Diversifying Across Factors - 2 Questions

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schooner
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Diversifying Across Factors - 2 Questions

Post by schooner » Mon Sep 09, 2019 4:40 pm

I have two questions about factor investing. And I can't find an answer on the board.

1) How many stocks would be in the US portion of a diversified factor portfolio? I know there are about 500 in the SP500 and about 3,600 in the Total Stock Market.

2) Is there a list of the general weighting for these stocks in a diversified factor portfolio? For instance, I know Microsoft is about 3.5% of the Total Stock Market as of 7/31/2019. What would its weighting be in a diversified factor portfolio?

I know this would depend a lot on how you construct a factor portfolio. I guess I'm looking for a consensus. There has been a lot of talk about "diversifying across factors." I'm trying to understand what it looks like under the hood. What's it made of.

Longtermgrowth
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Re: Diversifying Across Factors - 2 Questions

Post by Longtermgrowth » Mon Sep 09, 2019 6:11 pm

At the extreme level, the US portion could only consist of an S&P 600 value fund like IJS: https://www.etf.com/IJS#overview

I like Paul Merriman's approach of tilting to value and small, but not only holding small value: https://paulmerriman.com/best-in-class- ... hold-2019/

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Re: Diversifying Across Factors - 2 Questions

Post by schooner » Mon Sep 09, 2019 6:24 pm

Longtermgrowth wrote:
Mon Sep 09, 2019 6:11 pm
At the extreme level, the US portion could only consist of an S&P 600 value fund like IJS: https://www.etf.com/IJS#overview

I like Paul Merriman's approach of tilting to value and small, but not only holding small value: https://paulmerriman.com/best-in-class- ... hold-2019/
Thanks for the links! I understand your extreme example - but I don’t think it is “diversifying across factors.”

Merriman’s approach has a Total Stock Market Index and 3 other US equity funds? So it must hold all US stocks. However, there must also be some of the same securities across those funds.

My second question is what is the weighting of individual stocks once you put together all the funds? Has anyone actually calculated that out for these diversified factor portfolios?

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Re: Diversifying Across Factors - 2 Questions

Post by willthrill81 » Mon Sep 09, 2019 6:36 pm

schooner wrote:
Mon Sep 09, 2019 4:40 pm
I know this would depend a lot on how you construct a factor portfolio. I guess I'm looking for a consensus. There has been a lot of talk about "diversifying across factors." I'm trying to understand what it looks like under the hood. What's it made of.
Unfortunately, you're not going to find consensus on this issue.

Diversifying across the small and value factors could be done with a small-cap value U.S. fund, a small ex-U.S. fund, and a value ex-U.S. fund (or, if you have access to DFA funds, an ex-U.S. small-cap value fund in lieu of the last two). That gives you exposure to market beta, the small factor, and the value factor.
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Re: Diversifying Across Factors - 2 Questions

Post by rkhusky » Mon Sep 09, 2019 6:43 pm

schooner wrote:
Mon Sep 09, 2019 4:40 pm
2) Is there a list of the general weighting for these stocks in a diversified factor portfolio? For instance, I know Microsoft is about 3.5% of the Total Stock Market as of 7/31/2019. What would its weighting be in a diversified factor portfolio?
You could check the stock listings for a factor fund. Vanguard has some. (Here are the holdings for one: https://investor.vanguard.com/mutual-fu ... o-holdings)

My guess is that for efficiency they are cap-weighted.

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Re: Diversifying Across Factors - 2 Questions

Post by livesoft » Mon Sep 09, 2019 6:47 pm

I don't see any reason not to have total stock market as the "base" or "start" of your factor investing. Make it 50% of your US stocks and that leaves 50% for factor stuff, say 25% small-cap value and 25% momentum. Do something similar with international equities.
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Re: Diversifying Across Factors - 2 Questions

Post by tibbitts » Mon Sep 09, 2019 6:49 pm

schooner wrote:
Mon Sep 09, 2019 4:40 pm
I have two questions about factor investing. And I can't find an answer on the board.

1) How many stocks would be in the US portion of a diversified factor portfolio? I know there are about 500 in the SP500 and about 3,600 in the Total Stock Market.

2) Is there a list of the general weighting for these stocks in a diversified factor portfolio? For instance, I know Microsoft is about 3.5% of the Total Stock Market as of 7/31/2019. What would its weighting be in a diversified factor portfolio?

I know this would depend a lot on how you construct a factor portfolio. I guess I'm looking for a consensus. There has been a lot of talk about "diversifying across factors." I'm trying to understand what it looks like under the hood. What's it made of.
I don't understand the question. Are you asking about multi-factor funds, in that the factors themselves are diversified? Or identifying specific factor(s) and then diversifying equities within your factor selection?

And what would cause you to think there could ever be a consensus no matter which question you're asking?

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Re: Diversifying Across Factors - 2 Questions

Post by schooner » Mon Sep 09, 2019 7:09 pm

tibbitts wrote:
Mon Sep 09, 2019 6:49 pm
schooner wrote:
Mon Sep 09, 2019 4:40 pm
I have two questions about factor investing. And I can't find an answer on the board.

1) How many stocks would be in the US portion of a diversified factor portfolio? I know there are about 500 in the SP500 and about 3,600 in the Total Stock Market.

2) Is there a list of the general weighting for these stocks in a diversified factor portfolio? For instance, I know Microsoft is about 3.5% of the Total Stock Market as of 7/31/2019. What would its weighting be in a diversified factor portfolio?

I know this would depend a lot on how you construct a factor portfolio. I guess I'm looking for a consensus. There has been a lot of talk about "diversifying across factors." I'm trying to understand what it looks like under the hood. What's it made of.
I don't understand the question. Are you asking about multi-factor funds, in that the factors themselves are diversified? Or identifying specific factor(s) and then diversifying equities within your factor selection?

And what would cause you to think there could ever be a consensus no matter which question you're asking?
Sure, I know that Larry and others have recommended diversifying across factors. And have recommended specific portfolios to achieve this.

The link above references Merriman’s buy and hold w 4 domestic equity funds: TSM, SP Pure Value, SP Small Cap, and SP Small Cap Value.

These funds have overlapping securities. I think? Has anyone calculated the weighting of the securities in the entire portfolio? eg what percentage would Microsoft or any other company represent relative to your entire US equity exposure across all funds? How much does it differ from TSM and what are the securities that actually make the difference?

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Re: Diversifying Across Factors - 2 Questions

Post by vineviz » Mon Sep 09, 2019 7:16 pm

schooner wrote:
Mon Sep 09, 2019 4:40 pm
I have two questions about factor investing. And I can't find an answer on the board.

