value tilting: the numbers

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Beagler
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value tilting: the numbers

Post by Beagler »

It seems one of the more common questions is "how much, if any, do I tilt away from TSM?" Maybe the quandary is there are so many "good" answers, or at least replies, based upon Expert Opinion.

With (generically speaking) Rick advocating a dash of SV to "complete" TSM, Larry and Dr. Bill advocating LCV (and SCV), Bill Schultheis advocating both LCV and SCV in fairly large doses, you get quite a few opinions. Mr. Bogle cites RTM and doesn't advocate value tilting. Throw in the dizzying sets of data from Trev H and there's no question it gets confusing.

Even if you're not in search of the Efficient Frontier but simply want to add a value tilt, there are so many opinions from so many Experts -- and there's no consensus. The generic response to all this is 'tilt away only to the extent that you feel comfortable.' That decision is based upon past data points; 'past returns are no guarantee....'

It all reminds me of discussing with your spouse what color to paint to living room; many hours of conversation later you end up with a shade of white.
Last edited by Beagler on Wed Apr 01, 2009 4:33 pm, edited 1 time in total.
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femur
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Post by femur »

Excellent topic! I have often wondered the best way to implement a tilt in my portfolio. I hope this topic takes off and we can see some discussion on pros and cons of the various tilting strategies advocated by the experts.
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Post by acpain2010 »

There have been several long stretches where growth beat value. The last seven or eight years, value has trounced growth.

I'm a TSM'er, but I'd expect growth to be due for a run soon. Of course, I'm basing that on absolutely nothing but the fact that growth is "due." Means nothing :)
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Post by MrMatt2532 »

Just analyzing the numbers from 1972 through 2008 at vanguard, on a risk adjusted return basis (sharpe, sortino), the ideal balance between TSM and SCV would be 100% SCV. I'm guessing this isn't the answer you are looking for. In order to minimize the Standard Deviation of the return, the best split would be about 75% TSM, and 25% SCV. Here are the results for TSM compared to 75% TSM/25% SCV:

100%TSM 75%TSM/25%SCV
Average 11.01% 11.92%
Std. Dev. 18.84% 18.47%
Down SD 12.51% 12.14%
Up SD 9.43% 9.38%
CAGR 9.27% 10.27%
Sharpe 0.27 0.33
Sortino 0.32 0.41
Mkt. Corr. 1.00 0.98
Intl. Corr. 0.65 0.63
Total - Rebalanced (N) 266058 372058
Total-Un-Rebalanced (N) 266058 398414
Total - Rebalanced (Real) 51483 73552
1$ Portfolio 26.61 37.21

1972 16.71% 14.23%
1973 -18.29% -20.28%
1974 -27.39% -25.15%
1975 38.51% 42.45%
1976 26.51% 33.23%
1977 -4.39% 2.10%
1978 7.31% 10.88%
1979 22.81% 25.90%
1980 32.51% 30.68%
1981 -3.89% 0.75%
1982 20.61% 22.53%
1983 21.81% 25.95%
1984 4.31% 3.75%
1985 32.01% 31.70%
1986 15.91% 13.73%
1987 1.51% -0.70%
1988 17.81% 20.68%
1989 28.71% 24.58%
1990 -6.19% -10.15%
1991 34.51% 36.25%
1992 9.61% 14.43%
1993 10.43% 13.72%
1994 -0.17% -0.56%
1995 35.79% 33.24%
1996 20.96% 21.01%
1997 30.99% 31.14%
1998 23.26% 15.76%
1999 23.81% 18.64%
2000 -10.57% -2.46%
2001 -10.97% -4.80%
2002 -20.96% -19.27%
2003 31.35% 32.81%
2004 12.52% 15.28%
2005 5.98% 6.00%
2006 15.51% 16.44%
2007 5.49% 2.35%
2008 -37.04% -35.79%

Personally, I like splitting it up like FundAdvice.com or Bill S. recommend: 25% LCB, 25% LCV, 25% SCB, 25% SCV.

Here are the numbers for FundAdvice or Bill S.(25% LCB, 25% LCV, 25% SCB, 25% SCV) and Dr. Bill (37.5% TSM, 25% LCV, 25% SCV, 12.5% SCB) in that order:

Average 12.96% 12.69%
Std. Dev. 19.10% 18.81%
Down SD 12.22% 12.19%
Up SD 11.19% 10.79%
CAGR 11.25% 11.01%
Sharpe 0.37 0.36
Sortino 0.49 0.47
Mkt. Corr. 0.93 0.95
Intl. Corr. 0.59 0.60
Total - Rebalanced (N) 515736 476382
Total-Un-Rebalanced (N) 512049 486409
Total - Rebalanced (Real) 104502 95899
1$ Portfolio 51.57 47.64

1972 12.14% 13.18%
1973 -19.01% -18.26%
1974 -22.14% -23.22%
1975 50.21% 48.83%
1976 44.51% 41.38%
1977 9.99% 7.19%
1978 13.46% 11.82%
1979 29.08% 27.78%
1980 29.91% 29.33%
1981 3.08% 2.70%
1982 23.41% 22.83%
1983 29.16% 28.40%
1984 2.66% 3.67%
1985 31.04% 31.38%
1986 12.62% 13.39%
1987 -2.84% -2.32%
1988 23.29% 22.83%
1989 21.12% 22.05%
1990 -13.35% -12.37%
1991 35.49% 35.14%
1992 16.96% 16.47%
1993 17.58% 16.68%
1994 -0.45% -0.74%
1995 32.18% 32.64%
1996 21.01% 20.88%
1997 29.78% 30.03%
1998 8.48% 10.37%
1999 14.97% 15.74%
2000 4.06% 2.69%
2001 -1.78% -3.27%
2002 -19.32% -19.14%
2003 35.89% 34.82%
2004 17.37% 16.89%
2005 6.32% 6.45%
2006 18.17% 18.12%
2007 -0.11% 0.46%
2008 -35.28% -35.40%

Having looked at the numbers, I am glad I chose FundAdvice's/Bill S's recommendations. :D
Last edited by MrMatt2532 on Fri Apr 03, 2009 5:36 pm, edited 1 time in total.
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Post by woof755 »

