nisiprius wrote: ↑Sat Sep 03, 2022 8:52 am
nigel_ht wrote: ↑Sat Sep 03, 2022 6:50 am
...If you have lower volatility, lower max drawdown and a higher sustainable withdrawal rate from adding defensive sectors vs classic 60/40 why isn’t that worth consideration?...
Because you just used the present tense (although you were careful to qualify it with "if.") Perhaps they have had
these, but they are not intrinsic characteristics
, they are just observed past behavior.
For example, they do not "have" lower volatility than the whole stock market. All you can say is that over some specified time period they have had
If you purchase any basket of stocks smaller than the whole stock market you are basing it on current and prior characteristics.
If I buy an ETF for SCV then these stocks, up until today, meet the characteristics of small cap value.
If I buy an ETF for defensive sectors for low volatility then it’s because these sectors, up until today, meets the characteristics of low volatility factor.
How is this particularly different than buying a basket of stocks based on the volatility factor?
https://www.msci.com/documents/1296102/ ... 2eab715ed6
The difference is that a defensive sector allocation is an “unconstrained” minimum volatility approach:
“However, a naive unconstrained minimum volatility strategy has its own set of challenges, such as biases toward certain sectors and countries, unwanted factor exposures and potentially high turnover at rebalancing.“
Of these, only high turnover at rebalancing is of interest because when we invest in the “whole stock market” we’ve already accepted a large cap bias that heavily favors the technology sector in US, EU, JPN, KOR, TWN and CHN.
I don’t know how to evaluate the turnover concern listed by MSCI but I don’t rebalance as often as an ETF might…so maybe not as important to me as an individual investor.
Finally, as an investor with a finite time horizon I’m not as concerned with whether or not low volatility is an “intrinsic” trait of certain sectors as much as I am concerned with building a total portfolio that is diverse in ways that make sense to me and has historical evidence of doing what I want it to do.
USMV, SPLV, EFAV, etc holds many of the same stocks but are younger without the same ability to see how they performed in the past. And typically their ER is higher than a sector ETF.
If I want to lower my risk, as defined (inaccurately) as volatility, I have several options. I can add more bonds OR I can move some of my stocks from “neutral” to lower volatility OR I can put less overall into securities and into something else (real estate, physical gold, art, etc) considered “safe”.