the_wiki wrote: Mon Mar 10, 2025 12:39 pm
Factors have definitely been giving major positive outperformance. Just not Small Cap or Value factors. Large Cap and Growth have gone absolutely gangbusters for 10+ years. The 10-15 years before that, it was the other way around.
Those aren't factors in the sense generally meant. It's SMB (small minus big) not BMS. Ditto for Value vs Growth.
Value and Small factors have had a bad decade. Whether they're dead or just resting remains to be seen.
brightlightstonight wrote: Mon Mar 10, 2025 1:26 pm
Value and Small factors have had a bad decade. Whether they're dead or just resting remains to be seen.
prioritarian wrote: Mon Mar 10, 2025 11:59 am
Many Bogleheads forum participants also hold vanguard funds that tilt away from cap weight with little discussion of how they are deviating from some Bogleheads dogma.
Many hold individual stocks outside a mutual fund or ETF... You'd think that would be level 1 anathema vs tilts or active or anything else.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Factors haven’t been giving positive returns recently in the US. And factor investing isn’t about diversifying risk, it’s about concentrating and increasing risk, with the hopes of increasing return. The factor portfolio has stocks that all have the same factor characteristics.
The market portfolio is the most diverse with a mix of all the different characteristics.
Factor investing can be about diversifying risk; and no, the market portfolio is not the “most diverse” portfolio. The market is priced by the average of all risk assessments; the goals and measure of risk are different, so there will be tilts that are more diversified in the number/size of risk sources.
The market portfolio does not attempt to size risk sources equally or in any risk-managed manner; it is just the composite risk appetite, and some risk sources will be inevitably larger than others.
Is it right to size these risk sources differently than the market? It depends on one’s objectives. Those seeking a smoother ride would want to size the risk sources more equally via a tilt in a manner that reduces volatility. Those seeking a higher octane ride might do the opposite tilt to obtain a higher upside potential. Who is doing this wrong? The answer is neither.
That’s the efficient frontier. For each level of risk, there’s a best expected return. For each expected return, there’s a lowest risk.
rkhusky wrote: Fri Mar 07, 2025 10:18 am
Adding a tilt to SV is not diversification, because, as you point out, TSM already includes all the SV stocks at market weight. Adding bonds or international stocks or gold or physical real estate or collectibles to TSM are examples of diversification.
Adding more SV or SG or LV or LG or REIT’s is a tilt, not diversification. In fact, a significant tilt would be concentration, the opposite of diversification.
I see. So you’re saying we should be adding international small cap value
That’s one way to add diversification to TSM. It doesn’t add diversity to TISM.
Factors haven’t been giving positive returns recently in the US. And factor investing isn’t about diversifying risk, it’s about concentrating and increasing risk, with the hopes of increasing return. The factor portfolio has stocks that all have the same factor characteristics.
The market portfolio is the most diverse with a mix of all the different characteristics.
Factors have definitely been giving major positive outperformance. Just not Small Cap or Value factors. Large Cap and Growth have gone absolutely gangbusters for 10+ years. The 10-15 years before that, it was the other way around.
I suppose there’s factor investing and then there are factors, which are not necessarily the same thing. Factors are defined as long-short, but most everyone factor invests long-only.
the_wiki wrote: Mon Mar 10, 2025 12:39 pm
Factors have definitely been giving major positive outperformance. Just not Small Cap or Value factors. Large Cap and Growth have gone absolutely gangbusters for 10+ years. The 10-15 years before that, it was the other way around.
Those aren't factors in the sense generally meant. It's SMB (small minus big) not BMS. Ditto for Value vs Growth.
Value and Small factors have had a bad decade. Whether they're dead or just resting remains to be seen.
If you did use BmS and/or LmH, there would be no significant change. HmL and SmB were arbitrary choices.
Those aren't factors in the sense generally meant. It's SMB (small minus big) not BMS. Ditto for Value vs Growth.
Value and Small factors have had a bad decade. Whether they're dead or just resting remains to be seen.
If you did use BmS and/or LmH, there would be no significant change. HmL and SmB were arbitrary choices.
