'Stay the course' with international stock but give up on value?

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Forester
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Re: 'Stay the course' with international stock but give up on value?

Post by Forester » Fri Oct 04, 2019 9:31 am

rascott wrote:
Fri Oct 04, 2019 9:21 am
Forester wrote:
Fri Oct 04, 2019 2:39 am
SCV is essentially level with large cap US since March 09, it's just bounced around more. And value is supposedly doing better ex-US.

Just relying on the S&P 500 alone for US stocks is a horrible strategy as we saw in the Dotcom bust.
International proponents are relying entirely on theoretical arguments as to the possible benefit in the future.
I agree; US stocks may appear more expensive, as non-US stock markets are concentrated in things like banks & materials. Home country bias is surely more dangerous for non-American investors because the USA has the most diversified stock market across sectors. 30% ex-US might be the sweet spot for Americans? There will occasionally be periods of US dollar weakness.

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Re: 'Stay the course' with international stock but give up on value?

Post by vineviz » Fri Oct 04, 2019 9:36 am

jdilla1107 wrote:
Fri Oct 04, 2019 8:58 am
Forester wrote:
Fri Oct 04, 2019 2:39 am
Just relying on the S&P 500 alone for US stocks is a horrible strategy as we saw in the Dotcom bust.
Small Value was underweight technology going into the dotcom bust. Maybe this was predictive. Maybe it was an accident. But, were you really more diversified by being underweight technology in one of your positions?
Actually, you probably would be more diversified: holding the S&P 500 sectors in equal-weight is more diversified than holding them at market weight.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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willthrill81
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Re: 'Stay the course' with international stock but give up on value?

Post by willthrill81 » Fri Oct 04, 2019 9:55 am

blessed wrote:
Fri Oct 04, 2019 12:08 am
willthrill81 wrote:
Thu Oct 03, 2019 10:10 am
For a long while now, many posters here have been seriously questioning whether they should give up on international stock due to its underperformance compared to U.S., and they have generally been advised to 'stay the course'.

But at the same time, many have also been questioning the value premium and its underperformance compared to the total market (in the U.S.) and whether they should give up on it. However, it seems to me that relatively few here are advising such investors to 'stay the course' and have actually advised others to trade in their value tilt for total market funds.

Perhaps this is merely my perception and not objectively accurate, a possibility I will readily admit to. I wonder whether others have noted this phenomenon as well.

If this is indeed happening, it would seem to be logically inconsistent to me. Is this because Bogle himself usually eschewed factors (e.g. a value tilt)? But if this is the driving force, why then are posters being advised to 'stay the course' with regard to international stock, which Bogle held in disdain?

Maybe I'm missing something here.
I think you are spot on and I feel the exact same, but it doesn't really change what I do and I don't really worry about it. My wife and I have recently talked about what you're referring to: the debates about to tilt or not tilt, intl or no intl are fine. It's the threads that are referencing the last 2 or 3 years of SCV underperformance as the "aha, I told you SCV was bad" that seem a little ridiculous. Especially when standing quietly unnoticed in the corner of the room is the long term underperformer intl. I've wondered why intl always gets a pass in those discussions. My assumption, which isn't worth much, is that the members that haven't observed what you're referring to might not be tilters, so it doesn't jump out at them like it does you and I.

So yes, I feel that 'stay the course' isn't very consistently applied here. I try to learn something new about this stuff as often as I can, and the one thing that I seem to consistently run across is that 'staying the course' is probably more important than AA. Others may disagree and that's fine.

At the end of the day, I think this forum is awesome!! I try to send as many people here as will listen to me. Wish I would have found it much sooner in life.
Thanks. I'm glad that I'm not the only one with this sense.
“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: 'Stay the course' with international stock but give up on value?

Post by donaldfair71 » Fri Oct 04, 2019 10:00 am

rascott wrote:
Fri Oct 04, 2019 9:21 am
Forester wrote:
Fri Oct 04, 2019 2:39 am
SCV is essentially level with large cap US since March 09, it's just bounced around more. And value is supposedly doing better ex-US.

Just relying on the S&P 500 alone for US stocks is a horrible strategy as we saw in the Dotcom bust.

I agree..... holding only SP500/ Total Market Index (same thing) is leaving a lot of possible diversification on the table. At least factor investors can point to historical returns as an argument for including them in a portfolio.
That's one way to look at it. Another way is to look at it like the TSM is exactly as diversified as the market has deemed it to be.

I fought with this a lot in deciding to tilt or not tilt. Does the market tell me what is diversified, or ensuring equal weighting across size and growth/value decide? I don't know the answer, I don't think anyone does. One just wound up being simpler to me, and I know I am a tinkerer.

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Re: 'Stay the course' with international stock but give up on value?

Post by jdilla1107 » Fri Oct 04, 2019 10:48 am

vineviz wrote:
Fri Oct 04, 2019 9:36 am
jdilla1107 wrote:
Fri Oct 04, 2019 8:58 am
Forester wrote:
Fri Oct 04, 2019 2:39 am
Just relying on the S&P 500 alone for US stocks is a horrible strategy as we saw in the Dotcom bust.
Small Value was underweight technology going into the dotcom bust. Maybe this was predictive. Maybe it was an accident. But, were you really more diversified by being underweight technology in one of your positions?
Actually, you probably would be more diversified: holding the S&P 500 sectors in equal-weight is more diversified than holding them at market weight.
I thought sector was not a valid factor, thus changing the weights would result in an arbitrary change from beta. Are you proposing the sector factor?

If instead, your point is that equal weighting would bring down the company specific risk based on the CURRENT market composition, then that seems like you are proposing you know better than the market in terms of diversification. Company specific risk is only one of many forms of risk. So, to declare that sector weight is definitively more diversified seems silly to me.

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Re: 'Stay the course' with international stock but give up on value?

Post by rascott » Fri Oct 04, 2019 10:57 am

vineviz wrote:
Fri Oct 04, 2019 9:36 am
jdilla1107 wrote:
Fri Oct 04, 2019 8:58 am
Forester wrote:
Fri Oct 04, 2019 2:39 am
Just relying on the S&P 500 alone for US stocks is a horrible strategy as we saw in the Dotcom bust.
Small Value was underweight technology going into the dotcom bust. Maybe this was predictive. Maybe it was an accident. But, were you really more diversified by being underweight technology in one of your positions?
Actually, you probably would be more diversified: holding the S&P 500 sectors in equal-weight is more diversified than holding them at market weight.

I recall you mentioning this in another thread.... and I'm thinking I'll try this in a new account I'm been funding at M1. Now just need to weed through and find the best ETFs for each sector.

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Re: 'Stay the course' with international stock but give up on value?

Post by BlueEars » Fri Oct 04, 2019 11:50 am

There is another approach which does not lock one into a hard coded asset class allocation. One can trade occasionally between international and US based on a momentum measure (perhaps monthly data). One can also do this for value and growth. It should be a researched methodology as opposed to ad hoc timing. It should seek to minimize trades too. There are published methods so there are some easy to find out algorithms for this.

But of course that is verboten for many here as it involved changes in portfolio composition with time. I think the OP uses some time oriented allocating between different assets classes. I am not referring to being in or out of stocks though which is a separate and even more contentious topic.

If you choose this route you have a different "stay the course" issue. There might be an issue if your algorithm is not well thought out or we enter an unlucky time period where a great amount of turbulence between asset classes occurs.

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Re: 'Stay the course' with international stock but give up on value?

Post by vineviz » Fri Oct 04, 2019 12:23 pm

jdilla1107 wrote:
Fri Oct 04, 2019 10:48 am
I thought sector was not a valid factor, thus changing the weights would result in an arbitrary change from beta. Are you proposing the sector factor?

