Diversification Regret Index

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fortyofforty
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Re: Diversification Regret

Post by fortyofforty » Tue Aug 20, 2019 10:44 am

vineviz wrote:
Tue Aug 20, 2019 9:59 am
fortyofforty wrote:
Tue Aug 20, 2019 6:23 am
vineviz wrote:
Mon Aug 19, 2019 11:24 pm
willthrill81 wrote:
Mon Aug 19, 2019 10:49 pm
vineviz wrote:
Mon Aug 19, 2019 10:46 pm
Size is a continuous scale, and moving from biggest to medium-big is still a move TOWARD small.
Fair enough, although using such language could be very confusing to those who think 'tilting toward small-cap' means actually owning small-cap companies, which equal-weighting of the S&P 500 does not do.
My experience is that most people probably aren’t confused.

If anything the confusion may be more likely to run the other way: owning small caps at market weight doesn’t provide any exposure to the size factor. Some people clearly think it does.
I am going to invest a bit extra into Apple, to get some benefit from tilting to small caps. Microsoft is the largest stock in the Total Stock Market Index fund. Apple is second. By tilting to Apple, it's a clear tilt towards small caps. :happy
Sounds ridiculously inefficient to me. But have fun.
Just applying your logic.

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vineviz
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Re: Diversification Regret

Post by vineviz » Tue Aug 20, 2019 11:11 am

fortyofforty wrote:
Tue Aug 20, 2019 10:44 am
Just applying your logic.
No, you’re not.

Whatever that is, it has nothing to do with either me or logic.

I was trying to explain why equally weighting all 500 stocks in the S&P 500 tilts the portfolio toward small caps relative to market cap weighting, not suggesting that such a strategy was either logical or efficient.

Not every course of action that is possible should be undertaken, and I never said it should.

Can we stop trolling and stick to substantive discussions? It’d be more helpful and more pleasant, I think.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

fortyofforty
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Re: Diversification Regret

Post by fortyofforty » Tue Aug 20, 2019 3:00 pm

vineviz wrote:
Tue Aug 20, 2019 11:11 am
fortyofforty wrote:
Tue Aug 20, 2019 10:44 am
Just applying your logic.
No, you’re not.

Whatever that is, it has nothing to do with either me or logic.

I was trying to explain why equally weighting all 500 stocks in the S&P 500 tilts the portfolio toward small caps relative to market cap weighting, not suggesting that such a strategy was either logical or efficient.

Not every course of action that is possible should be undertaken, and I never said it should.

Can we stop trolling and stick to substantive discussions? It’d be more helpful and more pleasant, I think.
Sorry, but willthrill81 rightly pointed out that an equal weighting of S&P 500 companies does not contain any "small capitalization" companies. You took issue with that, and trolled that it tilted toward small caps, even if it contained NOT ONE small cap company. I merely took your statement to its logical conclusion: that tilting to even one company smaller than another could be claimed to be tilting toward small caps.

Let's be serious. The better (and more accurate) claim would be that an equal weighting of S&P 500 companies tilts towards SMALLER caps, not small caps. So, if you're done caviling, we can continue the discussion. If not, please continue apace.

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siamond
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Re: Diversification Regret Index

Post by siamond » Tue Aug 20, 2019 3:44 pm

Oh boy, what did I start by mentioning IN PASSING the concept of equal-weighing... :o

Guys, CAN WE PLEASE GO BACK TO DIVERSIFICATION? Pretty please? :shock:

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Re: Diversification Regret Index

Post by LadyGeek » Tue Aug 20, 2019 4:42 pm

Hey, that's my job. :wink:

Please stay focused on diversification. If anyone wants to continue discussion of equal-weighting, start a new thread and post the link here.
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HomerJ
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Re: Diversification Regret

Post by HomerJ » Tue Aug 20, 2019 4:49 pm

I just never compare "what ifs"

I get what I get and I don't throw a fit.

I've been 50/50 stocks/bonds for a long while now.

When stocks are going up, I'm happy for owning stocks
When stocks are going down, I'm happy for owning bonds.

The glass is always 100% full (half liquid and half air is 100% full).

I think way too many smart people make this a lot harder than it needs to be.

Just save a lot, assume low returns, and be pleasantly surprised most of the time.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”

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willthrill81
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Re: Diversification Regret

Post by willthrill81 » Tue Aug 20, 2019 5:10 pm

HomerJ wrote:
Tue Aug 20, 2019 4:49 pm
I just never compare "what ifs"

I get what I get and I don't throw a fit.

I've been 50/50 stocks/bonds for a long while now.

When stocks are going up, I'm happy for owning stocks
When stocks are going down, I'm happy for owning bonds.

The glass is always 100% full (half liquid and half air is 100% full).

I think way too many smart people make this a lot harder than it needs to be.

Just save a lot, assume low returns, and be pleasantly surprised most of the time.
I think that what can easily be lost in these discussions is that a particular goal or strategy may be very inappropriate for some investors and very appropriate for others.