This contains some of the dizzying numbers you referenced, so not sure if you're scoured this thread or not: http://www.bogleheads.org/forum/viewtop ... 37&start=0
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Post by Beagler »

woof755 wrote:This contains some of the dizzying numbers you referenced, so not sure if you're scoured this thread or not: http://www.bogleheads.org/forum/viewtop ... 37&start=0
Thank you for the reference.
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tilting

Post by pkcrafter »

Beager wrote:
It seems one of the more common questions is "how much, if any, do I tilt away from TSM?" Maybe the quandary is there are so many "good" answers, or at least replies, based upon Expert Opinion.
Key word: Opinion
Even if you're not in search of the Efficient Frontier but simply want to add a value tilt, there are so many opinions from so many Experts -- and there's no consensus.
Key words: opinions, no consensus
The generic response to all this is 'tilt away only to the extent that you feel comfortable.' That decision is based upon past data points; 'past returns are no guarantee....'
Key words: past data, no guarantee
It all reminds me of discussing with your spouse what color to paint to living room; many hours of conversation later you end up with a shade of white.
I think that sums it up.

Mr Matt, why list this data? What does it tell us that is going to help us for the next 10 or 15 years? 15 years can account for half the investment lifetime of most investors, and yet it may not be long term when it comes to comparison of past performance. The point being that the long term is made up of a series of short terms which will not match the long-term averages. I'm also convinced that any past data which is dominated by the great bull market of 1982-2000 is going to produce numbers that are of little use for reference.

Having said all that, I do believe there is value in historical returns, but it is useful for general guidance only. Small caps and value are likely to produce returns higher than the market, but again, these returns will never be consistent. You can only calculate last years efficient frontier and this year's will not be the same. The next 10 will not be the same.

Getting back to the original post, there can be no consensus. If there were, the risk would be known and any premium would not exist. The market has set the percentage of small caps. An investor can tilt—increase small exposure—by a small amount or a very large amount—and the risk will go from slight to extreme.

Larry holds a very high amount of small, but the portfolio is tempered by a small allocation to equities. He also does not directly recommend this approach to all readers. This type of portfolio is obviously not something the unseasoned investor should ever attempt. Rick if very tuned into the needs and abilities of the average investor and his suggestions are reasonable and appropriate for many investors who read this forum.

We have a lot of very smart people on this forum who love to crunch numbers and discuss theory, but they still make up a small portion of the Bogleheads. If you are an average investor just trying to get some decent returns without excessive risk, then keep things simple and temper tilting and everything else you do.

The bottom line: be prudent, leave room for mistakes, stay diversified, and read the discussions on theoretical, radical portfolios for interest only.


Paul
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Post by Taylor Larimore »

Hi Beagler:
It seems one of the more common questions is "how much, if any, do I tilt away from TSM?" Maybe the quandary is there are so many "good" answers, or at least replies, based upon Expert Opinion.
Mr. Bogle has done considerable research to help answer your question. You can read about it here:

The Stock Market Universe—Stars, Comets, and the Sun

and here:

The Telltale Charts
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Re: tilting

Post by MrMatt2532 »

pkcrafter wrote: Mr Matt, why list this data?

I'm also convinced that any past data which is dominated by the great bull market of 1982-2000 is going to produce numbers that are of little use for reference.

An investor can tilt—increase small exposure—by a small amount or a very large amount—and the risk will go from slight to extreme.
Paul,

I listed the data because I thought the OP was asking for it and/or interested in seeing it.

Not to argue, but I must make a few points.

-The great bull market of 1982-2000 actually helps out the case of 100% TSM.

-The tilt from 0% SCV, to 100% SCV hardly goes from slight to extreme. TSM has a StDev of about 19% from 1972-2008, while the StDev of SCV is about 21%.

-The StDev actually decreases to it's lowest point at about 75% TSM / 25% SCV over this period as I showed in my post.

Obviously past returns are no guarantee of future performance, but as you say there is value to historical returns.

Looking at the data (not just this data either, there is data available for over 80 years), SCV is likely to outperform TSM over a long period of time.

SCV is only moderately more risky than TSM, and on a risk adjusted return basis having only SCV is arguably smarter than having only TSM.

There is a high probability of some tilt towards SCV decreasing the overall volatility and increasing overall performance of your portfolio over any sort of time period. Whether this tilt value is as low as 5% or as high as 50% remains to be seen depending on the period and the duration of the sampling.

Even in the case of 1982 to 2000 where TSM outperformed SCV, both the annualized return and the StDev of TSM were less than 1 percentage point away from 75% TSM and 25% SCV.
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Post by Beagler »

Thanks to Paul, Taylor, Matt and others for their posts.
Last edited by Beagler on Sat May 05, 2012 2:16 pm, edited 2 times in total.
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Post by Rick Ferri »

There is a huge gap between theory and reality.

While all of these conversations about value verse the TSM are interesting, they are not very relevant. 99% of portfolio return is derived from an investor's long-term allocation between equity and fixed income AND how that investor behaves during bear and bull markets. The rest is the flavor of icing on the cake.

Rick Ferri
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Post by acpain2010 »

Rick Ferri wrote:There is a huge gap between theory and reality.

While all of these conversations about value verse the TSM are interesting, they are not very relevant. 99% of portfolio return is derived from an investor's long-term allocation between equity and fixed income AND how that investor behaves during bear and bull markets. The rest is the flavor of icing on the cake.

Rick Ferri
Great post, Rick.

Going 100% SCV or 100% EM will probably give the highest long-term return. However, I doubt many investors would be able to ride it out for 30 or 40 years.
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Theory and reality

Post by Taylor Larimore »

Rick Ferri wrote:There is a huge gap between theory and reality.

While all of these conversations about value verse the TSM are interesting, they are not very relevant. 99% of portfolio return is derived from an investor's long-term allocation between equity and fixed income AND how that investor behaves during bear and bull markets. The rest is the flavor of icing on the cake.

