[Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

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Re: Larry Swedroe: Small Value Stocks are Cheap

Post by abuss368 » Thu Aug 22, 2019 4:38 pm

nedsaid wrote:
Thu Aug 22, 2019 4:26 pm
abuss368 wrote:
Thu Aug 22, 2019 4:18 pm
I am curious how many Bogleheads invest in small cap value.
I have used Vanguard Small-Cap Value Index ETF and the iShares S&P 600 Small Cap Value Index ETF. When I had my 403(b), I used the Allianz NFJ Small Cap Value fund for my Small Value representation but switched it to the iShares product when I rolled the 403(b) over to a Rollover IRA. At American Century, I have used their Mid-Cap Value fund which actually has a better performance record than its Small Value product. You might substitute a Mid Cap Value Index and get very similar results. The S&P Indexes seem to be better than the Russell Indexes. Vanguard uses the CRSP indexes, which seem to be better than the Russell indexes. Reason being is that Russell doesn't seem to make any effort to screen out the junk. S&P does have quality criteria for their indexes.

I also use the iShares Core Small Cap Index ETF, which is based upon the S&P 600 Small Cap Index. I bought this back in 2004 and have been nothing but pleased with it. I also have a Micro Cap Index ETF but seems plagued by front running, is rated 2 star by Morningstar, and I am much less pleased with it.

So that is what I am doing.
Small caps by nature don’t pay much dividends correct.
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Re: Larry Swedroe: Small Value Stocks are Cheap

Post by Random Walker » Thu Aug 22, 2019 4:39 pm

rascott wrote:
Thu Aug 22, 2019 10:29 am
They don't look equal to me....roughly 1/2% difference. You can do some calcs on what 0.5% provides in real dollars over a 60+ year investment life.
I agree 0.5% is significant; especially on a website where we argue over 0.05% differences in expense ratios! After the conversion to indexing, further portfolio improvements are incremental. 0.5% is a significant increment.

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Re: Larry Swedroe: Small Value Stocks are Cheap

Post by FIREchief » Thu Aug 22, 2019 4:48 pm

willthrill81 wrote:
Thu Aug 22, 2019 4:28 pm
FIREchief wrote:
Thu Aug 22, 2019 4:23 pm
willthrill81 wrote:
Thu Aug 22, 2019 4:14 pm
FIREchief wrote:
Thu Aug 22, 2019 4:05 pm
It is starting to sound like SCV is more in the realm of active management than indexing. If that's the case, then any supposed premium may stem more from perception (or even manipulation) than observation.
Out of curiosity, do you consider the S&P 500 to be 'active management'? The Wiki refers to the S&P 500 as an index, but a committee selects the S&P 500 on the basis of numerous criteria.
I do not consider mutual funds or ETFs that track the S&P 500 to be active management. I see no opportunity for mixed or hidden agendas, and there is a long stable history of how well the associated index funds are able to track the S&P 500 index.
My admittedly limited understanding of indices is that they are typically (must?) be created using objective criteria. To the extent that this is true, I don't see then how someone could consider the S&P 500 to be a passive investment but an index fund tracking SCV to be active management. The fact that there are different ways to define SCV doesn't seem to imply active management any more than there are different ways to determine whether a firm should be included in the S&P 500.
No argument here. I simply asked how SCV and SCG are defined, and I haven't as of yet received any clear, consistent answers. More like, "well it depends on who is discussing them and how they are being used." If we're able to tie them to a single pair of indexes and stick to that, then I would have the simple answer I was hoping for.
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Re: Larry Swedroe: Small Value Stocks are Cheap

Post by oldcomputerguy » Thu Aug 22, 2019 4:51 pm

Note: Several posts have been removed for moderator review. --- moderator oldcomputerguy
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Re: Larry Swedroe: Small Value Stocks are Cheap

Post by Random Walker » Thu Aug 22, 2019 4:55 pm

willthrill81 wrote:
Thu Aug 22, 2019 1:08 pm

But if you own a SC fund, you're basically saying that you believe in the SC premium but not the SCV premium. That may be well founded, but I'm not sure why you would believe in one but not the other.
People have questioned the small cap premium. I believe part of the issue is definitional. Small is defined as 50/50 whereas all the other factor premia I think are 30/30. If one looks monotonically through the size deciles, I believe the premium gets bigger as the size gets smaller. Also the black hole nature of SG I think is largely removed when one screens out stocks with high investment and low profitability. What is very significant to me and has had a big effect on my Investing is that all the other factor premia tend to be more pronounced in small caps.

