Upping equity exposer instead of adding Factors/Value

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spdoublebass
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Upping equity exposer instead of adding Factors/Value

Post by spdoublebass » Mon Jun 11, 2018 3:22 pm

I'm asking this question only from an educational standpoint. I'm not arguing the validity of tilting to Value or other Factors.

While I acknowledge the studies and even think SCV will outperform TSM over the next 30 years, I still am not comfortable adding it to my portfolio.

I know what I am going to bring up is behavioral, but that seems to be the point to me. Find out what you are comfortable with and put it in your IPS and stick to it.

I recently had time to play around with PV and compared two portfolios (a basic 3 fund and one that has value tilts in Large, Mid, and Small). What I found was that, yes, there has been a premium for value in the last 25 years (which was not surprising).

I chose 25 years, because in my IPS, that is about when I will be at my target AA of 60/40 in my glide path.

What I also looked at when I compared the two portfolios was 3 different glide paths. It was a pain to enter all this into PV, but I'm glad I did. What I found was that when I delayed the start of my glide path, I had a similar ending balance to the value portfolio who's glide path started earlier. Again, none of this surprised me, but I wanted to see how the portfolios moved through the last few crashes.

In my IPS, I wrote out 3 different possible glide paths, and I wrote that I would choose one at a later date. I am only 34 and comfortable with my 90/10 AA. (I know other people would have more bonds in their 30's, but I don't currently want to debate my reasons for that now)

Is it a bad idea to stay 90/10 until say age 50, then add 3% a year in bonds over that decade so at age 60 I would be at 60/40?

When I did this on PV I was dealing with the last 25 years, so I know this is only one possibility of how this could turn out. I find that having a higher equity exposer is easier for me to mentally deal with verses adding riskier assets such as SCV.

A possible red flag to doing this would be if the market is turning downward in the decade that I am gliding.
Resist much, obey little.

bloom2708
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Re: Upping equity exposer instead of adding Factors/Value

Post by bloom2708 » Mon Jun 11, 2018 3:50 pm

You can do 90/10 through 50. There are no hard/fast rules.

It is different when your $200k portfolio drops to $110k. As compared to your $1.2 million portfolio dropping to $700k.

The statement "take as much risk as you have" to will come into play as your investments and net worth grow. Adjust as your willingness and need to take risk change.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

Random Walker
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Re: Upping equity exposer instead of adding Factors/Value

Post by Random Walker » Mon Jun 11, 2018 4:35 pm

One can certainly create a simple TSM/TBM Portfolio with the same expected return as a more complex tilted portfolio. The tilted portfolio would have a lower equity allocation and likely be more efficient. More efficient would be reflected in lower volatility, higher Sharpe ratio, smaller maximal drawdown, likely greater compounded return relative to average annual return of portfolio components. Simple portfolio will be cheaper for sure.

Dave

alex_686
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Re: Upping equity exposer instead of adding Factors/Value

Post by alex_686 » Mon Jun 11, 2018 4:43 pm

spdoublebass wrote:
Mon Jun 11, 2018 3:22 pm
When I did this on PV I was dealing with the last 25 years, so I know this is only one possibility of how this could turn out. I find that having a higher equity exposer is easier for me to mentally deal with verses adding riskier assets such as SCV.

A possible red flag to doing this would be if the market is turning downward in the decade that I am gliding.
Planning is important but also expect plans to change.

A generic glide path is for the generic individual. Maybe in 25 years, thanks to bull markets, you will have excess wealth and have the ability to take higher risks and hold more equity. Or maybe thanks to bear markets you will have low wealth, low ability to take risks, and hold less equity. Maybe the Equity Risk Premium for stocks will be high - or low. Maybe real rates on bonds will be high - or low.

25 years to far to long to make any predictions. It is still a good intellectual exercise.

stlutz
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Re: Upping equity exposer instead of adding Factors/Value

Post by stlutz » Mon Jun 11, 2018 6:15 pm

What I found was that, yes, there has been a premium for value in the last 25 years (which was not surprising).
Hmmmm.... I just backtested 3 combinations on PV: and 80/20 mix of Total Stock and Total Bond, an 80/20 mix of Vanguard Value Index and Total Bond, and an 80/20 mix of Vanguard Smallcap and Total Bond.

The one with total stock produced the highest Sharpe ratio and the one with Smallcap produced the highest absolute return.

Since "premiums" are generally measured based on Sharpe Ratio (returns for unit of risk), it looks to me like the premium for small and value were both negative over the past 25 years, at least when looking at real world funds.

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spdoublebass
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Re: Upping equity exposer instead of adding Factors/Value

Post by spdoublebass » Tue Jun 12, 2018 8:35 pm

Thank you for the replies.

I wanted to make sure I wasn't missing anything.
Resist much, obey little.

KlangFool
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Re: Upping equity exposer instead of adding Factors/Value

Post by KlangFool » Tue Jun 12, 2018 8:47 pm

spdoublebass wrote:
Mon Jun 11, 2018 3:22 pm

Is it a bad idea to stay 90/10 until say age 50, then add 3% a year in bonds over that decade so at age 60 I would be at 60/40?
spdoublebass,

Yes, it is a bad idea. Just think about this for a moment. Depending on whatever happened over the next 25 years, your portfolio size could be all over the map. Setting your AA based on your age is the wrong way to do this. Setting your AA based on your portfolio size is the right way to go.

Let's take an example.

Let's say 5 years from now, your portfolio is 50 times your current annual expense, why would you stay at 90/10?

KlangFool

Random Walker
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Re: Upping equity exposer instead of adding Factors/Value

Post by Random Walker » Tue Jun 12, 2018 9:30 pm

Agree with KlangFool,
Need to have an investment policy statement and generally stick to the plan. It’s the anchor. That being said, over time the market will do all sorts of crazy things. Periodically, and more frequently as one approaches retirement age or retirement net worth, they should look at where they are relative to needs and goals. Evaluate ability, willingness, need in light of past returns, portfolio size, current valuations, expected future returns, and adjust accordingly. These are rare adjustments, perhaps 2 or 3 times a decade in late 40s and 50s, even less so before that I think.

Dave

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