Diversify my portfolio further with factors and sectors

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Topic Author
UberGrub
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Diversify my portfolio further with factors and sectors

Post by UberGrub » Wed Oct 09, 2019 5:46 pm

Hello,
I have a 100% equity portfolio and looking for additional equity holdings.

35% VTI
19% IJS
6% VNQ
21% VXUS
13% VSS
6% VWO

- I'm wondering what additional sector funds (utilities, Int REIT) would improve the diversification of the above portfolio.
- What factor funds would also add further diversification (small cap value Int? Dividend ? Which funds?)
- Any alternative funds (WOOD, etc)?

I understand the forum is divided between those who think the market portfolio is the most diversified and those that think it can be further diversified. I'm looking for opinions from the latter crowd; no need to voice the former point please.

Thanks!

rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: Diversify my portfolio further with factors and sectors

Post by rkhusky » Wed Oct 09, 2019 6:35 pm

Define diversification. If you don’t have a definition, all you will do is make your portfolio more complicated, likely without achieving additional diversification (whatever you mean by that).

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Wiggums
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Re: Diversify my portfolio further with factors and sectors

Post by Wiggums » Wed Oct 09, 2019 6:48 pm

Have you compared your portfolio to the three fund portfolio to see how much overlap you have? There is an X-ray tool among others that will do this for you.

stlutz
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Re: Diversify my portfolio further with factors and sectors

Post by stlutz » Wed Oct 09, 2019 7:26 pm

rkhusky wrote:
Wed Oct 09, 2019 6:35 pm
Define diversification. If you don’t have a definition, all you will do is make your portfolio more complicated, likely without achieving additional diversification (whatever you mean by that).
To further clarify the question: Are you looking for greater portfolio efficiency from an MPT perspective, assets that will do well if currently unexpected things happen (e.g. stagflation), something else?

Topic Author
UberGrub
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Re: Diversify my portfolio further with factors and sectors

Post by UberGrub » Wed Oct 09, 2019 8:35 pm

rkhusky wrote:
Wed Oct 09, 2019 6:35 pm
Define diversification. If you don’t have a definition, all you will do is make your portfolio more complicated, likely without achieving additional diversification (whatever you mean by that).
A portfolio that is susceptible to other risks aside from those of US large capitalization companies. That's why I'm thinking of stuff like timber investing, utilities, small value, etc.
Wiggums wrote:
Wed Oct 09, 2019 6:48 pm
Have you compared your portfolio to the three fund portfolio to see how much overlap you have? There is an X-ray tool among others that will do this for you.
I will give that a shot thanks!
stlutz wrote:
Wed Oct 09, 2019 7:26 pm
rkhusky wrote:
Wed Oct 09, 2019 6:35 pm
Define diversification. If you don’t have a definition, all you will do is make your portfolio more complicated, likely without achieving additional diversification (whatever you mean by that).
To further clarify the question: Are you looking for greater portfolio efficiency from an MPT perspective, assets that will do well if currently unexpected things happen (e.g. stagflation), something else?
Definitely not more portfolio efficient since I know the market portfolio is already efficient. I'm looking for assets with low correlation to beta that still have good returns. That's why I overweight Emerging Markets for instance.

Thanks!

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vineviz
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Re: Diversify my portfolio further with factors and sectors

Post by vineviz » Wed Oct 09, 2019 9:57 pm

UberGrub wrote:
Wed Oct 09, 2019 5:46 pm
Hello,
I have a 100% equity portfolio and looking for additional equity holdings.

35% VTI
19% IJS
6% VNQ
21% VXUS
13% VSS
6% VWO

- I'm wondering what additional sector funds (utilities, Int REIT) would improve the diversification of the above portfolio.
- What factor funds would also add further diversification (small cap value Int? Dividend ? Which funds?)
- Any alternative funds (WOOD, etc)?
The first thing I'll point out is that you can increase your portfolio diversification noticeably without adding ANY new funds: simply adjusting the allocations of your existing funds would be an effective and low-cost way to make an improvement. By way of example (I rounded for simplicity sake):

20.00% VTI
20.00% IJS
20.00% VNQ
15.00% VXUS
10.00% VSS
15.00% VWO

To elevate the diversification further, you could eliminate VTI and VXUS altogether. For instance, the following would be a reasonable 5 fund approach.

20.00% IJS
20.00% VNQ
20.00% VSS
20.00% VWO
20.00% VPU
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

rkhusky
Posts: 7353
Joined: Thu Aug 18, 2011 8:09 pm

Re: Diversify my portfolio further with factors and sectors

Post by rkhusky » Thu Oct 10, 2019 6:32 am

For alternatives, this post lists and discusses some: viewtopic.php?t=222780.
QSPIX/QSPNX
QMHIX
LENDX
SRRIX
AVRPX

Note that diversification does not mean that you will get a higher return. For many of these alternatives, there is not enough history to make any reasonable assumptions on return. No one has seen how they will perform in sufficiently different types of markets.

BTW, emerging markets (and international in general) haven't done as well in recent years. So, again, taking higher risk is no guarantee of higher return or even a higher probability of higher return. It just makes higher return a possible outcome. There is no way to calculate the probability of future returns - all one can compute is the probabilities of the past.

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patrick013
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Re: Diversify my portfolio further with factors and sectors

Post by patrick013 » Thu Oct 10, 2019 8:42 am

IWF (LCGrowth) very hard to beat last bull run. VPU (utilities) for stability, low beta, and increasing dividends. TRSY ladder for low beta and needed returns due to negative correlation. The most important thing to blend with tech heavy factors.
age in bonds, buy-and-hold, 10 year business cycle

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Sandtrap
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Re: Diversify my portfolio further with factors and sectors

Post by Sandtrap » Thu Oct 10, 2019 8:49 am

Consider:
REIT Index Fund(s) at up to 10% of equities.
(search past threads on REIT correlation to equities, lot's on this. At any one time .31 to .68?)

Diversification of "fixed" as well.
IE: Investment Grade Bond Funds, etc.

j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

Elysium
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Joined: Mon Apr 02, 2007 6:22 pm

Re: Diversify my portfolio further with factors and sectors

Post by Elysium » Thu Oct 10, 2019 9:20 am

UberGrub wrote:
Wed Oct 09, 2019 5:46 pm
Hello,
I have a 100% equity portfolio and looking for additional equity holdings.

35% VTI
19% IJS
6% VNQ
21% VXUS
13% VSS
6% VWO

- I'm wondering what additional sector funds (utilities, Int REIT) would improve the diversification of the above portfolio.
- What factor funds would also add further diversification (small cap value Int? Dividend ? Which funds?)
- Any alternative funds (WOOD, etc)?

I understand the forum is divided between those who think the market portfolio is the most diversified and those that think it can be further diversified. I'm looking for opinions from the latter crowd; no need to voice the former point please.

Thanks!
You are not going to get diversification by adding a bit of this and bit of that. What you need instead is concentration, into assets that will give you chance for long term wealth accumulation. Large capitalization U.S stocks are the bed rock of economic growth, invest a good chunk of your assets in those. Beyond that, you can diversify outside of equities through fixed income, real assets like real estate, and alternative investment like lending. Apart from fixed income, more work is required to understand and manage those investments. You are not going to get more diversification by investing in equities of small distressed companies with high cost of capital and loads of debt, and equities of companies in countries with improper accounting / shady corporate regulations.

MotoTrojan
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Re: Diversify my portfolio further with factors and sectors

Post by MotoTrojan » Thu Oct 10, 2019 9:24 am

I think you are on the right track, if not over-complicated. Maybe increase IJS a bit and offset it with a holding in EDV (extended duration treasuries) for some diversification while maintaining a similar expected overall return.

Topic Author
UberGrub
Posts: 75
Joined: Wed Aug 21, 2019 3:47 pm

Re: Diversify my portfolio further with factors and sectors

Post by UberGrub » Thu Oct 10, 2019 9:39 am

vineviz wrote:
Wed Oct 09, 2019 9:57 pm
UberGrub wrote:
Wed Oct 09, 2019 5:46 pm
Hello,
I have a 100% equity portfolio and looking for additional equity holdings.

