is it a good idea for the OP or for anyone else? I cannot say. I can write that I think some of the reasons that it has worked for me is that I am fearless when buying on really bad days. From reading this forum for a long time I realize that many investors are fearful of doing that.
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Re: Is tilting ever a good idea?

Post by abuss368 »

alex123711 wrote: Fri Nov 11, 2022 9:06 pm E.g tilting to small, mid, large cap etc. I think I read small cap has outperformed long term, though who knows if it will continue to do so.
No one knows how sectors or styles of the stock and bond markets may perform in the future. Attempting to beat the markets is difficult and may or may not pay off.

A better strategy would be to invest in a few low cost and diversified index funds that own the stock and bond markets and stay the course.

Best wishes.
Tony
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Re: Is tilting ever a good idea?

Post by Wannaretireearly »

I tilted based on original recommendations here. Just went with some portfolio advice to SCV in my Roth. I’ve ‘tilted’ to be heavy in intl stocks in my taxable account. More accident and inertia, than intent.

Rebalancing, buying low especially has helped. Staying the course and not selling has been key. I now understand why folks say it’s ‘easier’ to manage a portfolio when in accumulation.
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Re: Is tilting ever a good idea?

Post by backofbeyond »

I tilt to Technology companies. 2/3 of my equities holdings are in the TSP C fund (S&P 500), while 1/3 is in individual securities in taxable and Roth accounts. In these last accounts, I hold 35% in Tech. The biggest one by far is Apple but I also have Microsoft, Tesla, Google, Meta and many other smaller holdings.

In the 10 years I've held this "tilt" up until 2022 I was 15% higher than my TSP C. Now, they are about neck and neck. You can take what you want from this, I'm just telling you what the actual numbers are.
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Re: Is tilting ever a good idea?

Post by Triple digit golfer »

Sure. It is a good idea if accomplishes a diversified, reasonable portfolio and the investor sticks with it.

I do that through world market cap equities and enough in cash and bonds to sleep at night. I would not be able to stick with a tilt far away from world market cap on the equity side. Many are the opposite and get heartburn with market cap because they are putting more in the top companies.
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Re: Is tilting ever a good idea?

Post by acegolfer »

There's an academic justification for tilting. But doesn't mean (1) it's a free lunch, (2) everyone should tilt.
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Re: Is tilting ever a good idea?

Post by enad »

alex123711 wrote: Fri Nov 11, 2022 9:06 pm E.g tilting to small, mid, large cap etc. I think I read small cap has outperformed long term, though who knows if it will continue to do so.
Jack Bogle talked about value vs. growth and tilts in his book. In a speech he gave in Chicago 20 years ago, titled "The Telltale Chart" he debunks a lot of this which you can read here

On this forum the topic is highly contentious, almost as contentious about holding US vs. holding International. There is no one "correct" answer. For each person, I think it comes down to whether or not you worry; possibly lose sleep over it.

At certain times value outpaces growth and at other times growth outpaces value, the same is true of small vs. large, but over long periods of time you may not see an advantage of one verses the other i.e. they all return to the mean.

If you are still not sure or convinced, do what Jack suggested, that is set aside up to 5% of your portfolio to try different things and get it out of your system.

Remember that one's investment horizon prior to retirement on average is from 35-49 years, and if you tilt you may end up finding out after 1/3 to 1/2 of your timeline that it is not worth it and you have lost the single most important thing i.e. time.
abuss368 wrote: Sat Nov 12, 2022 8:23 am No one knows how sectors or styles of the stock and bond markets may perform in the future. Attempting to beat the markets is difficult and may or may not pay off.

A better strategy would be to invest in a few low cost and diversified index funds that own the stock and bond markets and stay the course.

Best wishes.
Tony
Sage advice from Tony. You can read up more on Jack Bogle's 2-Fund strategy here:
viewtopic.php?t=188176

Best Wishes,
Enad
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Re: Is tilting ever a good idea?

Post by Dave55 »

abuss368 wrote: Sat Nov 12, 2022 8:23 am
alex123711 wrote: Fri Nov 11, 2022 9:06 pm E.g tilting to small, mid, large cap etc. I think I read small cap has outperformed long term, though who knows if it will continue to do so.
No one knows how sectors or styles of the stock and bond markets may perform in the future. Attempting to beat the markets is difficult and may or may not pay off.

A better strategy would be to invest in a few low cost and diversified index funds that own the stock and bond markets and stay the course.

Best wishes.
Tony
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Re: Is tilting ever a good idea?