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Re: Larry Swedroe: Small Value Stocks are Cheap

Post by Day9 » Thu Aug 22, 2019 5:01 pm

FIREchief wrote:
Thu Aug 22, 2019 4:48 pm
willthrill81 wrote:
Thu Aug 22, 2019 4:28 pm
FIREchief wrote:
Thu Aug 22, 2019 4:23 pm
willthrill81 wrote:
Thu Aug 22, 2019 4:14 pm
FIREchief wrote:
Thu Aug 22, 2019 4:05 pm
It is starting to sound like SCV is more in the realm of active management than indexing. If that's the case, then any supposed premium may stem more from perception (or even manipulation) than observation.
Out of curiosity, do you consider the S&P 500 to be 'active management'? The Wiki refers to the S&P 500 as an index, but a committee selects the S&P 500 on the basis of numerous criteria.
I do not consider mutual funds or ETFs that track the S&P 500 to be active management. I see no opportunity for mixed or hidden agendas, and there is a long stable history of how well the associated index funds are able to track the S&P 500 index.
My admittedly limited understanding of indices is that they are typically (must?) be created using objective criteria. To the extent that this is true, I don't see then how someone could consider the S&P 500 to be a passive investment but an index fund tracking SCV to be active management. The fact that there are different ways to define SCV doesn't seem to imply active management any more than there are different ways to determine whether a firm should be included in the S&P 500.
No argument here. I simply asked how SCV and SCG are defined, and I haven't as of yet received any clear, consistent answers. More like, "well it depends on who is discussing them and how they are being used." If we're able to tie them to a single pair of indexes and stick to that, then I would have the simple answer I was hoping for.
That is a fair question and I will avoid it once again. Larry says one of the main reasons to believe in the Value premium is that it is "Robust" and holds up under many definitions. He says: "(for example, a value premium is present whether it is measured by price-to-book, earnings, cash flow or sales); it’s not dependent on one formation that might have been a result of data snooping." source. In his Factor book he says there are hundreds of claimed factors in the academic literature, but after filtering out just the ones that are "robust", and other qualities (pervasive, persistent, investible, etc), only a handful including Small and Value remain.
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Re: Larry Swedroe: Small Value Stocks are Cheap

Post by willthrill81 » Thu Aug 22, 2019 5:02 pm

FIREchief wrote:
Thu Aug 22, 2019 4:48 pm
willthrill81 wrote:
Thu Aug 22, 2019 4:28 pm
FIREchief wrote:
Thu Aug 22, 2019 4:23 pm
willthrill81 wrote:
Thu Aug 22, 2019 4:14 pm
FIREchief wrote:
Thu Aug 22, 2019 4:05 pm
It is starting to sound like SCV is more in the realm of active management than indexing. If that's the case, then any supposed premium may stem more from perception (or even manipulation) than observation.
Out of curiosity, do you consider the S&P 500 to be 'active management'? The Wiki refers to the S&P 500 as an index, but a committee selects the S&P 500 on the basis of numerous criteria.
I do not consider mutual funds or ETFs that track the S&P 500 to be active management. I see no opportunity for mixed or hidden agendas, and there is a long stable history of how well the associated index funds are able to track the S&P 500 index.
My admittedly limited understanding of indices is that they are typically (must?) be created using objective criteria. To the extent that this is true, I don't see then how someone could consider the S&P 500 to be a passive investment but an index fund tracking SCV to be active management. The fact that there are different ways to define SCV doesn't seem to imply active management any more than there are different ways to determine whether a firm should be included in the S&P 500.
No argument here. I simply asked how SCV and SCG are defined, and I haven't as of yet received any clear, consistent answers. More like, "well it depends on who is discussing them and how they are being used." If we're able to tie them to a single pair of indexes and stick to that, then I would have the simple answer I was hoping for.
CRSP, who creates the index used by VISVX, identifies small companies as the bottom 85th to 98th percentile, in terms of market capitalization, of companies in the TSM (pg. 9 of their methodology document)

They identify value companies based on five factors.
CRSP classifies value securities using the following factors: book to price, forward earnings to price, historic earnings to price, dividend-to-price ratio and sales-to-price ratio.
For a detailed description of the quantitative method in which they use these five factors, you can look at their methodology document on pgs. 31-33.
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Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by willthrill81 » Thu Aug 22, 2019 5:35 pm

[Thread merged into here, see below (Page 8) -- admin LadyGeek]

In a recent post, Larry begins by noting that many large institutional investors have not gotten the factor premia that they wanted, causing some asset managers to say that factor investing isn't working.

Larry then says that a big reason for this is that many institutional investors (I thought that they were the 'smart money' :?: ) use periods of time that are far too short to evaluate a performance, often 3-5 years, to make ongoing investment decisions. Similarly, David Stein has said that the endowment managers that he worked with would seldom tolerate underperformance of 'the market' for longer than just 1-2 years.

He goes on to show that since their inception dates, ranging from 1992-1999, all of DFA's factor funds have outperformed, after accounting for higher ERs, their respective total market Vanguard counterpart by from .7% to 4.5% annualized and with an average of 2.5% annualized outperformance.