35% VTI
19% IJS
6% VNQ
21% VXUS
13% VSS
6% VWO

- I'm wondering what additional sector funds (utilities, Int REIT) would improve the diversification of the above portfolio.
- What factor funds would also add further diversification (small cap value Int? Dividend ? Which funds?)
- Any alternative funds (WOOD, etc)?
The first thing I'll point out is that you can increase your portfolio diversification noticeably without adding ANY new funds: simply adjusting the allocations of your existing funds would be an effective and low-cost way to make an improvement. By way of example (I rounded for simplicity sake):

20.00% VTI
20.00% IJS
20.00% VNQ
15.00% VXUS
10.00% VSS
15.00% VWO

To elevate the diversification further, you could eliminate VTI and VXUS altogether. For instance, the following would be a reasonable 5 fund approach.

20.00% IJS
20.00% VNQ
20.00% VSS
20.00% VWO
20.00% VPU
Could you briefly explain some of the thinking behind this please? Perhaps a reference/literature I could read on this subject. I'd love to arrive at these conclusions easily and quickly.
Thank you!
rkhusky wrote:
Thu Oct 10, 2019 6:32 am
For alternatives, this post lists and discusses some: viewtopic.php?t=222780.
QSPIX/QSPNX
QMHIX
LENDX
SRRIX
AVRPX

Note that diversification does not mean that you will get a higher return. For many of these alternatives, there is not enough history to make any reasonable assumptions on return. No one has seen how they will perform in sufficiently different types of markets.

BTW, emerging markets (and international in general) haven't done as well in recent years. So, again, taking higher risk is no guarantee of higher return or even a higher probability of higher return. It just makes higher return a possible outcome. There is no way to calculate the probability of future returns - all one can compute is the probabilities of the past.
Thank you for the response. I'm not looking for things that return more or did better recently. Just to spread out my risk into other options that are as reasonable as the market. The options you mention make sense, I will look into those!
patrick013 wrote:
Thu Oct 10, 2019 8:42 am
IWF (LCGrowth) very hard to beat last bull run. VPU (utilities) for stability, low beta, and increasing dividends. TRSY ladder for low beta and needed returns due to negative correlation. The most important thing to blend with tech heavy factors.
Thank you makes sense!
Sandtrap wrote:
Thu Oct 10, 2019 8:49 am
Consider:
REIT Index Fund(s) at up to 10% of equities.
(search past threads on REIT correlation to equities, lot's on this. At any one time .31 to .68?)

Diversification of "fixed" as well.
IE: Investment Grade Bond Funds, etc.

j :happy
Ok so even more in REITs. That sounds like a good idea. The market has a ton of private real estate and I have none. So more REITs would perhaps mimic the true market better. Are Int REITs a good option?
MotoTrojan wrote:
Thu Oct 10, 2019 9:24 am
I think you are on the right track, if not over-complicated. Maybe increase IJS a bit and offset it with a holding in EDV (extended duration treasuries) for some diversification while maintaining a similar expected overall return.
Yes fixed income makes sense but tends to have lower expected return. I was looking to stick to equities for now and increase diversification there.

rkhusky
Posts: 7353
Joined: Thu Aug 18, 2011 8:09 pm

Re: Diversify my portfolio further with factors and sectors

Post by rkhusky » Thu Oct 10, 2019 9:57 am

UberGrub wrote:
Thu Oct 10, 2019 9:39 am
I'm not looking for things that return more or did better recently. Just to spread out my risk into other options that are as reasonable as the market.
As long as you are prepared for big losses. If things go wrong and the market drops 50%, your riskier portfolio could lose 80-90%.

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nisiprius
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Re: Diversify my portfolio further with factors and sectors

Post by nisiprius » Thu Oct 10, 2019 10:06 am

UberGrub wrote:
Thu Oct 10, 2019 9:39 am
...Yes fixed income makes sense but tends to have lower expected return. I was looking to stick to equities for now and increase diversification there...
Do not kid yourself about the degree to which you can reduce risk by diversifying within equities. It is true that diversification reduces risk, but that doesn't help you think clearly unless you start putting some numbers on it.

How much do you think you can reduce risk by diversifying within equities?

How much by adding fixed income?

Fixed income is a simple, brute-force way of reducing risk. It works because debt is fundamentally different from equity. Certainly, it is likely to reduce return, a lot, but at least it is reliable at reducing risk, and also by a lot. Enough to make the difference between exceeding your risk tolerance and staying within it. In contrast, diversifying equities may be a worthwhile thing to do, it may have a visible effect... but it is fine tuning at best.

To see this, we can look at compare the behavior of
  1. plain-vanilla Vanguard Total Stock Market Index Fund (portfolio 1),
  2. a stock portfolio recommended by a factor expert in a 2004 book (portfolio 2), and
  3. with a 60/40 stock-bond portfolio (portfolio 3).
Portfolio 2, detailed below makes use of value factor, the size factor, and the supposed diversifying effects of real estate and international stocks.

Rather to my disappointment, as I'd hoped to show a small amount of downside protection from a model factor-based portfolio, the factor-based portfolio actually declined a bit more during the global financial crisis! In any case, the effect of fiddling around with stocks was relatively small and was not powerful protection, while the effect of a 40% bond allocation was large and meaningful. The point is not that the factor-based portfolio happened to be a change for the worse, it's that replacing one stock fund with nine mad a small change, while adding bonds made a big change.


Source

Image

Do what you like, but do not kid yourself that you can get the effect of a bond allocation just by diversifying your stock portfolio.

For the record, this is the factor-based portfolio I used, which uses nine different kinds of stock funds for one.

Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Topic Author
UberGrub
Posts: 75
Joined: Wed Aug 21, 2019 3:47 pm

Re: Diversify my portfolio further with factors and sectors

Post by UberGrub » Thu Oct 10, 2019 10:27 am

rkhusky wrote:
Thu Oct 10, 2019 9:57 am
UberGrub wrote:
Thu Oct 10, 2019 9:39 am
I'm not looking for things that return more or did better recently. Just to spread out my risk into other options that are as reasonable as the market.
As long as you are prepared for big losses. If things go wrong and the market drops 50%, your riskier portfolio could lose 80-90%.
Huh this is precisely what I want to avoid. If the portfolio is more diversified among different sources of risk, I thought it would be less likely to drop as low.
A loss of 80-90% sounds like a very undiversidied portfolio (say mostly Telecom in 2000).
nisiprius wrote:
Thu Oct 10, 2019 10:06 am
UberGrub wrote:
Thu Oct 10, 2019 9:39 am
...Yes fixed income makes sense but tends to have lower expected return. I was looking to stick to equities for now and increase diversification there...
Do not kid yourself about the degree to which you can reduce risk by diversifying within equities. It is true that diversification reduces risk, but that doesn't help you think clearly unless you start putting some numbers on it.

How much do you think you can reduce risk by diversifying within equities?

How much by adding fixed income?

Fixed income is a simple, brute-force way of reducing risk. It works because debt is fundamentally different from equity. Certainly, it is likely to reduce return, a lot, but at least it is reliable at reducing risk, and also by a lot. Enough to make the difference between exceeding your risk tolerance and staying within it. In contrast, diversifying equities may be a worthwhile thing to do, it may have a visible effect... but it is fine tuning at best.

To see this, we can look at compare the behavior of
  1. plain-vanilla Vanguard Total Stock Market Index Fund (portfolio 1),
  2. a stock portfolio recommended by a factor expert in a 2004 book (portfolio 2), and
  3. with a 60/40 stock-bond portfolio (portfolio 3).
Portfolio 2, detailed below makes use of value factor, the size factor, and the supposed diversifying effects of real estate and international stocks.