1) How many stocks would be in the US portion of a diversified factor portfolio? I know there are about 500 in the SP500 and about 3,600 in the Total Stock Market.

2) Is there a list of the general weighting for these stocks in a diversified factor portfolio? For instance, I know Microsoft is about 3.5% of the Total Stock Market as of 7/31/2019. What would its weighting be in a diversified factor portfolio?

I know this would depend a lot on how you construct a factor portfolio. I guess I'm looking for a consensus. There has been a lot of talk about "diversifying across factors." I'm trying to understand what it looks like under the hood. What's it made of.
There’s no intrinsic relationship between diversification and number of stocks, so there won’t be a consensus answer.

You could look at Vanguard’s fund (VFMFX) to get an idea of how it is constructed. I think it holds about 600 stocks, FWIW.
"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: Diversifying Across Factors - 2 Questions

Post by Longtermgrowth » Mon Sep 09, 2019 7:17 pm

schooner wrote:
Mon Sep 09, 2019 6:24 pm
Thanks for the links! I understand your extreme example - but I don’t think it is “diversifying across factors.”

Merriman’s approach has a Total Stock Market Index and 3 other US equity funds? So it must hold all US stocks. However, there must also be some of the same securities across those funds.

My second question is what is the weighting of individual stocks once you put together all the funds? Has anyone actually calculated that out for these diversified factor portfolios?
I think in the sense Larry Swedroe uses the term, adding small value to your desired percentage is diversifying across factors. His book, Your Complete Guide to Factor Based Investing, is even mentioned in that link to Paul Merriman's site.

I linked IJS so you could check the top holdings of the fund and what percentage they are. If starting with a total market fund, adding small and value will overweight those stocks, which is what most mean when talking about tilting.

Paul Merriman has mentioned in more detail the number of holdings and less concentration in just a few large cap stocks that his suggested funds have, but it could take me hours to find the right podcast.

If someone here has a premium membership to Morningstar, they could input any set of funds and desired percentage in each, then list the top holding percentages. Notice Paul Merriman lists the Morningstar style box of the combined funds in his best in class chart.

You can compare the overlap of two ETFs with etfrc.com's free fund overlap tool.

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Re: Diversifying Across Factors - 2 Questions

Post by schooner » Mon Sep 09, 2019 7:24 pm

vineviz wrote:
Mon Sep 09, 2019 7:16 pm
schooner wrote:
Mon Sep 09, 2019 4:40 pm
I have two questions about factor investing. And I can't find an answer on the board.

1) How many stocks would be in the US portion of a diversified factor portfolio? I know there are about 500 in the SP500 and about 3,600 in the Total Stock Market.

2) Is there a list of the general weighting for these stocks in a diversified factor portfolio? For instance, I know Microsoft is about 3.5% of the Total Stock Market as of 7/31/2019. What would its weighting be in a diversified factor portfolio?

I know this would depend a lot on how you construct a factor portfolio. I guess I'm looking for a consensus. There has been a lot of talk about "diversifying across factors." I'm trying to understand what it looks like under the hood. What's it made of.
There’s no intrinsic relationship between diversification and number of stocks, so there won’t be a consensus answer.

You could look at Vanguard’s fund (VFMFX) to get an idea of how it is constructed. I think it holds about 600 stocks, FWIW.
Thanks! Is multi-factor the same as “Diversifying across factors.”?

I see some regulars like JPMC and Walmart. But there are some others I haven’t heard of in the top 10, like HCA Healthcare. Its market cap is $43b but it’s the top holding and 1% of the portfolio.

Do you know why it got there? I tried to analyze the methodology from the fund prospectus but I can’t understand it?

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Re: Diversifying Across Factors - 2 Questions

Post by muffins14 » Mon Sep 09, 2019 8:02 pm

You could likely say that a multi-factor fund has the goal of "diversifying across factors". Specifically I'd interpret the term "diversified across factors" to mean your portfolio has a statistically-significant loading on a factor other than market beta, so market + small, or market+small+value loads, but I'm sure others have different opinions on what exactly "diversified" means. Some target specific factor loads.

You could achieve a diversified (by my above definition) portfolio that was 80% total stock market and 20% S&P Small Cap Value (IJS). I suppose you'd have 3600 stocks, as in the total stock market, and your amounts in each stock would be the weighted average of the two funds' components.

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Re: Diversifying Across Factors - 2 Questions

Post by schooner » Mon Sep 09, 2019 8:20 pm

muffins14 wrote:
Mon Sep 09, 2019 8:02 pm
You could likely say that a multi-factor fund has the goal of "diversifying across factors". Specifically I'd interpret the term "diversified across factors" to mean your portfolio has a statistically-significant loading on a factor other than market beta, so market + small, or market+small+value loads, but I'm sure others have different opinions on what exactly "diversified" means. Some target specific factor loads.

You could achieve a diversified (by my above definition) portfolio that was 80% total stock market and 20% S&P Small Cap Value (IJS). I suppose you'd have 3600 stocks, as in the total stock market, and your amounts in each stock would be the weighted average of the two funds' components.
I get the small cap tilt.

But why does the top holding of the multi-factor Vanguard fund have a market cap of $43b (HCA Healthcare)? The SP Small Cap index range is only up to $2b. And the company isn’t in the top 10 holdings of the SP Value index either? What am I missing?

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Re: Diversifying Across Factors - 2 Questions

Post by HippoSir » Mon Sep 09, 2019 8:45 pm

schooner wrote:
Mon Sep 09, 2019 8:20 pm
But why does the top holding of the multi-factor Vanguard fund have a market cap of $43b (HCA Healthcare)? The SP Small Cap index range is only up to $2b. And the company isn’t in the top 10 holdings of the SP Value index either? What am I missing?
Assuming you are referring to VFMF, it is explicitly not a small cap fund. It is 1/3 small, 1/3 mid, and 1/3 large.

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Re: Diversifying Across Factors - 2 Questions

Post by schooner » Mon Sep 09, 2019 10:25 pm

HippoSir wrote:
Mon Sep 09, 2019 8:45 pm
schooner wrote:
Mon Sep 09, 2019 8:20 pm
But why does the top holding of the multi-factor Vanguard fund have a market cap of $43b (HCA Healthcare)? The SP Small Cap index range is only up to $2b. And the company isn’t in the top 10 holdings of the SP Value index either? What am I missing?
Assuming you are referring to VFMF, it is explicitly not a small cap fund. It is 1/3 small, 1/3 mid, and 1/3 large.
Yes, I was. However, HCA Health doesn’t show up on the top ten of large, mid, or small cap indices. I’m still not sure how these multi-factor funds work?