As has been said by many on this forum, 'there are many roads to Dublin'. Based on each person's own subjective assessment of future events, some may want the road with the least physical distance, others may prefer the road that requires the least time, others may opt for the smoothest road, others may opt for the 'surest' road, etc. Which road is best is dependent on the individual investor's goals, unique situation, constraints (including those that may be emotional), and so on.

It seems that in your own case, a 50/50 allows you to minimize your own potential regret (i.e. "I'm happy no matter what happens."). That's great for you. But for others, that's simply inadequate, and that's okay.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

MoneyMarathon
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Re: Diversification Regret

Post by MoneyMarathon » Wed Aug 21, 2019 2:41 am

fortyofforty wrote:
Tue Aug 20, 2019 6:23 am
vineviz wrote:
Mon Aug 19, 2019 11:24 pm
willthrill81 wrote:
Mon Aug 19, 2019 10:49 pm
vineviz wrote:
Mon Aug 19, 2019 10:46 pm
Size is a continuous scale, and moving from biggest to medium-big is still a move TOWARD small.
Fair enough, although using such language could be very confusing to those who think 'tilting toward small-cap' means actually owning small-cap companies, which equal-weighting of the S&P 500 does not do.
My experience is that most people probably aren’t confused.

If anything the confusion may be more likely to run the other way: owning small caps at market weight doesn’t provide any exposure to the size factor. Some people clearly think it does.
I am going to invest a bit extra into Apple, to get some benefit from tilting to small caps. Microsoft is the largest stock in the Total Stock Market Index fund. Apple is second. By tilting to Apple, it's a clear tilt towards small caps. :happy
Some of the confusion may come from the academic definition of the size factor, which is going short the top 50% of market capitalization by company size and going long the bottom 50% of market capitalization by company size.

Because Apple is in the top-50%, you'd be reducing the weighting to the bottom 50% and thus decreasing size exposure. Unless your entire portfolio was Apple and Microsoft, in which case you're still negative on the size factor overall, just slightly less negative.

By the same definition, you could find a nice mid cap fund and increase size exposure (tilt towards the bottom 50% of market cap).

The S&P 500 is currently a little above 80% of the market capitalization. Since relatively few names - mega caps - fill out most of the top 50% of market capitalization, S&P by equal weighting has a lot of mid caps and holds a lot of its money in that bottom 3/8 of the S&P 500, which is part of the bottom 50% of the market cap in the US.

Small caps tend to move more than mid caps with the direction of the "size" factor, but mid caps are also recognized as a way to get access to the size factor. Some people don't like the volatility of small caps, and they might use mid caps to diversify a holding like the S&P 500. They're getting exposure to size in a way similar to someone who bought an S&P 500 fund that was weighted equally to each name.

fortyofforty
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Re: Diversification Regret

Post by fortyofforty » Wed Aug 21, 2019 5:58 am

MoneyMarathon wrote:
Wed Aug 21, 2019 2:41 am
fortyofforty wrote:
Tue Aug 20, 2019 6:23 am
vineviz wrote:
Mon Aug 19, 2019 11:24 pm
willthrill81 wrote:
Mon Aug 19, 2019 10:49 pm
vineviz wrote:
Mon Aug 19, 2019 10:46 pm
Size is a continuous scale, and moving from biggest to medium-big is still a move TOWARD small.
Fair enough, although using such language could be very confusing to those who think 'tilting toward small-cap' means actually owning small-cap companies, which equal-weighting of the S&P 500 does not do.
My experience is that most people probably aren’t confused.

If anything the confusion may be more likely to run the other way: owning small caps at market weight doesn’t provide any exposure to the size factor. Some people clearly think it does.
I am going to invest a bit extra into Apple, to get some benefit from tilting to small caps. Microsoft is the largest stock in the Total Stock Market Index fund. Apple is second. By tilting to Apple, it's a clear tilt towards small caps. :happy
Some of the confusion may come from the academic definition of the size factor, which is going short the top 50% of market capitalization by company size and going long the bottom 50% of market capitalization by company size.

Because Apple is in the top-50%, you'd be reducing the weighting to the bottom 50% and thus decreasing size exposure. Unless your entire portfolio was Apple and Microsoft, in which case you're still negative on the size factor overall, just slightly less negative.

By the same definition, you could find a nice mid cap fund and increase size exposure (tilt towards the bottom 50% of market cap).

The S&P 500 is currently a little above 80% of the market capitalization. Since relatively few names - mega caps - fill out most of the top 50% of market capitalization, S&P by equal weighting has a lot of mid caps and holds a lot of its money in that bottom 3/8 of the S&P 500, which is part of the bottom 50% of the market cap in the US.