If instead, your point is that equal weighting would bring down the company specific risk based on the CURRENT market composition, then that seems like you are proposing you know better than the market in terms of diversification. Company specific risk is only one of many forms of risk. So, to declare that sector weight is definitively more diversified seems silly to me.
The result I mentioned doesn't depend on GICS classification being a factor, per se, merely that at least some of the GICS sectors have factor exposures that differ from the market portfolio and that their average correlations be less than one. These effects, combined with the process of systematic rebalancing, produce a portfolio that has more exposure to value, quality, and low vol factors and less exposure to the market factor.

Ergo, more diversified (though admittedly being more diversified than the market portfolio is a pretty low bar to clear).
"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: 'Stay the course' with international stock but give up on value?

Post by Phineas J. Whoopee » Fri Oct 04, 2019 5:18 pm

vineviz wrote:
Fri Oct 04, 2019 9:36 am
jdilla1107 wrote:
Fri Oct 04, 2019 8:58 am
Forester wrote:
Fri Oct 04, 2019 2:39 am
Just relying on the S&P 500 alone for US stocks is a horrible strategy as we saw in the Dotcom bust.
Small Value was underweight technology going into the dotcom bust. Maybe this was predictive. Maybe it was an accident. But, were you really more diversified by being underweight technology in one of your positions?
Actually, you probably would be more diversified: holding the S&P 500 sectors in equal-weight is more diversified than holding them at market weight.
We've used up countless pixels arguing over the meaning of the word diversified. That's all this exchange is.

I suggest any in-the-know poster who writes the words diversified, diverse, or diversification explain what they mean by it in the same post. That way we won't have to waste so much of each others' time.

PJW

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Re: 'Stay the course' with international stock but give up on value?

Post by willthrill81 » Fri Oct 04, 2019 5:32 pm

donaldfair71 wrote:
Fri Oct 04, 2019 10:00 am
rascott wrote:
Fri Oct 04, 2019 9:21 am
Forester wrote:
Fri Oct 04, 2019 2:39 am
SCV is essentially level with large cap US since March 09, it's just bounced around more. And value is supposedly doing better ex-US.

Just relying on the S&P 500 alone for US stocks is a horrible strategy as we saw in the Dotcom bust.

I agree..... holding only SP500/ Total Market Index (same thing) is leaving a lot of possible diversification on the table. At least factor investors can point to historical returns as an argument for including them in a portfolio.
That's one way to look at it. Another way is to look at it like the TSM is exactly as diversified as the market has deemed it to be.
I might be completely wrong, but I don't believe that market cap weighting has anything to do with diversification. According to the widely held implications of the EMH (not the EMH itself), the current market price represent's the collective best estimate of all market participants of each publicly traded security's net present value.

Owning a market cap weighted TSM index fund essentially removes all idiosyncratic (i.e. single company) risk, but it does nothing to diversify away from market beta. In fact, the only thing 'left' in such a fund is market beta. Whether market beta alone represents an adequate level of diversification is a matter of judgment by the individual investor.
“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: 'Stay the course' with international stock but give up on value?

Post by bluquark » Fri Oct 04, 2019 5:56 pm

TomCat96 wrote:
Thu Oct 03, 2019 12:47 pm
Just like pro-international crowd, don't seem to advocate the market weight of Stocks to Bonds that the Global capital markets collectively hold. Why is 55/45 magical when 70/30 is not?
Because market allocation of equity vs bonds is based almost purely on collective risk preferences (desire for stability vs desire for returns). One's need, willingness and ability to take risk is unlikely to match the market's and there's no reason to take it as any kind of gospel. That's the underlying reason why CAPM models all stock/bond AAs as equally on the efficient frontier.

On the other hand, the market's allocation between intl vs domestic is much more about the markets trying to best predict the future returns of assets relative to one another.

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Re: 'Stay the course' with international stock but give up on value?

Post by DonIce » Fri Oct 04, 2019 6:09 pm

willthrill81 wrote:
Fri Oct 04, 2019 5:32 pm
Owning a market cap weighted TSM index fund essentially removes all idiosyncratic (i.e. single company) risk, but it does nothing to diversify away from market beta. In fact, the only thing 'left' in such a fund is market beta. Whether market beta alone represents an adequate level of diversification is a matter of judgment by the individual investor.
"Market beta" isn't a "thing" in itself. The movement of the market is merely the weighted sum of all companies that comprise the market. Tilting to value (or any other factor) is merely re-arranging the weights of each individual company in a different way other than market cap. The different weighting may or may not be "better". But it should be understood that "market beta" isn't some nebulous force, it's just the result you get by taking the universe of several thousand investable stocks and adding them all up together with a certain % of the portfolio allocated to each.

The market cap weighting is the default because it allows each stock to be bought just once, and then the fluctuations in their values will naturally keep your portfolio matching the market weight. Re-weighing them in some other way, which will fundamentally require a strategy that trades stocks as they change relative to each other in cost, will generate additional costs (whether or not this is done for you by some fund). And the only justification for using an alternative weighting is because you think that the stocks you are overweighting will outperform relative to the stocks that you are underweighting. In other words, factor investing = stock picking.

Running some regressions based on market cap or P/B or whatever and deciding that there's mystical "factors" driving the returns of stocks, so that you can pick a better set of weights for stocks than the market can, is extremely unconvincing. It's no different than the previous decades obsession with "high beta" stocks. The returns of each stock are driven by that company's unique situation, management, industry, etc, not by "factors".

The way to diversify away from "market beta" is by buying other kinds of assets other than stocks. These may include various kinds of bonds, preferred stock, cash, real estate, commodities, currencies, active strategies, etc.

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Re: 'Stay the course' with international stock but give up on value?

Post by vineviz » Fri Oct 04, 2019 6:27 pm

DonIce wrote:
Fri Oct 04, 2019 6:09 pm
"Market beta" isn't a "thing" in itself."
If it's not a "thing", then what it is it? A "who"? A "when"?

Seriously, I'm not sure what the beef is with the market factor: it represents a source of priced risk for holding stocks. Exposure to the market factor explains much, but not all, of the cross-section of equity returns.

Factors aren't mystical forces and aren't (I think) difficult to understand. Just as you'd use thrust, drag, and torque to predict the movement of an object in physical space you'd use factors like market, size, value, and quality to predict an asset's returns relative to other assets.
"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: 'Stay the course' with international stock but give up on value?

Post by DonIce » Fri Oct 04, 2019 6:42 pm

vineviz wrote:
Fri Oct 04, 2019 6:27 pm
Factors aren't mystical forces and aren't (I think) difficult to understand. Just as you'd use thrust, drag, and torque to predict the movement of an object in physical space you'd use factors like market, size, value, and quality to predict an asset's returns relative to other assets.
Bad analogy. Physical forces like thrust and drag, with a sufficient understanding of the physics, give a fully predictive model of the result. Physical laws are testable and results are precisely repeatable (on the macroscopic scale anyway, let's not get into quantum mechanics here). I can use a physical model to build something that's never been built before, and know in advance exactly how it will behave.

On the other hand, the price of assets as it relates to the various "factors" is based on nothing but a regression model. First, correlation is not causation. Second, the results are not predictive. Third, the results are not repeatable.
Seriously, I'm not sure what the beef is with the market factor: it represents a source of priced risk for holding stocks. Exposure to the market factor explains much, but not all, of the cross-section of equity returns.
It's not that this statement is incorrect, it's just that it's tautological and uninsightful. Of course the returns of the market are the returns of the market, and therefore the "market factor" explains market returns. But going back to your physics analogy, that's like trying to explain the orbits of the planets in terms of cycles and epicycles, rather than understanding the mechanics of the actual forces at play. Market returns are what they are because of the combination of the performance of all the real companies, real businesses with real people, that comprise the economy. The market return isn't dictated by the "market factor"; the "market factor" is simply the name given to the market return in certain papers.