There is obviously no guarantee that any fund, including those that Larry cites, will continue to outperform over any given period of time going forward. But the 'live data' certainly do indicate that they have so far. The recent underperformance of many factors in certain markets (i.e. the U.S.) should not be unexpected by informed investors since similar underperformance appears to have occurred in the past as well (when funds targeting these factors were not available). As a counter-example to those citing that factors aren't working, DFA's international SCV fund, DFSVX, has far outperformed total international equity stock (i.e. Vanguard's VGSTX) over the last decade (2010-current, 10.45% vs. 4.30%).

Regardless of one's stance concerning factors, it seems to me that the pendulum has now potentially swung in favor of the individual retail investor over institutional investors. Yes, there are still some asset classes that institutional investors have access to that retail investors do not, at least practically, but retail investors are not necessarily beholden to short-term results in order to stick with a particular investment strategy. I firmly believe that good investor behavior is likely more important to their long-term success than the specific strategy they have chosen, as long as that strategy is at least somewhat 'reasonable'.

And of course, "past performance is not necessarily predictive of future results," Bogle didn't like factor investing, YMMV, etc. etc.

Also, this is not an endorsement of DFA in any way. I believe that Vanguard's own factor funds may be perfectly adequate for a given investor, although Larry has pointed out in the past that they don't typically offer factor exposure that is as 'deep' as the DFA funds, although the advisor fee that is requisite for buying DFA funds may overwhelm that advantage.

Thoughts?

I have no connection with Larry and merely find his work interesting and thought provoking.
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by hdas » Thu Aug 22, 2019 5:44 pm

Fellow travelers should measure % of rolling periods out performance. You want to examine also if the outperformance is concentrated in a short window. That’s a red flag. Low Vol has been doing great for a while, so is Growth (quality + Momentum). Mr. Swedroe has been in the wrong side of things for a while. Cheers :greedy
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by 1789 » Thu Aug 22, 2019 6:04 pm

Dear willthrill81,

The arguments against factor investing (especially the ones against SCV) needs to account the long term trends (20+ years). And in long term, we know that SCV beat TSM in the past. I agree that past doesn't show what future brings us but it is one thing we look as a starting point.

My take on this is that, as long as there is a possibility to have returns --> TSM + ~1% in long periods, i agree on tilting an extra portion of my stock allocation to SCV.

Thank you
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Re: Larry Swedroe: Small Value Stocks are Cheap

Post by FIREchief » Thu Aug 22, 2019 6:24 pm

willthrill81 wrote:
Thu Aug 22, 2019 5:02 pm

CRSP, who creates the index used by VISVX, identifies small companies as the bottom 85th to 98th percentile, in terms of market capitalization, of companies in the TSM (pg. 9 of their methodology document)

They identify value companies based on five factors.
CRSP classifies value securities using the following factors: book to price, forward earnings to price, historic earnings to price, dividend-to-price ratio and sales-to-price ratio.
For a detailed description of the quantitative method in which they use these five factors, you can look at their methodology document on pgs. 31-33.
Thanks! That's really all I was asking about with my initial post. :sharebeer
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by Random Walker » Thu Aug 22, 2019 6:26 pm

Its worthwhile to note that FF published their work in 1992-1993, so this represents live data after the factors were widely publicized.

I agree that the individual investor may be able to display better investor behavior because of longer time frame.

A fund with deeper factor exposures will do better when the relevant factor does well and worse when the relevant factor underperforms. Factor funds are generally more expensive than TSM or core funds. If one chooses a more expensive fund with deeper exposures, he needs less of that more expensive fund to achieve his desired factor targets. He can use more of the cheaper TSM or core fund. So the differences in expense are less than many think. Moreover, the investor takes on less market beta risk, the risk he is trying to diversify away from, in order to achieve his other factor targets.

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by mrspock » Thu Aug 22, 2019 6:30 pm

My fundamental nit on this stuff, is that they basically ignore taxes. Say it works, and then stops working (because somebody arbitraged your factor away, or structural changes in the market), now what? Unless it’s have to pay you some 30% more than standard indexing to make up for this... and even then you are just even! There’s also the Jack Bogle argument: when it stops working... how long do I wait to be sure it’s not just temporary? 10 years? 20 years? At some point the wavelength of volatility gets absurd and you might as well not bother.

For buy and hold taxable account investors, they need an investment strategy they can depend on for decades... likely their entire life.

Pass.

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Re: Larry Swedroe: Small Value Stocks are Cheap

Post by Taylor Larimore » Thu Aug 22, 2019 6:31 pm

abuss368 wrote:
Thu Aug 22, 2019 4:18 pm
I am curious how many Bogleheads invest in small cap value.
abuss368:

The Total Market Index Fund holds the market's weight in Small-Cap Value stocks: Simple, low-cost and tax-efficient.

Best wishes
Taylor
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by whodidntante » Thu Aug 22, 2019 6:32 pm

I've noticed that sometimes people don't bother reading the article or even the OP. Maybe this meme will help.