They weren't arbitrary. They had (past tense very much intended) historically positive returns, and therefore BmS and LmH would have had negative returns. Who's gonna publish results proudly describing a new factor for the zoo with strong negative returns?
exodusing wrote: Mon Mar 10, 2025 6:38 am
This average investor (weighted by portfolio size means it's a very large portfolio) almost certainly is aware of the academic literature and has selected its portfolio accordingly. It has already made any adjustment towards (or away from) SV as it considers appropriate.
I respectfully disagree. The average investor cannot calculate a weighted average, knows the difference between a marginal tax rate or effective tax rate or has any idea what a 95% confidence interval is. Or is aware that 20 year treasuries beat large cap growth from 1969 thru 2008.
There was a poster last week who tilted to SCV and I think made it 1 week before switching back because it was down? Sounds about right lol.
The definition of average investor I'm using is average weighted by portfolio size. This is very different from the average person who is an investor. The average investor weighted by portfolio size holds a much larger portfolio than the average person who invests. Billionaires have much larger weights than you and I.
Perhaps Ken French's version of this will be clearer. I'm talking about the holder of the average dollar invested:
"Simple arithmetic then says the average dollar invested holds the global market portfolio. And if we weight by investment wealth, so Bill Gates gets more weight than I do, the average investor also holds the global market. As a result, the average investor and the global market portfolio provide useful reference points".
exodusing wrote: Mon Mar 10, 2025 6:38 am
The average investor, weighted by portfolio size, holds the market.
Which market? The SP500 has a strong size tilt (and deviates from cap weight) and the US market is a strong tilt away from the total market.
Many Bogleheads forum participants also hold vanguard funds that tilt away from cap weight with little discussion of how they are deviating from some Bogleheads dogma.
The market is the global market cap weighted market portfolio. Also see my post immediately above.
rkhusky wrote: Mon Mar 10, 2025 3:24 pm
If you did use BmS and/or LmH, there would be no significant change. HmL and SmB were arbitrary choices.
They weren't arbitrary. They had (past tense very much intended) historically positive returns, and therefore BmS and LmH would have had negative returns. Who's gonna publish results proudly describing a new factor for the zoo with strong negative returns?
That wasn’t the point of the model. But that was the only reason for the choice - to use positive numbers instead of negatives at the time - arbitrary choice, which didn’t affect the main point of explaining returns.
Factor investing can be about diversifying risk; and no, the market portfolio is not the “most diverse” portfolio. The market is priced by the average of all risk assessments; the goals and measure of risk are different, so there will be tilts that are more diversified in the number/size of risk sources.
The market portfolio does not attempt to size risk sources equally or in any risk-managed manner; it is just the composite risk appetite, and some risk sources will be inevitably larger than others.
Is it right to size these risk sources differently than the market? It depends on one’s objectives. Those seeking a smoother ride would want to size the risk sources more equally via a tilt in a manner that reduces volatility. Those seeking a higher octane ride might do the opposite tilt to obtain a higher upside potential. Who is doing this wrong? The answer is neither.
That’s the efficient frontier. For each level of risk, there’s a best expected return. For each expected return, there’s a lowest risk.
Right. However, the efficient frontier is not the same curve for everyone because their personal definition of risk is different. This is why Vanguard has hundreds of funds rather than just half a dozen.
Factor investing allow me to account for personal risks and circumstances that the market average is not quite respecting; I do not get a premium for holding investments that magnify my personal risks unless the market composite feels similarly.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
These convos end up going the same way every time. Well rkhusky, I support and respect your position to not tilt. Me on the other hand, I put my money where my mouth is and I'll keep rocking 100% global SCV.
And imma check out another forum where we can get into the nuts and bolts of this stuff.
grap0013 wrote: Mon Mar 10, 2025 6:58 pm
These convos end up going the same way every time. Well rkhusky, I support and respect your position to not tilt. Me on the other hand, I put my money where my mouth is and I'll keep rocking 100% global SCV.
And imma check out another forum where we can get into the nuts and bolts of this stuff.
There you go. Go big or go home.
And it’s all whether you think the past is going to repeat. Perhaps the lighting will strike twice.
exodusing wrote: Sun Mar 09, 2025 12:19 pmThe academic literature is generally to the effect that you're taking more risk to get a higher expected return (including FF who identify SV as risk factors), which is another case of (2).