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Re: 'Stay the course' with international stock but give up on value?

Post by bluquark » Fri Oct 04, 2019 6:51 pm

DonIce wrote:
Fri Oct 04, 2019 6:42 pm
vineviz wrote:
Fri Oct 04, 2019 6:27 pm
Factors aren't mystical forces and aren't (I think) difficult to understand. Just as you'd use thrust, drag, and torque to predict the movement of an object in physical space you'd use factors like market, size, value, and quality to predict an asset's returns relative to other assets.
Bad analogy. Physical forces like thrust and drag, with a sufficient understanding of the physics, give a fully predictive model of the result. Physical laws are testable and results are precisely repeatable (on the macroscopic scale anyway, let's not get into quantum mechanics here). I can use a physical model to build something that's never been built before, and know in advance exactly how it will behave.
The academic departments attempting to quantify chaotic human systems -- economics, psychology and social sciences -- have all been explicitly or implicitly encouraging us to make that exact analogy. If we become convinced that what they do is at root just as scientific as the laws of physics (because they apply the modeling tools originally designed for physics) it helps to create respect and careers for their practitioners.

Recently all the statistically based sciences have entered a replication crisis, causing this always-shaky analogy to completely collapse. As for the discipline of economics, it's basically been in a permanent replication crisis ever since the discipline was founded.
Last edited by bluquark on Fri Oct 04, 2019 6:59 pm, edited 2 times in total.

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Re: 'Stay the course' with international stock but give up on value?

Post by alex_686 » Fri Oct 04, 2019 6:56 pm

DonIce wrote:
Fri Oct 04, 2019 6:42 pm
vineviz wrote:
Fri Oct 04, 2019 6:27 pm
Factors aren't mystical forces and aren't (I think) difficult to understand. Just as you'd use thrust, drag, and torque to predict the movement of an object in physical space you'd use factors like market, size, value, and quality to predict an asset's returns relative to other assets.
Bad analogy. Physical forces like thrust and drag, with a sufficient understanding of the physics, give a fully predictive model of the result. Physical laws are testable and results are precisely repeatable (on the macroscopic scale anyway, let's not get into quantum mechanics here). I can use a physical model to build something that's never been built before, and know in advance exactly how it will behave.

On the other hand, the price of assets as it relates to the various "factors" is based on nothing but a regression model. First, correlation is not causation. Second, the results are not predictive. Third, the results are not repeatable.
Seriously, I'm not sure what the beef is with the market factor: it represents a source of priced risk for holding stocks. Exposure to the market factor explains much, but not all, of the cross-section of equity returns.
It's not that your statement is incorrect, it's just that it's tautological and uninsightful. Of course the returns of the market are the returns of the market, and therefore the "market factor" explains market returns. But going back to your physics analogy, that's like trying to explain the orbits of the planets in terms of cycles and epicycles, rather than understanding the mechanics of the actual forces at play. Market returns are what they are because of the combination of the performance of all the real companies, real businesses with real people, that comprise the economy. The market return isn't dictated by the "market factor"; the "market factor" is simply the name given to the market return in certain papers.
So let me give you a better example that is maybe a bit more on point to the question at hand.

30 years ago stocks loaded on regional, then sector, then world factors. This makes sense, companies tended to be smaller regional things. Today stocks load on world, then sector, then regional factors. This also makes sense. The world's economy are much more integrated. Companies tend to large multinational things. The divergence of US / Intentional indexes are largely driven by other factors - such as intentional indexes skews towards value. (A stronger case can be made for sector)

To bring it back to the original question, one should still probably hold world funds because the domestic / international factor is fading fast. Actually, by abandoning international you are indirectly stating a preference for growth stocks over value stocks. (Actually, a stronger case can be made for indirect sector weighting, but we are on a value topic here...)

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Re: 'Stay the course' with international stock but give up on value?

Post by DonIce » Fri Oct 04, 2019 7:01 pm

alex_686 wrote:
Fri Oct 04, 2019 6:56 pm
So let me give you a better example that is maybe a bit more on point to the question at hand.

30 years ago stocks loaded on regional, then sector, then world factors. This makes sense, companies tended to be smaller regional things. Today stocks load on world, then sector, then regional factors. This also makes sense. The world's economy are much more integrated. Companies tend to large multinational things. The divergence of US / Intentional indexes are largely driven by other factors - such as intentional indexes skews towards value. (A stronger case can be made for sector)

To bring it back to the original question, one should still probably hold world funds because the domestic / international factor is fading fast. Actually, by abandoning international you are indirectly stating a preference for growth stocks over value stocks. (Actually, a stronger case can be made for indirect sector weighting, but we are on a value topic here...)
Personally, I advocate for holding funds from across the world by market cap. Home country bias makes no sense to me (perhaps because the US is my 4th country?) People find all kinds of ways to justify home country bias, and in the US this perhaps does less harm than elsewhere since it represents such a large part of the world market cap, but its just home country bias nonetheless.

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Re: 'Stay the course' with international stock but give up on value?

Post by DonIce » Fri Oct 04, 2019 7:07 pm

bluquark wrote:
Fri Oct 04, 2019 6:51 pm
The academic departments attempting to quantify chaotic human systems -- economics, psychology and social sciences -- have all been explicitly or implicitly encouraging us to make that exact analogy. If we become convinced that what they do is at root just as scientific as the laws of physics (because they apply the modeling tools originally designed for physics) it helps to create respect and careers for their practitioners.

Recently all the statistically based sciences have entered a replication crisis, causing this always-shaky analogy to completely collapse. As for the discipline of economics, it's basically been in a permanent replication crisis ever since the discipline was founded.
Excellent points. The hard sciences do indeed work very differently from the social/economic sciences. It is perhaps possible that some day our understanding of the social sciences will be as predictive as our understanding of physics, but today, the social sciences are at about the same stage of understanding that we had of the physical sciences back in the middle ages: astrology instead of astronomy and alchemy instead of chemistry.

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Re: 'Stay the course' with international stock but give up on value?

Post by BigJohn » Fri Oct 04, 2019 7:13 pm

bluquark wrote:
Fri Oct 04, 2019 6:51 pm
Recently all the statistically based sciences have entered a replication crisis, causing this always-shaky analogy to completely collapse. As for the discipline of economics, it's basically been in a permanent replication crisis ever since the discipline was founded.
I've been reading more and more about this replication crisis. Fascinating stuff and little disturbing :shock:

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Re: 'Stay the course' with international stock but give up on value?

Post by vineviz » Fri Oct 04, 2019 7:34 pm

DonIce wrote:
Fri Oct 04, 2019 6:42 pm
vineviz wrote:
Fri Oct 04, 2019 6:27 pm
Factors aren't mystical forces and aren't (I think) difficult to understand. Just as you'd use thrust, drag, and torque to predict the movement of an object in physical space you'd use factors like market, size, value, and quality to predict an asset's returns relative to other assets.
Bad analogy. Physical forces like thrust and drag, with a sufficient understanding of the physics, give a fully predictive model of the result. Physical laws are testable and results are precisely repeatable (on the macroscopic scale anyway, let's not get into quantum mechanics here). I can use a physical model to build something that's never been built before, and know in advance exactly how it will behave.
Everything you said here about physical forces is true of financial factors. That's precisely why I used the analogy.

DonIce wrote:
Fri Oct 04, 2019 6:42 pm
Of course the returns of the market are the returns of the market, and therefore the "market factor" explains market returns.
No, the market factor does NOT explain market returns. That's not the role, function, or purpose of ANY factors.