Image

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by typical.investor » Thu Aug 22, 2019 6:42 pm

whodidntante wrote:
Thu Aug 22, 2019 6:32 pm
I've noticed that sometimes people don't bother reading the article. Maybe this meme will help.

Image
The annual advisory fee isn’t included in those figures, is it?

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by edgeagg » Thu Aug 22, 2019 6:49 pm

Well, here is the data from Portfolio Visualizer - the great clarifier:

(1) For the entire period the DFA fund does come out slightly ahead as compared to VTSAX. The ending portfolio values/Sharpe ratios were $35550/0.43 (VTSAX) vs $43644/0.47 (DFA). So yes, during that period DFA does appear to have a slightly better risk adjusted score.
(2) However, for a retail investor who came in after 2008, the story isn't the same as you can see. In this case VTSAX did slightly better.


So as someone remarked, the window does matter. And does it seem that factor effects haven't held over the last 10 years? Equally so.

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by Day9 » Thu Aug 22, 2019 6:53 pm

whodidntante wrote:
Thu Aug 22, 2019 6:32 pm
I've noticed that sometimes people don't bother reading the article or even the OP. Maybe this meme will help.
...
I love this. Can I join you?
Image
I'm just a fan of the person I got my user name from

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by Taylor Larimore » Thu Aug 22, 2019 6:54 pm

Bogleheads:

The "marketing" of financial advice is very expensive and very persuasive. It is important for investors to know the truth about costs. This is a very important finding by Morningstar:

"If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds."

We must never forget this quote by Upton Sinclair: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Best wishes.
Taylor
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Last edited by Taylor Larimore on Thu Aug 22, 2019 7:01 pm, edited 1 time in total.
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by typical.investor » Thu Aug 22, 2019 7:00 pm

whodidntante wrote:
Thu Aug 22, 2019 6:32 pm
I've noticed that sometimes people don't bother reading the article or even the OP. Maybe this meme will help.
I've noticed that the article doesn't include relevant information. Maybe this meme will help.

Image

Note to mention the 1.5-2%/year for alts that he'd put you in.

Goldman Sachs had a good podcast on risk premia funds ... sovereign wealth funds didn't do well '08 and looked at their active exposure ... asked for a cheaper systematic way to get that exposure ... and voila risk premia was born.

Interesting to hear the marketing manager say she applied what she'd learn promoting commodities to big funds ... nobody "needs" them but you have to push "diversification".

Hmmn, Larry seems to be on exactly the same path.
Last edited by typical.investor on Thu Aug 22, 2019 7:44 pm, edited 1 time in total.

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Re: Larry Swedroe: Small Value Stocks are Cheap

Post by abuss368 » Thu Aug 22, 2019 7:32 pm

Taylor Larimore wrote:
Thu Aug 22, 2019 6:31 pm
abuss368 wrote:
Thu Aug 22, 2019 4:18 pm
I am curious how many Bogleheads invest in small cap value.
abuss368:

The Total Market Index Fund holds the market's weight in Small-Cap Value stocks: Simple, low-cost and tax-efficient.

Best wishes
Taylor
Agree Taylor! No need for additional complexity.
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by willthrill81 » Thu Aug 22, 2019 7:39 pm

Day9 wrote:
Thu Aug 22, 2019 6:53 pm
whodidntante wrote:
Thu Aug 22, 2019 6:32 pm
I've noticed that sometimes people don't bother reading the article or even the OP. Maybe this meme will help.
...
I love this. Can I join you?
Image
That's sadly true and appears to even be so for many BHs.
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by willthrill81 » Thu Aug 22, 2019 7:43 pm

typical.investor wrote:
Thu Aug 22, 2019 7:00 pm
whodidntante wrote:
Thu Aug 22, 2019 6:32 pm
I've noticed that sometimes people don't bother reading the article or even the OP. Maybe this meme will help.
I've noticed that the article doesn't include relevant information. Maybe this meme will help.
You don't have to go through his advisory firm to gain access to DFA funds. You have to go through an advisor, and I believe that some have significantly lower fees than 1%. On average, paying 1% for 2.5% outperformance would still have been worth it. But I'm not sure that the DFA funds offer that much value over other factor funds that don't require an advisor and have significantly lower ERs.
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by abuss368 » Thu Aug 22, 2019 7:46 pm

I believe an investor needs an adviser who has access to DFA funds. Investors can not gain access to the funds directly.
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by abuss368 » Thu Aug 22, 2019 7:47 pm

Day9 wrote:
Thu Aug 22, 2019 6:53 pm
Image
Priceless and very true with many investors.
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by typical.investor » Thu Aug 22, 2019 7:53 pm

willthrill81 wrote:
Thu Aug 22, 2019 7:43 pm
On average, paying 1% for 2.5% outperformance would still have been worth it.
I think you misunderstand the returns. Sorry, I do.

Nobody using DFA funds (even if they had a 0% AUM fee) outperformed Bogle's suggested portfolio by 2.5%. Nobody.