I believe the academic literature would describe SV as more of the same risk and some different risk. Typical SV fund has full dose or slightly more of market risk plus the unique and independent risks of size and value.
rkhusky wrote: Mon Mar 10, 2025 2:42 pm
That’s the efficient frontier. For each level of risk, there’s a best expected return. For each expected return, there’s a lowest risk.
Right. However, the efficient frontier is not the same curve for everyone because their personal definition of risk is different. This is why Vanguard has hundreds of funds rather than just half a dozen.
Factor investing allow me to account for personal risks and circumstances that the market average is not quite respecting; I do not get a premium for holding investments that magnify my personal risks unless the market composite feels similarly.
Personal risk assessment is not the reason Vanguard has hundreds of funds. And the efficient frontier typically uses volatility as the measure of risk. If you want to create a personal efficient frontier that’s fine, but most people don’t. If you feel that you need to take more risk than the market provides to reach your goals, factor investing is one way to do that.
dcabler wrote: Sun Mar 09, 2025 4:44 pm
(I did a similar study as you years ago - that spreadsheet, along with many others, is on the island of lost toys somewhere on my hard drive)
Cheers.
Although crunching your own numbers can be fun I think good idea to read Larry Swedroe’s books on the topic. He has access to more data and has big sections on these factors and gives a good history lesson.
From what I remember there are two tables in Chapter 9 of the book that by themselves are worth the price of the book. One is the return, risk, sharpe ratio for each of the factors and 1/n portfolios comprised of the factors. The other is the odds of underperformance over different time spans for each of the factors and 1/n portfolios comprised of the factors. What becomes very clear from the tables is that the shorter one’s time frame, the more important is diversification.
Right. However, the efficient frontier is not the same curve for everyone because their personal definition of risk is different. This is why Vanguard has hundreds of funds rather than just half a dozen.
Factor investing allow me to account for personal risks and circumstances that the market average is not quite respecting; I do not get a premium for holding investments that magnify my personal risks unless the market composite feels similarly.
Personal risk assessment is not the reason Vanguard has hundreds of funds. And the efficient frontier typically uses volatility as the measure of risk. If you want to create a personal efficient frontier that’s fine, but most people don’t. If you feel that you need to take more risk than the market provides to reach your goals, factor investing is one way to do that.
Why do people deviate from the market? Because they feel the market at cap is unsuitable for their needs; therefore, it is a personal risk assessment. And no, I am not tilting because I want more risk. Why are my statements so hard to understand?
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
rkhusky wrote: Tue Mar 11, 2025 10:08 am
Personal risk assessment is not the reason Vanguard has hundreds of funds. And the efficient frontier typically uses volatility as the measure of risk. If you want to create a personal efficient frontier that’s fine, but most people don’t. If you feel that you need to take more risk than the market provides to reach your goals, factor investing is one way to do that.
Why do people deviate from the market? Because they feel the market at cap is unsuitable for their needs; therefore, it is a personal risk assessment. And no, I am not tilting because I want more risk. Why are my statements so hard to understand?
People usually deviate from the market from either ignorance or greed.
Factor investing, ie the variations of SCV, are about adding risk to get more return. If you are only using one or more of the lesser known factors that target less risk for less expected return, perhaps you could spell that strategy out.
Why do people deviate from the market? Because they feel the market at cap is unsuitable for their needs; therefore, it is a personal risk assessment. And no, I am not tilting because I want more risk. Why are my statements so hard to understand?
People usually deviate from the market from either ignorance or greed.
Factor investing, ie the variations of SCV, are about adding risk to get more return. If you are only using one or more of the lesser known factors that target less risk for less expected return, perhaps you could spell that strategy out.
A value tilt is safer in my personal situation; end of story. I have said this in the past many times. It is highly conflicting with the narrative of factor investing here, but alas here it is. Why is this hard to understand?
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
rkhusky wrote: Tue Mar 11, 2025 7:13 pm
Factor investing, ie the variations of SCV, are about adding risk to get more return. If you are only using one or more of the lesser known factors that target less risk for less expected return, perhaps you could spell that strategy out.
If you accept the idea that adding factors is akin to adding “diversification”, then adding factors is no more about adding risk to get more return than any other form of diversification. Indeed it’s the opposite. It’s about reducing risk to achieve the same expected return.
