Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

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Taylor Larimore
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What Nobel Laureate's Say

Post by Taylor Larimore » Thu Jun 06, 2019 7:12 pm

Bogleheads:

This is what Nobel Laureate's say:
Eugene Fama: "Whether you decide to tilt toward value depends on whether you are willing to bear the associated risk...The market portfolio is always efficient...For most people, the market portfolio is the most sensible decision."

Harry Markowitz: "A foolish attempt to beat the market and get rich quickly will make one's broker rich and oneself much less so."

Paul Samuelson: "The most efficient way to diversify a stock portfolio is with a low-fee index fund. Statistically, a broadly based stock index fund will outperform most actively managed equity portfolios."

William Sharpe: "You may think your opinion is superior, but it pays to be humble, investing in the market rather than trying to beat it."

Robert Shiller: "A portfolio approximating the market may be the most important portfolio."
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Taylor
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Lastrun » Thu Jun 06, 2019 8:45 pm

A little more specific discussion of Taylor’s quotes. First, a great thread, but the back and forth can get confusing. I appreciate the diversification discussion and the average investor discussion, but you all have lost me with the market portfolio efficency arguments.

From Sharpe’s RISMAT

Many investment firms and advisors argue that some portfolio composition other than that of the market is “smarter” and will provide better outcomes for any investor (although different firms and advisors tend to differ in their choices of superior investments). One hears of strategies with names such as “smart beta”, “factor tilt”, “momentum”, “value” “small capitalization” and on and on.

Let's say that the amount you wish to invest in a risky portfolio is x% of the total value of all the securities in the market and that your investment advisor advocates that you overweight (hold more than x% of) certain “underpriced” securities , market-weight (hold x% of) those that are “correctly priced”, and underweight (hold less than x% of) those that are “overpriced”. This, he or she says, is a portfolio with better risk and return characteristics than the market portfolio.

Perhaps it is, and by holding it you will indeed be smart. But if so, then those holding the market portfolio must be dumb. And those who underweight the securities that you overweight and overweight the securities that you underweight are even dumber. If this is the case, one might assume that sooner or later both groups will recognize their mistakes and try to buy the underpriced securities and sell the overpriced ones. But of course every buyer needs a seller and every seller needs a buyer. The net result will be for the prices of the formerly underpriced securities to increase and the prices of the formerly overpriced securities to decrease until every security is “correctly priced”. At this point it will be smart to hold the market portfolio. In this sense a strategy that can successfully “beat the market” will carry the seeds of its own destruction.

So is Sharpe wrong? Or am i reading him wrong? I suspect the latter but need to understand.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by vineviz » Thu Jun 06, 2019 8:59 pm

Lastrun wrote:
Thu Jun 06, 2019 8:45 pm
A little more specific discussion of Taylor’s quotes. First, a great thread, but the back and forth can get confusing. I appreciate the diversification discussion and the average investor discussion, but you all have lost me with the market portfolio efficency arguments.

From Sharpe’s RISMAT

Many investment firms and advisors argue that some portfolio composition other than that of the market is “smarter” and will provide better outcomes for any investor (although different firms and advisors tend to differ in their choices of superior investments). One hears of strategies with names such as “smart beta”, “factor tilt”, “momentum”, “value” “small capitalization” and on and on.

Let's say that the amount you wish to invest in a risky portfolio is x% of the total value of all the securities in the market and that your investment advisor advocates that you overweight (hold more than x% of) certain “underpriced” securities , market-weight (hold x% of) those that are “correctly priced”, and underweight (hold less than x% of) those that are “overpriced”. This, he or she says, is a portfolio with better risk and return characteristics than the market portfolio.

Perhaps it is, and by holding it you will indeed be smart. But if so, then those holding the market portfolio must be dumb. And those who underweight the securities that you overweight and overweight the securities that you underweight are even dumber. If this is the case, one might assume that sooner or later both groups will recognize their mistakes and try to buy the underpriced securities and sell the overpriced ones. But of course every buyer needs a seller and every seller needs a buyer. The net result will be for the prices of the formerly underpriced securities to increase and the prices of the formerly overpriced securities to decrease until every security is “correctly priced”. At this point it will be smart to hold the market portfolio. In this sense a strategy that can successfully “beat the market” will carry the seeds of its own destruction.

So is Sharpe wrong? Or am i reading him wrong? I suspect the latter but need to understand.
I’d need to read more to be sure, but based on the quoted section it looked like Sharpe is probably more wrong than right.
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Rick Ferri » Thu Jun 06, 2019 9:07 pm

Food for thought.

Here is what Fama and French really say about Smart Beta:

Smart Beta is Silly Talk

If you're going to go this route, and I'm not saying you should are shouldn't, but if you do, know what this is, know the cost, and know the risk.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by vineviz » Fri Jun 07, 2019 1:09 am

Rick Ferri wrote:
Thu Jun 06, 2019 9:07 pm
Food for thought.

Here is what Fama and French really say about Smart Beta:

Smart Beta is Silly Talk

If you're going to go this route, and I'm not saying you should are shouldn't, but if you do, know what this is, know the cost, and know the risk.
You know what’s silly? Writing an entire article about how semantically accurate the term ‘smart beta” is.

Where’s the article pointing out that Bogleheads aren’t literally heads?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Fri Jun 07, 2019 10:30 am

Rick Ferri wrote:
Thu Jun 06, 2019 9:07 pm
Food for thought.

Here is what Fama and French really say about Smart Beta:

Smart Beta is Silly Talk

If you're going to go this route, and I'm not saying you should are shouldn't, but if you do, know what this is, know the cost, and know the risk.

Rick Ferri
I remember the thread where you and Larry argued over the definition of beta. My understanding is that Beta was the volatility of the market itself. I agreed with you and Larry sent me a personal message saying he was right and you were wrong. A couple of math geeks told me Larry was correct.

I do think this is silly semantics and I personally would be with the historical definition of beta which has been defined at the volatility of the S&P 500. It just seems confusing to have multiple betas out there, it muddles the discussion. So I agree with Rick and this one. The cycle will probably repeat with another Personal Message from Larry and being set straight (again) by the math geeks.

I think Larry would say something like this: market factor explained something like 70% of market returns so you had potential alpha of 30% or so. Three factor model of market, size, and value explained over 90% of returns so potential alpha is less than 10%. Now we have momentum and profitability/quality and now over 95% of market returns are explained. So alpha is probably now potentially 3-4%. Larry would probably define alpha as excess investment returns that cannot be explained by factors.