Small caps tend to move more than mid caps with the direction of the "size" factor, but mid caps are also recognized as a way to get access to the size factor. Some people don't like the volatility of small caps, and they might use mid caps to diversify a holding like the S&P 500. They're getting exposure to size in a way similar to someone who bought an S&P 500 fund that was weighted equally to each name.
For me, the best way to identify a fallacy is to reduce things to their essential elements. Everybody knows what willthrill81 meant, and he was exactly correct. Adding exactly zero small caps to a portfolio, in an effort to increase small cap exposure, and, thereby, diversification, is a fool's errand. Weighting the bottom half of the S&P 500 equally will increase exposure to smaller capitalization companies, but not to small caps. You tilt toward small caps, in the same way that adding Apple to Microsoft increases a tilt toward small caps, but to make such an argument is senseless. Taking a step from 9th Avenue in NYC toward 10th Avenue might be a step toward California, but it is likely more just a step toward Ray's Famous, Ray's Original, Ray's Best, or Original Ray's.

So far, I don't think anyone has found an investable fund that equal weights down into the truly small cap or micro cap companies.

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siamond
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Re: Diversification Regret Index

Post by siamond » Wed Aug 21, 2019 7:13 am

I incidentally stumbled upon a couple of quotes about diversification from the old sage Peter Bernstein. This came from a chat with Jason Zweig: http://jasonzweig.com/a-long-chat-with- ... bernstein/

Unsurprisingly, he didn't go into considerations of volatility, risk parity, factor diversification or anything like that. He simply honed on fundamentals while displaying refreshing humility. Love it.
The riskiest moment is when you’re right. That’s when you’re in the most trouble, because you tend to overstay the good decisions. Once you’ve been right for long enough, you don’t even consider reducing your winning positions. They feel so good, you can’t even face that. As incredible as it sounds, that makes you comfortable with not being diversified. So, in many ways, it’s better not to be so right. That’s what diversification is for. It’s an explicit recognition of ignorance.

And I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place. I want to make sure I’m exposed to it. Somebody once said that if you’re comfortable with everything you own, you’re not diversified.

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Re: Diversification Regret Index

Post by garlandwhizzer » Wed Aug 21, 2019 12:52 pm

Quotes from Bernstein in the interview with Jason Zweig listed in the siamond's post above. Great interview with someone who has been investing long enough to know that we really know very little reliably about the market's future. Food for thought.
For institutional investors, the policy portfolio [a rigid allocation like 60% stocks, 40% bonds] had become a way of passing the buck and avoiding decisions. The problem was that institutions had settled on a [mostly stock] asset allocation because in the long run, they concluded, that’s the only place to be. And I think the long run ain’t what it used to be. Stocks don’t have to do well in the future because they did well in the past. In fact, the opposite may be more likely.
As you know, I have my doubts about the certainty so many investors feel about the long-run attractions of investing in stocks. We do not know what is going to happen over the long run, never have, never will, and when [in 1999] the institutional funds were relaxed about [holding] equities, it was a moment when equities were far away from anything resembling real value. Ben Graham said to invest with a margin of error, so you don’t get killed when you are wrong. They invested with a margin so small or nonexistent that meant they had to be right or they would get killed — and they were.
Individuals can’t ignore the asset-allocation question. You want to have some structure as to where you want to be. And rebalancing is a wonderful form of market timing for individuals, almost judgment-free.
But there is a tendency — as I’ve suggested in answering all your questions — for people to expect the status quo either to last indefinitely or to provide advance signals for shifting strategies. The world does not work like that. Surprise and shock are endemic to the system, and people should always arrange their affairs to that they will survive such events. They will end up richer that way than [by] focusing all the time on getting rich.
Q: You have voiced worries over the “twin towers” of the national debt and the federal deficit. Warren Buffett is so concerned that he is (at last report) short the US dollar. But most economic observers — and nearly all investors — seem unruffled by the debt and deficit. Who’s right, and why?
A: People seldom worry until the stuff hits the fan, a moment that may be inevitable but whose timing is impossible to predict. America has always somehow come through, but the world today is not the world in which we always scored ultimate success. Buffett is right, even if he’s early.
And I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place. I want to make sure I’m exposed to it. Somebody once said that if you’re comfortable with everything you own, you’re not diversified. I think you should have a small allocation to gold, to foreign currency, to TIPS [Treasury Inflation-Protected Securities]. If you’re worried about the strength of the U.S. dollar, then gold would be a good thing to own. It’s a very bad thing to own when things are good.
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CULater
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Re: Diversification Regret Index

Post by CULater » Wed Aug 21, 2019 3:20 pm

I don't know if anyone has pointed this out yet, but the "chart" of diversification regret should be interpreted with regard to the investment period. For example, I looked at 100% stocks compared to Vanguard Balanced (VBINX) starting in 1993. The only two times that my "regret" for being 100% in stocks even got back near the starting level of 1 was Oct, 2002 and June 2009, and the rest of the time it was well below. According to this perspective, I would have not experienced much regret at all for being 100% in stocks since 1993. However, it's a different story over specific shorter time periods. From March 2000 until Oct 2002, my 100% stock regret would have been considerable. And then again from July 2007 to June 2009. It's the frame of reference, stupid! :D You not only have to look at the overall picture, but the peaks and valleys.