Each factor - including the market factor - (partially) explains the cross-sectional returns of individual stocks. It's not a tautology. Beta is a measure of sensitivity and the factor return is the strength of the force: the various factor betas are what describe the relationship of the dependent variable (the return of an individual asset) and the independent variables (the return of each factor).
"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: 'Stay the course' with international stock but give up on value?

Post by bluquark » Fri Oct 04, 2019 7:49 pm

vineviz wrote:
Fri Oct 04, 2019 7:34 pm
DonIce wrote:
Fri Oct 04, 2019 6:42 pm

Bad analogy. Physical forces like thrust and drag, with a sufficient understanding of the physics, give a fully predictive model of the result. Physical laws are testable and results are precisely repeatable (on the macroscopic scale anyway, let's not get into quantum mechanics here). I can use a physical model to build something that's never been built before, and know in advance exactly how it will behave.
Everything you said here about physical forces is true of financial factors. That's precisely why I used the analogy.
Smells a bit like a motte-and-bailey argument here. You can make this confident-sounding claim in brief, but if you were to break down why you think the comparison is valid in detail, you would be forced to admit that the commonalities are extremely barebones.

"Testing" in physics means running experiments in a closed, controlled system. Backtesting the past behavior of an open system with a chaos of unseen effects influencing it has little in common.

"predictive" and "know in advance exactly" means what it says on the tin. It doesn't mean unfalsifiable assertions that if we wait for the results until our deathbeds, our heirs will reap the slight statistical edge.

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Re: 'Stay the course' with international stock but give up on value?

Post by vineviz » Fri Oct 04, 2019 7:55 pm

bluquark wrote:
Fri Oct 04, 2019 7:49 pm
Smells a bit like a motte-and-bailey argument here. You can make this confident-sounding claim in brief, but if you were to break down why you think the comparison is valid in detail, you would be forced to admit that the commonalities are extremely barebones.
I don't think any such admission would be necessary, forced or otherwise.

These discussions often go off the rails because the attacks/criticisms of financial economics generally are constructed without any foundational understanding of the field, its tools, or its implications. If I sound confident, it is only because I've literally spend thousands of hours studying economics and finance in academic and professional settings. I'm not infallible, certainly, but I'm not wrong on this topic.
"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: 'Stay the course' with international stock but give up on value?

Post by bluquark » Fri Oct 04, 2019 8:43 pm

Of course, most attacks on factors are statistically illiterate and full of fallacies, but the majority of critics' arguments being weak does not prove that a case is strong. The factor papers I've read convinced me they definitely identified real effects (especially the applicability to multiple international markets across multiple time periods), but I don't see what misunderstanding is required to conclude that the effects identified are still too small, potentially era-dependent (particularly given the reflexivity of markets -- which doesn't disprove factor research, but does undermine attempts at applying it) and poorly understood to justify taking action on the basis of them.

In general, I don't think economics is a worthless field by any means -- just as the humanities are valuable even though they are not useful to make predictions either -- and I like to use and defend many economics results and theories up to a point. Decisions must be made and I must swallow my misgivings and use the best available model to make those decisions. I'm mostly just saying we ought to approach most economics results with a provisional mindset -- forever expecting to be surprised by better evidence and models, and avoiding unnecessary overreliance on the current ones.
Last edited by bluquark on Fri Oct 04, 2019 9:26 pm, edited 6 times in total.

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Re: 'Stay the course' with international stock but give up on value?

Post by DonIce » Fri Oct 04, 2019 8:44 pm

vineviz wrote:
Fri Oct 04, 2019 7:55 pm
These discussions often go off the rails because the attacks/criticisms of financial economics generally are constructed without any foundational understanding of the field, its tools, or its implications. If I sound confident, it is only because I've literally spend thousands of hours studying economics and finance in academic and professional settings. I'm not infallible, certainly, but I'm not wrong on this topic.
Sometimes people that study a specific field get a bit too caught up within the mindset and jargon of that field, to the point that the things they think about it are not correct within a larger context. Certainly your statement that factors are as predictive as physical forces seems obviously wrong. For example, can you tell me what the exact price of a specific stock will be at a specific future moment in time? Because if we were talking about the motion of an object in a physical system, I could tell you exactly what its location would be at some future point in time.

Again, the market factor is not at all predictive of future results. Yes, once the future has happened, you can regress the behavior of a set of stocks against certain variables, such as beta, value, and size, and then say that within a certain R2, their returns WERE explainable by the influence of those 3 factors. But you have absolutely no idea in advance of what beta, value, and size will do over any specific future timeframe. You cannot predict anything. And even if you did know that over the next 1 year, beta, value, and size would have certain specific movements (which you don't), you STILL couldn't tell me the stock price of any particular stock at a certain specific moment of time. Nor do you even know with any certainty what the correlations of the various factors will be over any specific future timeframe. Factors models are NOT predictive.

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Re: 'Stay the course' with international stock but give up on value?

Post by rkhusky » Fri Oct 04, 2019 8:56 pm

vineviz wrote:
Fri Oct 04, 2019 6:27 pm
DonIce wrote:
Fri Oct 04, 2019 6:09 pm
"Market beta" isn't a "thing" in itself."
If it's not a "thing", then what it is it? A "who"? A "when"?

Seriously, I'm not sure what the beef is with the market factor: it represents a source of priced risk for holding stocks. Exposure to the market factor explains much, but not all, of the cross-section of equity returns.

Factors aren't mystical forces and aren't (I think) difficult to understand. Just as you'd use thrust, drag, and torque to predict the movement of an object in physical space you'd use factors like market, size, value, and quality to predict an asset's returns relative to other assets.
Market beta is simply the correlation of the returns of the market with another investment.

Factor analysis does not predict returns. It simply decomposes an investment's returns into different factors, i.e. correlations with the returns of basis portfolios.

If I say that next week I am going to drop a ball at a given location from 10 m off the ground, I can accurately predict the time that it will take to hit the ground.

The same cannot be said for factor analysis. You cannot predict what the return of any arbitrary investment will be next week. The factor analysis will tell you the decomposition of the investment return for that day, based on the factor returns for that day, assuming that the factor model is a good fit to that particular investment's returns and that the betas of the various factors haven't changed.

I don't have to know what the gravitational constant will be next week, because it doesn't fluctuate on the whims of a group of humans. And I don't have to wait until next week to know what the distance will be - if I say I will use 10 m, the distance will be 10 m.

That's not to say that factor decomposition does not work well. It works very well, especially for collections of stocks, like mutual funds. It's really remarkable that one can reproduce years of returns for an investment with only a few free parameters.

But comparing it to the physical sciences, where constants are measured out to 10+ significant figures, is not reasonable.

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Re: 'Stay the course' with international stock but give up on value?

Post by vineviz » Fri Oct 04, 2019 9:24 pm

DonIce wrote:
Fri Oct 04, 2019 8:44 pm
vineviz wrote:
Fri Oct 04, 2019 7:55 pm
These discussions often go off the rails because the attacks/criticisms of financial economics generally are constructed without any foundational understanding of the field, its tools, or its implications. If I sound confident, it is only because I've literally spend thousands of hours studying economics and finance in academic and professional settings. I'm not infallible, certainly, but I'm not wrong on this topic.
Sometimes people that study a specific field get a bit too caught up within the mindset and jargon of that field, to the point that the things they think about it are not correct within a larger context. Certainly your statement that factors are as predictive as physical forces seems obviously wrong. For example, can you tell me what the exact price of a specific stock will be at a specific future moment in time? Because if we were talking about the motion of an object in a physical system, I could tell you exactly what its location would be at some future point in time.