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by willthrill81 » Thu Aug 22, 2019 7:55 pm

typical.investor wrote:
Thu Aug 22, 2019 7:53 pm
willthrill81 wrote:
Thu Aug 22, 2019 7:43 pm
On average, paying 1% for 2.5% outperformance would still have been worth it.
I think you misunderstand the returns. Sorry, I do.

Nobody using DFA funds (even if they had a 0% AUM fee) outperformed Bogle's suggested portfolio by 2.5%. Nobody.
Evidence?
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by abuss368 » Thu Aug 22, 2019 7:57 pm

typical.investor wrote:
Thu Aug 22, 2019 7:53 pm
willthrill81 wrote:
Thu Aug 22, 2019 7:43 pm
On average, paying 1% for 2.5% outperformance would still have been worth it.
I think you misunderstand the returns. Sorry, I do.

Nobody using DFA funds (even if they had a 0% AUM fee) outperformed Bogle's suggested portfolio by 2.5%. Nobody.
Interesting. Do you happen to have a link or anything?
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by typical.investor » Thu Aug 22, 2019 8:00 pm

willthrill81 wrote:
Thu Aug 22, 2019 7:55 pm
typical.investor wrote:
Thu Aug 22, 2019 7:53 pm
willthrill81 wrote:
Thu Aug 22, 2019 7:43 pm
On average, paying 1% for 2.5% outperformance would still have been worth it.
I think you misunderstand the returns. Sorry, I do.

Nobody using DFA funds (even if they had a 0% AUM fee) outperformed Bogle's suggested portfolio by 2.5%. Nobody.
Evidence?


Seriously, ready the article.

Bogle says go US Total Market. Find me an a DFA fund asset class per Larry's figures that outperformed US total market by 2.5%. Which fund could you have been in to beat it by 2.5%? 100% small value? Microcaps. No.

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by willthrill81 » Thu Aug 22, 2019 8:06 pm

typical.investor wrote:
Thu Aug 22, 2019 8:00 pm
willthrill81 wrote:
Thu Aug 22, 2019 7:55 pm
typical.investor wrote:
Thu Aug 22, 2019 7:53 pm
willthrill81 wrote:
Thu Aug 22, 2019 7:43 pm
On average, paying 1% for 2.5% outperformance would still have been worth it.
I think you misunderstand the returns. Sorry, I do.

Nobody using DFA funds (even if they had a 0% AUM fee) outperformed Bogle's suggested portfolio by 2.5%. Nobody.
Evidence?
willthrill81 wrote:
Thu Aug 22, 2019 7:55 pm
typical.investor wrote:
Thu Aug 22, 2019 7:53 pm
willthrill81 wrote:
Thu Aug 22, 2019 7:43 pm
On average, paying 1% for 2.5% outperformance would still have been worth it.
I think you misunderstand the returns. Sorry, I do.

Nobody using DFA funds (even if they had a 0% AUM fee) outperformed Bogle's suggested portfolio by 2.5%. Nobody.
Evidence?
Seriously, ready the article.

Bogle says go US Total Market. Find me an a DFA fund asset class per Larry's figures that outperformed US total market by 2.5%. Which fund could you have been in to beat it by 2.5%?
Ah, so you're referring to U.S. only.

Then, no, while the factor funds all outperformed VTSMX, the margin was not 2.5% in the U.S. But their average outperformance was much bigger than 2.5% in ex-U.S. markets.

So are you suggesting TSM, U.S. only? I just want to be clear.
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by Random Walker » Thu Aug 22, 2019 8:07 pm

Typical investor,
Larry doesn’t mention the AUM fee in the article because it is irrelevant to the article. The article is on factor investing, most specifically size and value factor investing. DFA is representative of access to the factors. The factors can be accessed through passive funds that don’t require an advisor, including Vanguard funds. Even if one did want DFA access specifically, it is available these days very inexpensively.

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by abuss368 » Thu Aug 22, 2019 8:15 pm

It is after fees (and taxes) that counts.
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by columbia » Thu Aug 22, 2019 8:18 pm

They operate through advisors, so the funds won’t be over-bought? Or the reverse and plying on the psychology of exclusivity to attract high rollers?

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by nisiprius » Thu Aug 22, 2019 8:23 pm

It's a complicated picture, and bashing a firm's advisory fees or DFA's (reasonably low) expense ratios doesn't add clarity.

The facts seem plain enough. Both Larry Swedroe and Bill Schultheis put specific model portfolios on paper in published print books in 1998.

Schultheis used simple round numbers, and a portfolio that could be implemented by a do-it-yourself investor, using Vanguard index funds or those of many other firms. No advisory fees needed. Straight index funds without "secret sauce" in the transaction management. No pseudo-precision in the portfolio percentages.