Rick Ferri
Rick was in town earlier this week speaking and answering question at an ETF Convention for professional investors. Afterwards, we had lunch and I took him to the airport.

During lunch we talked about the current bear market, value/growth, asset allocation, past performance and the futility of predictions, we both agree:
"While all of these conversations about value versus the TSM are interesting, they are not very relevant. 99% of portfolio return is derived from an investor's long-term allocation between equity and fixed income AND how that investor behaves during bear and bull markets. The rest is the flavor of icing on the cake."
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Re: Theory and reality

Post by saurabhec »

Taylor Larimore wrote:
Rick Ferri wrote:There is a huge gap between theory and reality.

While all of these conversations about value verse the TSM are interesting, they are not very relevant. 99% of portfolio return is derived from an investor's long-term allocation between equity and fixed income AND how that investor behaves during bear and bull markets. The rest is the flavor of icing on the cake.

Rick Ferri
Rick was in town earlier this week speaking and answering question at an ETF Convention for professional investors. Afterwards, we had lunch and I took him to the airport.

During lunch we talked about the current bear market, value/growth, asset allocation, past performance and the futility of predictions, we both agree:
"While all of these conversations about value versus the TSM are interesting, they are not very relevant. 99% of portfolio return is derived from an investor's long-term allocation between equity and fixed income AND how that investor behaves during bear and bull markets. The rest is the flavor of icing on the cake."
It is also interesting that far more bandwith seems to be spent on how to optimize the equity side of the portfolio and much less on the fixed income side. Does no one care about the plight of the bond investors :-) ?
Bond investors are faced with low interest rates on Treasuries (and TIPS) and uncertain credit outlook on the corporate and muni side and the prospect of higher rates in the future.
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Post by Robert T »

.
I agree that staying the course and savings are key determinants of portfolio value, but think that stock:bond split, factor exposure (within stock:bond split), and global diversification are all important in determining portfolio performance.

Some quick [backtest] numbers for last 30 years(from table below):
  • - the spread in return performance by tilting a 50:50 stock:bond portfolio towards greater exposure to size, value and default risk was larger than shifting a TSM:5-yr treasury portfolio from 75% equity to 25% equity.
    - the spread in return performance by tilting the stock portion of a 50:50 stock:bond portfolio to equal parts US:EAFE:EM was also larger than shifting a TSM:5-yr treasury portfolio from 75% equity to 25% equity.
So IMO all three matter: stock:bond mix, factor exposure, global diversification. This is just what the backtest numbers say over the last 30 years. Some may rightly question the quality of the back-test data – but I think the difference in spreads is larger enough to pay attention. Just my opinion.

Code: Select all


                     1979-2008 [30 yrs]

                     Annualized               
                       Return      SD
Stock:bond*
50:50                   10.5      9.8
75:25                   10.9     13.6
25:75                    9.8      7.3

SPREAD                   1.1      6.3


Factor tilt
50:50
TSM:5yr T-notes         10.5      9.8  
TSM:HY                   9.6     13.3  
SV:5yr T-notes          12.6     10.7   
SV:HY                   11.7     14.4 

SPREAD                   3.0      4.6


Intl. Tilt
TSM:5yr T-notes         10.5      9.8			
US:EAFE:EM:5yr T-notes  13.3     14.5 

SPREAD                   2.8      4.7


*TSM:5yr T-notes
**SV has 0.6:0.6 size:value loads

Will check numbers again later when I have more time.

Robert
.
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Plight of bond holders ?

Post by Taylor Larimore »

Hi saurabhec:
Does no one care about the plight of the bond investors ? Bond investors are faced with low interest rates on Treasuries (and TIPS) and uncertain credit outlook on the corporate and muni side and the prospect of higher rates in the future.
During the past year, the Wilshire Total World Stock Index is down -44.30%. Vanguard's Total Bond Market Index is up +0.45%. Sorry, I can't feel sorry for the "plight" of bond investors. :roll:

Having said that, I understand what you mean. My suggestion is to develop an asset-allocation plan, stay-the-course, then forgetaboutit.
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Post by Rick Ferri »

Robert T,

All of your data is technically correct, of course. The problem is that no one actually received those returns. They rely on past allocations with the benefit of knowing a value premium existed, they assume investments in funds that did not exist, and they assume perfect investor behavior.

I agree that it is important to look at this information. But sometimes I think that value and size factor tilts become the focus of conversation when other basic factors contribute so much more to portfolio performance.

Rick Ferri
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Re: Theory and reality

Post by Beagler »

Taylor Larimore wrote:
Rick Ferri wrote:There is a huge gap between theory and reality.

While all of these conversations about value verse the TSM are interesting, they are not very relevant. 99% of portfolio return is derived from an investor's long-term allocation between equity and fixed income AND how that investor behaves during bear and bull markets. The rest is the flavor of icing on the cake.

Rick Ferri
Rick was in town earlier this week speaking and answering question at an ETF Convention for professional investors. Afterwards, we had lunch and I took him to the airport.

During lunch we talked about the current bear market, value/growth, asset allocation, past performance and the futility of predictions, we both agree:
"While all of these conversations about value versus the TSM are interesting, they are not very relevant. 99% of portfolio return is derived from an investor's long-term allocation between equity and fixed income AND how that investor behaves during bear and bull markets. The rest is the flavor of icing on the cake."
It's easy to lose track of the fact that the bond:equity ratio is the primary determinant of investment success.

Thanks to Taylor and Rick for putting things back in perspective.
Last edited by Beagler on Sat May 05, 2012 2:17 pm, edited 1 time in total.
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It's difficult to "beat the market."

Post by Taylor Larimore »

Beagler:

Thank you for your kind remarks.
It's easy to lose track of the fact that the bond:equity ratio is the primary determinant of investment success. We see so many posts of slicing and dicing!
Most Bogleheads understand it is extremely difficult to "beat the market" except by luck (or taking extraordinary risk that didn't show up).

If a monkey flips heads ten times in a row--we call it luck. If a convoluted portfolio beats the market ten years in a row we call it skill?
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Post by Rick Ferri »

Taylor,

Where did you buy that monkey? Do they have any others? Do you want to sell the monkey you own? Can I hire it as my asset manager? I will pay a high management fee! :lol:

Rick Ferri
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The monkey's next coin flip . . .