Post by balbrec2 »

alex123711 wrote: Fri Nov 11, 2022 9:06 pm E.g tilting to small, mid, large cap etc. I think I read small cap has outperformed long term, though who knows if it will continue to do so.
I say NO!
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Re: Is tilting ever a good idea?

Post by abuss368 »

acegolfer wrote: Sat Nov 12, 2022 9:20 am There's an academic justification for tilting. But doesn't mean (1) it's a free lunch, (2) everyone should tilt.
Would you be referring to factor based investing based on research by Kenneth French and Eugene Fama?

Original 3 Factor Model
* Market Risk
* Small minus Big
* High minus Low

Additional 2 Factors added
* Profitable
* Investment

Best.
Tony
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Re: Is tilting ever a good idea?

Post by abuss368 »

enad wrote: Sat Nov 12, 2022 9:29 am
On this forum the topic is highly contentious, almost as contentious about holding US vs. holding International. There is no one "correct" answer. For each person, I think it comes down to whether or not you worry; possibly lose sleep over it.
Hi Enad -

Thank you for the warm words. I recently got into podcasts and am enjoying the Bogleheads on Investing and also Bogleheads Live. Jon L has a podcast I am going to listen to with Bill Bernstein. Mr. Bernstein’s advice is that investors would be better off holding a non-optimized portfolio if they can stay the course rather than an optimized portfolio if they are unable to stay the course.

Us Bogleheads should pause and consider that sage advice from one of the best investment experts.

Thanks.
Tony
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Re: Is tilting ever a good idea?

Post by abuss368 »

Dave55 wrote: Sat Nov 12, 2022 9:56 am
abuss368 wrote: Sat Nov 12, 2022 8:23 am
alex123711 wrote: Fri Nov 11, 2022 9:06 pm E.g tilting to small, mid, large cap etc. I think I read small cap has outperformed long term, though who knows if it will continue to do so.
No one knows how sectors or styles of the stock and bond markets may perform in the future. Attempting to beat the markets is difficult and may or may not pay off.

A better strategy would be to invest in a few low cost and diversified index funds that own the stock and bond markets and stay the course.

Best wishes.
Tony
If you are not beating the market, I am going to cancel my subscription to your investing newsletter. :wink:

Dave
Will this change the strategy at the Hedge Fund?😂

Best.
Tony
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Re: Is tilting ever a good idea?

Post by whodidntante »

bh1 wrote: Sat Nov 12, 2022 12:01 am
alex_686 wrote: Fri Nov 11, 2022 10:41 pm The idea that the market weighted cap is the most efficient (highest risk/return profile) portfolio is non-existent.
I've never read any efficiency arguments for cap weight. I am sure that someone out there somewhere is minting some now. I cap weight because, by definition, it is the average weight of all investors. It may not be optimal in any sense, but it isn't likely to be optimally bad in any sense either.

To the mediocre belong the okay spoils!
There is a poster here who has tried to convince the forum of that, over and over again. Perhaps Alex is pre-registering his disagreement in case he happens to be watching football or playing chess or something when it happens.
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Re: Is tilting ever a good idea?

Post by acegolfer »

abuss368 wrote: Sat Nov 12, 2022 10:30 am
acegolfer wrote: Sat Nov 12, 2022 9:20 am There's an academic justification for tilting. But doesn't mean (1) it's a free lunch, (2) everyone should tilt.
Would you be referring to factor based investing based on research by Kenneth French and Eugene Fama?

Original 3 Factor Model
* Market Risk
* Small minus Big
* High minus Low

Additional 2 Factors added
* Profitable
* Investment

Best.
Tony
Yes, that's the groundwork. Cochrane (Fama's son-in-law) has a paper on portfolio implication of multifactor model. https://static1.squarespace.com/static/ ... 3Q99_4.pdf
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Re: Is tilting ever a good idea?

Post by Doc »

KlangFool wrote: Fri Nov 11, 2022 10:28 pm OP,

I keep 10% in SmallCapValue and 10% in Intermediate Term Treasury as part of my mini-Larry portfolio. It is part of the Barbell Investment Strategy. It works very well with rebalancing in a volatile market.

https://www.investopedia.com/articles/i ... rategy.asp

Don't try this unless you believe in it. And, you can rebalance and maintain the AA in a volatile market.

KlangFool
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Re: Is tilting ever a good idea?

Post by abuss368 »

acegolfer wrote: Sat Nov 12, 2022 10:43 am
abuss368 wrote: Sat Nov 12, 2022 10:30 am
acegolfer wrote: Sat Nov 12, 2022 9:20 am There's an academic justification for tilting. But doesn't mean (1) it's a free lunch, (2) everyone should tilt.
Would you be referring to factor based investing based on research by Kenneth French and Eugene Fama?