It’s the same basic diversification insight as Markowitz provided
(Ie, its total portfolio risk that matters, not individual portions of the portfolio)
“There is no deeper meaning to what risk tolerance is other than what kind of spending distribution you most prefer.” |
- Ben Mathew
rkhusky wrote: Tue Mar 11, 2025 7:13 pm
Factor investing, ie the variations of SCV, are about adding risk to get more return. If you are only using one or more of the lesser known factors that target less risk for less expected return, perhaps you could spell that strategy out.
If you accept the idea that adding factors is akin to adding “diversification”, then adding factors is no more about adding risk to get more return than any other form of diversification. Indeed it’s the opposite. It’s about reducing risk to achieve the same expected return.
It’s the same basic diversification insight as Markowitz provided
(Ie, its total portfolio risk that matters, not individual portions of the portfolio)
Factor-based funds like those targeting SCV don’t add diversification since those components are already in TSM. In small additional amounts, they don’t hurt diversification either. But large amounts reduce diversification and increase risk. They’re called risk factors after all.
Last edited by rkhusky on Tue Mar 11, 2025 8:30 pm, edited 1 time in total.
rkhusky wrote: Tue Mar 11, 2025 7:13 pm
People usually deviate from the market from either ignorance or greed.
Factor investing, ie the variations of SCV, are about adding risk to get more return. If you are only using one or more of the lesser known factors that target less risk for less expected return, perhaps you could spell that strategy out.
A value tilt is safer in my personal situation; end of story. I have said this in the past many times. It is highly conflicting with the narrative of factor investing here, but alas here it is. Why is this hard to understand?
rkhusky wrote: Tue Mar 11, 2025 8:24 pm
Factor-based funds like those targeting SCV don’t add diversification since those components are already in TSM. ..
Yes, if you categorically dismiss the framing, which you do, then they don’t. Which is fine
But if you don’t dismiss the framing, then they do, since the TSM HmL is offset completely by its counterpart
They’re called risk factors after all.
Well yes, but that’s missing the point. Any given stock is risky. But combining 100 stocks into a single portfolio is less risky than the individual components
“There is no deeper meaning to what risk tolerance is other than what kind of spending distribution you most prefer.” |
- Ben Mathew
A value tilt is safer in my personal situation; end of story. I have said this in the past many times. It is highly conflicting with the narrative of factor investing here, but alas here it is. Why is this hard to understand?
I don’t remember your personal story.
The point is that value is not as risky to some investors.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
rkhusky wrote: Tue Mar 11, 2025 8:27 pm
I don’t remember your personal story.
The point is that value is not as risky to some investors.
I’m not seeing it. Even if you work for a so-called growth company, the correlation of a single company with the growth factor is so minimal that investing in value isn’t going to balance things out.
Why do people deviate from the market? Because they feel the market at cap is unsuitable for their needs; therefore, it is a personal risk assessment. And no, I am not tilting because I want more risk. Why are my statements so hard to understand?
People usually deviate from the market from either ignorance or greed.
Factor investing, ie the variations of SCV, are about adding risk to get more return. If you are only using one or more of the lesser known factors that target less risk for less expected return, perhaps you could spell that strategy out.
Factor investing is not just “about adding risk to get more return”. To make rational allocation decisions, one must make estimates of factor returns. One can start with TSM as the only equity position. He can then add the higher expected return (more risk of a different kind) SV asset class and at the same time decrease overall equity allocation and increase allocation to safe bonds. This creates a portfolio with same expected return as TSM portfolio but better diversified across unique and independent sources of risk. The key is taking a bit of a barbell approach: more risk on the equity side, different risks on the equity side, decreased overall equity risk, increased safe bonds exposure with increased exposure to term. It’s more of a move in the direction of risk parity.
White Coat Investor wrote: Fri Mar 07, 2025 9:20 am
Easy to bag on SV after the last 15 years. Nobody was doing it in 2010 (after a decade of 0% returns for the S&P 500) though I assure you. Recency bias anyone?
I think the case for SV tilting can be made quite well from a behavioral standpoint as well as a risk standpoint. And if you liked it in 2010, you should really like it now with the valuation difference between LG and SV at or close to all time highs.