Rather to my disappointment, as I'd hoped to show a small amount of downside protection from a model factor-based portfolio, the factor-based portfolio actually declined a bit more during the global financial crisis! In any case, the effect of fiddling around with stocks was relatively small and was not powerful protection, while the effect of a 40% bond allocation was large and meaningful. The point is not that the factor-based portfolio happened to be a change for the worse, it's that replacing one stock fund with nine mad a small change, while adding bonds made a big change.


Source

Image

Do what you like, but do not kid yourself that you can get the effect of a bond allocation just by diversifying your stock portfolio.

For the record, this is the factor-based portfolio I used, which uses nine different kinds of stock funds for one.

Image
I don't doubt bonds offer great diversification. But their diversification was definitely not the reason Portfolio 3 didn't do so bad in 2008. I would imagine it's because they're simply less risky (less likely to lose value because they must be redeemed eventually).

I'm not looking to decrease drawdowns by taking less risk and reducing my expected returns. I'm looking to reduce drawdowns via higher diversification.
Thank you for the help!

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hdas
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Re: Diversify my portfolio further with factors and sectors

Post by hdas » Thu Oct 10, 2019 10:31 am

nisiprius wrote:
Thu Oct 10, 2019 10:06 am
UberGrub wrote:
Thu Oct 10, 2019 9:39 am
...Yes fixed income makes sense but tends to have lower expected return. I was looking to stick to equities for now and increase diversification there...
Do not kid yourself about the degree to which you can reduce risk by diversifying within equities. It is true that diversification reduces risk, but that doesn't help you think clearly unless you start putting some numbers on it.

How much do you think you can reduce risk by diversifying within equities?

How much by adding fixed income?

Fixed income is a simple, brute-force way of reducing risk. It works because debt is fundamentally different from equity. Certainly, it is likely to reduce return, a lot, but at least it is reliable at reducing risk, and also by a lot. Enough to make the difference between exceeding your risk tolerance and staying within it. In contrast, diversifying equities may be a worthwhile thing to do, it may have a visible effect... but it is fine tuning at best.

To see this, we can look at compare the behavior of
  1. plain-vanilla Vanguard Total Stock Market Index Fund (portfolio 1),
  2. a stock portfolio recommended by a factor expert in a 2004 book (portfolio 2), and
  3. with a 60/40 stock-bond portfolio (portfolio 3).
Portfolio 2, detailed below makes use of value factor, the size factor, and the supposed diversifying effects of real estate and international stocks.

Rather to my disappointment, as I'd hoped to show a small amount of downside protection from a model factor-based portfolio, the factor-based portfolio actually declined a bit more during the global financial crisis! In any case, the effect of fiddling around with stocks was relatively small and was not powerful protection, while the effect of a 40% bond allocation was large and meaningful. The point is not that the factor-based portfolio happened to be a change for the worse, it's that replacing one stock fund with nine mad a small change, while adding bonds made a big change.


Source

Image

Do what you like, but do not kid yourself that you can get the effect of a bond allocation just by diversifying your stock portfolio.

For the record, this is the factor-based portfolio I used, which uses nine different kinds of stock funds for one.

Image
When trying to prove a point, is best to "steel-man" (the opposite of straw man) the other side's point. The factor that has shown equity like returns with an actual reduction in max drawdown is LOW-VOL. Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

Elysium
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Re: Diversify my portfolio further with factors and sectors

Post by Elysium » Thu Oct 10, 2019 10:52 am

hdas wrote:
Thu Oct 10, 2019 10:31 am
When trying to prove a point, is best to "steel-man" (the opposite of straw man) the other side's point. The factor that has shown equity like returns with an actual reduction in max drawdown is LOW-VOL. Cheers :greedy
Yes, but Low-Vol is not expected to return as high as it has recently, instead you are supposed to get lower drawdown with lower returns compared to market. It could be an anomaly that resulted in higher recent returns with lower drawdown, this is unlikely to last. That said, if someone were to bet with factors then Low-vol or Quality probably are the best bets.

Elysium
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Re: Diversify my portfolio further with factors and sectors

Post by Elysium » Thu Oct 10, 2019 10:57 am

UberGrub wrote:
Thu Oct 10, 2019 10:27 am
Huh this is precisely what I want to avoid. If the portfolio is more diversified among different sources of risk, I thought it would be less likely to drop as low.
A loss of 80-90% sounds like a very undiversidied portfolio (say mostly Telecom in 2000).
The different sources of risk is a misnomer perpetrated by some of the vocal factor proponents just trying to make it sound like you are getting something in return for all the trouble, when in reality all equities are subject to market risk, and those that are most vulnerable like SCV and REIT has it in abundance. This is even more true in market downturns, when SCV and REIT are likely to face higher drawdowns and even get wiped out totally. Correlations between equity assets are likely to be at their highest during sharp reversals. You want less drawdowns look for assets with less risk, or diversify outside of publicly traded equity assets.

MotoTrojan
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Re: Diversify my portfolio further with factors and sectors

Post by MotoTrojan » Thu Oct 10, 2019 10:59 am

UberGrub wrote:
Thu Oct 10, 2019 9:39 am

MotoTrojan wrote:
Thu Oct 10, 2019 9:24 am
I think you are on the right track, if not over-complicated. Maybe increase IJS a bit and offset it with a holding in EDV (extended duration treasuries) for some diversification while maintaining a similar expected overall return.
Yes fixed income makes sense but tends to have lower expected return. I was looking to stick to equities for now and increase diversification there.
EDV has crushed the S&P500 this year, but I would not expect that to be a forever trait. If what you want is diversification, extended-duration treasuries cannot be beat.

Maybe check out the Excellent Adventure threads; using something like EDV along with leveraged equities can give you higher sharpe and thus higher return with equal risk. In your case you could hold some higher risk equities (and reduce total US/Int perhaps like vinev suggested) and balance that out with some volatile fixed in-come.

rkhusky
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Re: Diversify my portfolio further with factors and sectors

Post by rkhusky » Thu Oct 10, 2019 11:01 am

UberGrub wrote:
Thu Oct 10, 2019 10:27 am
rkhusky wrote:
Thu Oct 10, 2019 9:57 am
UberGrub wrote:
Thu Oct 10, 2019 9:39 am
I'm not looking for things that return more or did better recently. Just to spread out my risk into other options that are as reasonable as the market.
As long as you are prepared for big losses. If things go wrong and the market drops 50%, your riskier portfolio could lose 80-90%.
Huh this is precisely what I want to avoid. If the portfolio is more diversified among different sources of risk, I thought it would be less likely to drop as low.
A loss of 80-90% sounds like a very undiversidied portfolio (say mostly Telecom in 2000).
Then what you want to do is increase bonds in combination with increasing the risk of your stocks. Look for posts on the Larry Portfolio. The idea is to hold very risky stocks, but pair that with an increase in bonds. So, if there is a situation where the market drops 50% and your riskier stock portfolio drops 90%, then having a 50/50 portfolio of riskier stocks/bonds would only drop 45%, compared to the 50% of a 100% Total Market portfolio. A 40/60 portfolio of riskier stocks/bonds would only drop 36%.

Topic Author
UberGrub
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Re: Diversify my portfolio further with factors and sectors

Post by UberGrub » Thu Oct 10, 2019 11:19 am

MotoTrojan wrote:
Thu Oct 10, 2019 10:59 am
UberGrub wrote:
Thu Oct 10, 2019 9:39 am

MotoTrojan wrote:
Thu Oct 10, 2019 9:24 am
I think you are on the right track, if not over-complicated. Maybe increase IJS a bit and offset it with a holding in EDV (extended duration treasuries) for some diversification while maintaining a similar expected overall return.
Yes fixed income makes sense but tends to have lower expected return. I was looking to stick to equities for now and increase diversification there.
EDV has crushed the S&P500 this year, but I would not expect that to be a forever trait. If what you want is diversification, extended-duration treasuries cannot be beat.

