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GaryA505
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Re: Things you should know about minimum volatility investing

Post by GaryA505 » Fri Nov 15, 2019 12:48 pm

Ocean77 wrote:
Fri Nov 15, 2019 12:29 pm
I can't help it but these modern strategies such as low volatility or momentum strike me as fads. I mean, they rely upon some formula applied to the stock price chart of certain past periods, right? I just can't imagine that these will be good long term strategies. So I don't invest in these. Maybe I'm wrong, but I'd rather invest in things I understand and have conviction in.
I think you could also characterize index funds as a fad as well. I mean, to avoid placing a bet on any sector, size, or whatever, we buy a market-cap index fund that includes every unprofitable small cap out there.

It's almost as if, to avoid any chance of "stock picking", we buy everything including the really good and really bad companies out there. Of course, a market-cap index fund is very heavily weighted towards large caps, but that's a whole other discussion I guess.

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Re: USMV AUM

Post by Forester » Fri Nov 15, 2019 1:07 pm

GaryA505 wrote:
Fri Nov 15, 2019 11:53 am
hdas wrote:
Fri Nov 15, 2019 11:29 am
Remarkable, perhaps brace for underperfromance

Cheers :greedy
Isn't underperformance expected for low-vol/min-vol in a bull market?
The Pain of min vol is that it's boring :)
30% MinVol; 10% SCV; 25% Equity Trend; 20% Bonds; 10% Gold; 5% Gold Equity

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Forester
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Re: USMV AUM

Post by Forester » Fri Nov 15, 2019 1:09 pm

hdas wrote:
Fri Nov 15, 2019 11:29 am
Remarkable, perhaps brace for underperfromance

Image

Cheers :greedy
Well it looks like 2020 will be another year of riskier stocks powering forward / emerging markets catching up, USMV will lag and see outflows. Then the next 20% sell off will hit and the erratic investors will jump back in as USMV holds up.
30% MinVol; 10% SCV; 25% Equity Trend; 20% Bonds; 10% Gold; 5% Gold Equity

GaryA505
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Re: USMV AUM

Post by GaryA505 » Fri Nov 15, 2019 1:22 pm

Forester wrote:
Fri Nov 15, 2019 1:09 pm

Well it looks like 2020 will be another year of riskier stocks powering forward / emerging markets catching up, USMV will lag and see outflows. Then the next 20% sell off will hit and the erratic investors will jump back in as USMV holds up.
Isn't one of the theories of what makes low-vol/min-vol work (i.e. creates the inefficiency)? Individual investors who are chasing performance so keep buying the "lottery" stocks, and advisors/managers trying to beat the market and/or outperform an index?

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Forester
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Re: USMV AUM

Post by Forester » Fri Nov 15, 2019 1:53 pm

GaryA505 wrote:
Fri Nov 15, 2019 1:22 pm
Forester wrote:
Fri Nov 15, 2019 1:09 pm

Well it looks like 2020 will be another year of riskier stocks powering forward / emerging markets catching up, USMV will lag and see outflows. Then the next 20% sell off will hit and the erratic investors will jump back in as USMV holds up.
Isn't one of the theories of what makes low-vol/min-vol work (i.e. creates the inefficiency)? Individual investors who are chasing performance so keep buying the "lottery" stocks, and advisors/managers trying to beat the market and/or outperform an index?
Yes, investors are chasing stocks with the potential for outperformance. The front page multi-baggers will rarely be found in boring lowvol portfolios. Also, investors who jump in and out of lowvol stocks might contribute to the lower drawdowns experienced by investors who stick with lowvol through the full market cycle because they're bidding up the stocks (relatively) when there is market turmoil.
30% MinVol; 10% SCV; 25% Equity Trend; 20% Bonds; 10% Gold; 5% Gold Equity

Ocean77
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Re: Things you should know about minimum volatility investing

Post by Ocean77 » Fri Nov 15, 2019 2:01 pm

GaryA505 wrote:
Fri Nov 15, 2019 12:48 pm
Ocean77 wrote:
Fri Nov 15, 2019 12:29 pm
I can't help it but these modern strategies such as low volatility or momentum strike me as fads. I mean, they rely upon some formula applied to the stock price chart of certain past periods, right? I just can't imagine that these will be good long term strategies. So I don't invest in these. Maybe I'm wrong, but I'd rather invest in things I understand and have conviction in.
I think you could also characterize index funds as a fad as well. I mean, to avoid placing a bet on any sector, size, or whatever, we buy a market-cap index fund that includes every unprofitable small cap out there.