What is weird is that Larry would say that the market factor and beta are not the same thing. But on the other hand, I think even he has used the terms interchangeably. Beta is sometimes mentioned as a factor.

The thing is, most people understand the volatility of the market itself and that some stocks are more volatile than the market and that some stocks are less volatile than the market. The traditional definition of beta makes the discussion much easier. When you have multiple betas, that creates more variables that investors have to wrap their brains around and thus more difficult to understand. Hence my comments that this just muddles the discussion.

So to summarize the debate, Rick would say Beta is market volatility, Larry would say there is multiple betas based on market, size, value, momentum, quality and that alpha is what is left over. I think that will save another big thread on this.

I am with Rick on this one. You beta believe it!

But then again, I have been right on so many things lately, it will probably be years before I am right about anything again!
Last edited by nedsaid on Fri Jun 07, 2019 9:55 pm, edited 3 times in total.
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by vineviz » Fri Jun 07, 2019 10:39 am

nedsaid wrote:
Fri Jun 07, 2019 10:30 am
So to summarize the debate, Rick would say Beta is market volatility, Larry would say there is multiple betas based on market, size, value, momentum, quality and that alpha is what is left over. I think that will save another big thread on this.
I think it also depends on what year it is.

If it's 1964, Rick is correct. If it's 2019, Larry is correct.

Now everyone can be right. ;)
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Fri Jun 07, 2019 10:44 am

vineviz wrote:
Fri Jun 07, 2019 10:39 am
nedsaid wrote:
Fri Jun 07, 2019 10:30 am
So to summarize the debate, Rick would say Beta is market volatility, Larry would say there is multiple betas based on market, size, value, momentum, quality and that alpha is what is left over. I think that will save another big thread on this.
I think it also depends on what year it is.

If it's 1964, Rick is correct. If it's 2019, Larry is correct.

Now everyone can be right. ;)
Like I said, you beta believe it!
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Dialectical Investor » Fri Jun 07, 2019 10:57 am

nedsaid wrote:
Fri Jun 07, 2019 10:30 am

The thing is, most people understand the volatility of the market itself and that some stocks are more volatile than the market and that some stocks are less volatile than the market. The traditional definition of beta makes the discussion much easier. When you have multiple betas, that creates more variables that investors have to wrap their brains around and thus more difficult to understand. Hence my comments that this just muddles the discussion.
It depends what "tradition" you are referring to.

In the article, Sharp is quoted: "I tried many years ago to get people to use the term 'b' for the coefficients in a factor model, such as one in which the factors are value, size, etc. However, the industry and some academics have muddied the waters by using 'beta' for such factor loadings."

I wish he would have elaborated, because if you saw 'b' as a coefficient, how would you pronounce it? What would you call it? You would call it... beta. As in beta 1, beta 2, beta 3, etc. Perhaps many years ago he should have tried to get people to use a different letter for the coefficients, if he was trying to avoid confusion with market beta.

But, as Fama says, "Multifactor models have factors in addition to the market factor, and the additional factors have their own regression slopes, which can be interpreted as additional betas. The additional betas are not alternative or smart."

They are nonetheless traditionally called betas.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by typical.investor » Fri Jun 07, 2019 11:02 am

nedsaid wrote:
Fri Jun 07, 2019 10:30 am
Rick Ferri wrote:
Thu Jun 06, 2019 9:07 pm
Food for thought.

Here is what Fama and French really say about Smart Beta:

Smart Beta is Silly Talk

If you're going to go this route, and I'm not saying you should are shouldn't, but if you do, know what this is, know the cost, and know the risk.

Rick Ferri
So to summarize the debate, Rick would say Beta is market volatility, Larry would say there is multiple betas based on market, size, value, momentum, quality and that alpha is what is left over. I think that will save another big thread on this.

I am with Rick on this one.
It's simply illogical to claim there is only one Beta.

Ok, sure we can use Beta to describe market volatility as a whole and insist on no other usage. However, it's undeniable that some stocks are higher beta and some lower.

I don't see the difference between splitting the market into size and splitting the market into betas. In both cases, one part of the market is expected to offer a premium.

Smart Beta is simply a label for fund construction that offers loadings on different aspects of the market. If it's true those aspects of the market offer a premium, then it seems smart to invest in them (assuming your investment horizon coincides with the premiums - which isn't a given). So what?

The term "significant other" has a different meaning that you'd get from looking at the terms separately. I don't know why people insist on taking the term "Smart Beta", slicing it in half and then claiming it's not Beta. No it's not market volatility as a whole. Smart Beta was never intended to represent market volatility as a whole.

In any case, it's entirely inconsistent to say there is only one Beta, but that we can split the Market into high and low Beta stocks. It makes even less sense to parade out Fama French research returns as benchmarks when they aren't really investable.

In the end, the English language doesn't have strict rules on compound nouns. Using "smart-beta" or "smartbeta" would clue Fama and French into the fact that it's a compound noun and not an adjective (smart) + noun (beta) combination. Is that really so difficult to understand? Or as pointed out, do Bogleheads literally mean a cloned/grown part of John C. Bogle's anatomy. Obviously compound nouns convey particular meaning and separating the two terms is non-sensical. So who is being silly Fama and French? It's you.
Last edited by typical.investor on Fri Jun 07, 2019 11:10 am, edited 1 time in total.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Fri Jun 07, 2019 11:07 am

Dialectical Investor wrote:
Fri Jun 07, 2019 10:57 am
nedsaid wrote:
Fri Jun 07, 2019 10:30 am

The thing is, most people understand the volatility of the market itself and that some stocks are more volatile than the market and that some stocks are less volatile than the market. The traditional definition of beta makes the discussion much easier. When you have multiple betas, that creates more variables that investors have to wrap their brains around and thus more difficult to understand. Hence my comments that this just muddles the discussion.
It depends what "tradition" you are referring to.

In the article, Sharp is quoted: "I tried many years ago to get people to use the term 'b' for the coefficients in a factor model, such as one in which the factors are value, size, etc. However, the industry and some academics have muddied the waters by using 'beta' for such factor loadings."