Post by Taylor Larimore »

Hi Rick:

When the monkey made his next coin flip, he lost.
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Re: Plight of bond holders ?

Post by saurabhec »

Taylor Larimore wrote:Having said that, I understand what you mean. My suggestion is to develop an asset-allocation plan, stay-the-course, then forgetaboutit.
Taylor,

I was being a little tounge-in-cheek. One of my pet peeves with books on investing is how much they talk about equities and how to fine tune the equity side of the portfolio, but how little is spent on a discussion of the history of returns in the credit markets, how to structure the fixed income side of your portfolio.

I do worry though that investors are being setup for a double-whammy. While this equity bear market hurt, sudden inflation down the line could hurt on the bond side now (and could potentially take down equities as well, ala 73-74). My problem is that neither do I like the equity side of my portfolio, nor the fixed income side of my portfolio :-) Doesn't seem like a very good risk-reward tradeoff in either equity or bonds. That said, I would rather that the equity markets recover as that would do far more economic good than anything else.
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Post by acpain2010 »

Rick,

It seems that size and value tilts are all the hype in recent years. Now we have several mutual funds available for small caps and value stocks. More people may be tilting now than in the past 40, 50 years. Do you feel that it's possible that since people are buying those funds now rather than only the plain old vanilla S&P 500 fund or large blend fund, the price will be artificially bid up and tilts won't offer as much of a premium as in the past?
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Value Stocks vs. Large Stocks

Post by mike.bayer »

Although small and value stocks have higher expected returns than growth stocks, investors should recognize that the record of realized returns does not assure a similar pattern in the future. The timing and magnitude of the value premium will always be uncertain.

It does not seem prudent to have more than 80% in equity or 40% in small cap and value.
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Post by Avo »

Rick Ferri wrote:99% of portfolio return is derived from an investor's long-term allocation between equity and fixed income AND how that investor behaves during bear and bull markets.
Is this meant to be a quantitative statement? Does it mean that in the Fama-French model, the relative importance of the size and value factors is under 1%? (I don't know enough to know whether this is true, but it seems like a surprising claim.)
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Post by Rick Ferri »

Avo wrote:
Rick Ferri wrote:99% of portfolio return is derived from an investor's long-term allocation between equity and fixed income AND how that investor behaves during bear and bull markets.
Is this meant to be a quantitative statement? Does it mean that in the Fama-French model, the relative importance of the size and value factors is under 1%? (I don't know enough to know whether this is true, but it seems like a surprising claim.)
The FF is important in determining the risk and return characteristics of a portfolio of stocks, but it means very little in the actual portfolio returns of most investors because other factors play much larger rolls. What counts is not a tilt toward value or size factors, rather it is how most people people actually invest over their lifetime.

The important factors for most people are the amount of stocks verses bonds and cash, and how they react to changing market conditions. Investment costs would be a third determining factor. So, you could say the "Investor Three factor model" that determines most investor returns is the overall risk level (target stock and bond allocation), emotional intelligence level, and total investment cost.

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Post by Rick Ferri »

acpain2010 wrote:Rick, It seems that size and value tilts are all the hype in recent years. Now we have several mutual funds available for small caps and value stocks. More people may be tilting now than in the past 40, 50 years. Do you feel that it's possible that since people are buying those funds now rather than only the plain old vanilla S&P 500 fund or large blend fund, the price will be artificially bid up and tilts won't offer as much of a premium as in the past?
Could be. I honestly could not answer that question. The historic numbers show a large value premium. However, I only use a 1 percent premium in planning because you could be right. In other words, I am not relying on a premium when I put together a portfolio. If there is a value premium larger than 1 percent in the future, then that is a benefit. If not, I have done no harm.

Rick Ferri
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Post by acpain2010 »

Rick Ferri wrote:
acpain2010 wrote:Rick, It seems that size and value tilts are all the hype in recent years. Now we have several mutual funds available for small caps and value stocks. More people may be tilting now than in the past 40, 50 years. Do you feel that it's possible that since people are buying those funds now rather than only the plain old vanilla S&P 500 fund or large blend fund, the price will be artificially bid up and tilts won't offer as much of a premium as in the past?
Could be. I honestly could not answer that question. The historic numbers show a large value premium. However, I only use a 1 percent premium in planning because you could be right. In other words, I am not relying on a premium when I put together a portfolio. If there is a value premium larger than 1 percent in the future, then that is a benefit. If not, I have done no harm.

Rick Ferri
I honestly would not be surprised to see growth beat value over the next 40 years. People talk "long-term" like 80 or 100 years is a long time. It's really not. In 1,000 years people may be talking about 100-year time periods. Maybe for the first 100 years, value wins. Next 100 years, maybe growth. Maybe the next 100 years, they're even but large trounces small. I just find it troubling to rely on past performance when the past is not as long as often made out to be. I believe the market is efficient and there's no reason to expect to get ahead by simply basing my investments on knowledge that everyone has. My dad always told me if it's too good to be true, it probably is.

Were people talking up small and value in say, the 1960's or 1970's, before all the hype and all the funds holding large amounts of small and value became available? I'm guessing no.

Bottom line for me: no free lunches.
Trev H
Posts: 1896
Joined: Fri Mar 02, 2007 10:47 pm

As I have pointed out...

Post by Trev H »

.
It all depends on your starting point.

Many folks view the Market as some kind of base that should never be tilted from (or oh my - the sky could fall, the world will surly come to an end, etc, etc, etc).

I simply view the Cap Weighted Market as what it is (Large Cap Blend).

There is absolutely no doubt that for the next X # Years Large could outperform Small or Small could outperform Large.

The same can be said of US or International.

So the only logical (based on possibilities) No Tilt general equity mix is:

25% US Large
25% US Small
25% International Large
25% International Small

That puts you smack dab in the midst of the range of possible outcomes for any future period of equity returns.

You should only deviate from that if you want to increase your chance of having the worst possible outcome.