Again, the market factor is not at all predictive of future results. Yes, once the future has happened, you can regress the behavior of a set of stocks against certain variables, such as beta, value, and size, and then say that within a certain R2, their returns WERE explainable by the influence of those 3 factors. But you have absolutely no idea in advance of what beta, value, and size will do over any specific future timeframe. You cannot predict anything. And even if you did know that over the next 1 year, beta, value, and size would have certain specific movements (which you don't), you STILL couldn't tell me the stock price of any particular stock at a certain specific moment of time. Nor do you even know with any certainty what the correlations of the various factors will be over any specific future timeframe. Factors models are NOT predictive.
The only thing I can infer from this rant is that you have little interest in understanding financial economics in general , and factors in particular.

Which is perplexing to me.
"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: 'Stay the course' with international stock but give up on value?

Post by DonIce » Fri Oct 04, 2019 9:58 pm

vineviz wrote:
Fri Oct 04, 2019 9:24 pm
DonIce wrote:
Fri Oct 04, 2019 8:44 pm
vineviz wrote:
Fri Oct 04, 2019 7:55 pm
These discussions often go off the rails because the attacks/criticisms of financial economics generally are constructed without any foundational understanding of the field, its tools, or its implications. If I sound confident, it is only because I've literally spend thousands of hours studying economics and finance in academic and professional settings. I'm not infallible, certainly, but I'm not wrong on this topic.
Sometimes people that study a specific field get a bit too caught up within the mindset and jargon of that field, to the point that the things they think about it are not correct within a larger context. Certainly your statement that factors are as predictive as physical forces seems obviously wrong. For example, can you tell me what the exact price of a specific stock will be at a specific future moment in time? Because if we were talking about the motion of an object in a physical system, I could tell you exactly what its location would be at some future point in time.

Again, the market factor is not at all predictive of future results. Yes, once the future has happened, you can regress the behavior of a set of stocks against certain variables, such as beta, value, and size, and then say that within a certain R2, their returns WERE explainable by the influence of those 3 factors. But you have absolutely no idea in advance of what beta, value, and size will do over any specific future timeframe. You cannot predict anything. And even if you did know that over the next 1 year, beta, value, and size would have certain specific movements (which you don't), you STILL couldn't tell me the stock price of any particular stock at a certain specific moment of time. Nor do you even know with any certainty what the correlations of the various factors will be over any specific future timeframe. Factors models are NOT predictive.
The only thing I can infer from this rant is that you have little interest in understanding financial economics in general , and factors in particular.

Which is perplexing to me.
I'm sorry that you view it as a "rant". I do have an interest in economics, as well as many other fields, although it is not my specific field of specialization. I'll point out that you have not provided any argument to support your assertion that factors are predictive of future returns in the same way that physics is of the motion of objects. In fact, that's the first time I have seen anyone on this forum, including the strongest proponents of factors, make such a claim. Just to remind you, in response to a post you made, I said this:

Physical forces like thrust and drag, with a sufficient understanding of the physics, give a fully predictive model of the result. Physical laws are testable and results are precisely repeatable (on the macroscopic scale anyway, let's not get into quantum mechanics here). I can use a physical model to build something that's never been built before, and know in advance exactly how it will behave.

To which you replied:

Everything you said here about physical forces is true of financial factors.

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Re: 'Stay the course' with international stock but give up on value?

Post by stlutz » Fri Oct 04, 2019 11:03 pm

vineviz wrote:
Fri Oct 04, 2019 6:27 pm

Seriously, I'm not sure what the beef is with the market factor: it represents a source of priced risk for holding stocks. Exposure to the market factor explains much, but not all, of the cross-section of equity returns.
The problem is that it doesn't work well for explaining returns between stocks. That's what the whole low volatility anomaly is all about.

Beta is still useful in a model when one wants to focus on other factors. But on it's own beta is a rather poor explainer.

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Re: 'Stay the course' with international stock but give up on value?

Post by 2pedals » Fri Oct 04, 2019 11:16 pm

"Stay the course" to me implies to continue doing something until it is finished or until you achieved what you have planned. If one planned on using both including international and value tilt is the equity portfolio the following questions could be asked.

What was the plan? Was the plan achieved or finished? Are the current goals the same when the plan was created? If the current goals are different, should the plan be changed?

For example as someone gets older and achieves financial independence or even "won the game", goals might change. A priority may be shift to simplify assets to a "3 fund" or even a "2 fund" portfolio with instructions for DW or heirs. The easier to explain the better. In this case it is "easier" for me to give up on value first.

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Re: 'Stay the course' with international stock but give up on value?

Post by typical.investor » Fri Oct 04, 2019 11:39 pm

DonIce wrote:
Fri Oct 04, 2019 9:58 pm
I'll point out that you have not provided any argument to support your assertion that factors are predictive of future returns in the same way that physics is of the motion of objects. In fact, that's the first time I have seen anyone on this forum, including the strongest proponents of factors, make such a claim.
Perhaps a study of 'ex ante' and 'ex post' is due.

While it is true that many factors have higher 'ex ante' expected returns, we don't know how they will actually turn out - particularly for any holding period. To claim differently is just false.

I myself was accused of denying that the world is round and making statements that defy the very laws of physics. All I said was that a combination of funds (with 2.4 and 22 year durations), are subject to interest rate risk if you are spending out of them. Vineviz insists physics dictates differently. Reality says spent bonds can't recover from higher rates because they have been spent and aren't paying interest anymore.

Anyway, nothing about physics guarantees any factor will outperform beta in any holding period. It's simply another false claim. Someone pounding on the table, insisting in their version of facts, and claiming everyone else is simply poorly educated doesn't particularly convince me.

But to the thread topic, people should maintain their exposure to value and international. No guarantees of course, but changing course on assets based on recent performance is problematic.

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Re: 'Stay the course' with international stock but give up on value?

Post by Dead Man Walking » Sat Oct 05, 2019 12:00 am

I’m not sure that I would be classified as a “Boglehead” since I own a mix of active and index funds. According to the X-ray function at Morningstar, my portfolio has a value tilt and a domestic tilt. I hold about 1/3 of my equities in international. The 1/3 would be closer to 1/2 if international had performed as well as domestic. I recently added to my international allocation by purchasing a global fund with new money. I have done reasonably well staying the course according to my plan. I just hope that I’m not steering the Titanic! My guiding lights are the performance of my funds compared to the appropriate indices and the expense ratios of the funds in which I choose to invest.

DMW

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Re: 'Stay the course' with international stock but give up on value?

Post by ncbill » Sat Oct 05, 2019 11:40 am

Back to value, on another thread a poster noted that the critical factor for returns appeared to be just the "small" part...no real difference in value vs. growth, so just pick small cap blended investments rather than SCV.

Thoughts?

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Re: 'Stay the course' with international stock but give up on value?

Post by willthrill81 » Sat Oct 05, 2019 11:41 am

ncbill wrote:
Sat Oct 05, 2019 11:40 am
Back to value, on another thread a poster noted that the critical factor for returns appeared to be just the "small" part...no real difference in value vs. growth, so just pick small cap blended investments rather than SCV.

Thoughts?
That's almost certainly flavored by recency bias. The small premium was zero from roughly 1946-1977.
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Re: 'Stay the course' with international stock but give up on value?

Post by Forester » Sat Oct 05, 2019 11:57 am

ncbill wrote:
Sat Oct 05, 2019 11:40 am
Back to value, on another thread a poster noted that the critical factor for returns appeared to be just the "small" part...no real difference in value vs. growth, so just pick small cap blended investments rather than SCV.

Thoughts?
The bigger issue may be that value is a veiled sector bet. So investors are not "waiting for value to come back", they're waiting for banks, energy & materials to come back.

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Re: 'Stay the course' with international stock but give up on value?