I wish he would have elaborated, because if you saw 'b' as a coefficient, how would you pronounce it? What would you call it? You would call it... beta. As in beta 1, beta 2, beta 3, etc. Perhaps many years ago he should have tried to get people to use a different letter for the coefficients, if he was trying to avoid confusion with market beta.

But, as Fama says, "Multifactor models have factors in addition to the market factor, and the additional factors have their own regression slopes, which can be interpreted as additional betas. The additional betas are not alternative or smart."

They are nonetheless traditionally called betas.
Pretty hopeless. We are now debating the meaning of "traditional".

Larry and the math geeks are technically correct and this has been explained to me. And by the way, thanks for the explanation, I knew someone would take this on.

From a practical standpoint and for the sake of clear discussion it seems that defining beta as the volatility of the market itself seems best. I understand what you are saying, if you have one factor, you have one beta. If you have five factors, you have five betas. I suppose there will be heated debate about whether they should be named beta 1, beta 2, beta 3 or beta A, beta B, beta C. :wink:
Last edited by nedsaid on Fri Jun 07, 2019 11:14 am, edited 2 times in total.
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Fri Jun 07, 2019 11:10 am

typical.investor wrote:
Fri Jun 07, 2019 11:02 am

In the end, the English language doesn't have strict rules on compound nouns. Using "smart-beta" would clue Fama and French into the fact that it's a compound noun and not an adjective (smart) + noun (beta) combination. Is that really so difficult to understand?
Oh no! Not only are the math geeks weighing in but now also the English majors. I suppose someone reading my posts has red marks all over their computer screen. Ah yes, that dreaded English teacher red pen. Thought I escaped Mrs. Woodward and seventh grade!
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Fri Jun 07, 2019 11:17 am

Rick, I stood up for you on beta and now apparently I don't understand math, I don't understand logic, and I don't understand English. So I will take the heat here and you can get a free pass. When will I ever learn? Some topics around here are just best avoided.
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by vineviz » Fri Jun 07, 2019 11:31 am

nedsaid wrote:
Fri Jun 07, 2019 11:07 am
From a practical standpoint and for the sake of clear discussion it seems that defining beta as the volatility of the market itself seems best.
I think some caution is warranted even in this attempt at middle ground.

If someone colloquially refers to "beta" in the context of financial economics, virtually everyone will assume they mean "market beta" (or βMKT.). This is a pretty common usage, and I think a reasonable one given the historical that Sharpe and Markowitz had. It'd be unusual for anyone to ask "which beta": we all know what is meant.

On the other hand, it's not at all uncommon to use "beta" in the definitionally accurate sense of the word. For instance:

Image


Or from Vanguard:
Inflation beta is defined as how much an asset’s return increases when inflation goes up by 1 percentage point, and it represents the true inflation-hedging property of the asset.
I see nothing to be gained from pretending that such conventional usage is somehow confusing.
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by retiringwhen » Fri Jun 07, 2019 11:59 am

nedsaid wrote:
Fri Jun 07, 2019 11:07 am
Pretty hopeless. We are now debating the meaning of "traditional".

Larry and the math geeks are technically correct and this has been explained to me. And by the way, thanks for the explanation, I knew someone would take this on.

From a practical standpoint and for the sake of clear discussion it seems that defining beta as the volatility of the market itself seems best. I understand what you are saying, if you have one factor, you have one beta. If you have five factors, you have five betas. I suppose there will be heated debate about whether they should be named beta 1, beta 2, beta 3 or beta A, beta B, beta C. :wink:
This debate reminds me of the old saying about the USA and the UK. "Two countries separated by a common language"

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by larryswedroe » Fri Jun 07, 2019 1:02 pm

There is a nice and easy to understand paper available from S&p on alternative beta strategies and the idea of risk parity

Whether you are a TSMer or factor investor its worth reading

https://us.spindices.com/documents/rese ... cation.pdf

And there is another older one from MSCI that is similar
https://papers.ssrn.com/sol3/papers.cfm ... id=2543991

Neither is very long

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Fri Jun 07, 2019 3:42 pm

retiringwhen wrote:
Fri Jun 07, 2019 11:59 am
nedsaid wrote:
Fri Jun 07, 2019 11:07 am
Pretty hopeless. We are now debating the meaning of "traditional".

Larry and the math geeks are technically correct and this has been explained to me. And by the way, thanks for the explanation, I knew someone would take this on.

From a practical standpoint and for the sake of clear discussion it seems that defining beta as the volatility of the market itself seems best. I understand what you are saying, if you have one factor, you have one beta. If you have five factors, you have five betas. I suppose there will be heated debate about whether they should be named beta 1, beta 2, beta 3 or beta A, beta B, beta C. :wink:
This debate reminds me of the old saying about the USA and the UK. "Two countries separated by a common language"
Now that you have mentioned it, in the United States we pronounce it "bay-tah" and those speaking the proper Queen's English say "bee-tah."

Bee-tah, bay-tah,
Bay-tah, bee-tah,
Let's call the whole thing off.
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by HomerJ » Fri Jun 07, 2019 4:16 pm

larryswedroe wrote:
Wed Jun 05, 2019 1:15 pm
Same thing with investing, smart people when they learn something new that has strong evidence and logic behind it you change your views.
Which is it? Factors for the long run? Or change when something new comes along?
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by vineviz » Fri Jun 07, 2019 4:55 pm

HomerJ wrote:
Fri Jun 07, 2019 4:16 pm
larryswedroe wrote:
Wed Jun 05, 2019 1:15 pm
Same thing with investing, smart people when they learn something new that has strong evidence and logic behind it you change your views.
Which is it? Factors for the long run? Or change when something new comes along?
I don't think "change when something new comes along" quite captures the full meaning of what Larry said. Do you?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Fri Jun 07, 2019 7:45 pm

larryswedroe wrote:
Fri Jun 07, 2019 1:02 pm
There is a nice and easy to understand paper available from S&p on alternative beta strategies and the idea of risk parity

Whether you are a TSMer or factor investor its worth reading

https://us.spindices.com/documents/rese ... cation.pdf

And there is another older one from MSCI that is similar
https://papers.ssrn.com/sol3/papers.cfm ... id=2543991