It's almost as if, to avoid any chance of "stock picking", we buy everything including the really good and really bad companies out there. Of course, a market-cap index fund is very heavily weighted towards large caps, but that's a whole other discussion I guess.
No argument. But an index fund is at least a "fad" I have conviction in, and I think that's important in investing. If a 5 year bear market starts tomorrow, I expect (hope) I will have the conviction to stick with investing into index funds, since I know the economy and the stock market will come back. If we get another 5 years of bull market but min vol funds underperform for 5 years, I'm sure I'd bail out of them. So I'd better not invest in them to begin with.

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hdas
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Post by hdas » Sat Nov 16, 2019 9:05 am

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JoMoney
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Re: Things you should know about minimum volatility investing

Post by JoMoney » Sat Nov 16, 2019 9:27 am

Low Volatility stocks is/was a fine anomaly to debunk "Beta" as being a measure of risk/return in the stock market.
But any popular strategy trying to garner something extra is doomed to failure, we can't all be above average.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

reln
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Re: Things you should know about minimum volatility investing

Post by reln » Sat Nov 16, 2019 9:37 am

nedsaid wrote:
Tue Aug 27, 2019 11:12 am
Low volatility stocks will likely remain low volatility stocks. We also know that historically such stocks have been outperforming the market. The risk isn't that these stocks will start becoming more volatile but that their performance premiums will disappear. Everyone and their brother now know about Low Volatility, everyone and their brother knows that interest rates are very low. Between investors performance chasing low volatility stocks and investors chasing yields (many low volatility stocks are higher dividend payers), it is hard to see how this premium in investment performance will continue. The risk is that these stocks will get too expensive. For example, do folks realize how expensive the consumer staples sector is compared to the market as a whole? Found this out when I bought Coke stock, high valuations gave me pause, I held my nose and bought anyway.
Low vol stocks don't have to stay low vol. High vol can become low vol. The low vol indices have around 25% annual turnover. Financials used to be low vol now they are high vol. Low vol has time varying FFF exposures or the FFFs have time varying low vol exposure.

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Re: Things you should know about minimum volatility investing

Post by nedsaid » Sat Nov 16, 2019 8:13 pm

reln wrote:
Sat Nov 16, 2019 9:37 am
nedsaid wrote:
Tue Aug 27, 2019 11:12 am
Low volatility stocks will likely remain low volatility stocks. We also know that historically such stocks have been outperforming the market. The risk isn't that these stocks will start becoming more volatile but that their performance premiums will disappear. Everyone and their brother now know about Low Volatility, everyone and their brother knows that interest rates are very low. Between investors performance chasing low volatility stocks and investors chasing yields (many low volatility stocks are higher dividend payers), it is hard to see how this premium in investment performance will continue. The risk is that these stocks will get too expensive. For example, do folks realize how expensive the consumer staples sector is compared to the market as a whole? Found this out when I bought Coke stock, high valuations gave me pause, I held my nose and bought anyway.
Low vol stocks don't have to stay low vol. High vol can become low vol. The low vol indices have around 25% annual turnover. Financials used to be low vol now they are high vol. Low vol has time varying FFF exposures or the FFFs have time varying low vol exposure.
The 2008-2009 financial crisis exposed the risks inherent in financial stocks. Thanks for your response.
A fool and his money are good for business.

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Re: Things you should know about minimum volatility investing

Post by Forester » Fri Nov 22, 2019 10:08 am

USMV & SPY are now level for the last 12 months. However, a smoother ride with USMV :wink:
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GaryA505
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Re: Things you should know about minimum volatility investing

Post by GaryA505 » Sat Nov 23, 2019 1:28 pm

Forester wrote:
Fri Nov 22, 2019 10:08 am
USMV & SPY are now level for the last 12 months. However, a smoother ride with USMV :wink:
I would think that would be an advantage when taking regular withdrawals in retirement, no?

MotoTrojan
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Re: USMV AUM

Post by MotoTrojan » Sat Nov 23, 2019 4:57 pm

hdas wrote:
Fri Nov 15, 2019 11:29 am
Remarkable, perhaps brace for underperfromance

Image

Cheers :greedy
What percentage of the investment in the assets held by this fund, are held by this fund (or even held by this fund category)? I can't imagine this is a significant contribution to returns.