Perhaps something like the Ulcer Index would be a better measure of what you can tolerate, considering the ups and downs of fortune along the way.
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vineviz
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Re: Diversification Regret Index

Post by vineviz » Thu Mar 05, 2020 11:22 am

I've updated the chart in the first post to include month-end data from February, 2020.

From the prior update in June 2019 until January the index had crept higher, but diversification was significantly rewarded in February.

Interesting, February was the fourth month out of the last 24 months when the index dropped by 1.5% or more. The last time this happened was in 2009-2010.
"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: Diversification Regret Index

Post by milktoast » Thu Mar 05, 2020 11:50 am

vineviz wrote:
Thu Mar 05, 2020 11:22 am
I've updated the chart in the first post to include month-end data from February, 2020.
Thanks. I really like the concept from the original post.

But my feeling is that regret has to do with the slope of the graph more than the height.

In 2001, very few people would regret having bonds in addition to the SP500. The fact that they were still at 130 (way above 100) would be lost in the noise of falling from 150 to 130 in a short period of time. But in 1998, at the same 130 level, lots of regret to go around.

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Re: Diversification Regret Index

Post by willthrill81 » Thu Mar 05, 2020 11:56 am

vineviz wrote:
Thu Mar 05, 2020 11:22 am
I've updated the chart in the first post to include month-end data from February, 2020.
Thanks for the update. Good to see you back around!
vineviz wrote:
Thu Mar 05, 2020 11:22 am
Interesting, February was the fourth month out of the last 24 months when the index dropped by 1.5% or more. The last time this happened was in 2009-2010.
Yes, that is interesting.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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vineviz
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Re: Diversification Regret Index

Post by vineviz » Sat Aug 01, 2020 7:33 am

I've updated the chart in the OP to reflect returns through 7/31.

Image

As a reminder, the index measures the "regret" a globally and factor diversified investor would feel by comparing their portfolio returns to the S&P 500.

For many, probably most, investors "staying the course" gets progressively more difficult the more that recent history seems to favor some other alternative investment policy.

The current index value is 138.58, which is roughly what it was in October, 1998 when US large cap stocks were in the last innings of the dot-com bubble.

I think that periods like this can lead to overconfidence in the benefits of concentration relative to diversification, but a long view of history tells us that diversified investing approaches are the smarter strategy in the end. I guess time will tell whether it's really different this time, or whether we've seen this movie before.
"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: Diversification Regret Index

Post by Random Walker » Sat Aug 01, 2020 8:29 am

Thanks for that updated chart. Definitely relevant to me and my diversified equity portfolio. We eat past returns but invest looking forward.

Dave

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Re: Diversification Regret Index

Post by goodenyou » Sat Aug 01, 2020 8:33 am

vineviz wrote:
Sat Aug 01, 2020 7:33 am
I've updated the chart in the OP to reflect returns through 7/31.

Image

As a reminder, the index measures the "regret" a globally and factor diversified investor would feel by comparing their portfolio returns to the S&P 500.

For many, probably most, investors "staying the course" gets progressively more difficult the more that recent history seems to favor some other alternative investment policy.

The current index value is 138.58, which is roughly what it was in October, 1998 when US large cap stocks were in the last innings of the dot-com bubble.

I think that periods like this can lead to overconfidence in the benefits of concentration relative to diversification, but a long view of history tells us that diversified investing approaches are the smarter strategy in the end. I guess time will tell whether it's really different this time, or whether we've seen this movie before.
There may be a new taboo waiting to emerge: Diversification timing.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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Re: Diversification Regret Index

Post by RocketShipTech » Sat Aug 01, 2020 8:43 am

goodenyou wrote:
Sat Aug 01, 2020 8:33 am
vineviz wrote:
Sat Aug 01, 2020 7:33 am
I've updated the chart in the OP to reflect returns through 7/31.

Image

As a reminder, the index measures the "regret" a globally and factor diversified investor would feel by comparing their portfolio returns to the S&P 500.

For many, probably most, investors "staying the course" gets progressively more difficult the more that recent history seems to favor some other alternative investment policy.

The current index value is 138.58, which is roughly what it was in October, 1998 when US large cap stocks were in the last innings of the dot-com bubble.

I think that periods like this can lead to overconfidence in the benefits of concentration relative to diversification, but a long view of history tells us that diversified investing approaches are the smarter strategy in the end. I guess time will tell whether it's really different this time, or whether we've seen this movie before.
There may be a new taboo waiting to emerge: Diversification timing.
It’s an interesting thought.

The chart begs the question - is there such a thing as outperformance momentum? The trend appears to be many years long before reversing. Perhaps one could just ride the wave of the outperforming asset until it breaks?