Post by willthrill81 » Sat Oct 05, 2019 12:08 pm

Forester wrote:
Sat Oct 05, 2019 11:57 am
ncbill wrote:
Sat Oct 05, 2019 11:40 am
Back to value, on another thread a poster noted that the critical factor for returns appeared to be just the "small" part...no real difference in value vs. growth, so just pick small cap blended investments rather than SCV.

Thoughts?
The bigger issue may be that value is a veiled sector bet. So investors are not "waiting for value to come back", they're waiting for banks, energy & materials to come back.
Out of curiosity, do you have any data to show a substantial correlation between value and those sectors? I wonder whether low vol might be more strongly correlated with those specific sectors.
“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: 'Stay the course' with international stock but give up on value?

Post by Forester » Sat Oct 05, 2019 12:25 pm

willthrill81 wrote:
Sat Oct 05, 2019 12:08 pm
Forester wrote:
Sat Oct 05, 2019 11:57 am
ncbill wrote:
Sat Oct 05, 2019 11:40 am
Back to value, on another thread a poster noted that the critical factor for returns appeared to be just the "small" part...no real difference in value vs. growth, so just pick small cap blended investments rather than SCV.

Thoughts?
The bigger issue may be that value is a veiled sector bet. So investors are not "waiting for value to come back", they're waiting for banks, energy & materials to come back.
Out of curiosity, do you have any data to show a substantial correlation between value and those sectors? I wonder whether low vol might be more strongly correlated with those specific sectors.
Not sure if this gets at your question, but normalising sector weights for Emerging vs USA raises Emerging trailing P/E from 14.26 to 19.2;

https://fortunefinancialadvisors.com/bl ... developed/
Image

re Low vol, my understanding is that S&P methodology would end up two thirds utilities & healthcare because it's a 'dumb' volatility sort, whereas MSCI has sector constraints so the sectors only deviate by about 5% max vs market cap index.

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Re: 'Stay the course' with international stock but give up on value?

Post by vineviz » Sat Oct 05, 2019 12:43 pm

Forester wrote:
Sat Oct 05, 2019 11:57 am
ncbill wrote:
Sat Oct 05, 2019 11:40 am
Back to value, on another thread a poster noted that the critical factor for returns appeared to be just the "small" part...no real difference in value vs. growth, so just pick small cap blended investments rather than SCV.

Thoughts?
The bigger issue may be that value is a veiled sector bet. So investors are not "waiting for value to come back", they're waiting for banks, energy & materials to come back.
Variations in sector composition explain only about a third of the value premium: the majority of the difference relates to intra-sector performance as opposed to sector allocation.
"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: 'Stay the course' with international stock but give up on value?

Post by donaldfair71 » Wed Oct 09, 2019 7:02 am

willthrill81 wrote:
Fri Oct 04, 2019 5:32 pm
donaldfair71 wrote:
Fri Oct 04, 2019 10:00 am
rascott wrote:
Fri Oct 04, 2019 9:21 am
Forester wrote:
Fri Oct 04, 2019 2:39 am
SCV is essentially level with large cap US since March 09, it's just bounced around more. And value is supposedly doing better ex-US.

Just relying on the S&P 500 alone for US stocks is a horrible strategy as we saw in the Dotcom bust.

I agree..... holding only SP500/ Total Market Index (same thing) is leaving a lot of possible diversification on the table. At least factor investors can point to historical returns as an argument for including them in a portfolio.
That's one way to look at it. Another way is to look at it like the TSM is exactly as diversified as the market has deemed it to be.
I might be completely wrong, but I don't believe that market cap weighting has anything to do with diversification. According to the widely held implications of the EMH (not the EMH itself), the current market price represent's the collective best estimate of all market participants of each publicly traded security's net present value.

Owning a market cap weighted TSM index fund essentially removes all idiosyncratic (i.e. single company) risk, but it does nothing to diversify away from market beta. In fact, the only thing 'left' in such a fund is market beta. Whether market beta alone represents an adequate level of diversification is a matter of judgment by the individual investor.
I don't know that it does as much as you don't know that it does. That's the problem with weighing out diversification, attempting to measure, etc. It's not that one way > other ways. It's that nobody knows nothing, and very bright, intelligent, people disagree on it. Therefore, my conclusion is that I should control the things I can control: Costs, tax-efficient placement, and allocation.

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Re: 'Stay the course' with international stock but give up on value?

Post by vineviz » Wed Oct 09, 2019 7:06 am

donaldfair71 wrote:
Wed Oct 09, 2019 7:02 am
willthrill81 wrote:
Fri Oct 04, 2019 5:32 pm
Owning a market cap weighted TSM index fund essentially removes all idiosyncratic (i.e. single company) risk, but it does nothing to diversify away from market beta. In fact, the only thing 'left' in such a fund is market beta. Whether market beta alone represents an adequate level of diversification is a matter of judgment by the individual investor.
I don't know that it does as much as you don't know that it does. That's the problem with weighing out diversification, attempting to measure, etc. It's not that one way > other ways. It's that nobody knows nothing, and very bright, intelligent, people disagree on it. Therefore, my conclusion is that I should control the things I can control: Costs, tax-efficient placement, and allocation.
But no "bright, intelligent, people" disagree with the idea that enhancing diversification increases the probability of a better outcome for investors. And the level of portfolio diversification you have is definitely one of the "things you can control".
"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: 'Stay the course' with international stock but give up on value?

Post by donaldfair71 » Wed Oct 09, 2019 7:39 am

vineviz wrote:
Wed Oct 09, 2019 7:06 am
donaldfair71 wrote:
Wed Oct 09, 2019 7:02 am
willthrill81 wrote:
Fri Oct 04, 2019 5:32 pm
Owning a market cap weighted TSM index fund essentially removes all idiosyncratic (i.e. single company) risk, but it does nothing to diversify away from market beta. In fact, the only thing 'left' in such a fund is market beta. Whether market beta alone represents an adequate level of diversification is a matter of judgment by the individual investor.
I don't know that it does as much as you don't know that it does. That's the problem with weighing out diversification, attempting to measure, etc. It's not that one way > other ways. It's that nobody knows nothing, and very bright, intelligent, people disagree on it. Therefore, my conclusion is that I should control the things I can control: Costs, tax-efficient placement, and allocation.
But no "bright, intelligent, people" disagree with the idea that enhancing diversification increases the probability of a better outcome for investors. And the level of portfolio diversification you have is definitely one of the "things you can control".
I think that the options available to a lot of investors through their respective retirement accounts would lead one to believe that diversification isn't as much in the investor's control.

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Re: 'Stay the course' with international stock but give up on value?

Post by vineviz » Wed Oct 09, 2019 7:51 am

donaldfair71 wrote:
Wed Oct 09, 2019 7:39 am
I think that the options available to a lot of investors through their respective retirement accounts would lead one to believe that diversification isn't as much in the investor's control.
What leads you to that conclusion?
"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: 'Stay the course' with international stock but give up on value?

Post by donaldfair71 » Wed Oct 09, 2019 7:54 am

vineviz wrote:
Wed Oct 09, 2019 7:51 am
donaldfair71 wrote:
Wed Oct 09, 2019 7:39 am
I think that the options available to a lot of investors through their respective retirement accounts would lead one to believe that diversification isn't as much in the investor's control.
What leads you to that conclusion?
Would you consider a BH 3 Fund to have "enough" diversification?

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Re: 'Stay the course' with international stock but give up on value?