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Re: Diversifying Across Factors - 2 Questions

Post by willthrill81 » Mon Sep 09, 2019 10:40 pm

schooner wrote:
Mon Sep 09, 2019 10:25 pm
HippoSir wrote:
Mon Sep 09, 2019 8:45 pm
schooner wrote:
Mon Sep 09, 2019 8:20 pm
But why does the top holding of the multi-factor Vanguard fund have a market cap of $43b (HCA Healthcare)? The SP Small Cap index range is only up to $2b. And the company isn’t in the top 10 holdings of the SP Value index either? What am I missing?
Assuming you are referring to VFMF, it is explicitly not a small cap fund. It is 1/3 small, 1/3 mid, and 1/3 large.
Yes, I was. However, HCA Health doesn’t show up on the top ten of large, mid, or small cap indices. I’m still not sure how these multi-factor funds work?
Have you read the prospectus for VFMF?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Diversifying Across Factors - 2 Questions

Post by schooner » Mon Sep 09, 2019 10:54 pm

willthrill81 wrote:
Mon Sep 09, 2019 10:40 pm
schooner wrote:
Mon Sep 09, 2019 10:25 pm
HippoSir wrote:
Mon Sep 09, 2019 8:45 pm
schooner wrote:
Mon Sep 09, 2019 8:20 pm
But why does the top holding of the multi-factor Vanguard fund have a market cap of $43b (HCA Healthcare)? The SP Small Cap index range is only up to $2b. And the company isn’t in the top 10 holdings of the SP Value index either? What am I missing?
Assuming you are referring to VFMF, it is explicitly not a small cap fund. It is 1/3 small, 1/3 mid, and 1/3 large.
Yes, I was. However, HCA Health doesn’t show up on the top ten of large, mid, or small cap indices. I’m still not sure how these multi-factor funds work?
Have you read the prospectus for VFMF?
Yes, but unfortunately it’s proprietary:?!

“QEG uses a proprietary screening model that ranks stocks on factors such as momentum, quality, and value.”

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Re: Diversifying Across Factors - 2 Questions

Post by vineviz » Tue Sep 10, 2019 5:34 am

schooner wrote:
Mon Sep 09, 2019 10:25 pm
HippoSir wrote:
Mon Sep 09, 2019 8:45 pm
schooner wrote:
Mon Sep 09, 2019 8:20 pm
But why does the top holding of the multi-factor Vanguard fund have a market cap of $43b (HCA Healthcare)? The SP Small Cap index range is only up to $2b. And the company isn’t in the top 10 holdings of the SP Value index either? What am I missing?
Assuming you are referring to VFMF, it is explicitly not a small cap fund. It is 1/3 small, 1/3 mid, and 1/3 large.
Yes, I was. However, HCA Health doesn’t show up on the top ten of large, mid, or small cap indices. I’m still not sure how these multi-factor funds work?
Imagine you’re managing a basketball team.

One strategy would be to simple choose the five tallest players: that’s TSM.

Another strategy would be to choose a mix of players that balances the ability to shoot from the outside, the ability to rebound, the ability to make free throws, skill at passing, and defensive capability: that’s multifactor.
"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: Diversifying Across Factors - 2 Questions

Post by schooner » Tue Sep 10, 2019 7:47 am

vineviz wrote:
Tue Sep 10, 2019 5:34 am
schooner wrote:
Mon Sep 09, 2019 10:25 pm
HippoSir wrote:
Mon Sep 09, 2019 8:45 pm
schooner wrote:
Mon Sep 09, 2019 8:20 pm
But why does the top holding of the multi-factor Vanguard fund have a market cap of $43b (HCA Healthcare)? The SP Small Cap index range is only up to $2b. And the company isn’t in the top 10 holdings of the SP Value index either? What am I missing?
Assuming you are referring to VFMF, it is explicitly not a small cap fund. It is 1/3 small, 1/3 mid, and 1/3 large.
Yes, I was. However, HCA Health doesn’t show up on the top ten of large, mid, or small cap indices. I’m still not sure how these multi-factor funds work?
Imagine you’re managing a basketball team.

One strategy would be to simple choose the five tallest players: that’s TSM.

Another strategy would be to choose a mix of players that balances the ability to shoot from the outside, the ability to rebound, the ability to make free throws, skill at passing, and defensive capability: that’s multifactor.
Got it! So there really is no standard weighting? Each fund manager will decide which factors to include and in what ratio. Then they’ll pick stocks based on that? And it sounds like a good portion of this process is proprietary.

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Re: Diversifying Across Factors - 2 Questions

Post by vineviz » Tue Sep 10, 2019 8:10 am

schooner wrote:
Tue Sep 10, 2019 7:47 am
Got it! So there really is no standard weighting? Each fund manager will decide which factors to include and in what ratio. Then they’ll pick stocks based on that? And it sounds like a good portion of this process is proprietary.
Again, different funds do things differently so there is a risk of overgeneralizing.

Funds run the gamut from using factor indexes which are entirely transparent to funds that use more proprietary approaches.

But in virtually every case, the funds use a set of clearly defined rules (even when those rules are not made public), so old-fashioned language about managers “deciding” what to buy an “picking” stocks may not result in an entirely accurate understanding.

It’d be a little like trying to classify Spotify as either a radio station or an LP record: it shares similarities with both, but it’s also something completely different.
"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: Diversifying Across Factors - 2 Questions

Post by rkhusky » Tue Sep 10, 2019 10:41 am

vineviz wrote:
Tue Sep 10, 2019 5:34 am
Imagine you’re managing a basketball team.

One strategy would be to simple choose the five tallest players: that’s TSM.

Another strategy would be to choose a mix of players that balances the ability to shoot from the outside, the ability to rebound, the ability to make free throws, skill at passing, and defensive capability: that’s multifactor.
Actually, I think it is more like:
Imagine you’re managing a basketball team and trying to win coach of the year.

One strategy would be to simply choose the five tallest players: that’s TSM.

Another strategy would be to choose the five shortest, fattest players, with the greatest potential for improvement, but also with substantial risk of not winning a game: that’s multifactor.
Last edited by rkhusky on Tue Sep 10, 2019 10:45 am, edited 1 time in total.