Market timing heresy, I know. But maybe there is something structural about market cycles such that they can be timed relatively successfully?

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Re: Diversification Regret Index

Post by wackerdr » Sat Aug 01, 2020 9:13 am

RocketShipTech wrote:
Sat Aug 01, 2020 8:43 am
goodenyou wrote:
Sat Aug 01, 2020 8:33 am
vineviz wrote:
Sat Aug 01, 2020 7:33 am
I've updated the chart in the OP to reflect returns through 7/31.

Image

As a reminder, the index measures the "regret" a globally and factor diversified investor would feel by comparing their portfolio returns to the S&P 500.

For many, probably most, investors "staying the course" gets progressively more difficult the more that recent history seems to favor some other alternative investment policy.

The current index value is 138.58, which is roughly what it was in October, 1998 when US large cap stocks were in the last innings of the dot-com bubble.

I think that periods like this can lead to overconfidence in the benefits of concentration relative to diversification, but a long view of history tells us that diversified investing approaches are the smarter strategy in the end. I guess time will tell whether it's really different this time, or whether we've seen this movie before.
There may be a new taboo waiting to emerge: Diversification timing.
It’s an interesting thought.

The chart begs the question - is there such a thing as outperformance momentum? The trend appears to be many years long before reversing. Perhaps one could just ride the wave of the outperforming asset until it breaks?

Market timing heresy, I know. But maybe there is something structural about market cycles such that they can be timed relatively successfully?
To me, bad market timing is more regretful than regret with lack of diversification.

I think behaviorally ( I can only speak for myself), internalizing the risk and be comfortable is the key. To me I can stomach volatility with enough amount of emergency fund, so I am doing 100% stock, and large cap growth, knowing it will fall harder than TSM or a a 60:40 portfolio, when it does fall. But I have faith that it will pay off, given that over 15 year horizon there has never been losing stretch.

So I am trying to not second guess whether I should diversify to 70:30 or something more conservative. I will let it ride and fall when it does.
Last edited by wackerdr on Sat Aug 01, 2020 9:24 am, edited 1 time in total.

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Re: Diversification Regret Index

Post by nigel_ht » Sat Aug 01, 2020 9:15 am

vineviz wrote:
Sat Aug 01, 2020 7:33 am
I've updated the chart in the OP to reflect returns through 7/31.

Image

As a reminder, the index measures the "regret" a globally and factor diversified investor would feel by comparing their portfolio returns to the S&P 500.

For many, probably most, investors "staying the course" gets progressively more difficult the more that recent history seems to favor some other alternative investment policy.

The current index value is 138.58, which is roughly what it was in October, 1998 when US large cap stocks were in the last innings of the dot-com bubble.

I think that periods like this can lead to overconfidence in the benefits of concentration relative to diversification, but a long view of history tells us that diversified investing approaches are the smarter strategy in the end. I guess time will tell whether it's really different this time, or whether we've seen this movie before.
Does the chart really show that? Seems like it never goes below 80 but stays above 100 a lot and can go over 150...

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vineviz
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Re: Diversification Regret Index

Post by vineviz » Sat Aug 01, 2020 9:26 am

nigel_ht wrote:
Sat Aug 01, 2020 9:15 am

Does the chart really show that? Seems like it never goes below 80 but stays above 100 a lot and can go over 150...
No, that's not what this chart shows. The chart is merely illustrating the pain of being diversified.

The benefits of diversification are copiously documented elsewhere.
"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: Diversification Regret Index

Post by RocketShipTech » Sat Aug 01, 2020 9:28 am

Vineviz you should run the chart against QQQ, I have a lot of regret about not concentrating in that :oops:

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Re: Diversification Regret Index

Post by nigel_ht » Sat Aug 01, 2020 9:51 am

vineviz wrote:
Sat Aug 01, 2020 9:26 am
nigel_ht wrote:
Sat Aug 01, 2020 9:15 am

Does the chart really show that? Seems like it never goes below 80 but stays above 100 a lot and can go over 150...
No, that's not what this chart shows. The chart is merely illustrating the pain of being diversified.

The benefits of diversification are copiously documented elsewhere.
Yes, but when I look at that chart I don't see the benefits. I just see "meh". Shouldn't the benefits show more? I mean, people complain about DCA only winning 1/3rd the time so that chart probably would look similar...

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vineviz
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Re: Diversification Regret Index

Post by vineviz » Sat Aug 01, 2020 9:55 am

nigel_ht wrote:
Sat Aug 01, 2020 9:51 am
vineviz wrote:
Sat Aug 01, 2020 9:26 am
nigel_ht wrote:
Sat Aug 01, 2020 9:15 am

Does the chart really show that? Seems like it never goes below 80 but stays above 100 a lot and can go over 150...
No, that's not what this chart shows. The chart is merely illustrating the pain of being diversified.