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Post by hdas » Tue Nov 26, 2019 3:38 pm

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MotoTrojan
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Re: USMV AUM

Post by MotoTrojan » Tue Nov 26, 2019 3:49 pm

hdas wrote:
Tue Nov 26, 2019 3:38 pm
MotoTrojan wrote:
Sat Nov 23, 2019 4:57 pm
hdas wrote:
Fri Nov 15, 2019 11:29 am
Remarkable, perhaps brace for underperfromance

Image

Cheers :greedy
What percentage of the investment in the assets held by this fund, are held by this fund (or even held by this fund category)? I can't imagine this is a significant contribution to returns.
You might want to rephrase your question/comment.. :confused :confused :confused
I can see how it would be confusing, let me try to clarify. Of this funds holdings, what percent of their market cap is actually held by this fund or funds in this category? Just because the AUM of this fund is growing, doesn't mean much for future performance if the fund is only a fraction of the shares available for it's holdings.

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hdas
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Post by hdas » Fri Dec 06, 2019 2:00 am

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GaryA505
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Re: Things you should know about minimum volatility investing

Post by GaryA505 » Fri Dec 06, 2019 5:35 pm

Aren't a lot of popular funds (even popular with with BHs) actually "low volatility" even though they're not advertised as such? I mean, if you picked apart Wellesley or Wellington (or non VG funds like PRWCX - T. Row Price Capital Appreciation) or AUENX (AQR Large Cap Defensive), wouldn't you find much of the equity holdings in these to be "low volatility"?

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Re: Things you should know about minimum volatility investing

Post by grog » Sat Dec 07, 2019 4:30 pm

Ocean77 wrote:
Fri Nov 15, 2019 12:29 pm
I can't help it but these modern strategies such as low volatility or momentum strike me as fads. I mean, they rely upon some formula applied to the stock price chart of certain past periods, right? I just can't imagine that these will be good long term strategies. So I don't invest in these. Maybe I'm wrong, but I'd rather invest in things I understand and have conviction in.
GaryA505 wrote:
Fri Dec 06, 2019 5:35 pm
Aren't a lot of popular funds (even popular with with BHs) actually "low volatility" even though they're not advertised as such? I mean, if you picked apart Wellesley or Wellington (or non VG funds like PRWCX - T. Row Price Capital Appreciation) or AUENX (AQR Large Cap Defensive), wouldn't you find much of the equity holdings in these to be "low volatility"?
Agreed. By no means do you have to buy USMV to tilt to low beta/low volatility. Any strategy that selects for conservative, stable kinds of companies and industries will likely be low beta. USMV is a much more modern (not to say better) approach. It has blue chip type companies like Visa, McDonald's, and Coke. But it also relies on covariance estimates to reduce overall portfolio volatility. The largest holding is Newmont Goldcorp which isn't especially low volatility but it moves differently because of the commodity exposure. It also has a fair bit of real estate.
Probably the main advantage of the fancy min vol style approach is that you get more balanced sector weights.

Wellesley picks large cap dividend paying stocks, has a bit of a value focus, and overweights the defensive sectors. Looking at portfolio visualizer, Wellesley has a beta of around 0.32 whereas a similar mix of corporate bonds and TSM would be around 0.40. The equity portion in isolation would probably have a beta in the 0.80-0.85 range. It isn't managed just to target low volatility, but that is part of package.

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Re: Things you should know about minimum volatility investing

Post by no simpler » Sat Dec 07, 2019 11:52 pm

Min vol really is different from the other factors which rely more on a qualitative narrative about the nature of some sort of risk premium. Rather, "min vol" investing is kind of the whole motivation behind modern, quantitative investing. Vast majority of the consistently top performing hedge funds employ some form of min vol investing, with varying degrees of risk/leverage.

In the end of the day, most people just don't get the implications of Ito's lemma w.r.t geometric brownian motion. The gap between the arithmetic mean and the geometric mean of a log normal distribution is equal to the variance/2. Doesn't matter if you "believe" in this, it's just math.

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Re: Things you should know about minimum volatility investing

Post by Forester » Mon Jan 27, 2020 8:23 am

Interesting paper, low vol through the decades. The premier anomaly which the CAPM ivory tower mafia don't like to talk about.

"The performance of low volatility strategies did not depend on the multi- decade (perhaps once-in-a-lifetime) changes in the fixed income environment."

S&P 500® Low Volatility Index: Five Decades of History

https://us.spindices.com/documents/rese ... istory.pdf
30% MinVol; 10% SCV; 25% Equity Trend; 20% Bonds; 10% Gold; 5% Gold Equity

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Post by hdas » Mon Jan 27, 2020 9:18 am

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Re: Things you should know about minimum volatility investing

Post by DB2 » Mon Jan 27, 2020 9:57 am

Minimal volatility investing has caught my eye as of late. With the sell-off this morning, I was curious how it was responding. Only down about half of VTI by comparison as of typing this.