Portfolio 1 is the Coffeehouse Portfolio. 40% Total Bond, 10% each Vanguard [Large-Cap] Value Index, 500 Index, Small-Cap Value Index, Small-Cap Index, REIT index, and Total International index. For portfolio 2, I used the same international and bond allocations, but replaced the five stock funds with a 50% allocation to Vanguard Total Stock Index.

Well, these are the results.

Source

Image

And here's the problem. It's the "one great shining moment" problem. It is all attributable to 2000-2003. 2000-2003 look like magic for classic factor portfolios. Stock market went down, portfolio went up. I mean, seriously, wow.

If you started in 2004--which I chose, of course, in order to produce a desired result--there was basically a tie. No outperformance, no underperformance either. The Coffeehouse factor-based portfolio 2 is not quite as good in terms of volatility (higher), maximum drawdown in 2008-2009 (deeper), and risk-adjusted return (lower). But nothing much to complain about

Image

And there is nothing you can say about this that doesn't involve spin, either way. This is just the terrible burstiness of financial data. If you believe that factor investing is only going to consist of bursts of outperformance, never underperformance, then four years of outperformance in a 20-year period isn't bad. Hanging in there another 20 years in hopes of getting another burst like that could sound good.

The point is, just as ten years isn't enough data to come to any firm conclusions, neither is twenty years. If we had a thousand years and we could say, "well, we've had fifty burst of outperformance like 2000-2003, and only twenty bursts of underperformance," then you can start to do Poisson tests and so forth. But if all you know is that you had one burst of outperformance in twenty years, it's just... whatever you want to make of it.

Meanwhile, I missed out on 2000-2003. Am I going to switch to something like the Coffeehouse Portfolio in hope that something like that will happen again? No, because I'm staying the course, and my course may be suboptimal but it's good enough.
Last edited by nisiprius on Thu Aug 22, 2019 8:35 pm, edited 2 times in total.
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by typical.investor » Thu Aug 22, 2019 8:32 pm

willthrill81 wrote:
Thu Aug 22, 2019 7:55 pm
On average, paying 1% for 2.5% outperformance would still have been worth it.
willthrill81 wrote:
Thu Aug 22, 2019 8:06 pm

So are you suggesting TSM, U.S. only? I just want to be clear.
I am stating that a 2.5% outperformance claim is misleading. Is that clear?

Anyway, please notice me in the "should I sell my DFA funds" as saying no because I don't believe in changing allocation once you are in (especially value). I do believe their promise is cleverly oversold though.

At any rate, I just read value does poorly three years prior to yield curve inversion and well three years post. This is for full quarter inversions and not just blips. We shall see.
Last edited by typical.investor on Thu Aug 22, 2019 8:44 pm, edited 1 time in total.

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by Day9 » Thu Aug 22, 2019 8:42 pm

I have access to DFA funds in two different 401k plans (from 2 different employers). I do not have a financial advisor. I hear this is not uncommon.

Value has underperformed for 10 years. In Larry's factor book he argues that there is a 15% chance for Value to underperform in a 10 year period (and a 25% chance for small). He argues we just experienced one of those periods. If there were no risk there would be no premium. He also points out 3 different 13-year periods where TSM underperformed 1-month T-Bills.

I only joined this forum in 2012 but I have the sense that there may have been some people advocating seeking a cheap advisor just for access to DFA funds back then, but now that we are 10 years into value underperformance those people have been silent. The fact that those people existed does not necessarily mean factor investing is a bad investment strategy. Back then there were also people who "tilt" or "slice & dice" who argued it was a bad idea to pay a fee just for DFA access.
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by Dead Man Walking » Thu Aug 22, 2019 8:43 pm

whodidntante wrote:
Thu Aug 22, 2019 6:32 pm
I've noticed that sometimes people don't bother reading the article or even the OP. Maybe this meme will help.

Image
I read the article and noticed that he stated the results were compared to an appropriate index. I don’t believe that VTMSX is the appropriate index for value funds, particularly scv funds.

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Re: Larry Swedroe: Small Value Stocks are Cheap

Post by nedsaid » Thu Aug 22, 2019 9:23 pm

abuss368 wrote:
Thu Aug 22, 2019 4:38 pm
nedsaid wrote:
Thu Aug 22, 2019 4:26 pm
abuss368 wrote:
Thu Aug 22, 2019 4:18 pm
I am curious how many Bogleheads invest in small cap value.
I have used Vanguard Small-Cap Value Index ETF and the iShares S&P 600 Small Cap Value Index ETF. When I had my 403(b), I used the Allianz NFJ Small Cap Value fund for my Small Value representation but switched it to the iShares product when I rolled the 403(b) over to a Rollover IRA. At American Century, I have used their Mid-Cap Value fund which actually has a better performance record than its Small Value product. You might substitute a Mid Cap Value Index and get very similar results. The S&P Indexes seem to be better than the Russell Indexes. Vanguard uses the CRSP indexes, which seem to be better than the Russell indexes. Reason being is that Russell doesn't seem to make any effort to screen out the junk. S&P does have quality criteria for their indexes.