The benefits of diversification are copiously documented elsewhere.
Yes, but when I look at that chart I don't see the benefits. I just see "meh". Shouldn't the benefits show more? I mean, people complain about DCA only winning 1/3rd the time so that chart probably would look similar...
The chart isn’t showing the benefits of diversification. That’s not what the index is measuring, so of course you won’t see it in the measurement.
"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: Diversification Regret Index

Post by RocketShipTech » Sat Aug 01, 2020 9:59 am

nigel_ht wrote:
Sat Aug 01, 2020 9:51 am
vineviz wrote:
Sat Aug 01, 2020 9:26 am
nigel_ht wrote:
Sat Aug 01, 2020 9:15 am

Does the chart really show that? Seems like it never goes below 80 but stays above 100 a lot and can go over 150...
No, that's not what this chart shows. The chart is merely illustrating the pain of being diversified.

The benefits of diversification are copiously documented elsewhere.
Yes, but when I look at that chart I don't see the benefits. I just see "meh". Shouldn't the benefits show more? I mean, people complain about DCA only winning 1/3rd the time so that chart probably would look similar...
You’re missing the point. The chart going below 100 does not show the benefits of diversification.

Outperformance is not a benefit of diversification.

alluringreality
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Re: Diversification Regret Index

Post by alluringreality » Sat Aug 01, 2020 10:02 am

RocketShipTech wrote:
Sat Aug 01, 2020 9:28 am
Vineviz you should run the chart against QQQ, I have a lot of regret about not concentrating in that :oops:
As noted in the first post, it's possible to adjust for personal preferences. QQQ started just before the 2000 crash, so the information isn't pretty.

Compared to Total Market $100 comparatively falls by over 61% across 2.5 years and is underwater in nominal terms for over 20 years.
https://www.portfoliovisualizer.com/bac ... ion2_1=100

Compared to the mix from the first post, QQQ is still underwater in nominal terms.
https://www.portfoliovisualizer.com/bac ... ion5_1=100
Last edited by alluringreality on Sat Aug 01, 2020 12:14 pm, edited 4 times in total.
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)

RocketShipTech
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Re: Diversification Regret Index

Post by RocketShipTech » Sat Aug 01, 2020 10:08 am

alluringreality wrote:
Sat Aug 01, 2020 10:02 am
RocketShipTech wrote:
Sat Aug 01, 2020 9:28 am
Vineviz you should run the chart against QQQ, I have a lot of regret about not concentrating in that :oops:
As noted in the first post, it's possible to adjust for personal preferences. QQQ started just before the 2000 crash, so the information isn't pretty. $100 comparatively falls by over 61% across 2.5 years and is underwater in nominal terms for over 20 years. In real terms, comparatively QQQ is still underwater and hasn't recovered from 2000.
https://www.portfoliovisualizer.com/bac ... ion2_1=100
Actually you should start the comparison with the inception of the fund in April 1999:

https://www.portfoliovisualizer.com/bac ... ion2_1=100

What a difference a few months makes. Also, Total Stock is not the “globally factor-diversified” benchmark vineviz is using.

The other aspect of this is I only started investing in 2008. So yes, I have a whole lotta regret.

Nowizard
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Re: Diversification Regret Index

Post by Nowizard » Sat Aug 01, 2020 10:11 am

Nice term, and something we are dealing with now with a value fund that shows "red" on our portfolio entry when others are "black." Hanging in there, though.

Tim

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Re: Diversification Regret Index

Post by willthrill81 » Sat Aug 01, 2020 10:12 am

RocketShipTech wrote:
Sat Aug 01, 2020 8:43 am
goodenyou wrote:
Sat Aug 01, 2020 8:33 am
vineviz wrote:
Sat Aug 01, 2020 7:33 am
I've updated the chart in the OP to reflect returns through 7/31.

Image

As a reminder, the index measures the "regret" a globally and factor diversified investor would feel by comparing their portfolio returns to the S&P 500.

For many, probably most, investors "staying the course" gets progressively more difficult the more that recent history seems to favor some other alternative investment policy.

The current index value is 138.58, which is roughly what it was in October, 1998 when US large cap stocks were in the last innings of the dot-com bubble.

I think that periods like this can lead to overconfidence in the benefits of concentration relative to diversification, but a long view of history tells us that diversified investing approaches are the smarter strategy in the end. I guess time will tell whether it's really different this time, or whether we've seen this movie before.
There may be a new taboo waiting to emerge: Diversification timing.
It’s an interesting thought.

The chart begs the question - is there such a thing as outperformance momentum? The trend appears to be many years long before reversing. Perhaps one could just ride the wave of the outperforming asset until it breaks?

Market timing heresy, I know. But maybe there is something structural about market cycles such that they can be timed relatively successfully?
If you're asking whether momentum is considered to be a 'genuine' factor by those with Ph.D.s in finance, the answer is a resounding yes.

Precisely how an investor gains access to the momentum factor is debated.