Neither is very long
I read the first paper and I liked how it broke things out. I am still trying to understand completely the risk parity approach. I think of the efficient frontier and how it tries to optimize risk and return. So if you are shooting for let's say a 6% return, risk parity will come up with the lowest risk mix of investments that will achieve that 6% return with the lowest possible volatility. The problem with this is that financial data is slippery, for example the correlations between asset classes change over time. So this can involve some sophisticated modeling and frankly educated guesswork.
In this paper, we explored three approaches to incorporating risk factors into asset allocation and portfolio construction. The first approach involved constructing risk parity allocation based on asset classes; the second involved enhancing returns and reducing risk using alternate beta building blocks; and the third looked at constructing an “absolute return” portfolio using risk premia building blocks.
The first approach based upon the 3 basic asset classes of stocks, bonds, and cash is the classic Bogleheaded approach. Pretty much you pick your allocation between stocks and bonds. Some Bogleheads are U.S. only investors, their portfolio would be Total Stock Market Index and Total Bond Market Index. For John Bogle, this would be investment heaven as he was wary of International stocks. He often said that the Vanguard Balanced Index Fund was all most investors needed. Other Bogleheads are in the camp of International diversification. Their portfolio would be the Taylor Larimore 3 fund portfolio which is Total Stock Market Index, Total International Stock Market Index, and Total Bond Index. Vanguard's basic approach would add Total International Bond Market to the 3 fund portfolio.

The Alternate Beta approach is the long only factor tilting that is often discussed here. Most of these portfolios are Small/Value tilted portfolios. These folks believe not only in asset class diversification but also diversify across geography and across factors. The simplest factor portfolios I can think of are the Larry Swedroe portfolio which is 70% short term US Treasuries and 30% Small-Cap Value which includes US and International. TrevH has a portfolio which is Total Stock Market Index, Total International Stock Index, Total Bond Market Index, and Small-Cap Value Index. Bill Schultheis has the Coffeehouse portfolio which is also a simpler Small/Value tilted portfolio. Paul Merriman has his Ultimate Buy and Hold Portfolio which is more complex. Long only factor tilted portfolios can include Momentum and Quality/Profitability as well. One thing that I notice is that a lot of the do-it-yourself long-only factor portfolios have their Small-Cap tilts in US only as International Small/Value funds are hard to find. The paper showed an example of doing a long only factor strategy with commodities.

The Risk Premia approach uses a long/short approach to isolate a factor from the Market factor or Beta. Market or beta being the volatility of the market itself, defined as the S&P 500. The weakness of long only factor tilting is that most of the risk and most of the return comes from Beta. So if you wanted to isolate the Value factor, you are long the stocks with the best Value characteristics and you are short the stocks with the worst Value characteristics. In theory, you cancel out the market factor and you are capturing only the Value premium. You can do this with other asset classes and include such things as commodities, bonds, currencies, etc. I noticed that in the case study here that they would be long the factor and short the benchmark. For example, you could be long a selection of Small/Value stocks and short the S&P 500 Index. You can also use leverage. The AQR Style Premia I fund or the famous QSPIX, is a good example of this, capturing factor premium across asset classes.
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by HomerJ » Tue Jun 11, 2019 12:03 am

vineviz wrote:
Fri Jun 07, 2019 4:55 pm
HomerJ wrote:
Fri Jun 07, 2019 4:16 pm
larryswedroe wrote:
Wed Jun 05, 2019 1:15 pm
Same thing with investing, smart people when they learn something new that has strong evidence and logic behind it you change your views.
Which is it? Factors for the long run? Or change when something new comes along?
I don't think "change when something new comes along" quite captures the full meaning of what Larry said. Do you?
How do we normal people determine what constitutes strong evidence? How do we decide which economic expert to trust? If one highly respected expert says one thing, and another highly respected expert says another (like in this very thread), and we are not experts ourselves, how do we decide if we should change our views?
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Tue Jun 11, 2019 2:13 am

HomerJ wrote:
Tue Jun 11, 2019 12:03 am
vineviz wrote:
Fri Jun 07, 2019 4:55 pm
HomerJ wrote:
Fri Jun 07, 2019 4:16 pm
larryswedroe wrote:
Wed Jun 05, 2019 1:15 pm
Same thing with investing, smart people when they learn something new that has strong evidence and logic behind it you change your views.
Which is it? Factors for the long run? Or change when something new comes along?
I don't think "change when something new comes along" quite captures the full meaning of what Larry said. Do you?
How do we normal people determine what constitutes strong evidence? How do we decide which economic expert to trust? If one highly respected expert says one thing, and another highly respected expert says another (like in this very thread), and we are not experts ourselves, how do we decide if we should change our views?
What is truth?
A fool and his money are good for business.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by typical.investor » Tue Jun 11, 2019 4:41 am

HomerJ wrote:
Tue Jun 11, 2019 12:03 am
vineviz wrote:
Fri Jun 07, 2019 4:55 pm
HomerJ wrote:
Fri Jun 07, 2019 4:16 pm
larryswedroe wrote:
Wed Jun 05, 2019 1:15 pm
Same thing with investing, smart people when they learn something new that has strong evidence and logic behind it you change your views.
Which is it? Factors for the long run? Or change when something new comes along?
I don't think "change when something new comes along" quite captures the full meaning of what Larry said. Do you?
How do we normal people determine what constitutes strong evidence? How do we decide which economic expert to trust? If one highly respected expert says one thing, and another highly respected expert says another (like in this very thread), and we are not experts ourselves, how do we decide if we should change our views?
Obviously this is what people pay an advisor for. That's what the OP of the thread does, and when the research arm of the firm (that's Larry) decides something has changed, or should be changed based on current information, the advisor passes that along.

That's also why many view Larry in such high regard because he takes his time to discuss this stuff here.

What happens when Larry isn't around anymore though? What if the views on factors or alts like AQR Style Premia Alternative Fund (QSPRX) and the three funds from Stone Ridge: the Alternative Lending Risk Premium Interval Fund (LENDX), the Reinsurance Risk Premium Interval Fund (SRRIX) and the All Asset Variance Risk Premium Interval Fund (AVRPX) change? I guess we will have to rely on the OP updating us from what an advisor said. Or hire the advisor ourselves.

So yeah Swedroe is awesome, but long run, where does the info come from? The next Buckingham Strategic Wealth advisor might not be so generous.