With the chance of having the worst possible outcome, there is also a chance you could have the best possible outcome.

In fact at times you will have the worst, and other times the best.

If you absolutely want to ensure that your equity holdings do well no matter which part is winning or loosing over the next X # Years, you got to start smack dab in the middle of the range of possible outcomes.

If you look at the average TR Fund Holdings (Vanguards for example).

All Large Caps, and nearly all US Large Caps ( something like 80% US Large, 20% International Large).

It is extremely tilted !

It will do extremely well when US Large does, but other than that it will not do so well, could do very poorly if Intl Small, or US Small take the lead for 8-10 years equity return wise. And again looking at it from what is or was possible.

Not looking at it from a point of view that the "Cap Weighted US Market" is something magical, or something to fear deviating from.

The Cap Weighted Market = Large Cap Blend = it is deviated already.

You should not fear deviating from it because when you do you are actually not deviating at all. When you move away from the "Market" you are actually seeking a more balanced and diversified equity holding.

Call me crazy if you want, but I will never see TSM as anything other than Large Cap Blend. A part of my portfolio will sure be decidated to Large Cap Blend (forever) but there is absolutely no way that I would ever consider holding more Large Cap Blend than I do Small Value or International Small.

If you do consider the history of stock returns by cap size, small beats large or valuation wise value beats growth.

A true coward (as in Bernsteins example) would be afraid to make a onesided bet and would simply decide for Half US Large, Half US Small, Half International Large, Half International Small.

But a coward (like me) who has some faith in achademics would do the same, but value tilt :-)

A TSM'er is making a serious tilt (IMO) and they are afraid to tilt away from their serious tilt. To the point that it gets talked about so much hear that even new investors are afraid to tilt away from the extremely tilted market.

Oh... may never talk some of you folks in to seeing it my way.

That is OK

Best of Luck to us all !

Trev H
Last edited by Trev H on Thu Apr 02, 2009 7:44 pm, edited 1 time in total.
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baw703916
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Re: The monkey's next coin flip . . .

Post by baw703916 »

Taylor Larimore wrote:Hi Rick:

When the monkey made his next coin flip, he lost.
Not if Rick paid him a high management fee! :wink:

Nice thread.

Best wishes,
Brad
Most of my posts assume no behavioral errors.
Trev H
Posts: 1896
Joined: Fri Mar 02, 2007 10:47 pm

Warning...

Post by Trev H »

.
Warning Warning Danger Danger..

Dizzying sets of data ahead :-)

What is tilted ?

The Market (dominated by Large Caps) is Tilted.
The same would be true if you gave say 80% weight to Small and 20% weight to Large.

Either way would be seriously tilted (possibility wise).

In reality it would take a very Gutsy Person to make either bet, even though for some reason, many feel perfectly comfortable tilting to Large Caps.

The Coward, just plain old not willing to make a bet in either direction takes a middle of the road approach splitting equally between the two.

He does not want to risk his possible outcome being the worst performer, but instead will be perfectly OK with it falling somewhere in the middle of what was possible.


Code: Select all

LC.......= Large Caps (CRSP Decile 1-2)
SC.......= Small Caps (CRSP Decile 6-7-8)
50/50....= 50% Large / 50% Small

1927-1945

Portfolio....Stdev....10K Growth
================================
SC...........44.82.....54,795.48
50/50........35.42.....43,629.49
LC...........27.30.....29,518.82

1946-1965

Portfolio....Stdev....10K Growth
================================
LC...........15.65....119,992.38
50/50........18.69....112,734.26
SC...........22.28....102,935.07


1966-1985

Portfolio....Stdev....10K Growth
================================
SC...........28.32....122,199.62
50/50........21.80.....80,476.99
LC...........17.21.....47,018.19


1986-2005

Portfolio....Stdev....10K Growth
================================
SC...........19.75....100,705.51
50/50........17.25.....99,369.47
LC...........17.43.....91,116.78
Last edited by Trev H on Fri Apr 03, 2009 6:22 am, edited 1 time in total.
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Robert T
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Post by Robert T »

.
Rick Ferri wrote:The problem is that no one actually received those returns. They rely on past allocations with the benefit of knowing a value premium existed, they assume investments in funds that did not exist, and they assume perfect investor behavior.
Yes, I was partly guilty of this when I set up my portfolio at the start of 2003. The spread pattern since then (in table below) seems very similar to that shown in the earlier table for the period 1979-2008 (perhaps coincidence). And my actual return on a 75:25 portfolio with a global small cap and value tilt was more than double a 75:25 US TSM:TBM. In this case a factor tilt and global diversification drove most of the return. Obviously no guarantees going forward.

Code: Select all

 

                        2003-2008  

                     Annualized                
                       Return      SD 
Stock:bond* 
50:50                    5.3      9.3 
75:25                    4.5     16.2 
25:75                    5.7      3.4 

SPREAD                   1.2     12.8 

Factor tilt 
50:50 
TSM:Int.Trsy             5.3      9.3  
TSM:HY                   2.8     18.0  
SV:Int Trsy              6.4     10.3    
SV:HY                    3.8     18.7 

SPREAD                   3.6      9.4 

Intl. Tilt
50:50 
TSM:Int. Trsy            5.3      9.8          
TSM:EAFE:EM:Int Trsy     8.6     12.8 

SPREAD                   3.3      3.0 

75:25 stock bond
ACTUAL RETURN            8.7	  21.7
US TSM:US TBM            4.0     17.1

SPREAD                   4.7      4.6

*Vanguard TSM:Vanguard Intermediate Treasury
TSM=Vanguard TSM
Int.Try=Vanguard Intermediate Treasury
SV=Vanguard Small Value
HY=Vanguard HY Corp.
EAFE=Vanguard Tax-Managed Intl.
EM=Vanguard EM
TBM=Vanguard Total Bond Market

 
Rick Ferri wrote:I agree that it is important to look at this information. But sometimes I think that value and size factor tilts become the focus of conversation when other basic factors contribute so much more to portfolio performance.
I agree. The basics include – save, and select a combination of risky assets and safe asset that you can stick with for the long-term. The reason for my 25% ‘safe asset’ allocation is exactly to help me stay the course in periods like the past 18 months or so. 100% equity allocation looks good in the backtest, but do not think I could stay the course. I understand the opportunity cost and am willing to accept that – as the alternative may likely not be 100% equity of the long-term but perhaps a reduction in equity just at the wrong time. I’m human…

Robert
.
Last edited by Robert T on Thu Apr 02, 2009 8:11 pm, edited 1 time in total.
Trev H
Posts: 1896
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More Tilt or No Tilt

Post by Trev H »

.
Below - another crunch on Tilting vs No Tilting.