Maybe check out the Excellent Adventure threads; using something like EDV along with leveraged equities can give you higher sharpe and thus higher return with equal risk. In your case you could hold some higher risk equities (and reduce total US/Int perhaps like vinev suggested) and balance that out with some volatile fixed in-come.
That's just because rates have gone down. The long term investor holding LT bonds will realize approximately the coupon. To the extent that EDV is similar to buying LT treasuries, short term fluctuations will cancel out when held long term.

I looked at the excellent adventure but don't want to pay the high management fees of those ETFs. Costs matter to me!
rkhusky wrote:
Thu Oct 10, 2019 11:01 am
UberGrub wrote:
Thu Oct 10, 2019 10:27 am
rkhusky wrote:
Thu Oct 10, 2019 9:57 am
UberGrub wrote:
Thu Oct 10, 2019 9:39 am
I'm not looking for things that return more or did better recently. Just to spread out my risk into other options that are as reasonable as the market.
As long as you are prepared for big losses. If things go wrong and the market drops 50%, your riskier portfolio could lose 80-90%.
Huh this is precisely what I want to avoid. If the portfolio is more diversified among different sources of risk, I thought it would be less likely to drop as low.
A loss of 80-90% sounds like a very undiversidied portfolio (say mostly Telecom in 2000).
Then what you want to do is increase bonds in combination with increasing the risk of your stocks. Look for posts on the Larry Portfolio. The idea is to hold very risky stocks, but pair that with an increase in bonds. So, if there is a situation where the market drops 50% and your riskier stock portfolio drops 90%, then having a 50/50 portfolio of riskier stocks/bonds would only drop 45%, compared to the 50% of a 100% Total Market portfolio. A 40/60 portfolio of riskier stocks/bonds would only drop 36%.
Mkay thanks I appreciate the suggestion!

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hdas
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Re: Diversify my portfolio further with factors and sectors

Post by hdas » Thu Oct 10, 2019 11:37 am

Elysium wrote:
Thu Oct 10, 2019 10:52 am
hdas wrote:
Thu Oct 10, 2019 10:31 am
When trying to prove a point, is best to "steel-man" (the opposite of straw man) the other side's point. The factor that has shown equity like returns with an actual reduction in max drawdown is LOW-VOL. Cheers :greedy
instead you are supposed to get lower drawdown with lower returns compared to market.
This is not what the empirical evidence suggest. Check the multiple studies out there.

From here (Oct 2019), what will likely happen is that we get a new wave of risk taking behavior that rewards high vol, high beta stocks and low vol underperfoms during the upswing.

It's also important to point out that unlike the factors that are dependent on accounting figures, low vol is parsimonious and not static. Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

MotoTrojan
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Re: Diversify my portfolio further with factors and sectors

Post by MotoTrojan » Thu Oct 10, 2019 12:44 pm

UberGrub wrote:
Thu Oct 10, 2019 11:19 am
MotoTrojan wrote:
Thu Oct 10, 2019 10:59 am
UberGrub wrote:
Thu Oct 10, 2019 9:39 am

MotoTrojan wrote:
Thu Oct 10, 2019 9:24 am
I think you are on the right track, if not over-complicated. Maybe increase IJS a bit and offset it with a holding in EDV (extended duration treasuries) for some diversification while maintaining a similar expected overall return.
Yes fixed income makes sense but tends to have lower expected return. I was looking to stick to equities for now and increase diversification there.
EDV has crushed the S&P500 this year, but I would not expect that to be a forever trait. If what you want is diversification, extended-duration treasuries cannot be beat.

Maybe check out the Excellent Adventure threads; using something like EDV along with leveraged equities can give you higher sharpe and thus higher return with equal risk. In your case you could hold some higher risk equities (and reduce total US/Int perhaps like vinev suggested) and balance that out with some volatile fixed in-come.
That's just because rates have gone down. The long term investor holding LT bonds will realize approximately the coupon. To the extent that EDV is similar to buying LT treasuries, short term fluctuations will cancel out when held long term.

I looked at the excellent adventure but don't want to pay the high management fees of those ETFs. Costs matter to me!
rkhusky wrote:
Thu Oct 10, 2019 11:01 am
UberGrub wrote:
Thu Oct 10, 2019 10:27 am
rkhusky wrote:
Thu Oct 10, 2019 9:57 am
UberGrub wrote:
Thu Oct 10, 2019 9:39 am
I'm not looking for things that return more or did better recently. Just to spread out my risk into other options that are as reasonable as the market.
As long as you are prepared for big losses. If things go wrong and the market drops 50%, your riskier portfolio could lose 80-90%.
Huh this is precisely what I want to avoid. If the portfolio is more diversified among different sources of risk, I thought it would be less likely to drop as low.
A loss of 80-90% sounds like a very undiversidied portfolio (say mostly Telecom in 2000).
Then what you want to do is increase bonds in combination with increasing the risk of your stocks. Look for posts on the Larry Portfolio. The idea is to hold very risky stocks, but pair that with an increase in bonds. So, if there is a situation where the market drops 50% and your riskier stock portfolio drops 90%, then having a 50/50 portfolio of riskier stocks/bonds would only drop 45%, compared to the 50% of a 100% Total Market portfolio. A 40/60 portfolio of riskier stocks/bonds would only drop 36%.
Mkay thanks I appreciate the suggestion!
Nothing in my statement relied on rates dropping. I suggested you offset the reduced expected return with higher risk equity holdings.

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Re: Diversify my portfolio further with factors and sectors

Post by asif408 » Thu Oct 10, 2019 12:54 pm

UberGrub wrote:
Wed Oct 09, 2019 8:35 pm
A portfolio that is susceptible to other risks aside from those of US large capitalization companies. That's why I'm thinking of stuff like timber investing, utilities, small value, etc.

Definitely not more portfolio efficient since I know the market portfolio is already efficient. I'm looking for assets with low correlation to beta that still have good returns. That's why I overweight Emerging Markets for instance.

Thanks!
You should look at precious metals equities, then, like the gold and silver mining stocks. Gold mining stocks fell 80% from August 2011 to January 2016 while the US market was up 60%. Since September of last year they are up 50% while the S&P has been flat. They do historically have low returns but they also have low correlation with the market.

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Re: Diversify my portfolio further with factors and sectors

Post by UberGrub » Thu Oct 10, 2019 12:55 pm

MotoTrojan wrote:
Thu Oct 10, 2019 12:44 pm
Nothing in my statement relied on rates dropping.
MotoTrojan wrote:
Thu Oct 10, 2019 10:59 am
EDV has crushed the S&P500 this year

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Re: Diversify my portfolio further with factors and sectors

Post by Jack FFR1846 » Thu Oct 10, 2019 1:02 pm

UberGrub wrote:
Wed Oct 09, 2019 8:35 pm
A portfolio that is susceptible to other risks aside from those of US large capitalization companies. That's why I'm thinking of stuff like timber investing, utilities, small value, etc.
So do you think that there are no companies in VTI who are involved in timber, utilities or other factors?

I think you've already got the whole haystack and are thinking that you need something that's not in the haystack. If it's a grain of wheat, will that really make any difference? I suppose if you buy a haystack stack of grains of wheat, it would make a difference, but then you're less diversified....not more.

Simple matters too. I think you're heading towards making things more complicated needlessly.
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Re: Diversify my portfolio further with factors and sectors

Post by Taylor Larimore » Thu Oct 10, 2019 1:27 pm

UberGrub:

In my opinion, and the opinion of Morningstar, high quality bond funds are a much better diversifier than "factors and sector funds." Anyone who bought a small-cap factor fund for "diversification" ten years ago is now badly disappointed.

Morningstar wrote this article recommending high-quality bonds for maximum diversification.