And what about our spouses if they take over the portfolio. Even three funds might be a stretch for them to do if they haven't much interest. Just thinking long run here.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Dialectical Investor » Tue Jun 11, 2019 6:38 am

HomerJ wrote:
Tue Jun 11, 2019 12:03 am
vineviz wrote:
Fri Jun 07, 2019 4:55 pm
HomerJ wrote:
Fri Jun 07, 2019 4:16 pm
larryswedroe wrote:
Wed Jun 05, 2019 1:15 pm
Same thing with investing, smart people when they learn something new that has strong evidence and logic behind it you change your views.
Which is it? Factors for the long run? Or change when something new comes along?
I don't think "change when something new comes along" quite captures the full meaning of what Larry said. Do you?
How do we normal people determine what constitutes strong evidence? How do we decide which economic expert to trust? If one highly respected expert says one thing, and another highly respected expert says another (like in this very thread), and we are not experts ourselves, how do we decide if we should change our views?
The same way you've weighed the evidence thus far to determine you will do whatever it is you currently are doing. The same way you decide to follow, dismiss, or further investigate advice your hear from any so-called "expert" in any field. The same way you go about making other decisions in your personal and professional life. (Nothing particularly special about investing, IMO.)

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by larryswedroe » Tue Jun 11, 2019 9:12 am

How to decide if evidence is strong enough? You do what we do. You review the published research on the criteria we established showing it's adding explanatory power to returns of diversified portfolios, that there is a premium that is persistent across time, pervasive around globe and asset classes, robust to various definitions and is implementable (survives transactions costs) and also has intuitive explanations for why you should believe the premium will persist in future. All of this is designed to minimize if not eliminate the risk that a finding is not result of data mining.

And for individuals you can read Your Complete Guide to Factor Based Investing which provides a summary of all the research on the factors that we believe meet all the criteria and some on ones we don't believe and the why. And I would note that with more than 600 in the literature we conclude yes on just
Market beta
Size (when screening out junk)
Value (adding profitability/quality and momentum screens to screen out value traps)
MOM, CS and TS
profitability/quality
carry
Term

So all the research has been done for you, the book cites over 100 academic papers. And then you decide for yourself if the evidence is strong enough for you, after also reviewing the evidence on how long each factor has negative returns so you don't fall prey to recency mistake and then have discipline to stay the course. And if you are not convinced, don't invest because you will bail out when a risky asset underperforms for long time. And that holds for TSM as well as it is all market beta and nothing else and you have to own more of it than when you add other factors with higher expected returns.


Larry

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Random Walker » Tue Jun 11, 2019 9:27 am

I would strongly recommend Larry’s factor book. The description of the factors and the data supporting them is valuable. Perhaps more valuable though is the not so implicit lesson on how to evaluate whether any potential portfolio addition is worthwhile. For example, one can evaluate the alternatives from the same standpoints of persistent, pervasive, robust, intuitive, investable.

Dave

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Tue Jun 11, 2019 9:55 am

typical.investor wrote:
Tue Jun 11, 2019 4:41 am
HomerJ wrote:
Tue Jun 11, 2019 12:03 am
vineviz wrote:
Fri Jun 07, 2019 4:55 pm
HomerJ wrote:
Fri Jun 07, 2019 4:16 pm
larryswedroe wrote:
Wed Jun 05, 2019 1:15 pm
Same thing with investing, smart people when they learn something new that has strong evidence and logic behind it you change your views.
Which is it? Factors for the long run? Or change when something new comes along?
I don't think "change when something new comes along" quite captures the full meaning of what Larry said. Do you?
How do we normal people determine what constitutes strong evidence? How do we decide which economic expert to trust? If one highly respected expert says one thing, and another highly respected expert says another (like in this very thread), and we are not experts ourselves, how do we decide if we should change our views?
Obviously this is what people pay an advisor for. That's what the OP of the thread does, and when the research arm of the firm (that's Larry) decides something has changed, or should be changed based on current information, the advisor passes that along.

That's also why many view Larry in such high regard because he takes his time to discuss this stuff here.

What happens when Larry isn't around anymore though? What if the views on factors or alts like AQR Style Premia Alternative Fund (QSPRX) and the three funds from Stone Ridge: the Alternative Lending Risk Premium Interval Fund (LENDX), the Reinsurance Risk Premium Interval Fund (SRRIX) and the All Asset Variance Risk Premium Interval Fund (AVRPX) change? I guess we will have to rely on the OP updating us from what an advisor said. Or hire the advisor ourselves.

So yeah Swedroe is awesome, but long run, where does the info come from? The next Buckingham Strategic Wealth advisor might not be so generous.

And what about our spouses if they take over the portfolio. Even three funds might be a stretch for them to do if they haven't much interest. Just thinking long run here.
Thank you. What I have tried to tell folks is that such folks as Larry Swedroe and Rick Ferri are very valuable resources for the forum. It is pretty unusual for market professionals to spend this kind of time on the forum and to share their knowledge. Very unusual to interact with authors over ideas presented in their books. Very unusual to have somebody like Larry willing to take time to answer questions by personal message or e-mail.

Even if you disagree with Larry, he performs a valuable service here. There needs to be a competition of ideas, where informative debates can occur. Someone can look at the evidence and decide for themselves. Sort of a we report, you decide type of thing. Larry certainly isn't a villain in any sense of the word, but he is the factors champion vs. the Taylor Larimore 3 fund portfolio advocates. It was fun to see Larry who is the factors champion post in the same thread with Rick, who seems to have reconsidered his earlier advocacy of factors. Sort of like the hero vs. villain at a professional wresting match, Yankees vs. Red Sox, or "Tastes Great" vs. "Less Filling." It helps make the forum fun and interesting.

I also want to thank Rick Ferri for participating in the forum again after a brief retirement. He has long been regarded as one of the recommended Boglehead authors, he has posted here for a long time, as has Larry. Though I gave him the raspberries over a couple of things, I have lots of respect for him and what he has accomplished. Building a successful advisory business is not easy and now he is doing it again.

Finally, everyone who posts here and those who lurk here and don't post make a valuable contribution to the forum. Lots of unsung heroes here who make valuable contributions to the forum but never get any credit. I want to thank them as well.

Whoops, I forgot. We should also thank the moderators who keep the forum a civil and a safe place to ask questions and to debate ideas.
A fool and his money are good for business.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Gemini » Tue Jun 11, 2019 10:31 am

nedsaid, i would also like to thank you for your commentary and time spent understanding these tricky topics. It helps ALL of us when you verbalize your thoughts.