Showing the extremely tilted TSM only and SCV only portfolios compared to a couple of Cowards approaches.

Have you ever just stopped and looked at the Growth of 10K (like below) and said, well you know what, they all do OK.... I just don't want to be too far off from what was possible or what is possible for the next X # Years.

Going all TSM is just as risky from that perspective as going all SCV is.

The timeframe is 1970-2008 and the "No Tilt" portfolios (two middle columns) are given 50/50 weight (yearly rebalancing).

Code: Select all

..................Cowards.................................
..................Academic........Cowards.................
....TILTED........No Tilt.........No Tilt..........TILTED.
.....TSM..........TSM/SCV.........LCB/SCB...........SCV...
==========================================================
..10,000.00......10,000.00.......10,000.00.......10,000.00 
...9,981.00......10,005.50........9,325.00.......10,030.00 
..11,578.96......11,526.84.......10,761.05.......11,474.32 
..13,513.80......12,893.34.......12,020.09.......12,277.52 
..11,042.13......10,038.11........9,279.51........9,085.37 
...8,017.69.......7,749.92........7,126.66........7,431.83 
..11,105.30......11,354.03.......10,333.66.......11,482.18 
..14,049.32......15,901.88.......14,534.30.......17,636.62 
..13,432.55......17,286.14.......15,813.32.......21,481.41 
..14,414.47......19,802.14.......18,137.87.......26,164.36 
..17,702.41......25,565.55.......23,679.00.......35,426.54 
..23,457.47......32,968.06.......32,025.84.......44,424.88 
..22,544.97......34,782.95.......31,513.43.......51,044.18 
..27,191.49......43,323.90.......38,730.00.......65,591.78 
..33,121.95......56,409.89.......48,489.96.......90,910.20 
..34,549.51......58,274.23.......48,223.27.......93,001.14 
..45,608.81......76,633.53.......63,244.82......121,831.49 
..52,865.17......85,565.17.......70,770.95......130,847.02 
..53,663.43......83,173.62.......69,320.15......121,556.88 
..63,220.89.....102,848.34.......83,704.08......157,416.16 
..81,371.60.....123,988.82......103,625.65......176,935.76 
..76,334.70.....106,636.58.......91,812.32......138,363.77 
.102,677.81.....147,270.45......126,847.90......196,061.46 
.112,545.14.....175,774.65......143,097.12......253,115.34 
.124,497.44.....206,025.46......163,552.85......313,356.80 
.124,285.79.....204,305.15......164,100.76......308,656.44 
.168,767.68.....267,220.92......218,409.90......388,289.81 
.204,141.38.....323,818.31......263,183.93......471,383.82 
.267,404.80.....425,481.07......339,217.77......621,283.88 
.329,603.15.....461,136.38......383,333.04......580,900.43 
.408,081.67.....523,758.71......468,049.64......600,360.59 
.364,947.43.....553,377.26......440,598.53......731,719.49 
.324,912.70.....560,930.86......420,947.83......831,965.06 
.256,811.00.....462,319.22......332,190.98......713,826.02 
.337,321.25.....620,756.01......455,317.57......979,297.92 
.379,553.87.....732,709.36......525,072.22....1,209,922.58 
.402,251.19.....776,855.10......556,917.85....1,283,364.88 
.464,640.35.....911,833.67......644,019.81....1,530,284.28 
.490,149.10.....904,630.18......665,111.45....1,422,093.18 
.308,597.87.....592,125.69......422,046.47......966,312.32 
==========================================================
Trev H
Posts: 1896
Joined: Fri Mar 02, 2007 10:47 pm

More Tilted vs No Tilt Examples...

Post by Trev H »

.
Not a lot of history on this one - limiting the results to asset classes available at Vanguard and the actual investor returns there.

1997-2008 (yearly rebalancing)


The Extremely Tilted Target Retirement Fund holdings...

Including Extreme TILTS to US Equity and US Large Caps.


80% TSM
20% Total Intl
========
10K Growth
14,991.29
CAGR
3.43
StDev
21.76
Sharpe
0.1054

vs...

A Cowards approach with some faith in achademics (half value tilted).


25% 500 Index
25% Small Cap Value
25% International Value
25% Intl Small Cap (Intl Explorer)
=======
10K Growth
20,238.16
CAGR
6.05
StDev
22.30
Sharpe
0.2233


Short timeframe, but still a good example of how Tilting to Extremes like the Target Retirement Funds do, can give you the worst performance for any future period.

And again - using a Cowards view of Tilting, not the Market worshiping view of Tilting.

:-)
pkcrafter
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tilting

Post by pkcrafter »

MrMiatt wrote:
I listed the data because I thought the OP was asking for it and/or interested in seeing it.
Sorry Matt, I was not trying to single you out. I was just trying to add some balance for the newer investors on this board about the realities of tilting.
Not to argue, but I must make a few points.