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Re: Diversifying Across Factors - 2 Questions

Post by rkhusky » Tue Sep 10, 2019 10:44 am

schooner wrote:
Tue Sep 10, 2019 7:47 am
Got it! So there really is no standard weighting? Each fund manager will decide which factors to include and in what ratio. Then they’ll pick stocks based on that? And it sounds like a good portion of this process is proprietary.
The better funds don't do stock picking, they come up with a set of rules and filter the available stocks based on that.

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Re: Diversifying Across Factors - 2 Questions

Post by willthrill81 » Tue Sep 10, 2019 10:48 am

rkhusky wrote:
Tue Sep 10, 2019 10:41 am
vineviz wrote:
Tue Sep 10, 2019 5:34 am
Imagine you’re managing a basketball team.

One strategy would be to simple choose the five tallest players: that’s TSM.

Another strategy would be to choose a mix of players that balances the ability to shoot from the outside, the ability to rebound, the ability to make free throws, skill at passing, and defensive capability: that’s multifactor.
Actually, I think it is more like:
Imagine you’re managing a basketball team and trying to win coach of the year.

One strategy would be to simply choose the five tallest players: that’s TSM.

Another strategy would be to choose the five shortest, fattest players, with the greatest potential for improvement, but also with substantial risk of not winning a game: that’s multifactor.
Except that TSM also has a substantial risk of not winning the game.

I'm not saying that this is true of you, but I don't understand why many around here appear to assume that TSM will give them the returns that they need. It might, but it might not. Tilting toward factors does not necessarily increase an investor's risk; if you believe in factors, doing so actually decreases your risk.
Last edited by willthrill81 on Tue Sep 10, 2019 10:51 am, edited 1 time in total.
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Factor Funds vs. Total Stock Market

Post by Taylor Larimore » Tue Sep 10, 2019 10:50 am

vineviz wrote:Imagine you’re managing a basketball team.

One strategy would be to simple choose the five tallest players: that’s TSM.

Another strategy would be to choose a mix of players that balances the ability to shoot from the outside, the ability to rebound, the ability to make free throws, skill at passing, and defensive capability: that’s multifactor.
vineviz:

I respectfully suggest you have it backwards. TSM contains every player, not just the tallest.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners."
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Re: Factor Funds vs. Total Stock Market

Post by willthrill81 » Tue Sep 10, 2019 10:53 am

Taylor Larimore wrote:
Tue Sep 10, 2019 10:50 am
vineviz wrote:Imagine you’re managing a basketball team.

One strategy would be to simple choose the five tallest players: that’s TSM.

Another strategy would be to choose a mix of players that balances the ability to shoot from the outside, the ability to rebound, the ability to make free throws, skill at passing, and defensive capability: that’s multifactor.
vineviz:

I respectfully suggest you have it backwards. TSM contains every player, not just the tallest.
Yes, but it is heavily tilted toward large-caps. The mid-caps and small-caps it owns are not enough to differentiate it in a meaningful way from a large-cap-only allocation. That's not inherently good or bad, but a TSM is for all intents and purposes a large-cap fund.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Factor Funds vs. Total Stock Market

Post by schooner » Tue Sep 10, 2019 10:57 am

Taylor Larimore wrote:
Tue Sep 10, 2019 10:50 am
vineviz wrote:Imagine you’re managing a basketball team.

One strategy would be to simple choose the five tallest players: that’s TSM.

Another strategy would be to choose a mix of players that balances the ability to shoot from the outside, the ability to rebound, the ability to make free throws, skill at passing, and defensive capability: that’s multifactor.
vineviz:

I respectfully suggest you have it backwards. TSM contains every player, not just the tallest.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners."
Yeah, going back to my original question, I don’t think anyone really answered it.

I really understand a TSM fund. Super easy. I even understand tilting a bit by increasing small cap. Don’t agree but understand.

But I don’t understand a multi-factor fund or “diversifying across factors” - I don’t know what’s in it or how it’s weighted. It’s just seems like a black box of investment jargon I don’t understand.

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Re: Factor Funds vs. Total Stock Market

Post by LilyFleur » Tue Sep 10, 2019 10:59 am

willthrill81 wrote:
Tue Sep 10, 2019 10:53 am
Taylor Larimore wrote:
Tue Sep 10, 2019 10:50 am
vineviz wrote:Imagine you’re managing a basketball team.

One strategy would be to simple choose the five tallest players: that’s TSM.

Another strategy would be to choose a mix of players that balances the ability to shoot from the outside, the ability to rebound, the ability to make free throws, skill at passing, and defensive capability: that’s multifactor.
vineviz:

I respectfully suggest you have it backwards. TSM contains every player, not just the tallest.
Yes, but it is heavily tilted toward large-caps. The mid-caps and small-caps it owns are not enough to differentiate it in a meaningful way from a large-cap-only allocation. That's not inherently good or bad, but a TSM is for all intents and purposes a large-cap fund.
My Russell 2000 (small cap) has done quite well this year. I'm not a strict 3-fund BH.
I guess by having a Russell 2000 I am "tilting" and using "factors." I don't really know about the jargon. All I know is I like the diversification of a few more funds than 3 but not a complicated portfolio that is confusing to manage. I have access to other planning tools as well as BHs, and I look/listen/study quite a bit.

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Re: Factor Funds vs. Total Stock Market

Post by vineviz » Tue Sep 10, 2019 11:17 am

Taylor Larimore wrote:
Tue Sep 10, 2019 10:50 am
I respectfully suggest you have it backwards. TSM contains every player, not just the tallest.
I respectfully suggest that you don't understand the analogy, and request that you re-read it and ask questions until you DO understand it.

I'm always available by PM if you want to ask your questions in private.
"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: Factor Funds vs. Total Stock Market

Post by vineviz » Tue Sep 10, 2019 11:37 am

schooner wrote:
Tue Sep 10, 2019 10:57 am
Yeah, going back to my original question, I don’t think anyone really answered it.

I really understand a TSM fund. Super easy. I even understand tilting a bit by increasing small cap. Don’t agree but understand.

But I don’t understand a multi-factor fund or “diversifying across factors” - I don’t know what’s in it or how it’s weighted. It’s just seems like a black box of investment jargon I don’t understand.
I don't know what question you think is unanswered.

A total stock market fund is a single factor fund. It owns stocks that, in aggregate, provide exposure to one factor: the "market" factor.

A (hypothetical) small cap fund is a two-factor fund. It owns stocks that, in aggregate, provide exposure to two factors: "market" and "size".

A (hypothetical small-cap value fund is a three-factor fund. It owns stocks that, in aggregate, provide exposure to three factors: "market", "size", and "value".

Any fund that has more than single-factor exposure is a multi-factor fund. If you understand "tilting", in other words, then you understand multifactor investing.