The Best Diversifiers For Your Equity Portfolio

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "You want some bonds in your portfolio, for safety. But you need stocks for growth."
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Re: Diversify my portfolio further with factors and sectors

Post by MotoTrojan » Thu Oct 10, 2019 2:11 pm

UberGrub wrote:
Thu Oct 10, 2019 12:55 pm
MotoTrojan wrote:
Thu Oct 10, 2019 12:44 pm
Nothing in my statement relied on rates dropping.
MotoTrojan wrote:
Thu Oct 10, 2019 10:59 am
EDV has crushed the S&P500 this year
I think you left off an important part of that sentence. My point was just to show you (in case you weren't aware) that bonds can actually be quite volatile, while still remaining imperfectly correlated, which is exactly what diversification of a portfolio is. I would suggest you take a more academic view of diversification if that is what you want, rather than just holding more funds.

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Re: Diversify my portfolio further with factors and sectors

Post by MotoTrojan » Thu Oct 10, 2019 2:14 pm

Taylor Larimore wrote:
Thu Oct 10, 2019 1:27 pm
UberGrub:

Anyone who bought a small-cap factor fund for "diversification" ten years ago is now badly disappointed.

Until recently I don't think they would be too bummed; S&P600 Value index has kept right on up with the Total US Market, even in a strong growth-fueled bull market.

https://www.portfoliovisualizer.com/bac ... 0&total3=0

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Re: Diversify my portfolio further with factors and sectors

Post by Elysium » Thu Oct 10, 2019 3:35 pm

MotoTrojan wrote:
Thu Oct 10, 2019 2:14 pm
Taylor Larimore wrote:
Thu Oct 10, 2019 1:27 pm
UberGrub:

Anyone who bought a small-cap factor fund for "diversification" ten years ago is now badly disappointed.

Until recently I don't think they would be too bummed; S&P600 Value index has kept right on up with the Total US Market, even in a strong growth-fueled bull market.

https://www.portfoliovisualizer.com/bac ... 0&total3=0
That is not true. One of the common mistakes people make with PV is looking at time weighted returns, which only tells the partial story. Modify it to include Money weighted returns and see the difference: https://www.portfoliovisualizer.com/bac ... &total3=0

Most of us invest regular amounts annually and do a re-balance annually, so this chart reflects the reality for most investors in accumulation. You would have around $123,000 more in TSM portfolio compared to IJS. That's a lot of money. No one knows future, but if you had SCV tilt in past 10 years, then you have less money now. Not only that, SCV also had much higher S/D, so more risk less returns and less wealth accumulated at 10 year mark.
Last edited by Elysium on Thu Oct 10, 2019 3:41 pm, edited 2 times in total.

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Re: Diversify my portfolio further with factors and sectors

Post by MotoTrojan » Thu Oct 10, 2019 4:47 pm

Elysium wrote:
Thu Oct 10, 2019 3:35 pm
MotoTrojan wrote:
Thu Oct 10, 2019 2:14 pm
Taylor Larimore wrote:
Thu Oct 10, 2019 1:27 pm
UberGrub:

Anyone who bought a small-cap factor fund for "diversification" ten years ago is now badly disappointed.

Until recently I don't think they would be too bummed; S&P600 Value index has kept right on up with the Total US Market, even in a strong growth-fueled bull market.

https://www.portfoliovisualizer.com/bac ... 0&total3=0
That is not true. One of the common mistakes people make with PV is looking at time weighted returns, which only tells the partial story. Modify it to include Money weighted returns and see the difference: https://www.portfoliovisualizer.com/bac ... &total3=0

Most of us invest regular amounts annually and do a re-balance annually, so this chart reflects the reality for most investors in accumulation. You would have around $123,000 more in TSM portfolio compared to IJS. That's a lot of money. No one knows future, but if you had SCV tilt in past 10 years, then you have less money now. Not only that, SCV also had much higher S/D, so more risk less returns and less wealth accumulated at 10 year mark.
I think my analysis was a perfect response to Taylor’s phrasing. He did not mention DCA. Either way, 10 years is not enough time to compare any strategy.

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Re: Diversify my portfolio further with factors and sectors

Post by Taylor Larimore » Thu Oct 10, 2019 5:37 pm

Moto Trojan:

You should find this link informative:

Morningstar Index Performance

Best wishes.
Taylor
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Re: Diversify my portfolio further with factors and sectors

Post by Elysium » Thu Oct 10, 2019 6:34 pm

MotoTrojan wrote:
Thu Oct 10, 2019 4:47 pm
Elysium wrote:
Thu Oct 10, 2019 3:35 pm
MotoTrojan wrote:
Thu Oct 10, 2019 2:14 pm
Taylor Larimore wrote:
Thu Oct 10, 2019 1:27 pm
UberGrub:

Anyone who bought a small-cap factor fund for "diversification" ten years ago is now badly disappointed.

Until recently I don't think they would be too bummed; S&P600 Value index has kept right on up with the Total US Market, even in a strong growth-fueled bull market.

https://www.portfoliovisualizer.com/bac ... 0&total3=0
That is not true. One of the common mistakes people make with PV is looking at time weighted returns, which only tells the partial story. Modify it to include Money weighted returns and see the difference: https://www.portfoliovisualizer.com/bac ... &total3=0

Most of us invest regular amounts annually and do a re-balance annually, so this chart reflects the reality for most investors in accumulation. You would have around $123,000 more in TSM portfolio compared to IJS. That's a lot of money. No one knows future, but if you had SCV tilt in past 10 years, then you have less money now. Not only that, SCV also had much higher S/D, so more risk less returns and less wealth accumulated at 10 year mark.
I think my analysis was a perfect response to Taylor’s phrasing. He did not mention DCA. Either way, 10 years is not enough time to compare any strategy.
I did not select the time period, instead simply edited the PV tables to include MWR for the same data set you linked. The point is extremely volatile assets like SV and EM that goes through extended periods of underperformance relative to broader indexes may end up providing less than expected returns in real money even when their TWR may show they did well over long periods. Most investors go through a period accumulation followed by a period of decumulation, which is very important aspect to consider. An investor will not have 40 years of investing at a static AA, instead they may have higher allocation to assets like SCV and EM which suffers poor performance when they are accumulating and then ends up doing well for a short burst just when you start decumulating by reducing their allocation. This will result in the investor getting overall poor performance compared to assets with lower volatility and more stable stream of returns.

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Re: Diversify my portfolio further with factors and sectors

Post by vineviz » Thu Oct 10, 2019 7:07 pm

Elysium wrote:
Thu Oct 10, 2019 6:34 pm
MotoTrojan wrote:
Thu Oct 10, 2019 4:47 pm
Elysium wrote:
Thu Oct 10, 2019 3:35 pm
MotoTrojan wrote:
Thu Oct 10, 2019 2:14 pm
Taylor Larimore wrote:
Thu Oct 10, 2019 1:27 pm
UberGrub:

Anyone who bought a small-cap factor fund for "diversification" ten years ago is now badly disappointed.

Until recently I don't think they would be too bummed; S&P600 Value index has kept right on up with the Total US Market, even in a strong growth-fueled bull market.

https://www.portfoliovisualizer.com/bac ... 0&total3=0
That is not true. One of the common mistakes people make with PV is looking at time weighted returns, which only tells the partial story. Modify it to include Money weighted returns and see the difference: https://www.portfoliovisualizer.com/bac ... &total3=0

Most of us invest regular amounts annually and do a re-balance annually, so this chart reflects the reality for most investors in accumulation. You would have around $123,000 more in TSM portfolio compared to IJS. That's a lot of money. No one knows future, but if you had SCV tilt in past 10 years, then you have less money now. Not only that, SCV also had much higher S/D, so more risk less returns and less wealth accumulated at 10 year mark.
I think my analysis was a perfect response to Taylor’s phrasing. He did not mention DCA. Either way, 10 years is not enough time to compare any strategy.
I did not select the time period, instead simply edited the PV tables to include MWR for the same data set you linked. The point is extremely volatile assets like SV and EM that goes through extended periods of underperformance relative to broader indexes may end up providing less than expected returns in real money even when their TWR may show they did well over long periods. Most investors go through a period accumulation followed by a period of decumulation, which is very important aspect to consider. An investor will not have 40 years of investing at a static AA, instead they may have higher allocation to assets like SCV and EM which suffers poor performance when they are accumulating and then ends up doing well for a short burst just when you start decumulating by reducing their allocation. This will result in the investor getting overall poor performance compared to assets with lower volatility and more stable stream of returns.
Picking funds, or even investment strategies, based on nothing except performance over the past 12 months would be appalling to Jack Bogle and should be embarrassing to those who profess an embrace of his philosophies.
"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: Diversify my portfolio further with factors and sectors

Post by abuss368 » Thu Oct 10, 2019 8:33 pm

Taylor Larimore wrote:
Thu Oct 10, 2019 1:27 pm
UberGrub:

In my opinion, and the opinion of Morningstar, high quality bond funds are a much better diversifier than "factors and sector funds." Anyone who bought a small-cap factor fund for "diversification" ten years ago is now badly disappointed.