Regarding the apparent trend going on for years before reversing, I'll just say that my own strategy has kept me in U.S. large-cap growth almost continuously over the last three years, and it's worked out very well for me so far. I won't discuss that further on the open forum though; PM me if you want more details.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Diversification Regret Index

Post by alluringreality » Sat Aug 01, 2020 11:39 am

RocketShipTech wrote:
Sat Aug 01, 2020 10:08 am
What a difference a few months makes.
Many backtests are somewhat sensitive to start date. I'm not sure how to determine if the future is necessarily going to be an upwards or downwards trend. My guesses are sometimes right and sometimes wrong. I'm wrong enough that I figure it's probably best if I don't market time or chase stock performance.
The other aspect of this is I only started investing in 2008. So yes, I have a whole lotta regret.
I had stocks before 2000, and behaviorally the way I dealt with it was just to ignore that I had the account. As someone that's planning to continue buying through downturns, it's always possible I could lose half my assets again in the future. A similar experience would be enough for me, so higher volatility (QQQ, gold, etc.) simply doesn't have a lot of appeal to me, although a mix can look nice on backtests. Basically I just don't find looking at upwards trends very instructive, aside from considering that a fall could be quicker.
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Re: Diversification Regret Index

Post by columbia » Sat Aug 01, 2020 1:29 pm

I imagine that Edward Tufte would argue that the chart should be flipped upside down: that would - visually - better represent that said hypothetical investor likely hasn't had regret over their decision.
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Re: Diversification Regret Index

Post by nigel_ht » Sat Aug 01, 2020 10:10 pm

RocketShipTech wrote:
Sat Aug 01, 2020 9:59 am
nigel_ht wrote:
Sat Aug 01, 2020 9:51 am
vineviz wrote:
Sat Aug 01, 2020 9:26 am
nigel_ht wrote:
Sat Aug 01, 2020 9:15 am

Does the chart really show that? Seems like it never goes below 80 but stays above 100 a lot and can go over 150...
No, that's not what this chart shows. The chart is merely illustrating the pain of being diversified.

The benefits of diversification are copiously documented elsewhere.
Yes, but when I look at that chart I don't see the benefits. I just see "meh". Shouldn't the benefits show more? I mean, people complain about DCA only winning 1/3rd the time so that chart probably would look similar...
You’re missing the point. The chart going below 100 does not show the benefits of diversification.

Outperformance is not a benefit of diversification.
Lower volatility is nice but if it mostly limits gains rather than losses...

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vineviz
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Re: Diversification Regret Index

Post by vineviz » Sun Aug 02, 2020 11:25 am

nigel_ht wrote:
Sat Aug 01, 2020 10:10 pm
Lower volatility is nice but if it mostly limits gains rather than losses...
Yeah, that's quite not true.

There are two ways to "lower volatility", de-risking and diversification. De-risking lowers volatility and expected return at the same time. Diversification lowers volatility without reducing expected return.

As you might guess, the two approaches to lowering volatility tend to have different impacts on investor outcomes. Either way, the asymmetry you mention ("mostly limits gains rather than losses") is rarely the case and even then ONLY when the observation horizon is shorter than the investment horizon.

Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days, weeks, months, years) even when their actual investment time horizon is quite long (e.g. multiple years, decades). Behavioral economists call this myopic loss aversion and it's likely an important contributor to performance chasing and/or under-diversification.
"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: Diversification Regret Index

Post by Robot Monster » Sun Aug 02, 2020 12:19 pm

vineviz wrote:
Sun Aug 02, 2020 11:25 am
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days, weeks, months, years) even when their actual investment time horizon is quite long (e.g. multiple years, decades). Behavioral economists call this myopic loss aversion and it's likely an important contributor to performance chasing and/or under-diversification.
This disease is alive and well in me, I'm sad to say, but I don't think I'm the only one around here who's infected.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: Diversification Regret Index

Post by garlandwhizzer » Sun Aug 02, 2020 12:58 pm

vineviz wrote:

I'm not predicting that the next 10 years will look like 1999 to 2009, but I do think it is worth remembering that in the past when the benefits of diversification appeared to have disappeared they soon came back with a vengeance.
1+

Great post, vineviz.

Diversification regret is real and it pushes investors toward performance chasing. The problem with performance chasing is that it's impossible for the individual investor to accurately time the point when the outperforming asset is going to tank as they all do given sufficient time. SCV versus LCG is a case in point over the last 10 years or so. It's up to the individual investor whether to choose wide diversification like the balanced portfolio that vineviz points out, or whether to chase TSLA and AMZN as they skyrocket or put in all in QQQ.

My personal belief is that the wide diversification of a balanced portfolio offers the best long term protection from risk and uncertainty and provides reliable positive real returns. Wide diversification will never be the best performing portfolio, but neither will it ever be the worst. The thing about risk is that we never know in advance where the next major risk will come from. Covid-19 is a case in point. No one expected that. LCG held up much better in that crisis than SCV, but that doesn't mean that the same will happen in the next market gyration. Usually in the markets the longer and more dramatic a winning streak goes, the more dramatic is the collapse that follows it. Putting all eggs in the one basket that has been wining for long while may increase returns over a given time period but that concentration in a narrow segment of the market or asset classes inevitably increases risk as well when the market wind shifts in the opposite direction.