As for "what’s in it" and "how it’s weighted", you can only figure that out the same way you figure out what's in ANY fund: study the particular fund. It's really no different from funds you already think that you understand: the only way to know what is (or should be) in VTSMX or VGTSX is to dig into the fund and index methodologies.

I'll say, though, that just because they SEEM easy to understand I'd wager that few investors truly grasp all the nuances: the CRSP index methodology paper is nearly 60 pages long and doesn't come close to providing all the details you'd need to reconstruct the fund precisely.

Most TSM investors don't even know that they don't need to care whether a cash dividend with an ex-date on the same day as a stock split is reported in post-split, what a sparse trading score is, or pre-split terms or what formula is used in a spin-off to create the detached security's start-of-day price. They trust CRSP and Vanguard to get it right.
Last edited by vineviz on Tue Sep 10, 2019 11:38 am, edited 1 time in total.
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Re: Factor Funds vs. Total Stock Market

Post by Elysium » Tue Sep 10, 2019 11:37 am

willthrill81 wrote:
Tue Sep 10, 2019 10:53 am
Taylor Larimore wrote:
Tue Sep 10, 2019 10:50 am
vineviz wrote:Imagine you’re managing a basketball team.

One strategy would be to simple choose the five tallest players: that’s TSM.

Another strategy would be to choose a mix of players that balances the ability to shoot from the outside, the ability to rebound, the ability to make free throws, skill at passing, and defensive capability: that’s multifactor.
vineviz:

I respectfully suggest you have it backwards. TSM contains every player, not just the tallest.
Yes, but it is heavily tilted toward large-caps. The mid-caps and small-caps it owns are not enough to differentiate it in a meaningful way from a large-cap-only allocation. That's not inherently good or bad, but a TSM is for all intents and purposes a large-cap fund.
Yes, but who says it isn't enough. The US economy which represents actions of millions and millions of consumers, employers, investors, and everything else has decided that this is the correct weight for these mid/small cap companies. It has been discussed here many many times. The market is neither a large cap or mid/small cap fund, it is simply the market as represented by the companies that take up the majority of the share of economic activity. Naturally they tend to grow large. Things such as large cap, mid/small, value/growth are labels created by Wall street. We use them constantly here because we need an established nomenclature to talk about these things. But the market itself is a different entity by its own, when you drill it down to a mutual fund or ETF you label it large cap, that doesn't mean it is wrong, its exactly how it is supposed to be and it's not less diversified. If you create your own weight, then you are disagreeing with the view of millions and millions of consumers with no backing whatsoever for your weighting.

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Re: Diversifying Across Factors - 2 Questions

Post by rkhusky » Tue Sep 10, 2019 11:38 am

willthrill81 wrote:
Tue Sep 10, 2019 10:48 am
Except that TSM also has a substantial risk of not winning the game.

I'm not saying that this is true of you, but I don't understand why many around here appear to assume that TSM will give them the returns that they need. It might, but it might not. Tilting toward factors does not necessarily increase an investor's risk; if you believe in factors, doing so actually decreases your risk.
Tilting towards small and value does increase risk, if you keep your bond allocation the same. TSM has less volatility than SV.

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Re: Factor Funds vs. Total Stock Market

Post by vineviz » Tue Sep 10, 2019 11:40 am

Elysium wrote:
Tue Sep 10, 2019 11:37 am
willthrill81 wrote:
Tue Sep 10, 2019 10:53 am
Taylor Larimore wrote:
Tue Sep 10, 2019 10:50 am
vineviz wrote:Imagine you’re managing a basketball team.

One strategy would be to simple choose the five tallest players: that’s TSM.

Another strategy would be to choose a mix of players that balances the ability to shoot from the outside, the ability to rebound, the ability to make free throws, skill at passing, and defensive capability: that’s multifactor.
vineviz:

I respectfully suggest you have it backwards. TSM contains every player, not just the tallest.
Yes, but it is heavily tilted toward large-caps. The mid-caps and small-caps it owns are not enough to differentiate it in a meaningful way from a large-cap-only allocation. That's not inherently good or bad, but a TSM is for all intents and purposes a large-cap fund.
Yes, but who says it isn't enough.
Anyone with training in statistics is qualified to say that it is "not enough". The difference in returns between the TSM and large cap index funds is not statistically significant.
"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: Factor Funds vs. Total Stock Market

Post by Elysium » Tue Sep 10, 2019 12:15 pm

vineviz wrote:
Tue Sep 10, 2019 11:40 am
Elysium wrote:
Tue Sep 10, 2019 11:37 am
willthrill81 wrote:
Tue Sep 10, 2019 10:53 am
Taylor Larimore wrote:
Tue Sep 10, 2019 10:50 am
vineviz wrote:Imagine you’re managing a basketball team.

One strategy would be to simple choose the five tallest players: that’s TSM.

Another strategy would be to choose a mix of players that balances the ability to shoot from the outside, the ability to rebound, the ability to make free throws, skill at passing, and defensive capability: that’s multifactor.
vineviz:

I respectfully suggest you have it backwards. TSM contains every player, not just the tallest.
Yes, but it is heavily tilted toward large-caps. The mid-caps and small-caps it owns are not enough to differentiate it in a meaningful way from a large-cap-only allocation. That's not inherently good or bad, but a TSM is for all intents and purposes a large-cap fund.
Yes, but who says it isn't enough.
Anyone with training in statistics is qualified to say that it is "not enough". The difference in returns between the TSM and large cap index funds is not statistically significant.
Anyone with or without training in statistics can disagree with the market makeup. Everyone is entitled to their opinions but not entitled to their own facts. There is almost no difference between TSM and S&P 500, everyone knows this, that is not because they somehow fit in to a label assigned by ratings agencies, but because it is an actual representation of the market. This is an established fact, now, there has been challenges presented to this from several academics and economists, however almost all of them have their own definitions which do not agree with each other. Therefore the long standing and well accepted standard of the market portfolio remains.

In other words, you are free to disagree and come up with your own definitions, or support the view of another academic/practitioner, and invest your money accordingly. All that does is place you in the group of people dissenting with the prevailing view that the market portfolio is the most neutral one. That's just fine.