Random walker, I agree that book is a very good resource. I read it twice and I understand the factors somewhat better. However, understanding, and implementing are very different. Besides small and value, I have not been able to tap into any of the other factors due to various reasons, and, even with SCV, I don't know what the optimal mix is or how it may potentially impact my overall portfolio as it likely still has heavy beta exposure.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Random Walker » Tue Jun 11, 2019 10:53 am

Gemini,
For all of us essentially long only investors, I think all we can do is move in the direction of risk parity as opposed to actually getting there. Market beta is so dominant in our portfolios. But by decreasing overall equity exposure, increasing exposure to SV, and increasing exposure to term, we should narrow SD and cut both the right and left tails. No one can know the optimal mix, but we can move to various extents towards risk parity.

Dave

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Tue Jun 11, 2019 11:07 am

Gemini wrote:
Tue Jun 11, 2019 10:31 am
nedsaid, i would also like to thank you for your commentary and time spent understanding these tricky topics. It helps ALL of us when you verbalize your thoughts.
Thank you, I like to believe that my posts are "plain English" and in narrative form. People can follow a story but can get lost in a dry recitation of numbers, statistics, and jargon. I sometimes have to go over something several times before I start getting it, math geek I am not. I also try to add a pinch of humor to my posts. The forum should be a fun place to hang out. Not all of us are insurance actuaries, statistics jocks, engineers, or quants. I also like to focus on the behavioral aspects of investing, we can all relate to the emotions of fear and greed.

The great American movie is good vs. evil, boy meets girl, the chase scene, good triumphs in the end, and the good guy gets the girl. Action for the guys, romance for the gals. It is a formula that has made billions and billions for Hollywood. Investing explained well should be something like this and hopefully the good guys/gals win in the end. I know John Bogle did. Hopefully the rest of us Bogleheads win in the end too.
A fool and his money are good for business.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by YRT70 » Tue Jun 11, 2019 11:39 am

vineviz wrote:
Thu Jun 06, 2019 1:32 pm
Vanguard U.S. Multifactor Fund Admiral Shares (VFMFX) is a fantastic single fund solution, in my mind, with an intellectually rigorous process and very reasonable expenses. For simplicity, you could do a lot worse. I wouldn't normally recommend trying to combine VFMFX in a portfolio with the other funds, though. It'd be redundant and unnecessarily complex, IMHO.
Thanks for the tip. I had a look at it. With ~33% small companies, would that be enough of a tilt to get enough exposure to the size factor?

And same question for value, is it really 'valuey' enough?

http://portfolios.morningstar.com/fund/ ... ture=en_US

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by vineviz » Tue Jun 11, 2019 11:55 am

YRT70 wrote:
Tue Jun 11, 2019 11:39 am
vineviz wrote:
Thu Jun 06, 2019 1:32 pm
Vanguard U.S. Multifactor Fund Admiral Shares (VFMFX) is a fantastic single fund solution, in my mind, with an intellectually rigorous process and very reasonable expenses. For simplicity, you could do a lot worse. I wouldn't normally recommend trying to combine VFMFX in a portfolio with the other funds, though. It'd be redundant and unnecessarily complex, IMHO.
Thanks for the tip. I had a look at it. With ~33% small companies, would that be enough of a tilt to get enough exposure to the size factor?

And same question for value, is it really 'valuey' enough?

http://portfolios.morningstar.com/fund/ ... ture=en_US
"Enough" is a subjective term, so there can't be a definitive answer.

VMFMX (the mutual fund ) and VFMF (the ETF) both have had statistically significant exposures to both the size and value factors, however, along with quality and momentum over their lifespan.

And I think it'd be very difficult (maybe nearly impossible) to build a DIY portfolio that had MORE exposure at anything close to the same cost.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by YRT70 » Tue Jun 11, 2019 12:22 pm

vineviz wrote:
Tue Jun 11, 2019 11:55 am
"Enough" is a subjective term, so there can't be a definitive answer.

VMFMX (the mutual fund ) and VFMF (the ETF) both have had statistically significant exposures to both the size and value factors, however, along with quality and momentum over their lifespan.
How do you determine that?

I don't understand the topic very well yet.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by vineviz » Tue Jun 11, 2019 12:31 pm

YRT70 wrote:
Tue Jun 11, 2019 12:22 pm
vineviz wrote:
Tue Jun 11, 2019 11:55 am
"Enough" is a subjective term, so there can't be a definitive answer.

VMFMX (the mutual fund ) and VFMF (the ETF) both have had statistically significant exposures to both the size and value factors, however, along with quality and momentum over their lifespan.
How do you determine that?

I don't understand the topic very well yet.
Technically, you run a linear regression of the fund's returns (the dependent variable) against the returns of various factor portfolios (the independent variables).

The factor portfolios are long-short portfolios, formed by subtracting the returns of stocks with the lowest exposure to a factor from the returns of the stocks with the highest exposure. For instance, the size factor portfolio is the returns of the smallest stocks minus the returns of the largest stocks. The only factor that is calculated differently is the market factor.

I'm sure that Larry's book explains this much better than I ever could.

The easiest way to run the regressions is to use a site like Portfolio Visualizer (e.g. https://www.portfoliovisualizer.com/fac ... sisResults) but it's probably helpful to learn about the process before leaning too heavily on the outputs that site provides.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by hdas » Tue Jun 11, 2019 12:35 pm

vineviz wrote:
Tue Jun 11, 2019 12:31 pm
Factor portfolios are long-short portfolios, formed by subtracting the returns of stocks with the lowest exposure to a factor from the returns of the stocks with the highest exposure.
This makes the whole difference. I did a deep dive on Low Vol and was able to talk to a prominent research and pioneer in this specific factor and was convinced that the implementation of the short side of Low Vol in US equities doesn't add. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by YRT70 » Tue Jun 11, 2019 12:46 pm

vineviz wrote:
Tue Jun 11, 2019 12:31 pm
Technically, you run a linear regression of the fund's returns (the dependent variable) against the returns of various factor portfolios (the independent variables).

The factor portfolios are long-short portfolios, formed by subtracting the returns of stocks with the lowest exposure to a factor from the returns of the stocks with the highest exposure. For instance, the size factor portfolio is the returns of the smallest stocks minus the returns of the largest stocks. The only factor that is calculated differently is the market factor.

I'm sure that Larry's book explains this much better than I ever could.