-The great bull market of 1982-2000 actually helps out the case of 100% TSM.
This is why I am trying to add some balance. The bull market does seem to make a case for 100% equity, which is the wrong approach.
-The tilt from 0% SCV, to 100% SCV hardly goes from slight to extreme. TSM has a StDev of about 19% from 1972-2008, while the StDev of SCV is about 21%.
Large tilts toward small create large tracking error. This is not good for unseasoned investors whose only knowledge of FF is from what is written this forum. And trying to adjust to an optimal portfolio can lead to constant portfolio changes, which is no different than performance chasing. And that's going to lead to underperformance, no matter what the tilt is.
Obviously past returns are no guarantee of future performance, but as you say there is value to historical returns.
Of course, there is value in knowing how markets are supposed to work. There is value in knowing that small caps and value have provided higher returns. There is value in knowing that tilting causes tracking error. There is value in knowing that the market's cap-weighted existing profile is set by all investors. And finally, there is value in knowing that the optimal portfolio going forward cannot be known. Some tilting may be beneficial: extreme tilting may not. Investors, especially newer ones, should do everything in moderation.
There is a high probability of some tilt towards SCV decreasing the overall volatility and increasing overall performance of your portfolio over any sort of time period. Whether this tilt value is as low as 5% or as high as 50% remains to be seen depending on the period and the duration of the sampling.
I agree. But you can sample every way imaginable and you cannot come up with the optimal tilt for the next three years.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
pkcrafter
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excellent perspective

Post by pkcrafter »

mike.bayer wrote:
Although small and value stocks have higher expected returns than growth stocks, investors should recognize that the record of realized returns does not assure a similar pattern in the future. The timing and magnitude of the value premium will always be uncertain.

It does not seem prudent to have more than 80% in equity or 40% in small cap and value.
Welcome to the forum, Mike. You are obviously knowledgeable and have made a very important point. You said the magic word—prudent. There is a lot of discussion on theory, but 90% of the readers are average investors looking for ways to invest successfully, keep things simple, and stay on course. For balance, we need to let them know they can be successful without getting to far from the market profile.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
pkcrafter
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tilting

Post by pkcrafter »

Trev wrote:
So the only logical (based on possibilities) No Tilt general equity mix is:

25% US Large
25% US Small
25% International Large
25% International Small
I am surprised no one has challenged this. It is absolutely false information that can confuse readers.
That puts you smack dab in the midst of the range of possible outcomes for any future period of equity returns.
A 50/50 allocation to U.S. large and small is overweighting the market in small by a factor of 5x
If you look at the average TR Fund Holdings (Vanguards for example).

All Large Caps, and nearly all US Large Caps ( something like 80% US Large, 20% International Large).

It is extremely tilted !

The TR (target retirement) funds hold total stock market, which has no tilt at all. There is no small international, but still you are covering about 80% of the foreign market.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Trev H
Posts: 1896
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Post by Trev H »

.
Pcrafter,

You said:

===
Large tilts toward small create large tracking error.

A 50/50 allocation to U.S. large and small is overweighting the market in small by a factor of 5x
===

The reason you see it that way is you are still stuck in side the TSM box.

I am not.

TSM is Tilted, yet you don't see it that way.

TSM = Large Cap Blend - nothing more, nothing less.

The Market is nothing magical. There should be no fear of deviating from it, and tracking error works both ways.

Anyone who is smart enough to be reading this board and understanding what is being said here, will suffer just as much TE when the Market Underperforms SV as they do when SV underperforms the Market.

The SV tilters here will absolutely let you know about it when TSM is underperforming, just as loudly as the TSM'ers will yell out when TSM is outperforming SV.

From 1974-1983 SV outperformed TSM in all but 1 of those years.

From 2000-2006 SV outperformed TSM in all of those years.

Talk about TE.

TSM'ers were sure suffering during those times.

It you only think that TE applies to (whatever) vs TSM, well then that again is because you are still thinking inside the TSM box.

I am not.

To me the Market means nothing, absolutely nothing but LCB.

I like LCB, but I don't worship it to the point that I fear deviating from it.

Not in the least.

I also don't consider TE a one way street.

TSM'ers will suffer TE (to SV) just the same as SV tilters suffer TE to TSM.

From 1970-2008 SV outperformed TSM 64% of the years.

Who suffered the most ?

Again - just thinking outside the TSM box and trying to get a few others to take a peek outside toooooo.

:-)

Trev H
Trev H
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Paul...

Post by Trev H »

.
Time for one more reply on my lunch hour..

Paul - you said:

===
But you can sample every way imaginable and you cannot come up with the optimal tilt for the next three years.
===

I would say, yes you can.

It just depends on what your goal is.

Is your goal to have the Best performer, or a mix that falls very close to the middle of what is possible for the next 3 years ?

If you place that Bet on TSM, it could be the Best Performer because "possibility wise" it is extremely TILTED.

It will only be the best performer if LCB is the Best Perfomer, but you would have a slight chance of that happening.

Same is true if you placed that bet on 100% SCV. You could have the best (or worst) performing mix the next 3 years.

Now if you placed that bet 50/50 TSM/SCV, then your odds of capturing a very nice slice of what was possible are much higher.

Or if you placed that bet 50/50 LCB/SCB (say you had no faith in value) then you are still assured performance smack dab in the midst of what was possible.

Again - review the LC, SC, 50/50 details below.

1927-1945

Code: Select all

Portfolio....Stdev....10K Growth 
================================ 
SC...........44.82.....54,795.48 
50/50........35.42.....43,629.49 
LC...........27.30.....29,518.82 

1946-1965 

Portfolio....Stdev....10K Growth 
================================ 
LC...........15.65....119,992.38 
50/50........18.69....112,734.26 
SC...........22.28....102,935.07 


1966-1985 

Portfolio....Stdev....10K Growth 
================================ 
SC...........28.32....122,199.62 
50/50........21.80.....80,476.99 
LC...........17.21.....47,018.19 


1986-2005 

Portfolio....Stdev....10K Growth 
================================ 
SC...........19.75....100,705.51 
50/50........17.25.....99,369.47 
LC...........17.43.....91,116.78 
At times LC will be the best bet, yet at other times LC was a very bad bet, at times SC will be the best bet, yet other times a bad bet, but there will never be a time when 50/50 LC/SC will be a bad bet.

When you think outside the TSM Box, it is not just about how much your equity size/valuation details deviate from the market, but it is all about how much your size/valuation details deviate you from what will be possible over the next X # Years.

:-)
Topic Author
Beagler
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Post by Beagler »

Coffeehouse Portfolio seems to be roughly constructed according to Trev's wishes.