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Re: Factor Funds vs. Total Stock Market

Post by vineviz » Tue Sep 10, 2019 12:23 pm

Elysium wrote:
Tue Sep 10, 2019 12:15 pm
There is almost no difference between TSM and S&P 500, everyone knows this, that is not because they somehow fit in to a label assigned by ratings agencies, but because it is an actual representation of the market. This is an established fact, now, there has been challenges presented to this from several academics and economists, however almost all of them have their own definitions which do not agree with each other. Therefore the long standing and well accepted standard of the market portfolio remains.
It seemed to me that you were questioning the veracity of what will thrill81 wrote:

willthrill81 wrote:
Tue Sep 10, 2019 10:53 am
Yes, but it is heavily tilted toward large-caps. The mid-caps and small-caps it owns are not enough to differentiate it in a meaningful way from a large-cap-only allocation. That's not inherently good or bad, but a TSM is for all intents and purposes a large-cap fund.
Now it seems to me that you agree with him and with me on this point.
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MSCI study comparing TSM and factor funds

Post by Taylor Larimore » Tue Sep 10, 2019 1:02 pm

Bogleheads:

MSCI Inc is an investment research firm that provides indices, portfolio risk and performance analytics, and governance tools to institutional investors and hedge funds. In a 33 page study they wrote:
In sum, a market capitalization weighted index is the only appropriate candidate for a truly passive,
macro consistent, buy and hold investment strategy that aims to capture the long term equity risk
premium with structurally low turnover, very high trading liquidity and extremely large investment
capacity.

In contrast, investing in factors represents active views away from the market portfolio and
investors must form their own belief about what explains the premium and whether it is likely to persist.
Thus, like traditional active strategies, factor index strategies should be assessed in the long run against
a market capitalization weighted benchmark.
https://www.msci.com/documents/1296102/ ... 14515ff3dc

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

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Re: Factor Funds vs. Total Stock Market

Post by Elysium » Tue Sep 10, 2019 1:06 pm

vineviz wrote:
Tue Sep 10, 2019 12:23 pm
Elysium wrote:
Tue Sep 10, 2019 12:15 pm
There is almost no difference between TSM and S&P 500, everyone knows this, that is not because they somehow fit in to a label assigned by ratings agencies, but because it is an actual representation of the market. This is an established fact, now, there has been challenges presented to this from several academics and economists, however almost all of them have their own definitions which do not agree with each other. Therefore the long standing and well accepted standard of the market portfolio remains.
It seemed to me that you were questioning the veracity of what will thrill81 wrote:

willthrill81 wrote:
Tue Sep 10, 2019 10:53 am
Yes, but it is heavily tilted toward large-caps. The mid-caps and small-caps it owns are not enough to differentiate it in a meaningful way from a large-cap-only allocation. That's not inherently good or bad, but a TSM is for all intents and purposes a large-cap fund.
Now it seems to me that you agree with him and with me on this point.
I think you are getting confused. My view on this has been very consistent, the market portfolio is the most efficient and neutral portfolio, it is not missing mid/small cap stocks unlike you and some others are mistakenly arguing. The market portfolio contains all stocks in their correct representation as determined by the sum of all economic activity.

You may want to listen to Eugene Fama who agrees that most people should own the market portfolio, which is always efficient, but some may choose to tilt to small and/or value based on their personal taste. Link: https://www.youtube.com/watch?v=dj-RO4mh-wA

So yeah, go ahead and tilt all you want and disagree that you are not getting enough mid/small cap for your personal taste from the market. To that extend I can agree with you and willthrill, that you may have different "taste".

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Re: MSCI study comparing TSM and factor funds

Post by abuss368 » Tue Sep 10, 2019 1:23 pm

Taylor Larimore wrote:
Tue Sep 10, 2019 1:02 pm
Bogleheads:

MSCI Inc is an investment research firm that provides indices, portfolio risk and performance analytics, and governance tools to institutional investors and hedge funds. In a 33 page study they wrote:
In sum, a market capitalization weighted index is the only appropriate candidate for a truly passive,
macro consistent, buy and hold investment strategy that aims to capture the long term equity risk
premium with structurally low turnover, very high trading liquidity and extremely large investment
capacity.

In contrast, investing in factors represents active views away from the market portfolio and
investors must form their own belief about what explains the premium and whether it is likely to persist.
Thus, like traditional active strategies, factor index strategies should be assessed in the long run against
a market capitalization weighted benchmark.
https://www.msci.com/documents/1296102/ ... 14515ff3dc

Best wishes
Taylor
Thanks Taylor! “Investors must form their own belief about the premium and whether it is likely to persist.” Good summary.
John C. Bogle: "Simplicity is the master key to financial success."

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Re: Factor Funds vs. Total Stock Market

Post by abuss368 » Tue Sep 10, 2019 1:24 pm

Taylor Larimore wrote:
Tue Sep 10, 2019 10:50 am
vineviz wrote:Imagine you’re managing a basketball team.

One strategy would be to simple choose the five tallest players: that’s TSM.

Another strategy would be to choose a mix of players that balances the ability to shoot from the outside, the ability to rebound, the ability to make free throws, skill at passing, and defensive capability: that’s multifactor.
vineviz:

I respectfully suggest you have it backwards. TSM contains every player, not just the tallest.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners."
Very good analogy!
John C. Bogle: "Simplicity is the master key to financial success."

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Re: Diversifying Across Factors - 2 Questions

Post by pdavi21 » Tue Sep 10, 2019 1:27 pm

I assume you are talking about small and value and not momentum, quality, et al.

US Large Value:
Indices all generally represent 35-44% of the total market and have about 150-750 holdings in most cases.

INTL Large Value:
I don't have a clear picture, but I would imagine almost half the market cap and more than half the holdings of INTl large cap.

US Small Cap:
"Extended Market [~3300 holdings]" represents about 17% of the Dow total US stock market but includes large caps the SP 500 excludes (+\-84-~100)
"CSRP Small Cap [~1400 holdings]" represents about 13% of the CSRP total US stock market and excludes microcaps (percentiles 86-98)
"Russell 2000" represents about 7-8% of the total US stock market and holds the bottom 2000 companies of the Russell 3000
"S&P 600" represents about 2-3% of the total US stock market towards the bottom but excluding some microcaps

INTL Small Cap Tilts
"FTSE Global Small Cap ex US Index [~3700 holdings]" represents about 12% of the MSCI total exUS stock market (percentiles 87-98)

US Small Value:
Split all the market cap percentages into roughly half. Holdings will increase because value stocks tend to be smaller and there is also overlap between growth and value. Notably SP600 value is 450 holdings.

INTL Small Value:
Doesn't exist, at least not the kind of funds I would want to hold (active / high expenses).

So a 50/50 value tilt will cut microsoft and Alibaba in half and double Berkshire and HSBC. In practice, Berkshire (and 150-750 other stocks) will more than double if the value fund is large cap instead of total market. The holdings will be less than or equal to a total market fund but tilted.