Post by vineviz » Wed Oct 09, 2019 8:08 am

donaldfair71 wrote:
Wed Oct 09, 2019 7:54 am
vineviz wrote:
Wed Oct 09, 2019 7:51 am
donaldfair71 wrote:
Wed Oct 09, 2019 7:39 am
I think that the options available to a lot of investors through their respective retirement accounts would lead one to believe that diversification isn't as much in the investor's control.
What leads you to that conclusion?
Would you consider a BH 3 Fund to have "enough" diversification?
My question was related to your conclusion that diversification isn't in the control of investors: I'm wondering why you think that investors don't have control of portfolio diversification within retirement plans.
"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: 'Stay the course' with international stock but give up on value?

Post by SandysDad » Wed Oct 09, 2019 8:12 am

If one fundamentally believes in "reversion to the mean", then the benefits of this and rebalancing go away if one does not "stay the course" whatever the course may be. As long as the "course" is not fundamentally flawed I would not abandon it. Neither of these courses are fundamentally flawed IMHO.

Chasing "winning" strategies is counter productive to long term returns and this fact has also been proven.

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Re: 'Stay the course' with international stock but give up on value?

Post by donaldfair71 » Wed Oct 09, 2019 9:00 am

vineviz wrote:
Wed Oct 09, 2019 8:08 am
donaldfair71 wrote:
Wed Oct 09, 2019 7:54 am
vineviz wrote:
Wed Oct 09, 2019 7:51 am
donaldfair71 wrote:
Wed Oct 09, 2019 7:39 am
I think that the options available to a lot of investors through their respective retirement accounts would lead one to believe that diversification isn't as much in the investor's control.
What leads you to that conclusion?
Would you consider a BH 3 Fund to have "enough" diversification?
My question was related to your conclusion that diversification isn't in the control of investors: I'm wondering why you think that investors don't have control of portfolio diversification within retirement plans.
A few things:

One, I still don't know (and would argue, as originally, that experts can't agree upon) what is "enough" diversification. I think "diversification" gets used a lot on this site, but what does that mean? What is the cutoff between being diversified and not being diversified? I draw this conclusion from the weekly "Do I need International?" threads (and I'm certain subsequent "How much International should I have?" once Ex-US makes a comeback). So at the primary level, Jack Bogle insists international isn't necessary, others believe it is, and we can dig up tens of experts who fall on one side or the other. The same thing can be said to factors/tilts. There is enough debate on this for me to politely disagree with anyone who thinks that there is this settled science on diversification. So we don't know what that looks like to begin with, "Diversification".

Second, with all that being said, I would venture to say that a lot (is it 20%? 50%? I don't know) of people whose primary retirement savings fall into 401k or the like have to make a decision: Do I go with more diversification but much higher costs, or the one stock index fund available to me in my retirement and hope to complement it with a few in my IRA?

To me, unless I want to incur high costs (I have Institutional S&P500 in my 403b and a bunch of 1%+ options, as do the other ~12000 employees in the school division where I teach), I have options but some of them are really not available. The Merriman 10 or 8 fund is off the board. The BH version of UBH is probably unattainable as well unless I am below certain income thresholds that allow me to use a traditional IRA and, even then, if I want a high savings rate there simply isn't enough space in an IRA to keep the individual factor components up to levels of the one fund in my 403b. Some probably have a tiltable SCV index fund, or even a small cap fund. I would venture to guess that many do not.

So that leads to questioning, really, is diversification available to most investors in so far as it is in their control? Well, in so far as enough authority that believes a 3 fund or similar, then sure. Do I believe that? I don't know. I do know that I can probably get enough with it. In my own retirement I am 60 S&P500/23 Ex-US/17 Stable Value currently, the 23 makes up all of my IRA space.

If one thinks that, say, a 3 fund is diversified, then one can be diversified within many (most?) retirement accounts. If one needs even something as simple as Rick Ferri's total economy portfolio of Total Market/Small Cap/REIT, let alone across style boxes and sizes, it becomes a major issue. One where the decision has to be made between cost or diversification.

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Re: 'Stay the course' with international stock but give up on value?

Post by dcabler » Wed Oct 09, 2019 9:57 am

donaldfair71 wrote:
Wed Oct 09, 2019 9:00 am
vineviz wrote:
Wed Oct 09, 2019 8:08 am
donaldfair71 wrote:
Wed Oct 09, 2019 7:54 am
vineviz wrote:
Wed Oct 09, 2019 7:51 am
donaldfair71 wrote:
Wed Oct 09, 2019 7:39 am
I think that the options available to a lot of investors through their respective retirement accounts would lead one to believe that diversification isn't as much in the investor's control.
What leads you to that conclusion?
Would you consider a BH 3 Fund to have "enough" diversification?
My question was related to your conclusion that diversification isn't in the control of investors: I'm wondering why you think that investors don't have control of portfolio diversification within retirement plans.
A few things:

One, I still don't know (and would argue, as originally, that experts can't agree upon) what is "enough" diversification. I think "diversification" gets used a lot on this site, but what does that mean? What is the cutoff between being diversified and not being diversified? I draw this conclusion from the weekly "Do I need International?" threads (and I'm certain subsequent "How much International should I have?" once Ex-US makes a comeback). So at the primary level, Jack Bogle insists international isn't necessary, others believe it is, and we can dig up tens of experts who fall on one side or the other. The same thing can be said to factors/tilts. There is enough debate on this for me to politely disagree with anyone who thinks that there is this settled science on diversification. So we don't know what that looks like to begin with, "Diversification".

Second, with all that being said, I would venture to say that a lot (is it 20%? 50%? I don't know) of people whose primary retirement savings fall into 401k or the like have to make a decision: Do I go with more diversification but much higher costs, or the one stock index fund available to me in my retirement and hope to complement it with a few in my IRA?

To me, unless I want to incur high costs (I have Institutional S&P500 in my 403b and a bunch of 1%+ options, as do the other ~12000 employees in the school division where I teach), I have options but some of them are really not available. The Merriman 10 or 8 fund is off the board. The BH version of UBH is probably unattainable as well unless I am below certain income thresholds that allow me to use a traditional IRA and, even then, if I want a high savings rate there simply isn't enough space in an IRA to keep the individual factor components up to levels of the one fund in my 403b. Some probably have a tiltable SCV index fund, or even a small cap fund. I would venture to guess that many do not.

So that leads to questioning, really, is diversification available to most investors in so far as it is in their control? Well, in so far as enough authority that believes a 3 fund or similar, then sure. Do I believe that? I don't know. I do know that I can probably get enough with it. In my own retirement I am 60 S&P500/23 Ex-US/17 Stable Value currently, the 23 makes up all of my IRA space.

If one thinks that, say, a 3 fund is diversified, then one can be diversified within many (most?) retirement accounts. If one needs even something as simple as Rick Ferri's total economy portfolio of Total Market/Small Cap/REIT, let alone across style boxes and sizes, it becomes a major issue. One where the decision has to be made between cost or diversification.
I like a definition for diversification that vineviz has posted a number of times in the forum - the diversification ratio (DR) which boils things down to a single number. Like many things in investing, it is backwards looking only, so todays DR might not be tomorrow's. And it isn't super clear what might constitute "good enough". But all that said, though, I do like the ability to be able to compare two portfolios DR as a relative metric.
Anyway, that's but one definition - I'm sure there are many others.

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Re: 'Stay the course' with international stock but give up on value?

Post by willthrill81 » Wed Oct 09, 2019 10:02 am

donaldfair71 wrote:
Wed Oct 09, 2019 7:02 am
willthrill81 wrote:
Fri Oct 04, 2019 5:32 pm
donaldfair71 wrote:
Fri Oct 04, 2019 10:00 am
rascott wrote:
Fri Oct 04, 2019 9:21 am
Forester wrote:
Fri Oct 04, 2019 2:39 am
SCV is essentially level with large cap US since March 09, it's just bounced around more. And value is supposedly doing better ex-US.