Original 3 Factor Model
* Market Risk
* Small minus Big
* High minus Low

Additional 2 Factors added
* Profitable
* Investment

Best.
Tony
Yes, that's the groundwork. Cochrane (Fama's son-in-law) has a paper on portfolio implication of multifactor model. https://static1.squarespace.com/static/ ... 3Q99_4.pdf
Did either Kenneth French and Eugene Fama write any books to explain the factor investing?

Best.
Tony
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Re: Is tilting ever a good idea?

Post by acegolfer »

abuss368 wrote: Sat Nov 12, 2022 10:49 am Did either Kenneth French and Eugene Fama write any books to explain the factor investing?

Best.
Tony
Not that I'm aware of. But here's Fama's interview on the topic of "perfect portfolio". He discusses factor investing + tilting. https://www.youtube.com/watch?v=dj-RO4mh-wA
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Re: Is tilting ever a good idea?

Post by nisiprius »

Which is the better explanation of what Fama and French actually found? (For extra credit, if you don't think either is correct, write one that is better).

1) Fama and French found that all investors should have a small-cap value tilt, because within the investor's lifetime they are likely to outperform, not just on a return, but also on a risk-adjusted return basis.

2) Fama and French found that almost all that it is possible to know about a stock or a stock portfolio can be summarized in five numbers, the loading on each of five factors. Beyond that, market efficiency takes over and the market performance is a random walk around what is explained by the factors. The theory predicts that when the value factor outperforms, portfolios with a value tilt will outperform, and when it underperforms, they will underperform. They found that after you account for the market factor, there is still some non-random-walk behavior left, but once you add the other factors, what is left over is random.
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Re: Is tilting ever a good idea?

Post by abuss368 »

Triple digit golfer wrote: Sat Nov 12, 2022 9:02 am
I do that through world market cap equities and enough in cash and bonds to sleep at night. I would not be able to stick with a tilt far away from world market cap on the equity side. Many are the opposite and get heartburn with market cap because they are putting more in the top companies.
Hi Triple Digit Golfer -

Excellent point. For many of us we invest in and take what the markets provide. Tilting and moving away from market weight may challenge an investors resolve to sta the course during market pullbacks.

Best wishes.
Tony
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Re: Is tilting ever a good idea?

Post by whodidntante »

nisiprius wrote: Sat Nov 12, 2022 11:05 am Which is the better explanation of what Fama and French actually found? (For extra credit, if you don't think either is correct, write one that is better).

1) Fama and French found that all investors should have a small-cap value tilt, because within the investor's lifetime they are likely to outperform, not just on a return, but also on a risk-adjusted return basis.

2) Fama and French found that almost all that it is possible to know about a stock or a stock portfolio can be summarized in five numbers, the loading on each of five factors. Beyond that, market efficiency takes over and the market performance is a random walk around what is explained by the factors. The theory predicts that when the value factor outperforms, portfolios with a value tilt will outperform, and when it underperforms, they will underperform. They found that after you account for the market factor, there is still some non-random-walk behavior left, but once you add the other factors, what is left over is random.
I disagree with both statements so I would be picking the least bad option.

We could settle this bet by just reading the papers again. But now I have to make a statement that I think is true by the rules of your game to earn that extra credit. Put simply, I think they found a model that was better at explaining returns than CAPM.
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Taylor Larimore
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Re: Is tilting ever a good idea?

Post by Taylor Larimore »

alex123711:

I believe that "tilting" (hoping to beat the U.S. total stock market) is usually a mistake. See below:

* Three Proofs That TSM Is Efficient.

* What Experts Say About Total Market Index Funds

Best wishes.
Taylor
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Re: Is tilting ever a good idea?

Post by drk »

I think tilting can be a good idea for people with idiosyncratic risk that they can't reasonably hedge otherwise (e.g., human capital tied to a particular industry, country, or type of company), but it seems like general factor-tilting just introduces new idiosyncratic risk (maybe positive, definitely high variance).
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Re: Is tilting ever a good idea?

Post by acegolfer »

drk wrote: Sat Nov 12, 2022 12:25 pm but it seems like general factor-tilting just introduces new idiosyncratic risk (maybe positive, definitely high variance).
The economic justification for factor tilting is to lower variance (=volatility) at the expense of increasing other systematic risks.
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Re: Is tilting ever a good idea?

Post by drk »

acegolfer wrote: Sat Nov 12, 2022 12:30 pm The economic justification for factor tilting is to lower variance (=volatility) at the expense of increasing other systematic risks.
OK. I was referring to variance in the premium.
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Re: Is tilting ever a good idea?