A 25/25/25/25 LCB/LCV/SCB/SCV using the bigger small cap funds would quarter+ Microsoft and Alibaba, 3/4 to equal weight Berkshire and HSBC, x2 Steris PLC and Open Text Corp, and x6 Atmos Energy and [insert small INTl value stock]. The holdings will be less than, equal to, or larger than a total market fund but tilted.

A 50/50 LCB/SCV using the SP600 and a theoretical equivalent INTl fund would roughly half+ Microsoft, Alibaba, Berkshire, and HSBC, and x40 Darling Ingredients Inc and [insert smaller small INTL value stock]. The holdings will be less than a total market fund and tilted.

EDIT: Sorry about all the EDITs, the Math is very confusing.
Last edited by pdavi21 on Tue Sep 10, 2019 1:56 pm, edited 6 times in total.
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Re: Factor Funds vs. Total Stock Market

Post by vineviz » Tue Sep 10, 2019 1:37 pm

Elysium wrote:
Tue Sep 10, 2019 1:06 pm
I think you are getting confused. My view on this has been very consistent . . . "
It doesn't seem very consistent to me, but maybe you just misunderstood what willthrill81 said.
Elysium wrote:
Tue Sep 10, 2019 1:06 pm
... the market portfolio is the most efficient and neutral portfolio, it is not missing mid/small cap stocks unlike you and some others are mistakenly arguing.
No one said that the market portfolio is "missing" any stocks. I've certainly never made such a ridiculous claim.
Elysium wrote:
Tue Sep 10, 2019 1:06 pm
The market portfolio contains all stocks in their correct representation as determined by the sum of all economic activity.
Nothing after the word "stocks" in that sentence is true. There's no such thing as an objectively "correct reprsentation" of stocks: the market portfolio possesses some characteristics that many people fine desirable, but that doesn't make the weighting "correct" in any sense of the words except a tautological one. And the link between relative market capitalization and economic activity is tenuous at best.

A total market indexing approach to investing has many benefits, certainly more than enough to recommend it as an excellent strategy for the vast majority of investors. I don't think anyone would take issue with this. I obviously don't.

What I DO take issue with is people perpetuating a fundamentally incorrect understanding of financial economics in what appears to me be an effort to characterize what is already a great investment approach as inherently perfect and flawless. Not only is such a misrepresentation unbecoming, IMHO, it's also completely unnecessary.

Even if you happen to think that Michael Jordan is the greatest NBA player of all time, it takes nothing away from Jordan to acknowledge that Dennis Rodman was a superior rebounder or that Stephen Curry was a superior three-point shooter.
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Re: Factor Funds vs. Total Stock Market

Post by Elysium » Tue Sep 10, 2019 2:26 pm

vineviz wrote:
Tue Sep 10, 2019 1:37 pm
Elysium wrote:
Tue Sep 10, 2019 1:06 pm
I think you are getting confused. My view on this has been very consistent . . . "
It doesn't seem very consistent to me, but maybe you just misunderstood what willthrill81 said.
Elysium wrote:
Tue Sep 10, 2019 1:06 pm
... the market portfolio is the most efficient and neutral portfolio, it is not missing mid/small cap stocks unlike you and some others are mistakenly arguing.
No one said that the market portfolio is "missing" any stocks. I've certainly never made such a ridiculous claim.
Elysium wrote:
Tue Sep 10, 2019 1:06 pm
The market portfolio contains all stocks in their correct representation as determined by the sum of all economic activity.
Nothing after the word "stocks" in that sentence is true. There's no such thing as an objectively "correct reprsentation" of stocks: the market portfolio possesses some characteristics that many people fine desirable, but that doesn't make the weighting "correct" in any sense of the words except a tautological one. And the link between relative market capitalization and economic activity is tenuous at best.

A total market indexing approach to investing has many benefits, certainly more than enough to recommend it as an excellent strategy for the vast majority of investors. I don't think anyone would take issue with this. I obviously don't.

What I DO take issue with is people perpetuating a fundamentally incorrect understanding of financial economics in what appears to me be an effort to characterize what is already a great investment approach as inherently perfect and flawless. Not only is such a misrepresentation unbecoming, IMHO, it's also completely unnecessary.

Even if you happen to think that Michael Jordan is the greatest NBA player of all time, it takes nothing away from Jordan to acknowledge that Dennis Rodman was a superior rebounder or that Stephen Curry was a superior three-point shooter.
A quick response, as I really do not have the time for an endless back and forth on this topic which has been discussed Ad Nauseam on this forum over two decades by many with no clear consensus on either side. Almost every respectable academic including Nobel laureates agree that the market portfolio is the most efficient one and the market cap weighting method is the most correct method for all practical purposes. Beyond that there are many dissenting voices, among them there is no consensus as I have pointed out earlier on what would be a better method. Everyone has their own favorite method which makes it their opinions / experimentation.

Those who disagree can join the line, there is nothing wrong about it. That wouldn't make the market portfolio any less optimal or efficient, as it is a model to base your starting portfolio on, whether you think it is perfect or not. Some may decide to deviate from the base model according to their taste, once again that doesn't mean that the market portfolio does not contain enough weight in mid/small stocks, just not enough perhaps for someones personal taste.
Last edited by Elysium on Tue Sep 10, 2019 2:28 pm, edited 1 time in total.

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Re: Factor Funds vs. Total Stock Market

Post by 305pelusa » Tue Sep 10, 2019 2:28 pm

vineviz wrote:
Tue Sep 10, 2019 11:40 am
The difference in returns between the TSM and large cap index funds is not statistically significant.
I really doubt that. TSM is neutral the size factor while LC is short it. So I would expect a statistically significant outperformance of TSM.

Do you have a source backing up your claim?

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Re: Factor Funds vs. Total Stock Market

Post by vineviz » Tue Sep 10, 2019 2:34 pm

Elysium wrote:
Tue Sep 10, 2019 2:26 pm
Some may decide to deviate from the base model according to their taste, once again that doesn't mean that the market portfolio does not contain enough weight in mid/small stocks, just not enough perhaps for someones personal taste.
It seems to me that maybe you stopped reading what willthrill81 wrote as soon as you saw the word "enough". As a consequence, you're arguing against a point that he never made.

What he actually wrote was this (emphasis mine):
willthrill81 wrote:
Tue Sep 10, 2019 10:53 am
Yes, but it is heavily tilted toward large-caps. The mid-caps and small-caps it owns are not enough to differentiate it in a meaningful way from a large-cap-only allocation. That's not inherently good or bad, but a TSM is for all intents and purposes a large-cap fund.
He's making a statistical observation: that the weight of mid- and small-cap stocks in TSM is insufficient to differentiate its performance from that of a large-cap fund.