Just relying on the S&P 500 alone for US stocks is a horrible strategy as we saw in the Dotcom bust.

I agree..... holding only SP500/ Total Market Index (same thing) is leaving a lot of possible diversification on the table. At least factor investors can point to historical returns as an argument for including them in a portfolio.
That's one way to look at it. Another way is to look at it like the TSM is exactly as diversified as the market has deemed it to be.
I might be completely wrong, but I don't believe that market cap weighting has anything to do with diversification. According to the widely held implications of the EMH (not the EMH itself), the current market price represent's the collective best estimate of all market participants of each publicly traded security's net present value.

Owning a market cap weighted TSM index fund essentially removes all idiosyncratic (i.e. single company) risk, but it does nothing to diversify away from market beta. In fact, the only thing 'left' in such a fund is market beta. Whether market beta alone represents an adequate level of diversification is a matter of judgment by the individual investor.
I don't know that it does as much as you don't know that it does.
What did I say that you disagree with, and why?
“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: 'Stay the course' with international stock but give up on value?

Post by donaldfair71 » Wed Oct 09, 2019 10:24 am

willthrill81 wrote:
Wed Oct 09, 2019 10:02 am
donaldfair71 wrote:
Wed Oct 09, 2019 7:02 am
willthrill81 wrote:
Fri Oct 04, 2019 5:32 pm
donaldfair71 wrote:
Fri Oct 04, 2019 10:00 am
rascott wrote:
Fri Oct 04, 2019 9:21 am



I agree..... holding only SP500/ Total Market Index (same thing) is leaving a lot of possible diversification on the table. At least factor investors can point to historical returns as an argument for including them in a portfolio.
That's one way to look at it. Another way is to look at it like the TSM is exactly as diversified as the market has deemed it to be.
I might be completely wrong, but I don't believe that market cap weighting has anything to do with diversification. According to the widely held implications of the EMH (not the EMH itself), the current market price represent's the collective best estimate of all market participants of each publicly traded security's net present value.

Owning a market cap weighted TSM index fund essentially removes all idiosyncratic (i.e. single company) risk, but it does nothing to diversify away from market beta. In fact, the only thing 'left' in such a fund is market beta. Whether market beta alone represents an adequate level of diversification is a matter of judgment by the individual investor.
I don't know that it does as much as you don't know that it does.
What did I say that you disagree with, and why?
I don't think market-cap weighting in and of itself necessarily adds (or subtracts from) diversification as much expressing that the amount of diversification presented in market-weighted total market funds could very well be enough diversification to be diversified enough. Or it couldn't be. But no one knows either way. What is known is that it is less expensive to hold.

I wasn't disagreeing with you, I was agreeing with you and commenting further on the topic.

donaldfair71
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Joined: Wed Mar 06, 2013 4:15 pm

Re: 'Stay the course' with international stock but give up on value?

Post by donaldfair71 » Wed Oct 09, 2019 10:35 am

dcabler wrote:
Wed Oct 09, 2019 9:57 am
donaldfair71 wrote:
Wed Oct 09, 2019 9:00 am
vineviz wrote:
Wed Oct 09, 2019 8:08 am
donaldfair71 wrote:
Wed Oct 09, 2019 7:54 am
vineviz wrote:
Wed Oct 09, 2019 7:51 am


What leads you to that conclusion?
Would you consider a BH 3 Fund to have "enough" diversification?
My question was related to your conclusion that diversification isn't in the control of investors: I'm wondering why you think that investors don't have control of portfolio diversification within retirement plans.
A few things:

One, I still don't know (and would argue, as originally, that experts can't agree upon) what is "enough" diversification. I think "diversification" gets used a lot on this site, but what does that mean? What is the cutoff between being diversified and not being diversified? I draw this conclusion from the weekly "Do I need International?" threads (and I'm certain subsequent "How much International should I have?" once Ex-US makes a comeback). So at the primary level, Jack Bogle insists international isn't necessary, others believe it is, and we can dig up tens of experts who fall on one side or the other. The same thing can be said to factors/tilts. There is enough debate on this for me to politely disagree with anyone who thinks that there is this settled science on diversification. So we don't know what that looks like to begin with, "Diversification".

Second, with all that being said, I would venture to say that a lot (is it 20%? 50%? I don't know) of people whose primary retirement savings fall into 401k or the like have to make a decision: Do I go with more diversification but much higher costs, or the one stock index fund available to me in my retirement and hope to complement it with a few in my IRA?

To me, unless I want to incur high costs (I have Institutional S&P500 in my 403b and a bunch of 1%+ options, as do the other ~12000 employees in the school division where I teach), I have options but some of them are really not available. The Merriman 10 or 8 fund is off the board. The BH version of UBH is probably unattainable as well unless I am below certain income thresholds that allow me to use a traditional IRA and, even then, if I want a high savings rate there simply isn't enough space in an IRA to keep the individual factor components up to levels of the one fund in my 403b. Some probably have a tiltable SCV index fund, or even a small cap fund. I would venture to guess that many do not.

So that leads to questioning, really, is diversification available to most investors in so far as it is in their control? Well, in so far as enough authority that believes a 3 fund or similar, then sure. Do I believe that? I don't know. I do know that I can probably get enough with it. In my own retirement I am 60 S&P500/23 Ex-US/17 Stable Value currently, the 23 makes up all of my IRA space.

If one thinks that, say, a 3 fund is diversified, then one can be diversified within many (most?) retirement accounts. If one needs even something as simple as Rick Ferri's total economy portfolio of Total Market/Small Cap/REIT, let alone across style boxes and sizes, it becomes a major issue. One where the decision has to be made between cost or diversification.
I like a definition for diversification that vineviz has posted a number of times in the forum - the diversification ratio (DR) which boils things down to a single number. Like many things in investing, it is backwards looking only, so todays DR might not be tomorrow's. And it isn't super clear what might constitute "good enough". But all that said, though, I do like the ability to be able to compare two portfolios DR as a relative metric.
Anyway, that's but one definition - I'm sure there are many others.
Thank you for this, I am digging into the 6/2018 thread immediately.

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willthrill81
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Re: 'Stay the course' with international stock but give up on value?

Post by willthrill81 » Wed Oct 09, 2019 10:42 am

donaldfair71 wrote:
Wed Oct 09, 2019 10:24 am
willthrill81 wrote:
Wed Oct 09, 2019 10:02 am
donaldfair71 wrote:
Wed Oct 09, 2019 7:02 am
willthrill81 wrote:
Fri Oct 04, 2019 5:32 pm
donaldfair71 wrote:
Fri Oct 04, 2019 10:00 am


That's one way to look at it. Another way is to look at it like the TSM is exactly as diversified as the market has deemed it to be.
I might be completely wrong, but I don't believe that market cap weighting has anything to do with diversification. According to the widely held implications of the EMH (not the EMH itself), the current market price represent's the collective best estimate of all market participants of each publicly traded security's net present value.

Owning a market cap weighted TSM index fund essentially removes all idiosyncratic (i.e. single company) risk, but it does nothing to diversify away from market beta. In fact, the only thing 'left' in such a fund is market beta. Whether market beta alone represents an adequate level of diversification is a matter of judgment by the individual investor.
I don't know that it does as much as you don't know that it does.
What did I say that you disagree with, and why?
I don't think market-cap weighting in and of itself necessarily adds (or subtracts from) diversification as much expressing that the amount of diversification presented in market-weighted total market funds could very well be enough diversification to be diversified enough. Or it couldn't be. But no one knows either way. What is known is that it is less expensive to hold.

I wasn't disagreeing with you, I was agreeing with you and commenting further on the topic.
I see. Thank you for the explanation.
“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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