I also use the iShares Core Small Cap Index ETF, which is based upon the S&P 600 Small Cap Index. I bought this back in 2004 and have been nothing but pleased with it. I also have a Micro Cap Index ETF but seems plagued by front running, is rated 2 star by Morningstar, and I am much less pleased with it.

So that is what I am doing.
Small caps by nature don’t pay much dividends correct.
My S&P 600 Small-Cap Index ETF has a yield of 1.41%.
The Vanguard Small-Cap Value Index ETF yields 2.23%.
The iShares Micro-Cap Index ETF yields 0.97%
The S&P 500 SPDRs yield 1.82%.

Ain't necessarily so.
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Re: Larry Swedroe: Small Value Stocks are Cheap

Post by InvestInLife » Thu Aug 22, 2019 10:19 pm

I “believe” in SCV and initially had US domestic equity 50/50 between SCV and TSM. That way it didn’t matter which one performed better.
But I cut SCV way back just because Jack Bogle cautioned against having more than a slight tilt since SCV meant taking on more risk. So now I’m 40% TSM, 20% SCV.
If SCV takes off I wonder if I’ll be kicking myself for trying to be a good Boglehead by following what Bogle told me to do.

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by marcopolo » Thu Aug 22, 2019 10:47 pm

willthrill81 wrote:
Thu Aug 22, 2019 5:35 pm

He goes on to show that since their inception dates, ranging from 1992-1999, all of DFA's factor funds have outperformed, after accounting for higher ERs, their respective total market Vanguard counterpart by from .7% to 4.5% annualized and with an average of 2.5% annualized outperformance.
Honest question, since i have not been investing as long to know the history of the factor funds being introduced. But, were they telling people at the time that they should expect long periods of under performance (may be a decade or more) in order to benefit from the brief periods of sharp out performance? Or is that warning a more recent phenomenon?
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by JoMoney » Thu Aug 22, 2019 10:58 pm

(Despite substantially higher risk) the original "Factor Fund", DFA's small-cap DFSCX , hasn't really done much of anything a S&P 500 fund couldn't (at lower cost and risk)... but I guess it depends on what you mean by "works"
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by willthrill81 » Thu Aug 22, 2019 11:16 pm

marcopolo wrote:
Thu Aug 22, 2019 10:47 pm
willthrill81 wrote:
Thu Aug 22, 2019 5:35 pm

He goes on to show that since their inception dates, ranging from 1992-1999, all of DFA's factor funds have outperformed, after accounting for higher ERs, their respective total market Vanguard counterpart by from .7% to 4.5% annualized and with an average of 2.5% annualized outperformance.
Honest question, since i have not been investing as long to know the history of the factor funds being introduced. But, were they telling people at the time that they should expect long periods of under performance (may be a decade or more) in order to benefit from the brief periods of sharp out performance? Or is that warning a more recent phenomenon?
Anyone who saw the Fama and French data should have known that a decade or longer of underperformance was bound to happen again, but I'm not sure if DFA or anyone else was discussing that back in the 90s. Remember that it was 'common knowledge' that a 7% withdrawal rate was 'safe' until Bengen's study in 1994.

It seems obvious to us now to not expect a factor, even a 'genuine' one, to not underperform the market for an extended period of time, but I have little doubt that many investors have bought factor funds through the years thinking that it would outperform pretty much all the time.
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by JoMoney » Thu Aug 22, 2019 11:28 pm

willthrill81 wrote:
Thu Aug 22, 2019 11:16 pm
... Anyone who saw the Fama and French data should have known that a decade or longer of underperformance was bound to happen again, but I'm not sure if DFA or anyone else was discussing that back in the 90s. Remember that it was 'common knowledge' that a 7% withdrawal rate was 'safe' until Bengen's study in 1994....
From 1974 to 1993 10yr Treasuries had well over 7% yields. But there's a problem with thinking that returns are somehow set in stone. Uncertainty is what stocks are all about, they're not ordained to have any particular return.
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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by willthrill81 » Thu Aug 22, 2019 11:35 pm

JoMoney wrote:
Thu Aug 22, 2019 11:28 pm
willthrill81 wrote:
Thu Aug 22, 2019 11:16 pm
... Anyone who saw the Fama and French data should have known that a decade or longer of underperformance was bound to happen again, but I'm not sure if DFA or anyone else was discussing that back in the 90s. Remember that it was 'common knowledge' that a 7% withdrawal rate was 'safe' until Bengen's study in 1994....
From 1974 to 1993 10yr Treasuries had well over 7% yields. But there's a problem with thinking that returns are somehow set in stone. Uncertainty is what stocks are all about, they're not ordained to have any particular return.
There was a lot of uncertainty surrounding 10 year Treasuries over that period as well though. 10 year Treasuries had a whopping 45% maximum drawdown in real dollars from 1973-1981. I think that many investors today have a hard time wrapping their mind around bonds losing that much in buying power in under a decade.