Morningstar wrote this article recommending high-quality bonds for maximum diversification.

The Best Diversifiers For Your Equity Portfolio

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "You want some bonds in your portfolio, for safety. But you need stocks for growth."
Good points. Thank you for the link Taylor.

Best.
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Re: Diversify my portfolio further with factors and sectors

Post by abuss368 » Thu Oct 10, 2019 8:44 pm

Sandtrap wrote:
Thu Oct 10, 2019 8:49 am
Consider:
REIT Index Fund(s) at up to 10% of equities.
(search past threads on REIT correlation to equities, lot's on this. At any one time .31 to .68?)

Diversification of "fixed" as well.
IE: Investment Grade Bond Funds, etc.

j :happy
I would agree. REITs seem to work well with Total Stock and Total International Index funds. I also added International REITs for additional diversification.
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Re: Diversify my portfolio further with factors and sectors

Post by vineviz » Fri Oct 11, 2019 9:42 am

MotoTrojan wrote:
Thu Oct 10, 2019 2:11 pm
I would suggest you take a more academic view of diversification if that is what you want, rather than just holding more funds.
This point is worth reiterating, and I fear it got lost in the noise of previous posts.

As in all things related to investing, have a rational and disciplined approach to diversification is much more likely to help the OP achieve their goals than randomly collecting funds recommended by the internet.
"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: Diversify my portfolio further with factors and sectors

Post by 305pelusa » Sun Oct 13, 2019 6:58 pm

UberGrub wrote:
Wed Oct 09, 2019 5:46 pm
Hello,
I have a 100% equity portfolio and looking for additional equity holdings.

35% VTI
19% IJS
6% VNQ
21% VXUS
13% VSS
6% VWO

- I'm wondering what additional sector funds (utilities, Int REIT) would improve the diversification of the above portfolio.
- What factor funds would also add further diversification (small cap value Int? Dividend ? Which funds?)
- Any alternative funds (WOOD, etc)?

I understand the forum is divided between those who think the market portfolio is the most diversified and those that think it can be further diversified. I'm looking for opinions from the latter crowd; no need to voice the former point please.

Thanks!
I'll tell you what I did. Maybe you'll find it useful.

My pool of assets to choose from ended up being:
VTI
IJS
VNQ
VPU
VXUS
VWO
VSS

I looked up their historical volatility (using older/similar ETFs where possible to grab more years). Volatility tends to be consistent (unlike the highly variable returns). I then fixed their Sharpe ratios at 0.54 (long term Sharpe of TSM) to determine their "returns". I also looked up their correlations with PV. I do it this way (instead of the realized returns) to eliminate any potential confounding from some assets displaying a higher Sharpe in my sample since I don't necessarily expect that to continue.

I then ran an efficient frontier calculation and found the tangent portfolio. I added some constraints (no shorts, 60/40 US/Int, no more than 10% from sector funds, at least 20% from TSM and at least 7.5% from TS Int.). These constraints are subjective. I add them because mean-variance analysis is very susceptible by small changes in returns. Perhaps a portfolio of 40% VPU, 60% VWO shows the biggest tangency slope but if an allocation with more to the "total funds" with thousands of stocks achieves a virtually similar slope, I have a strong preference for it.

I found the following asset allocation for my long term portfolio:
20% VTI
20% IJS
10% VNQ
10% VPU
7.5% VXUS
25% VWO
7.5% VSS

I also played around by adding Sharpe "penalties" to see how it changed things. Both VPU and VNQ could handle them. In other words: Even if you decreased their returns such that their Sharpe was 0.5-0.15 lower than TSM, the program still assigned some weight to them. That's because of their low correlations (relatively). IJS and VSS could barely handle Sharpe penalties so I split their allocations with the LC equivalents.

Crude method but hopefully gives you some ideas!

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Re: Diversify my portfolio further with factors and sectors

Post by nisiprius » Mon Oct 14, 2019 6:37 am

hdas wrote:
Thu Oct 10, 2019 10:31 am
nisiprius wrote:
Thu Oct 10, 2019 10:06 am
...To see this, we can look at compare the behavior of
  1. plain-vanilla Vanguard Total Stock Market Index Fund (portfolio 1),
  2. a stock portfolio recommended by a factor expert in a 2004 book (portfolio 2), and
  3. with a 60/40 stock-bond portfolio (portfolio 3).
....When trying to prove a point, is best to "steel-man" (the opposite of straw man) the other side's point. The factor that has shown equity like returns with an actual reduction in max drawdown is LOW-VOL. Cheers :greedy
Provide me with a model portfolio
1) published in print
2) prior to 2008
3) based on asset classes representable by mutual funds or ETFs available at the time to retail investors
4) referring either to "factors" or "sectors" (or both)
5) preferably using the phrase "low-vol" or "low-volatility"

and we can both run the numbers.

Although the low-volume anomaly is often credited to Robert Haugen and a 1972 paper, my impression is that low-vol did not become a "thing" until about 2011.

For example, a Morningstar article, Battle-tested low-volatility funds says "most of the low-volatility ETFs weren't around during the last financial crisis." She surveys the field based on screening for low drawdowns and mentions... bond funds, balanced funds, and two US stock funds--American Century Equity Income (TWEIX), Royce Special Equity (RYSEX), Vanguard Dividend Growth (VDIGX). The problem is that none of these are "low-volatility as we know it," and I'm not aware that Benz ever published model portfolios suggesting they be used in place of, or in addition to, a total market index fund.

I am willing to "steelman" the case, but not to "vaporman" it by using paper indexes, or model portfolios that a Boglehead-level investor could have have read about before 2008, nor funds that were never described as "low volatility" until after it was observed that they had had low drawdown in 2008-9.

Using 7 low-volatility ETFs for this roller-coaster market as a good representative list that I didn't pick myself, I find USMV, FDLO, LVHD, EEMV, OUSM, OVLC, and HYLV. Not only was not a single one available in 2008-2009, not a single one was even available in 2010--the oldest, EEMV, had inception on 10/2011.
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Re: Diversify my portfolio further with factors and sectors

Post by rkhusky » Mon Oct 14, 2019 7:25 am

UberGrub wrote:
Thu Oct 10, 2019 10:27 am
I'm not looking to decrease drawdowns by taking less risk and reducing my expected returns. I'm looking to reduce drawdowns via higher diversification.
Reducing drawdowns is lowering risk and will therefore reduce expected returns. You can't get around that. The market is efficient. If it were possible to reduce drawdowns (and lower risk), while maintaining the same expected return, the market would have bid those diversifiers up in a millisecond. And if the market doesn't bid those diversifiers up, it's because the market had determined that there are other risks involved for which you aren't accounting.

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Re: Diversify my portfolio further with factors and sectors

Post by grabiner » Mon Oct 14, 2019 7:48 am

UberGrub wrote:
Wed Oct 09, 2019 5:46 pm
Hello,
I have a 100% equity portfolio and looking for additional equity holdings.