Garland Whizzer

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Re: Diversification Regret Index

Post by goodenyou » Sun Aug 02, 2020 1:27 pm

Robot Monster wrote:
Sun Aug 02, 2020 12:19 pm
vineviz wrote:
Sun Aug 02, 2020 11:25 am
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days, weeks, months, years) even when their actual investment time horizon is quite long (e.g. multiple years, decades). Behavioral economists call this myopic loss aversion and it's likely an important contributor to performance chasing and/or under-diversification.
This disease is alive and well in me, I'm sad to say, but I don't think I'm the only one around here who's infected.
For this one you wear a mask over your eyes, not your nose and mouth.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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Re: Diversification Regret Index

Post by nigel_ht » Sun Aug 02, 2020 3:19 pm

vineviz wrote:
Sun Aug 02, 2020 11:25 am
nigel_ht wrote:
Sat Aug 01, 2020 10:10 pm
Lower volatility is nice but if it mostly limits gains rather than losses...
Yeah, that's quite not true.

There are two ways to "lower volatility", de-risking and diversification. De-risking lowers volatility and expected return at the same time. Diversification lowers volatility without reducing expected return.

As you might guess, the two approaches to lowering volatility tend to have different impacts on investor outcomes. Either way, the asymmetry you mention ("mostly limits gains rather than losses") is rarely the case and even then ONLY when the observation horizon is shorter than the investment horizon.
I guess since this is less than 20 years data I can live with that.

I would expect that over a longer period we would see a higher percentage of years under 100 than we see in this chart.

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Re: Diversification Regret Index

Post by vineviz » Sun Aug 02, 2020 4:01 pm

nigel_ht wrote:
Sun Aug 02, 2020 3:19 pm
I would expect that over a longer period we would see a higher percentage of years under 100 than we see in this chart.
The index level (e.g. 1993 = 100) is arbitrary, so you could argue that the "pain" is more accurately represented by the slope of the line: increasing feels good for the diversified investor and decreasing feels bad.

Indeed, for MOST of the past 60 years the line has been downward sloping. The main graph starts in 1993 because of the inception of actual funds, but extending back using annual index data instead of monthly fund data shows that diversification has USUALLY triggered less regret than it has recently:


Image
"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: Diversification Regret Index

Post by lostdog » Mon Aug 03, 2020 10:25 am

vineviz wrote:
Sun Aug 02, 2020 11:25 am
nigel_ht wrote:
Sat Aug 01, 2020 10:10 pm
Lower volatility is nice but if it mostly limits gains rather than losses...
Yeah, that's quite not true.

There are two ways to "lower volatility", de-risking and diversification. De-risking lowers volatility and expected return at the same time. Diversification lowers volatility without reducing expected return.

As you might guess, the two approaches to lowering volatility tend to have different impacts on investor outcomes. Either way, the asymmetry you mention ("mostly limits gains rather than losses") is rarely the case and even then ONLY when the observation horizon is shorter than the investment horizon.

Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days, weeks, months, years) even when their actual investment time horizon is quite long (e.g. multiple years, decades). Behavioral economists call this myopic loss aversion and it's likely an important contributor to performance chasing and/or under-diversification.
Thank you for sharing this stuff.

The bold we see running rampant on this forum all of the time.
Global Market Cap Equity || 25x Expenses

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Re: Diversification Regret Index

Post by Robot Monster » Mon Aug 03, 2020 11:13 am

lostdog wrote:
Mon Aug 03, 2020 10:25 am
vineviz wrote:
Sun Aug 02, 2020 11:25 am
nigel_ht wrote:
Sat Aug 01, 2020 10:10 pm
Lower volatility is nice but if it mostly limits gains rather than losses...
Yeah, that's quite not true.

There are two ways to "lower volatility", de-risking and diversification. De-risking lowers volatility and expected return at the same time. Diversification lowers volatility without reducing expected return.

As you might guess, the two approaches to lowering volatility tend to have different impacts on investor outcomes. Either way, the asymmetry you mention ("mostly limits gains rather than losses") is rarely the case and even then ONLY when the observation horizon is shorter than the investment horizon.

Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days, weeks, months, years) even when their actual investment time horizon is quite long (e.g. multiple years, decades). Behavioral economists call this myopic loss aversion and it's likely an important contributor to performance chasing and/or under-diversification.
Thank you for sharing this stuff.

The bold we see running rampant on this forum all of the time.
Indeed. Seems we have three threads dedicated to this myopic view on this forum: US stocks soar, US stocks freefall, what u up YTD. And no, I don't believe everyone in those is treating it tongue in cheek. That's all I'll say on the matter.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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