This morning I bought more shares of VTI and more shares of DFSV (along with TLHing a bunch of AVUV to DFSV). So even if Karsten is right and SV tilting is foolish, I've still got more VTI than I'll ever spend.
How are you recovering? Things going OK? Hope you’re doing well
From my fall last Summer? Very well I think. Still doing PT three times a day on my wrist. I really destroyed that pretty badly but I'm hoping for a pretty good long term outcome.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy |
4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
rkhusky wrote: Tue Mar 11, 2025 7:13 pm
People usually deviate from the market from either ignorance or greed.
Factor investing, ie the variations of SCV, are about adding risk to get more return. If you are only using one or more of the lesser known factors that target less risk for less expected return, perhaps you could spell that strategy out.
Factor investing is not just “about adding risk to get more return”. To make rational allocation decisions, one must make estimates of factor returns. One can start with TSM as the only equity position. He can then add the higher expected return (more risk of a different kind) SV asset class and at the same time decrease overall equity allocation and increase allocation to safe bonds. This creates a portfolio with same expected return as TSM portfolio but better diversified across unique and independent sources of risk. The key is taking a bit of a barbell approach: more risk on the equity side, different risks on the equity side, decreased overall equity risk, increased safe bonds exposure with increased exposure to term. It’s more of a move in the direction of risk parity.
Dave
If you're the average investor (where average is weighted by portfolio size), then you've thought about how to construct the best portfolio and ended up with the market portfolio. That's because the average investor (where average is weighted by portfolio size) holds the market portfolio, by definition. Above I quoted Ken French, as perhaps his version is easier to understand: "I start with the fact that all investors must collectively hold the global market portfolio of all stocks, bonds, and other financial assets. Simple arithmetic then says the average dollar invested holds the global market portfolio. And if we weight by investment wealth, so Bill Gates gets more weight than I do, the average investor also holds the global market. As a result, the average investor and the global market portfolio provide useful reference points for my portfolio." https://www.dimensional.com/sg-en/insig ... -investing
It makes sense to deviate from the market portfolio if you're meaningfully different from this average investor or you're better at picking investments and constructing portfolios. Otherwise, probably not. Note that this does not require a view about efficient markets.
Your post appears to suggest a portfolio that's generally better than the market portfolio. If such a portfolio existed, why hasn't the market moved there? This does seem contrary to efficient markets.
exodusing wrote: Wed Mar 12, 2025 6:41 am
If you're the average investor (where average is weighted by portfolio size), then you've thought about how to construct the best portfolio and ended up with the market portfolio.
Actually they haven’t “thought” about it. In your formulation the “average” investor doesn’t actually exist. It’s a mathematically construct of the sum of all the individuals behaviors. Whatever the market portfolio is, that’s what the average investor is. It’s emergent. It requires no one, at all, anywhere, to have “thought about how to construct the best portfolio.”
“There is no deeper meaning to what risk tolerance is other than what kind of spending distribution you most prefer.” |
- Ben Mathew
exodusing wrote: Wed Mar 12, 2025 6:41 am
If you're the average investor (where average is weighted by portfolio size), then you've thought about how to construct the best portfolio and ended up with the market portfolio.
Actually they haven’t “thought” about it. In your formulation the “average” investor doesn’t actually exist. It’s a mathematically construct of the sum of all the individuals behaviors. Whatever the market portfolio is, that’s what the average investor is. It’s emergent. It requires no one, at all, anywhere, to have “thought about how to construct the best portfolio.”
Anthropomorphizing the market is a common rhetorical device. In any event, believing you can construct a portfolio that's generally better than the market portfolio is contrary to market efficiency.
exodusing wrote: Wed Mar 12, 2025 7:17 am
In any event, believing you can construct a portfolio that's generally better than the market portfolio is contrary to market efficiency.
Well…it’s not actually. That’s why literally the same guy who came up with the term “efficient market” is one of the publishers of the seminal work of factor investing. Eugene Fama.
There’s nothing in the concept of “efficient market” that says risk shouldn’t be compensated. Instead it just says “all information” is included in the price, including risk.
And factor advocates will claim that something like Value is at least a partial story about risk.