The easiest way to run the regressions is to use a site like Portfolio Visualizer (e.g. https://www.portfoliovisualizer.com/fac ... sisResults) but it's probably helpful to learn about the process before leaning too heavily on the outputs that site provides.
Thank you for taking the time to explain it.

I did read Larry's book but will have to read it again to see if I understand the way he calculates the exposure to each factor.

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Larry Swedroe changed his mind.

Post by Taylor Larimore » Tue Jun 11, 2019 5:45 pm

YRT70 wrote: I did read Larry's book but will have to read it again to see if I understand the way he calculates the exposure to each factor.
YRT70:

You will need to read one of Larry Swedroe's later books. His first books do not mention "factors." This is what he wrote in his forth book, Wise Investing Made Simpler:
"The winning strategy is to stop trying to beat the market. The historical evidence is clear. If you simply accept market returns over the long term, you are likely to outperform approximately 90% of investors."
Mr. Swedroe is a great writer and very knowledgeable. He was never an academic. He works for BAM Alliance which supports over 130 financial advisers.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Tue Jun 11, 2019 7:17 pm

Hi Taylor, I don't have Larry's earliest books. Though Larry probably didn't use the word factor in his earlier books, I would be pretty certain that he used DFA funds and that he advocated for Small/Value tilting and REITs. I went to Merriman seminars in 2007 and 2008, they talked about the Academic research and Small/Value tilting but I don't recall that they used that term either. Not sure when that term factor started to be used. What I would say is that the concepts were well understood way back in 2007.
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Re: Larry Swedroe changed his mind.

Post by Random Walker » Tue Jun 11, 2019 7:37 pm

Taylor Larimore wrote:
Tue Jun 11, 2019 5:45 pm
YRT70 wrote: I did read Larry's book but will have to read it again to see if I understand the way he calculates the exposure to each factor.
YRT70:

You will need to read one of Larry Swedroe's later books. His first books do not mention "factors." This is what he wrote in his forth book, Wise Investing Made Simpler:
"The winning strategy is to stop trying to beat the market. The historical evidence is clear. If you simply accept market returns over the long term, you are likely to outperform approximately 90% of investors."
Mr. Swedroe is a great writer and very knowledgeable. He was never an academic. He works for BAM Alliance which supports over 130 financial advisers.

Best wishes
Taylor
For those who want to read something closer to an academic text, good starts include:
Asset Management by Andrew Ang 704 pages
Successful Investing Is A Process by Jacques Lussier 368 pages
Expected Returns by Antti Ilmanen 570 pages

For the rest of us who are interested in investing and want to appreciate the current state of academic finance, yet want a shorter, simpler, and more enjoyable read, very hard to beat one of Larry’s books or essays.

Dave

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by larryswedroe » Tue Jun 11, 2019 8:26 pm

First re factors and calculating, market beta is ALSO a long short and it's ANNUAL AVERAGE return of market MINUS ANNUAL AVERAGE return on one month bills.

Second, early books talked about asset classes, as only talked about stocks and bonds and did not begin to discuss MOM until later and other factors not discovered until more recently. But for stocks asset classes like large and small and value and growth are factor investments (positive or negative). Same thing. And the books discussed benefits of diversification across asset classes.

Note re not trying to beat the market as Taylor referenced is meant to be not trying to beat the market in the ASSET CLASS you are investing in, so no individual stock selection or market timing.

Note low vol is well explained, just like REITS by exposure to value and TERM (logical as stocks are more bond like and the low vol premium only exists in value regime, is negative in growth regime and low vol exposure to value is time varying). And of course it is long-short (as all factors are, and also annual averages) so long low beta or low vol and short high beta and high vol.

Hope that is helpful
Larry

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by gtwhitegold » Tue Jun 11, 2019 8:45 pm

larryswedroe wrote:
Tue Jun 11, 2019 8:26 pm
First re factors and calculating, market beta is ALSO a long short and it's ANNUAL AVERAGE return of market MINUS ANNUAL AVERAGE return on one month bills.

Second, early books talked about asset classes, as only talked about stocks and bonds and did not begin to discuss MOM until later and other factors not discovered until more recently. But for stocks asset classes like large and small and value and growth are factor investments (positive or negative). Same thing. And the books discussed benefits of diversification across asset classes.

Note re not trying to beat the market as Taylor referenced is meant to be not trying to beat the market in the ASSET CLASS you are investing in, so no individual stock selection or market timing.

Note low vol is well explained, just like REITS by exposure to value and TERM (logical as stocks are more bond like and the low vol premium only exists in value regime, is negative in growth regime and low vol exposure to value is time varying). And of course it is long-short (as all factors are, and also annual averages) so long low beta or low vol and short high beta and high vol.

Hope that is helpful
Larry
I appreciate the input Larry. I've been wondering if low volatility would still be a drag if you included it in a fund that also has a positive loading on value. It seems like it could have a multiplicative effect by avoiding low volatility stocks that have a growth bias.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by larryswedroe » Tue Jun 11, 2019 9:11 pm

BTW, I just went back to look at my first book and it includes discussion on a five-factor model (3 equities and 2 bonds) and shows model portfolios and the benefits of diversifying across the asset classes (factors).

And for gtwhitegold, yes the research shows that you combine factors you get better results, so buy small value but avoid negative momentum and buy low vol only when in value regime, or low vol stocks that are also cheap.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Top99% » Tue Jun 11, 2019 9:47 pm

This has been a fascinating thread. Looking at one of my favorite sources http://www.retireearlyhomepage.com/reallife19.html which shows returns for portfolios with the 4% "rule" applied I certainly prefer the smoother ride the more factor-centric (MPT and Larry Portfolio) portfolios provided especially if one starts from 1999 (see the table at the very bottom). They don't show Three Fund but certainly the pucker factor would be pretty high with the 75% S&P 500 / 25% FI portfolio for 1999 retirees. After the 01/02 tech crash and the GFC it looks like they will make it but what a ride. And I think conditions today are a lot more similar to 1999 than 1994 let alone the early 1980s (if I recall) when Taylor retired. But, as many state and the data in this source shows there are many roads to Dublin all with different risks and rewards. Yeah I know, past results...
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by YRT70 » Wed Jun 12, 2019 6:08 am

I like this idea of diversifying risk across several factors. Say my goal is to build a portfolio that's exposed to the market, size, value, quality, momentum and term factor.