Post by enad »

whodidntante wrote: Sat Nov 12, 2022 11:26 am
nisiprius wrote: Sat Nov 12, 2022 11:05 am Which is the better explanation of what Fama and French actually found? (For extra credit, if you don't think either is correct, write one that is better).

1) Fama and French found that all investors should have a small-cap value tilt, because within the investor's lifetime they are likely to outperform, not just on a return, but also on a risk-adjusted return basis.

2) Fama and French found that almost all that it is possible to know about a stock or a stock portfolio can be summarized in five numbers, the loading on each of five factors. Beyond that, market efficiency takes over and the market performance is a random walk around what is explained by the factors. The theory predicts that when the value factor outperforms, portfolios with a value tilt will outperform, and when it underperforms, they will underperform. They found that after you account for the market factor, there is still some non-random-walk behavior left, but once you add the other factors, what is left over is random.
I disagree with both statements so I would be picking the least bad option.

We could settle this bet by just reading the papers again. But now I have to make a statement that I think is true by the rules of your game to earn that extra credit. Put simply, I think they found a model that was better at explaining returns than CAPM.
I think the 2nd explanation is more plausible. The way I understand it is they were looking to find a way to better compare the results of different portfolios returns since CAPM only explained about 66% of the returns. Over time they find-tuned the process and came up with 5 factors that better explains the returns. The question is can these 5-factors be used to predict the future? Me thinks not, else "Past Performance does not guarantee future returns" would be laid to rest. Still there are those who believe in it and it won't stop them from trying.

Best Wishes,
Enad
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Re: Is tilting ever a good idea?

Post by LeoB »

Robert T wrote: Sun May 09, 2010 10:35 am .
There can be many years with low individual factor returns. Here's a cut and paste from a previous post. The message IMO - is diversify across factors.

Code: Select all

Annualized returns 
                     Equity       Size        Value     T-bills 
                     Premium     Premium     Premiums 
                     [Rm-Rf]       [SmB]      [HmL]       [Rf] 

1931-1947 (17 yrs)    5.85         9.62        3.88       0.31 
1948-1964 (17 yrs)   12.77        -1.66        4.82       2.05 
1965-1981 (17 yrs)    0.11         7.11        4.23       6.66 
1982-1998 (17 yrs)   10.46        -2.84        5.25       6.33 
------------------------------------------------------------------
1999-2007 ( 9 yrs)    1.68         5.84        4.71       3.40 

Calculated for the Fama-French Research Factors (from Ken French's website where there are further details on the definitions) 
.
From this old post by Robert T, it seems that tilting to factors like small size and value could hedge against periods of poor returns. For example, from 1965-1981 the US total stock market had flat real returns. Who knows if this will persist in the future though…
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Re: Is tilting ever a good idea?

Post by enad »

In his book, Bogle on Mutual Funds, Jack states on pages 95-96:

Limit narrowly based funds (such as international and small company funds) to perhaps 20% of your equity assets in the aggregate. Do not try to beat the market by engagingly in short-term trading among sector funds.

It was the last of eight rules he outlined and followed it up as follows:

If following these rules of common stock mutual fund selection seems overly analytical, tedious, and time-consuming--and, based upon the record of the past, uncertain of success--there is a simpler way. It is called owning the entire market.

Regard the past, Jack wrote (on page 94):

Another of Alfred E. Smith's memorable phrases might have been used to describe the hazards of placing too much reliance on a fund's past performance: "No matter how thin you slice it, it's still baloney."

Some here will disagree with Jack, others will say he was wrong, and others will say it's wrong to blindly follow what Jack says. Only you can decide. I think Jack knew far more than many of us will ever know.

I wish you all best wishes,
Enad
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Re: Is tilting ever a good idea?

Post by bh1 »

After pondering overnight, it seems to me that any advantage of tilting violates the efficient market hypothesis. Which is okay, it's a hypothesis, not a law.

Works like this: F&F analyze past data and find that tickers with the letter "F" outperform. They publish. Now what was previously unknown is known by the market. A bunch of people read that publication and invest in "F" ticker stocks, driving the price up and erasing the advantage those stocks had.

Given that, the question of US/ex-US gets interesting. Arbitrageurs are out there making the market efficient, so any arguments against ex-US (again, assuming EMH), has to be, what, location, tax and/or currency related? EMH makes the return fair, so valid arguments against (assuming EMH) must be based on something other than returns. My guess is that people inside the country view the risk differently that outside the country, and the market value is some sort of average that is exactly correct for no one.
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Re: Is tilting ever a good idea?