“There is no deeper meaning to what risk tolerance is other than what kind of spending distribution you most prefer.” |
- Ben Mathew
rkhusky wrote: Tue Mar 11, 2025 7:13 pm
People usually deviate from the market from either ignorance or greed.
Factor investing, ie the variations of SCV, are about adding risk to get more return. If you are only using one or more of the lesser known factors that target less risk for less expected return, perhaps you could spell that strategy out.
Factor investing is not just “about adding risk to get more return”. To make rational allocation decisions, one must make estimates of factor returns. One can start with TSM as the only equity position. He can then add the higher expected return (more risk of a different kind) SV asset class and at the same time decrease overall equity allocation and increase allocation to safe bonds. This creates a portfolio with same expected return as TSM portfolio but better diversified across unique and independent sources of risk. The key is taking a bit of a barbell approach: more risk on the equity side, different risks on the equity side, decreased overall equity risk, increased safe bonds exposure with increased exposure to term. It’s more of a move in the direction of risk parity.
Dave
Yes, I was only speaking about the stock side of things, which gets more risky.
exodusing wrote: Wed Mar 12, 2025 6:41 am
Your post appears to suggest a portfolio that's generally better than the market portfolio. If such a portfolio existed, why hasn't the market moved there? This does seem contrary to efficient markets.
I agree with you way more than you might think. I’m a big believer in market efficiency. In fact I’m pretty sure Fama states that TSM is always on the efficient frontier, and I think I’ve heard Larry Swedroe say that too. The only way I’ve been able to reconcile this in my mind is to distinguish between an efficient market and an efficient portfolio. Markowitz got a Nobel prize for Modern Portfolio Theory, and books like Roger Gibson’s Asset Allocation: Balancing Financial Risk and Larry Swedroe’s Reducing The Risk Of Black Swans show that combining low correlated assets in a portfolio make for more efficient portfolios. Gibson shows this by displaying how mixtures of uncorrelated assets move the potential outcomes of portfolios closer to the ideal northwest corner of a plot of return versus standard deviation. Larry shows this with potential portfolio outcomes that have same expected return but narrower standard deviations and smaller tails. In our portfolios, TSM is only one portfolio component. Adding other components with similar expected return and less than perfect correlation has a good chance of having created a more efficient portfolio when looking backwards at one’s investing results.
Random Walker wrote: Tue Mar 11, 2025 10:58 am
What becomes very clear from the tables is that the shorter one’s time frame, the more important is diversification.
Dave
Exactly. You may have to wait a while for any given premium to outperform during a specific timeframe with a lump sum investment. However, during any given period whether it's a decade, a year, a month, a day, or even a second in the market you expect to receive a premium of a risky asset so you always want to hold some market beta relative to bonds and the same can be said about the other premiums. You always want to take a position of high diversification and having uncorrelated assets with expected risk premiums. Folks get that wrong all the time on here.
Random Walker wrote: Tue Mar 11, 2025 10:58 am
What becomes very clear from the tables is that the shorter one’s time frame, the more important is diversification.
Dave
Exactly. You may have to wait a while for any given premium to outperform during a specific timeframe with a lump sum investment. However, during any given period whether it's a decade, a year, a month, a day, or even a second in the market you expect to receive a premium of a risky asset so you always want to hold some market beta relative to bonds and the same can be said about the other premiums. You always want to take a position of high diversification and having uncorrelated assets with expected risk premiums. Folks get that wrong all the time on here.
There is no guarantee of any factor outperformance for any of the factors for any time period, especially for the more ephemeral ones Iike size and value.
The Total Stock Market is made up of mostly uncorrelated assets, ie the individual stocks. For example, Apple and Microsoft have had a 0.44 correlation, Apple and Ford have had a 0.18 correlation, GM and Ford have had a 0.34 correlation, GM and Tesla have had a 0.30 correlation, and Tesla and NVidia have had a 0.27 correlation.
Exactly. You may have to wait a while for any given premium to outperform during a specific timeframe with a lump sum investment. However, during any given period whether it's a decade, a year, a month, a day, or even a second in the market you expect to receive a premium of a risky asset so you always want to hold some market beta relative to bonds and the same can be said about the other premiums. You always want to take a position of high diversification and having uncorrelated assets with expected risk premiums. Folks get that wrong all the time on here.