It's not an opinion or value judgment, nor is it a disparagement. It's not even different from what you yourself said moments later:
Elysium wrote:
Tue Sep 10, 2019 12:15 pm
There is almost no difference between TSM and S&P 500, everyone knows this . . .
"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: Factor Funds vs. Total Stock Market

Post by vineviz » Tue Sep 10, 2019 2:58 pm

305pelusa wrote:
Tue Sep 10, 2019 2:28 pm
vineviz wrote:
Tue Sep 10, 2019 11:40 am
The difference in returns between the TSM and large cap index funds is not statistically significant.
I really doubt that. TSM is neutral the size factor while LC is short it. So I would expect a statistically significant outperformance of TSM.

Do you have a source backing up your claim?
Not a published source, no, but you can easily run a two-sample t-test in Excel to verify it for yourself.
"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: Diversifying Across Factors - 2 Questions

Post by pdavi21 » Tue Sep 10, 2019 3:35 pm

In order for small cap funds to perform differently, LC funds have to perform differently in a smaller magnitude in the opposite direction.

Most US large cap funds hold 70-98% of the total US market with their small/mid counterparts holding the remaining 2-30%. So if the 2-30% has performance that is statistically significantly different, the 70-98% will have a performance difference that is ~2-40% of a value that is considered statistically significantly different. Since vineviz likes the SP600 and 500, the performance difference of the SP500 versus the total market would be about 20% of the difference difference between the total market and the extended market. The SP 600 would have a performance difference that is roughly 40x the difference between the market excluding the SP 600 and the market including it.

If you define US large cap as the top 50% by market cap (about 50-100 holdings) and define US small (mid/whatever) cap as the bottom 50% by market cap (3-4k holdings), large caps will perform differently to the total market with an opposite but equal magnitude to the different performance of small caps.

The only thing preventing large caps from behaving as statistically significantly different is by defining them as more than 50% of the total market by market cap and by defining small caps as less than 50% of the total market.

But what is the point of this argument when it has nothing to do with the OP's question?
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Re: Factor Funds vs. Total Stock Market

Post by willthrill81 » Tue Sep 10, 2019 5:07 pm

vineviz wrote:
Tue Sep 10, 2019 2:58 pm
305pelusa wrote:
Tue Sep 10, 2019 2:28 pm
vineviz wrote:
Tue Sep 10, 2019 11:40 am
The difference in returns between the TSM and large cap index funds is not statistically significant.
I really doubt that. TSM is neutral the size factor while LC is short it. So I would expect a statistically significant outperformance of TSM.

Do you have a source backing up your claim?
Not a published source, no, but you can easily run a two-sample t-test in Excel to verify it for yourself.
A visual depiction is probably good enough to illustrate the lack of difference between them.

The graph below is of VTSMX (TSM, Portfolio 1, blue line) and VFINX (S&P 500, Portfolio 2, red line). The CAGR of these two funds over this period was 9.44% and 9.45%, respectively, and their standard deviations were 14.61% and 14.26%, respectively.
Image

Aside from a little divergence from about 1998-2003, they look darn near identical to me. There was certainly not a meaningful difference in the time-weighted returns.
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Re: Factor Funds vs. Total Stock Market

Post by Elysium » Tue Sep 10, 2019 5:19 pm

vineviz wrote:
Tue Sep 10, 2019 2:34 pm
Elysium wrote:
Tue Sep 10, 2019 2:26 pm
Some may decide to deviate from the base model according to their taste, once again that doesn't mean that the market portfolio does not contain enough weight in mid/small stocks, just not enough perhaps for someones personal taste.
It seems to me that maybe you stopped reading what willthrill81 wrote as soon as you saw the word "enough". As a consequence, you're arguing against a point that he never made.

What he actually wrote was this (emphasis mine):
willthrill81 wrote:
Tue Sep 10, 2019 10:53 am
Yes, but it is heavily tilted toward large-caps. The mid-caps and small-caps it owns are not enough to differentiate it in a meaningful way from a large-cap-only allocation. That's not inherently good or bad, but a TSM is for all intents and purposes a large-cap fund.
He's making a statistical observation: that the weight of mid- and small-cap stocks in TSM is insufficient to differentiate its performance from that of a large-cap fund.

It's not an opinion or value judgment, nor is it a disparagement. It's not even different from what you yourself said moments later:
Elysium wrote:
Tue Sep 10, 2019 12:15 pm
There is almost no difference between TSM and S&P 500, everyone knows this . . .
Okay, I stand corrected, as I have no disagreements with that as stated.

I think of the market as an abstract entity, a base model, I don't think of it as TSM index. S&P 500 is good enough and so is any number of indexes that can track 90% of the market because statistically the last 10% makes no meaningful impact.

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patrick013
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Re: Diversifying Across Factors - 2 Questions

Post by patrick013 » Wed Sep 11, 2019 10:25 am

schooner wrote:
Mon Sep 09, 2019 4:40 pm
I have two questions about factor investing. And I can't find an answer on the board.

1) How many stocks would be in the US portion of a diversified factor portfolio? I know there are about 500 in the SP500 and about 3,600 in the Total Stock Market.

2) Is there a list of the general weighting for these stocks in a diversified factor portfolio? For instance, I know Microsoft is about 3.5% of the Total Stock Market as of 7/31/2019. What would its weighting be in a diversified factor portfolio?

I know this would depend a lot on how you construct a factor portfolio. I guess I'm looking for a consensus. There has been a lot of talk about "diversifying across factors." I'm trying to understand what it looks like under the hood. What's it made of.
Traditional diversification would say the more stocks the merrier. Will the future reveal an 1000 stock general index or an 100 stock factor fund take the long term prize for total return ? The bull market had stronger returns for LC as well as strong returns for several factors. Several well performing factor funds are heavy in tech and health care. A 10% tilt each plus the 500 was always a good long term gamble. Or whatever factor funds perform well in rising markets. 10 year actual returns and older index data are just being constructed for as many as seven factors, more possibly. I think LC growth is a simple tilt as I think the era of LC's will continue or at least perform well. So a 10% tilt for your favorite factor won 't put too much money in a spurious concept if it turns out to be so whether it is LC growth, Quality, Dividends, or the ever present SC tilters. In a crash all stock investors lose money for awhile, so diversification shouldn't be abandoned.
age in bonds, buy-and-hold, 10 year business cycle

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