Post by ivgrivchuck »

I have a medium-sized scv/factor tilt.

I see it as a low risk bet. If factors indeed work, there is a nice extra premium to be captured. If they don't I expect still to get around market return in the long run... Nothing is of course guaranteed.
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Re: Is tilting ever a good idea?

Post by acegolfer »

bh1 wrote: Sat Nov 12, 2022 1:47 pm After pondering overnight, it seems to me that any advantage of tilting violates the efficient market hypothesis. Which is okay, it's a hypothesis, not a law.
Multifactor model does violate CAPM (and MPT) but doesn't violate EMH.
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Re: Is tilting ever a good idea?

Post by bh1 »

acegolfer wrote: Sat Nov 12, 2022 2:26 pm
bh1 wrote: Sat Nov 12, 2022 1:47 pm After pondering overnight, it seems to me that any advantage of tilting violates the efficient market hypothesis. Which is okay, it's a hypothesis, not a law.
Multifactor model does violate CAPM (and MPT) but doesn't violate EMH.
Not saying I am agreeing or disagreeing, but if that's true, then tilting is potentially advantageous; I explicitly believe CAPM and MPT are incorrect, due to false assumptions.
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Re: Is tilting ever a good idea?

Post by JasonHutt »

For my second ever post here, I will comment on what I do (~8 years before retirement). Based mainly on Bernstein's "Pillars" book and Swensen's "Unconventional" book, I divide US equities into Large Cap Market, Large Cap Value, Mid Cap Market, Mid Cap Value, and Small Cap Value. Vanguard makes this easy. The proportions are roughly equal, except SCV gets 3x other individual cells (it *should" get 2x if I split money equally). I also have ~15% in a dedicated REIT fund, with excess REITs in the value funds, leading to about a 20% REITs weighting. International is tougher, so I am half in Vanguard Total International and half in Schwab Intl Fundamental Small Co Fund.

The logic here is two-fold. History does seem to point to a smaller/value-er premium over extended periods. But also, these different chunks of the market tend to gain and lose unequally over time. I back tested for the "lost decade," and found that the moment one departed from Large Market (in the US or outside the US), things look much better. Furthermore, as Bernstein pointed out in a booklet, correlations themselves change over time.

I believe this approach will mostly give me a pot of money that has increased for the year that I can draw from (rebalancing into my checking/savings). But when the US stock market is hammered, I will draw from intermediate treasuries and TIPs.

Note: this year treasuries have not served as a safe harbor, to my surprise. But had I owned short-term TIPS, I would have been ok. Still, Large Value has done minimally bad.

I post this with fear and trembling.
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Re: Is tilting ever a good idea?

Post by acegolfer »

bh1 wrote: Sat Nov 12, 2022 2:34 pm
acegolfer wrote: Sat Nov 12, 2022 2:26 pm Multifactor model does violate CAPM (and MPT) but doesn't violate EMH.
Not saying I am agreeing or disagreeing, but if that's true, then tilting is potentially advantageous; I explicitly believe CAPM and MPT are incorrect, due to false assumptions.
Yes, it can be advantageous to certain type of investors. This is well documented in the Cochrane's paper that I cited earlier.
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Re: Is tilting ever a good idea?

Post by Apathizer »

bh1 wrote: Sat Nov 12, 2022 1:47 pm After pondering overnight, it seems to me that any advantage of tilting violates the efficient market hypothesis.
No it doesn't. The EMH states risk is priced into assets. Investors are generally willing to pay more for safer assets, so they're priced higher than riskier ones. Riskier assets have higher potential return, but also more risk of under-performance. Considering all this, factor slants are consistent with the EMH.
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Re: Is tilting ever a good idea?

Post by Logan Roy »

alex123711 wrote: Fri Nov 11, 2022 9:06 pm E.g tilting to small, mid, large cap etc. I think I read small cap has outperformed long term, though who knows if it will continue to do so.
On balance, I'm close to certain the net effect is negative.

Small-cap hasn't really outperformed large-cap since about 1982(?) – and Cliff Asness showed the data we base our longer-term view of small-cap outperformance on was somewhat flawed, and there is quite a bit more nuance to it. But overall, in their words: there is no size effect.

So one problem is we're often talking about REALLY long timeframes – and another is we're often using flawed data and analysis, that may take another 20 years to be debunked. Either way, I think the net negative is that the longer these tilts underperform, the more likely we'll become to scrap them. Meaning the majority of investors will scrap them, and the only effect will have been negative.
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