There is no guarantee of any factor outperformance for any of the factors for any time period, especially for the more ephemeral ones Iike size and value.
The Total Stock Market is made up of mostly uncorrelated assets, ie the individual stocks. For example, Apple and Microsoft have had a 0.44 correlation, Apple and Ford have had a 0.18 correlation, GM and Ford have had a 0.34 correlation, GM and Tesla have had a 0.30 correlation, and Tesla and NVidia have had a 0.27 correlation.
1. The fact that there is no guarantee of any factor outperformance is a reason to diversify across them, not avoid them. The market factor underperformed T Bills for 3 periods 13 years or longer: 1929-1943, 1966-1982, 2000-2012.
2. Correlations between TSM components may be low (I’m surprised by your numbers), but we invest in TSM as only a single indivisible portfolio component. As a whole, it has its own expected return, volatility, other risks. And we’re trying to improve the risk/return characteristics of a portfolio dominated by TSM market factor.
rkhusky wrote: Wed Mar 12, 2025 10:44 am
There is no guarantee of any factor outperformance for any of the factors for any time period, especially for the more ephemeral ones Iike size and value.
The Total Stock Market is made up of mostly uncorrelated assets, ie the individual stocks. For example, Apple and Microsoft have had a 0.44 correlation, Apple and Ford have had a 0.18 correlation, GM and Ford have had a 0.34 correlation, GM and Tesla have had a 0.30 correlation, and Tesla and NVidia have had a 0.27 correlation.
1. The fact that there is no guarantee of any factor outperformance is a reason to diversify across them, not avoid them. The market factor underperformed T Bills for 3 periods 13 years or longer: 1929-1943, 1966-1982, 2000-2012.
2. Correlations between TSM components may be low (I’m surprised by your numbers), but we invest in TSM as only a single indivisible portfolio component. As a whole, it has its own expected return, volatility, other risks. And we’re trying to improve the risk/return characteristics of a portfolio dominated by TSM market factor.
Dave
Factors aren’t typically diversified across, they are stacked and concentrated.
Individual stocks are the sources of risk and return in the stock market. They are across what should be diversified.
GP813 wrote: Fri Mar 07, 2025 3:50 pm
Small cap value has good fundamentals even if the market isn't recognizing it. AVUV is trading at a low p/e, excellent price to sales, etc. Once people start buying companies based on fundamentals again and not "stories", small cap value should do well.
I thought SCV had low P/E and higher risk because it has bad fundamentals.
Avantis has a bunch of screens for profitability and quality, so the fundamentals of the portfolios they make tend to be very good.
GP813 wrote: Fri Mar 07, 2025 3:50 pm
Small cap value has good fundamentals even if the market isn't recognizing it. AVUV is trading at a low p/e, excellent price to sales, etc. Once people start buying companies based on fundamentals again and not "stories", small cap value should do well.
Agreed. Valuation spread between large cap/large cap growth vs SCV is the highest it has ever been. Every single time in history this has happened the expensive asset went on to have prolonged low returns and vice versa. I expect this to happen again. You want to pay $10 for every $1 of earnings (SCV) or $25 for $1 earnings (TSM) or buy TSLA $121 dollars for $1 for earnings? TSLA expected returns = 1/1.21 = 0.8% CAGR real. The market has lost its mind. Expect mean reversion. This time is not different.
rkhusky wrote: Fri Mar 07, 2025 8:54 pm
I thought SCV had low P/E and higher risk because it has bad fundamentals.
Avantis has a bunch of screens for profitability and quality, so the fundamentals of the portfolios they make tend to be very good.
So, the best of the junky stocks, if their metrics pan out.
The market knows everything Avantis knows about quality and profitability factors, so it’s not clear why those stocks aren’t quickly bid up to erase any easy profits.
Avantis has a bunch of screens for profitability and quality, so the fundamentals of the portfolios they make tend to be very good.
So, the best of the junky stocks, if their metrics pan out.
The market knows everything Avantis knows about quality and profitability factors, so it’s not clear why those stocks aren’t quickly bid up to erase any easy profits.
Markets price risk. In an efficient market, all investable assets should have about the same risk adjusted returns, not same returns.