35% VTI (Total Stock Market)
19% IJS (S&P 600 Small-Cap Value)
6% VNQ (REIT Index)
21% VXUS (Total International)
13% VSS (FTSE All-World Ex-US Small-Cap)
6% VWO (Emerging Markets)

- I'm wondering what additional sector funds (utilities, Int REIT) would improve the diversification of the above portfolio.
The logic of using REITs for additional diversification is that real estate represents a larger share of the economy than it does of the stock market. Thus it makes sense to use international REITs as the same fraction of international holdings as US REITs are of US holdings. (I do this myself; my US/foreign stock split has been 50/50 for years, and I hold equal amounts in Vanguard's REIT and international REIT indexes.)

This does not apply to other sectors, such as utilities.
What factor funds would also add further diversification (small cap value Int? Dividend ? Which funds?)
In general, factors do not add diversification; they are deliberate overweights of part of the stock market, in the expectation of higher returns. If you overweight value stocks and the stock market falls, value stocks are likely to fall just as much as the rest of the market. This does not mean that you should avoid them, only that you should understand the purpose. If you want exposure to value, a value factor fund may be the best way to get that exposure. (I hold Vanguard's value factor ETF VFVA for my value exposure, both large-cap and small-cap, and iShares EAFE value factor IVLU for large-cap international value because it has better value exposure and lower costs than conventional international value ETFs.)

Emerging markets and international small-cap, which you already overweight, are possible exceptions. At least in theory, international small-cap stocks should be less correlated with the US economy than international large-cap stocks are. And emerging markets are subject to many risks which are less significant in development markets; investors are aware of those risks and expect higher returns.
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Re: Diversify my portfolio further with factors and sectors

Post by Elysium » Mon Oct 14, 2019 8:19 am

nisiprius wrote:
Mon Oct 14, 2019 6:37 am
hdas wrote:
Thu Oct 10, 2019 10:31 am
nisiprius wrote:
Thu Oct 10, 2019 10:06 am
...To see this, we can look at compare the behavior of
  1. plain-vanilla Vanguard Total Stock Market Index Fund (portfolio 1),
  2. a stock portfolio recommended by a factor expert in a 2004 book (portfolio 2), and
  3. with a 60/40 stock-bond portfolio (portfolio 3).
....When trying to prove a point, is best to "steel-man" (the opposite of straw man) the other side's point. The factor that has shown equity like returns with an actual reduction in max drawdown is LOW-VOL. Cheers :greedy
Provide me with a model portfolio
1) published in print
2) prior to 2008
3) based on asset classes representable by mutual funds or ETFs available at the time to retail investors
4) referring either to "factors" or "sectors" (or both)
5) preferably using the phrase "low-vol" or "low-volatility"

and we can both run the numbers.

Although the low-volume anomaly is often credited to Robert Haugen and a 1972 paper, my impression is that low-vol did not become a "thing" until about 2011.

For example, a Morningstar article, Battle-tested low-volatility funds says "most of the low-volatility ETFs weren't around during the last financial crisis." She surveys the field based on screening for low drawdowns and mentions... bond funds, balanced funds, and two US stock funds--American Century Equity Income (TWEIX), Royce Special Equity (RYSEX), Vanguard Dividend Growth (VDIGX). The problem is that none of these are "low-volatility as we know it," and I'm not aware that Benz ever published model portfolios suggesting they be used in place of, or in addition to, a total market index fund.

I am willing to "steelman" the case, but not to "vaporman" it by using paper indexes, or model portfolios that a Boglehead-level investor could have have read about before 2008, nor funds that were never described as "low volatility" until after it was observed that they had had low drawdown in 2008-9.

Using 7 low-volatility ETFs for this roller-coaster market as a good representative list that I didn't pick myself, I find USMV, FDLO, LVHD, EEMV, OUSM, OVLC, and HYLV. Not only was not a single one available in 2008-2009, not a single one was even available in 2010--the oldest, EEMV, had inception on 10/2011.
Nisi, If someone were to put in some work it would not be difficult to build a custom index of stocks as a representative sample for Low-Volatility or Minimum-Volatility funds in existence today. However, that would not yield very much as we already know that from inspecting the portfolios held by these funds that they tend to prefer stocks that are often stable slow growers. Typically stocks of companies like McDonalds, Pepsi, Coca-cola, Waste Management, food products like Hershey, Yum brands, energy utilities, etc. Do we think these companies are better than Amazon, Google, Apple, etc?

Specifically this is nothing but re-hashing the age old formula of under weighting Technology and over weighting Consumer Staples, Utilities, Consumer Defensive, and to little bit of my surprise Real Estate. I wonder if REITs would have been overweighted by these ETFs back in 2008 also? That would have been disastrous as any benefit from holding defensive stocks would have been diluted by REIT losses in that time period.

The point of low-volatility factor as in most of the other factors appear to be again Wall Street trying to market age-old stodgy stocks into their new found shiny label called factor-investing. Wall Street needs commissions and more trades needs to happen for that, more people need to hold all available marketable securities, so the new label factor helps. The past performance chasing crowd looks at factor label and the good number put up recently, and some "expert" pop-up with an academic study or two from 1970's and a helpful back test showing this strategy worked for the last 100 years, including even internationally. Voila, you get a bunch of gullible investors chasing performance, only to be disappointed as you are getting in at the end of cycle of a 5-7 year performance. Just ask those who got into Value factor around 2007.

So the question is, will putting more into Utilities, Consumer Staples, Consumer Defensive, and REITs, with underweight in Technology and perhaps Financial Services going to end up with better returns than the broad market over time. When you put it that way, everyone can see the folly of such an argument, but when you wrap it around a factor label and site an academic study or two with back tested results suddenly it sounds very smart.

As always it is important to see through the marketing strategies of the so called experts whose interests do not always align with those of the investors.
Last edited by Elysium on Mon Oct 14, 2019 8:51 am, edited 5 times in total.

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vineviz
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Re: Diversify my portfolio further with factors and sectors

Post by vineviz » Mon Oct 14, 2019 8:23 am

rkhusky wrote:
Mon Oct 14, 2019 7:25 am
Reducing drawdowns is lowering risk and will therefore reduce expected returns. You can't get around that. The market is efficient. If it were possible to reduce drawdowns (and lower risk), while maintaining the same expected return, the market would have bid those diversifiers up in a millisecond.
This is simply not how markets work. If you believe that markets are efficient, you must also believe that market prices can not and do not incorporate information about diversification benefits. Both things can not be true at the same time.
rkhusky wrote:
Mon Oct 14, 2019 7:25 am
And if the market doesn't bid those diversifiers up, it's because the market had determined that there are other risks involved for which you aren't accounting.
This is a non-sequitur. Every asset has risks, and if those risks are less-than-perfectly-correlated then it is obviously possible to combine them in such a way that the aggregate risk is less than the weighted average risk. That is, in fact, the very definition of diversification. It does not follow, then, that somehow the risks "aren't accounted for" when building a diversified portfolio because the process of diversification IS THE PROCESS THROUGH WHICH they are accounted.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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UberGrub
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Re: Diversify my portfolio further with factors and sectors

Post by UberGrub » Mon Oct 14, 2019 9:45 am

vineviz wrote:
Mon Oct 14, 2019 8:23 am
rkhusky wrote:
Mon Oct 14, 2019 7:25 am
Reducing drawdowns is lowering risk and will therefore reduce expected returns. You can't get around that. The market is efficient. If it were possible to reduce drawdowns (and lower risk), while maintaining the same expected return, the market would have bid those diversifiers up in a millisecond.
This is simply not how markets work. If you believe that markets are efficient, you must also believe that market prices can not and do not incorporate information about diversification benefits. Both things can not be true at the same time.
I had never heard this before. I don't see why the market cannot price VPU's "uncorrolation with the market" into a small premium. Why is that inconsistent with an efficient market?