Say I build a portfolio with:
10% US small cap value (IJS)
10% International small cap value (DLS)
10% iShares Edge Multifactor World (ACWF)
70% 5 year treasuries

How would I calculate the exposure to market, size, value, quality, momentum and term factor?
It would be nice if I could hop on Morningstar and just check some metric but I suspect it may be a bit more complicated than that.

Does it make sense to strive for roughly equal exposure to each factor?

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by vineviz » Wed Jun 12, 2019 6:52 am

YRT70 wrote:
Wed Jun 12, 2019 6:08 am
I like this idea of diversifying risk across several factors. Say my goal is to build a portfolio that's exposed to the market, size, value, quality, momentum and term factor.

Say I build a portfolio with:
10% US small cap value (IJS)
10% International small cap value (DLS)
10% iShares Edge Multifactor World (ACWF)
70% 5 year treasuries

How would I calculate the exposure to market, size, value, quality, momentum and term factor?
I think you'll find it nearly impossible to build a portfolio with statistically significant exposure to all those factors with only 30% equities and using 5-year treasuries.
YRT70 wrote:
Wed Jun 12, 2019 6:08 am
It would be nice if I could hop on Morningstar and just check some metric but I suspect it may be a bit more complicated than that.
Portfolio Visualizer has tools that can do what you want.

E.g. https://www.portfoliovisualizer.com/fac ... total1=100

But it has some limitations (bond factors only work for the US, not all factor sources will match the definitions that your funds use, etc.) but I think you can see in this link that getting beyond market, size, and term will be tough with a 30/70 portfolio.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by YRT70 » Wed Jun 12, 2019 7:02 am

vineviz wrote:
Wed Jun 12, 2019 6:52 am
I think you'll find it nearly impossible to build a portfolio with statistically significant exposure to all those factors with only 30% equities and using 5-year treasuries.
Ok good to know. Well 30% was just a hunch as it was similar to the Larry portfolio in his book. I don't mind taking it to 40% or 50%, in fact it probably fits my goals better.The choice for 5 year treasuries was also based on Larry's portfolio.

Thanks for reminding me of the portfoliovisualizer tool. Trying it out now.

edit: ah you already filled it in, nice!

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by YRT70 » Wed Jun 12, 2019 7:46 am

So in Larry's book 'Reducing the risk of black swans' this is one of the profiles. Or maybe I should say the Larry profile (:-)).

14.00% DFA US Small Cap Value I (DFSVX)
10.50% DFA International Small Cap Value I (DISVX)
3.50% DFA Emerging Markets Value I (DFEVX)
72.00% iShares 3-7 Year Treasury Bond ETF (IEI)

It comes out as significant on the market (0.00), size (0.00), value (0.03) and term factor (0.00).

@vineviz, that's pretty impressive right, with only 28% equity? Is it because the DFA funds are better optimised for the factors?

If I replace DFSVX with IJS the value factor the significance becomes P=0.057

Edit:
28% VTMSX, 72% IEI is (very) significant on market, size, value, momentum and term.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Random Walker » Wed Jun 12, 2019 9:22 am

YRT70 wrote:
Wed Jun 12, 2019 7:02 am
vineviz wrote:
Wed Jun 12, 2019 6:52 am
I think you'll find it nearly impossible to build a portfolio with statistically significant exposure to all those factors with only 30% equities and using 5-year treasuries.
Ok good to know. Well 30% was just a hunch as it was similar to the Larry portfolio in his book. I don't mind taking it to 40% or 50%, in fact it probably fits my goals better.The choice for 5 year treasuries was also based on Larry's portfolio.

Thanks for reminding me of the portfoliovisualizer tool. Trying it out now.

edit: ah you already filled it in, nice!
I think it’s fair to say that the Larry Portfolio is more a concept than a specific portfolio. The concept is hold only higher expected return SV equities and increase allocation to high quality short to intermediate term bonds. One can apply this concept to whatever expected return portfolio they desire. In any case, it’s a move in the direction of risk parity from a TSM portfolio with equivalent expected return. I think Larry’s examples used SV, Int SV, and EMV on the equity side because no EM Small Value funds available.

Dave

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nedsaid
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Joined: Fri Nov 23, 2012 12:33 pm

Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Wed Jun 12, 2019 11:13 am

larryswedroe wrote:
Tue Jun 11, 2019 9:11 pm
BTW, I just went back to look at my first book and it includes discussion on a five-factor model (3 equities and 2 bonds) and shows model portfolios and the benefits of diversifying across the asset classes (factors).

And for gtwhitegold, yes the research shows that you combine factors you get better results, so buy small value but avoid negative momentum and buy low vol only when in value regime, or low vol stocks that are also cheap.
I was right, even though I don't own Larry's first book. Lots of fun being right about things, it happens so rarely that I need to celebrate. The later findings on Quality and Momentum helped Dimensional Fund Advisors fine tune their portfolios. Value works better when momentum is set to neutral, Value tends to have negative momentum. Hard to time the bottom on Value stocks. Quality also seems to help Value as well. Buffett is a Quality and Value type of guy which is why I call him Value oriented rather than a pure Value investor. He and Munger, it turned out where ahead of the academics on this.
A fool and his money are good for business.

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wintermute
Posts: 200
Joined: Mon Mar 15, 2010 10:36 pm

Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by wintermute » Wed Jun 12, 2019 11:43 am

Lastrun wrote:
Thu Jun 06, 2019 8:45 pm
From Sharpe’s RISMAT

“Perhaps it is, and by holding it you will indeed be smart. But if so, then those holding the market portfolio must be dumb. And those who underweight the securities that you overweight and overweight the securities that you underweight are even dumber. If this is the case, one might assume that sooner or later both groups will recognize their mistakes and try to buy the underpriced securities and sell the overpriced ones. But of course every buyer needs a seller and every seller needs a buyer. The net result will be for the prices of the formerly underpriced securities to increase and the prices of the formerly overpriced securities to decrease until every security is “correctly priced”. At this point it will be smart to hold the market portfolio. In this sense a strategy that can successfully “beat the market” will carry the seeds of its own destruction.

So is Sharpe wrong? Or am i reading him wrong? I suspect the latter but need to understand.
It's not a one-time event. It can happen with different securities or even the same ones (as the company's prospects change), and those trading at the less accurate prices, even if they learn, could be replaced by others doing the same.

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