How are you recovering? Things going OK? Hope you’re doing well
From my fall last Summer? Very well I think. Still doing PT three times a day on my wrist. I really destroyed that pretty badly but I'm hoping for a pretty good long term outcome.
Glad to hear you are on the mend, hope you make it back 100%
Avantis has a bunch of screens for profitability and quality, so the fundamentals of the portfolios they make tend to be very good.
So, the best of the junky stocks, if their metrics pan out.
The market knows everything Avantis knows about quality and profitability factors, so it’s not clear why those stocks aren’t quickly bid up to erase any easy profits.
Historical large cap PE ratio ~18 and SCV ~16. Right now it's 25 and 10. Massive spread. S&P500 has never gained >10% CAGR in the next 5 year period when starting at this high of a valuation and SCV has never returned <10% CAGR over the next 5 years when starting at this low of a valuation. I don't think this time is different. Let's see what happens.
rkhusky wrote: Wed Mar 12, 2025 3:55 pm
So, the best of the junky stocks, if their metrics pan out.
The market knows everything Avantis knows about quality and profitability factors, so it’s not clear why those stocks aren’t quickly bid up to erase any easy profits.
Did you used to invest in SCV and don't anymore?
You're so dedicated to rebuttal, it reminds me of how people can be once they've quit something.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
rkhusky wrote: Wed Mar 12, 2025 3:55 pm
So, the best of the junky stocks, if their metrics pan out.
The market knows everything Avantis knows about quality and profitability factors, so it’s not clear why those stocks aren’t quickly bid up to erase any easy profits.
Markets price risk. In an efficient market, all investable assets should have about the same risk adjusted returns, not same returns.
Dave
Agreed. Insofar as the market can predict return and assess risk, the two should be closely linked.
rkhusky wrote: Wed Mar 12, 2025 3:55 pm
So, the best of the junky stocks, if their metrics pan out.
The market knows everything Avantis knows about quality and profitability factors, so it’s not clear why those stocks aren’t quickly bid up to erase any easy profits.
Historical large cap PE ratio ~18 and SCV ~16. Right now it's 25 and 10. Massive spread. S&P500 has never gained >10% CAGR in the next 5 year period when starting at this high of a valuation and SCV has never returned <10% CAGR over the next 5 years when starting at this low of a valuation. I don't think this time is different. Let's see what happens.
Could be. After a long period of SCV underperformance, it would make sense that it outperforms for awhile. Hard to say when that might happen. As it’s said, the market can stay irrational longer than you can stay solvent.
rkhusky wrote: Wed Mar 12, 2025 3:55 pm
So, the best of the junky stocks, if their metrics pan out.
The market knows everything Avantis knows about quality and profitability factors, so it’s not clear why those stocks aren’t quickly bid up to erase any easy profits.
Historical large cap PE ratio ~18 and SCV ~16. Right now it's 25 and 10. Massive spread. S&P500 has never gained >10% CAGR in the next 5 year period when starting at this high of a valuation and SCV has never returned <10% CAGR over the next 5 years when starting at this low of a valuation. I don't think this time is different. Let's see what happens.
Very good point and I am also patiently waiting for SCV to outperform. Mine is all IJS.
rkhusky wrote: Wed Mar 12, 2025 3:55 pm
So, the best of the junky stocks, if their metrics pan out.
The market knows everything Avantis knows about quality and profitability factors, so it’s not clear why those stocks aren’t quickly bid up to erase any easy profits.
Did you used to invest in SCV and don't anymore?
You're so dedicated to rebuttal, it reminds me of how people can be once they've quit something.
Nope, just doing my part to correct misinformation and redefinitions of common terms.
exodusing wrote: Wed Mar 12, 2025 7:17 am
In any event, believing you can construct a portfolio that's generally better than the market portfolio is contrary to market efficiency.
Well…it’s not actually. That’s why literally the same guy who came up with the term “efficient market” is one of the publishers of the seminal work of factor investing. Eugene Fama.
There’s nothing in the concept of “efficient market” that says risk shouldn’t be compensated. Instead it just says “all information” is included in the price, including risk.
And factor advocates will claim that something like Value is at least a partial story about risk.
By generally I mean applicable to everyone. A claim that a specific portfolio is better for everyone than the market portfolio is contrary to market efficiency.