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nedsaid
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Re: Diversify my portfolio further with factors and sectors

Post by nedsaid » Mon Oct 14, 2019 10:08 am

nisiprius wrote:
Mon Oct 14, 2019 6:37 am
hdas wrote:
Thu Oct 10, 2019 10:31 am
nisiprius wrote:
Thu Oct 10, 2019 10:06 am
...To see this, we can look at compare the behavior of
  1. plain-vanilla Vanguard Total Stock Market Index Fund (portfolio 1),
  2. a stock portfolio recommended by a factor expert in a 2004 book (portfolio 2), and
  3. with a 60/40 stock-bond portfolio (portfolio 3).
....When trying to prove a point, is best to "steel-man" (the opposite of straw man) the other side's point. The factor that has shown equity like returns with an actual reduction in max drawdown is LOW-VOL. Cheers :greedy
Provide me with a model portfolio
1) published in print
2) prior to 2008
3) based on asset classes representable by mutual funds or ETFs available at the time to retail investors
4) referring either to "factors" or "sectors" (or both)
5) preferably using the phrase "low-vol" or "low-volatility"

and we can both run the numbers.

Although the low-volume anomaly is often credited to Robert Haugen and a 1972 paper, my impression is that low-vol did not become a "thing" until about 2011.

For example, a Morningstar article, Battle-tested low-volatility funds says "most of the low-volatility ETFs weren't around during the last financial crisis." She surveys the field based on screening for low drawdowns and mentions... bond funds, balanced funds, and two US stock funds--American Century Equity Income (TWEIX), Royce Special Equity (RYSEX), Vanguard Dividend Growth (VDIGX). The problem is that none of these are "low-volatility as we know it," and I'm not aware that Benz ever published model portfolios suggesting they be used in place of, or in addition to, a total market index fund.

I am willing to "steelman" the case, but not to "vaporman" it by using paper indexes, or model portfolios that a Boglehead-level investor could have have read about before 2008, nor funds that were never described as "low volatility" until after it was observed that they had had low drawdown in 2008-9.

Using 7 low-volatility ETFs for this roller-coaster market as a good representative list that I didn't pick myself, I find USMV, FDLO, LVHD, EEMV, OUSM, OVLC, and HYLV. Not only was not a single one available in 2008-2009, not a single one was even available in 2010--the oldest, EEMV, had inception on 10/2011.
I would not recommend that investors chase Low Volatility at this time, compare the valuation metrics of the Consumer Staples sector to the US Stock Market itself and you can see that these stocks are very expensive. With interest rates so low, lots of chasing of Higher Dividend stocks such as Utilities and REITs. Lots of Low Volatility stocks are priced like Growth stocks which implies that investors have chased this strategy pretty darned hard. As long as I can remember, folks have talked about defensive stocks and the benefits of dividends and reinvesting them as techniques to mitigate the effects of bear markets.

Vanguard has a Global Low Volatility product that might be worth consideration as it holds a lot of cheaper foreign stocks. I have not performed any kind of analysis on it but have seen other forum members discuss it. Might be worth a look.
A fool and his money are good for business.

rkhusky
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Re: Diversify my portfolio further with factors and sectors

Post by rkhusky » Mon Oct 14, 2019 10:27 am

vineviz wrote:
Mon Oct 14, 2019 8:23 am
rkhusky wrote:
Mon Oct 14, 2019 7:25 am
Reducing drawdowns is lowering risk and will therefore reduce expected returns. You can't get around that. The market is efficient. If it were possible to reduce drawdowns (and lower risk), while maintaining the same expected return, the market would have bid those diversifiers up in a millisecond.
This is simply not how markets work. If you believe that markets are efficient, you must also believe that market prices can not and do not incorporate information about diversification benefits. Both things can not be true at the same time.
I will rephrase - if there was some magical investment that, all else being equal, could reliably decrease volatility of a portfolio, while maintaining the same return, that investment, once known and publicized, would be bid up in a microsecond.

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vineviz
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Re: Diversify my portfolio further with factors and sectors

Post by vineviz » Mon Oct 14, 2019 10:30 am

UberGrub wrote:
Mon Oct 14, 2019 9:45 am
I had never heard this before. I don't see why the market cannot price VPU's "uncorrolation with the market" into a small premium. Why is that inconsistent with an efficient market?
The concept of an efficient market holds that the price of each security is equal to the the present value of its future expected cash flows. In other words, all available information about the intrinsic value is incorporated into the price.

In order to assert that the price of that asset reflects any diversification benefits, you have to assert that the price of the asset reflects something OTHER THAN the present value of that asset's cash flows. That creates an opportunity for arbitrage, which can't exist in an efficient market.

On the other hand, in order to assert that the present value of an asset's cash flows INCLUDES information about its correlation with another asset then you must assert that the two assets have precisely the same risks (otherwise the prices can't be same with and without incorporating correlation). In that case, there can be no diversification benefits.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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vineviz
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Re: Diversify my portfolio further with factors and sectors

Post by vineviz » Mon Oct 14, 2019 10:31 am

rkhusky wrote:
Mon Oct 14, 2019 10:27 am
vineviz wrote:
Mon Oct 14, 2019 8:23 am
rkhusky wrote:
Mon Oct 14, 2019 7:25 am
Reducing drawdowns is lowering risk and will therefore reduce expected returns. You can't get around that. The market is efficient. If it were possible to reduce drawdowns (and lower risk), while maintaining the same expected return, the market would have bid those diversifiers up in a millisecond.
This is simply not how markets work. If you believe that markets are efficient, you must also believe that market prices can not and do not incorporate information about diversification benefits. Both things can not be true at the same time.
I will rephrase - if there was some magical investment that, all else being equal, could reliably decrease volatility of a portfolio, while maintaining the same return, that investment, once known and publicized, would be bid up in a microsecond.
You've just made exactly the same incorrect claim using different words.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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UberGrub
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Re: Diversify my portfolio further with factors and sectors

Post by UberGrub » Mon Oct 14, 2019 10:46 am

vineviz wrote:
Mon Oct 14, 2019 10:30 am
UberGrub wrote:
Mon Oct 14, 2019 9:45 am
I had never heard this before. I don't see why the market cannot price VPU's "uncorrolation with the market" into a small premium. Why is that inconsistent with an efficient market?
The concept of an efficient market holds that the price of each security is equal to the the present value of its future expected cash flows. In other words, all available information about the intrinsic value is incorporated into the price.
I didn't know that. I thought an efficient market priced in all available relevant information to a stock. Intrinsic, as well as how it relates to other stocks. So if there was a stock that was perfectly negatively correlated with the market, every investor would obviously want some of it, bidding up it's prices, reducing it's return, until the additional correlation benefit is exactly offset by the lower returns.
vineviz wrote:
Mon Oct 14, 2019 10:30 am

In order to assert that the price of that asset reflects any diversification benefits, you have to assert that the price of the asset reflects something OTHER THAN the present value of that asset's cash flows. That creates an opportunity for arbitrage, which can't exist in an efficient market.
How would that be arbitraged? You'd go long the firm's with high future returns (and highly correlated with the market) and short those with low returns (but little market correlation).

This isn't an arbitrage. If the market tanks, your long position suffer while your short also suffers.

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hdas
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Re: Diversify my portfolio further with factors and sectors

Post by hdas » Mon Oct 14, 2019 10:51 am

nisiprius wrote:
Mon Oct 14, 2019 6:37 am
Although the low-volume anomaly is often credited to Robert Haugen and a 1972 paper, my impression is that low-vol did not become a "thing" until about 2011.
I don't know what you mean by "a thing"....But perhaps you can be better informed, check this out.
nisiprius wrote:
Mon Oct 14, 2019 6:37 am

I am willing to "steelman" the case, but not to "vaporman" it by using paper indexes, or model portfolios that a Boglehead-level investor could have have read about before 2008, nor funds that were never described as "low volatility" until after it was observed that they had had low drawdown in 2008-9.
You can easily test 2008-2009 this with stock data, or even ETF's. I guess I can grant you that there's nothing like the live test in order to see the liquidity and contagion effects specifically related to: widely adoption of ETF model, interest rate risk, higher dedicated AUM.

Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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