Image

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by heyyou » Thu Aug 22, 2019 11:44 pm

Have we considered that both investing philosophies may perform well enough, so there is less risk about which one to choose? There is significant risk that one will outperform the other, over any specific period.

The desire to own whichever one will do better in the future, could be the problem. Would investing even exist without our greed and noticeable uncertainty?

My suggestion is for each of you to choose what suits you the best, and let others do what suits them. Portraying your choice as absolutely superior, contributes to confusion since the historical record is variable.

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by willthrill81 » Thu Aug 22, 2019 11:53 pm

heyyou wrote:
Thu Aug 22, 2019 11:44 pm
Have we considered that both investing philosophies may perform well enough, so there is less risk about which one to choose? There is significant risk that one will outperform the other, over any specific period.
Using French's data from 1972-1998 and Vanguard's VISVX from 1999 to current, the lowest returns that either SCV or TSM had were higher (i.e. better) for SCV in all 1, 3, 5, 7, 10, and 15 year rolling periods. To the extent that French's data are reliable, that strongly indicates that SCV had less downside risk than TSM over that 47+ year period.

Image
Portfolio 1 is TSM, and Portfolio 2 is SCV.

But what if French's data aren't reliable and we should only use 'live fund' data? They are below.

Image
Portfolio 1 is Vanguard's TSM fund, VTSMX, and Portfolio 2 is Vanguard's SCV fund, VISVX.
heyyou wrote:
Thu Aug 22, 2019 11:44 pm
The desire to own whichever one will do better in the future, could be the problem. Would investing even exist without our greed and noticeable uncertainty?

My suggestion is for each of you to choose what suits you the best, and let others do what suits them. Portraying your choice as absolutely superior, contributes to confusion since the historical record is variable.
+1000 :sharebeer

I couldn't agree more.
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Re: Larry Swedroe: Small Value Stocks are Cheap

Post by Elysium » Fri Aug 23, 2019 7:09 am

willthrill81 wrote:
Thu Aug 22, 2019 1:08 pm
There's no point in holding both SCV and SCG. Just own SC unless you don't have access to a SC fund.
Just made the case for TSM investing. I have been saying something different on this thread. If you own a separate SCV fund, in that case you need a SCG fund to counter balance. If you don't overweight value, then simply own a SC fund, or just own Market.
willthrill81 wrote:
Thu Aug 22, 2019 1:08 pm
But if you own a SC fund, you're basically saying that you believe in the SC premium but not the SCV premium. That may be well founded, but I'm not sure why you would believe in one but not the other.
I never said I reject value premium, although I am skeptical about it to the extend of not over weighting it. I am simply saying there could be a growth premium as well, or let's just call it "reward for owning growth stocks". So there is a reward for owning Growth stocks, and you own separate Value funds then you own separate Growth funds.

Exactly the same reason why you would not own only SC funds and no LC funds. Just because you believe in a Small premium would you only invest in that and eliminate LC completely.

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by Elysium » Fri Aug 23, 2019 7:19 am

willthrill81 wrote:
Thu Aug 22, 2019 5:35 pm
Larry then says that a big reason for this is that many institutional investors (I thought that they were the 'smart money' :?: ) use periods of time that are far too short to evaluate a performance, often 3-5 years, to make ongoing investment decisions.
Okay, makes sense that we need more than 5 years.
willthrill81 wrote:
Thu Aug 22, 2019 5:35 pm
He goes on to show that since their inception dates, ranging from 1992-1999, all of DFA's factor funds have outperformed, after accounting for higher ERs, their respective total market Vanguard counterpart by from .7% to 4.5% annualized and with an average of 2.5% annualized outperformance.
Okay, so 7 years is enough, just not 3-5 years.

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by Random Walker » Fri Aug 23, 2019 7:42 am

Elysium,
Are you intentionally trying to not understand? The STARTING DATES range from 1992-1997. The ending dates are all the same, June 2019.

Dave

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Re: Larry Swedroe: Factor Investing Works (Despite What Some May Say)

Post by Elysium » Fri Aug 23, 2019 8:01 am

Random Walker wrote:
Fri Aug 23, 2019 7:42 am
Elysium,
Are you intentionally trying to not understand? The STARTING DATES range from 1992-1997. The ending dates are all the same, June 2019.

Dave
Ramdom Walker, as a client of Larry's firm BAM, are you intentionally trying to defend his ideas here? Let's not call each others intentions as dubious here and instead stick to the merits of the discussion.

I noticed on second inspection that he used a rather loose term to refer to 1992-1997 as starting range for a collection of DFA funds without naming them or their Vanguard counter parts. Most everyone knows here there are no equal Vanguard counter parts for many DFA factor funds, for instance Intl SCV and EM Value. What's the point in then stacking them up all together to create a strawman argument. If we stick to US LCV/SCV, then compare to US LCG/SCG and see where they stand.

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