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Re: Things you should know about minimum volatility investing

Post by Forester » Mon Jan 27, 2020 11:54 am

Notably of the six largest bear markets since 1972, the 1980-82 drawdown of rapidly rising interest rates, low vol had one of its biggest wins versus the S&P 500.
Finally, the period between 1980 and 1982 was challenging for the S&P 500 as it experienced the third-largest drawdown due to the Fed hiking
interest rates in response to surging inflation.16 Against the backdrop of the prolonged period of market uncertainty, the S&P 500 was in negative
territory for almost two years and bottomed out by August 1982 with a decline of 20.18%. Conversely, and in spite of a minimal drawdown in the
first month, the low volatility index produced positive returns for most of the period, recovering a full 454 trading days sooner and with a cumulative outperformance of over 43% from peak-to-trough
30% MinVol; 10% SCV; 25% Equity Trend; 20% Bonds; 10% Gold; 5% Gold Equity

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Re: Things you should know about minimum volatility investing

Post by GaryA505 » Mon Jan 27, 2020 12:37 pm

I, for one, don't want LowVol/MinVol investing to become any more popular than it is. You should know why.

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Re: Things you should know about minimum volatility investing

Post by Portfolio7 » Mon Jan 27, 2020 9:00 pm

DB2 wrote:
Mon Jan 27, 2020 9:57 am
Minimal volatility investing has caught my eye as of late. With the sell-off this morning, I was curious how it was responding. Only down about half of VTI by comparison as of typing this.
Which product(s)?

VMNVX and ACWV are global, but both seem to decline about 60% of the global market decline (Today was even better at about 50% as you noted, if I use VT to compare, which I know is a bit questionable.) Have been carrying VMNVX in substantial amounts for over two years if I recall right.

My wife's current 401(k) is 90% VMNVX, 10% Vanguard Total Bond Market. Theoretically, variability and drawdowns should correspond to something like a 60/40 portfolio with a extra couple points of returns, and so far it's roughly keeping pace. This portfolio captured over 75% of VT returns with half the volatility in 2019 (actual portfolio), and over 5 years it's beating VT with half the drawdowns... though if you go back 3 more years using ACWV, the CAGR lags VT by 1%, but the risk statistics hold. The numbers seem roughly equivalent if you fold in some small to mid-cap results to better mimic VMNVX's holdings; I'm not sure if there's a good equivalent index. It seems like a great trade-off. In total across all retirement funds, I have about 25% in VMNVX.
"An investment in knowledge pays the best interest" - Benjamin Franklin

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Re: Things you should know about minimum volatility investing

Post by DB2 » Mon Jan 27, 2020 9:13 pm

Portfolio7 wrote:
Mon Jan 27, 2020 9:00 pm
DB2 wrote:
Mon Jan 27, 2020 9:57 am
Minimal volatility investing has caught my eye as of late. With the sell-off this morning, I was curious how it was responding. Only down about half of VTI by comparison as of typing this.
Which product(s)?

VMNVX and ACWV are global, but both seem to decline about 60% of the global market decline (Today was even better at about 50% as you noted, if I use VT to compare, which I know is a bit questionable.) Have been carrying VMNVX in substantial amounts for over two years if I recall right.

My wife's current 401(k) is 90% VMNVX, 10% Vanguard Total Bond Market. Theoretically, variability and drawdowns should correspond to something like a 60/40 portfolio with a extra couple points of returns, and so far it's roughly keeping pace. This portfolio captured over 75% of VT returns with half the volatility in 2019 (actual portfolio), and over 5 years it's beating VT with half the drawdowns... though if you go back 3 more years using ACWV, the CAGR lags VT by 1%, but the risk statistics hold. The numbers seem roughly equivalent if you fold in some small to mid-cap results to better mimic VMNVX's holdings; I'm not sure if there's a good equivalent index. It seems like a great trade-off. In total across all retirement funds, I have about 25% in VMNVX.
Thanks. Sorry, I meant the U.S. iShares fund (USMV). It was down -71% today versus -1.50% for VTI. The ER is only .15 which seems reasonable for this type of product.

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Re: Things you should know about minimum volatility investing

Post by Portfolio7 » Mon Jan 27, 2020 9:25 pm

DB2 wrote:
Mon Jan 27, 2020 9:13 pm
Thanks. Sorry, I meant the U.S. iShares fund (USMV). It was down -71% today versus -1.50% for VTI. The ER is only .15 which seems reasonable for this type of product.
The US-centric funds didn't seem to be quite as advantageous as the global funds (VMNVX/ACWV) from a risk standpoint, when I looked at them a year or so ago. I have no idea if that's a function of currency, cap size, region, construction, or simple chance.
"An investment in knowledge pays the best interest" - Benjamin Franklin

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