I guess all those large caps overwhelm the smaller stocks in TSM.
Last edited by Beagler on Sat May 05, 2012 2:18 pm, edited 1 time in total.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.
Trev H
Posts: 1896
Joined: Fri Mar 02, 2007 10:47 pm

Beagler...

Post by Trev H »

.
Beagler,

1970-2008 (yearly rebalancing)

Coffeehouse Style
25% LCB
25% LCV
25% SCB
25% SCV
==========
10K Growth
609,877.26
CAGR
11.12
StDev
18.74
Sharpe
0.3706


50% LCB
50% SCV
==========
10K Growth
608,306.65
CAGR
11.11
StDev
17.98
Sharpe
0.3798



50% TSM
50% SCV
==========
10K Growth
592,125.69
CAGR
11.03
StDev
18.42
Sharpe
0.3705


And - you said:

===
But I don't have the fortitude to tilt as heavily as Trev!
===

And I have to reply, that I don't have the fortitude to tilt as heavily (possibility wise) as TSM does.

On TSM and Large Cap Blend

1970-2008

0.06 = the difference in CAGR
0.30 = the difference in StDev
.9918 = correlation

When I say TSM = LCB, that is not 100% true - only something like 99% true when you look at the actual meaningful differences (stats above).


Trev H
Topic Author
Beagler
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Post by Beagler »

Trev, it would take a steady hand to rebalance like that.

TSM acts like 99% LCB. Not much mid- an small-cap effects then, I assume. I guess that's why Rick says SCV compliments TSM.
Last edited by Beagler on Sat May 05, 2012 2:18 pm, edited 1 time in total.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.
MrMatt2532
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Post by MrMatt2532 »

Beagler wrote:Trev, it would take a steady hand to rebalance like that.
Rebalancing once a year would be fine. It's not really a big deal as long you have a plan and stick to it.
MAFinvest
Posts: 14
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Post by MAFinvest »

Trev,

There are so many things blatantly wrong with what you're saying.

First, the S&P 500, which is what I assume you're using for LCB (even though there is about 15% midcaps in it, but that's for a different day) being very closely correlated with the market doesn't show anything other than the fact that the S&P 500 pretty much IS the market. Therefore, holding solely an S&P 500 index fund for stocks means you're pretty close to holding the total market.

Second, TILTING to 50/50 large/small is a huge, huge, severe tilt. In investing, a tilt is anything away from the market. You claim the market is tilted; in investing, the market, by definition, CAN'T be tilted. What you claim is a balanced, untilted portfolio of U.S. stocks is in FACT, yes, FACT, a huge tilt.

Third, why would you hold 50/50 large/small if you want to be totally diversified? Why not hold every single stock equally? At 5,000 stocks, that'd be 0.02% in each stock. Wouldn't that give you the best "range of possible outcomes" rather than cap-weighted index funds? At 50/50 large/small, using Vanguard funds (VLACX and NAESX), you'd have 23.5% of your money in 20 stocks out of the 5,000. What you claim to be untilted is not only tilted away from the market, it's also severely tilted to the largest companies in each index (23.5% of money in 0.04% of the companies) due to using cap-weighted funds.

Fourth, posting results of 100% in one fund, 100% in another, and then 50/50 between the two will ALWAYS result in the 50/50 split having the middle outcome. All your numbers do is show us that mathematics still work. Why not invest in 500 different funds with 0.20% of your money in each? That'll give you the best "range of possible outcomes."

Fifth, showing that the standard deviation decreases by adding a small value fund is misleading because you assume that risk is measured solely by standard deviation. The fact of the matter is that investors are more likely to lose money in small value funds than total market funds. Therefore, anytime you take money out of a total market fund and add it to a small value fund, your risk of losing money increases. Volatility only tells part of the story. Adding riskier asset classes does NOT reduce risk of loss. It only reduces volatility. Those are two very, very different things.

With all due respect, and with beginning investors in mind, please stop posting blatantly wrong information.
MrMatt2532
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Post by MrMatt2532 »

MAFinvest wrote:Trev,
Fourth, posting results of 100% in one fund, 100% in another, and then 50/50 between the two will ALWAYS result in the 50/50 split having the middle outcome. All your numbers do is show us that mathematics still work. Why not invest in 500 different funds with 0.20% of your money in each? That'll give you the best "range of possible outcomes."

Fifth, showing that the standard deviation decreases by adding a small value fund is misleading because you assume that risk is measured solely by standard deviation. The fact of the matter is that investors are more likely to lose money in small value funds than total market funds. Therefore, anytime you take money out of a total market fund and add it to a small value fund, your risk of losing money increases. Volatility only tells part of the story. Adding riskier asset classes does NOT reduce risk of loss. It only reduces volatility. Those are two very, very different things.

With all due respect, and with beginning investors in mind, please stop posting blatantly wrong information.
To your fourth point: Not true. Take a hypothetical example for Fund 1 and Fund 2:

Yr F1 F2 Split
1 -1% 10% 4.50%
2 -1% 10% 4.50%
3 -1% 10% 4.50%
4 -1% 10% 4.50%
5 -1% 10% 4.50%
6 12% 1% 6.50%
7 12% 1% 6.50%
8 12% 1% 6.50%
9 12% 1% 6.50%
10 12% 1% 6.50%
CAGR 5.30% 5.40% 5.50%
StDev 6.85% 4.74% 1.05%

Yes this is hypotheical. But this is why diversification is so great. Return can increase while Risk/Volatility decreases. By your logic, the CAGR of the split must be between the CAGR of F1 and F2.

Which brings me to your fifth point. If volatility/standard deviation is decreased, risk may indeed be decreased. Yes standard deviation isn't the best measure of risk, but it is the easiest to compute and is actually ok for an initial analysis. Take something that has a average return of 10% and a standard deviation of 10%. The annualized return over a long period will be less than 10% which will likely include some years with negative returns. Compare that with something that has the same return but with a much smaller standard deviation. Let's say it approaches zero, or is zero. Then the annualized return will be exactly 10% with zero risk.
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woof755
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Post by woof755 »

I'm with TrevH.

It hasn't been mentioned in a while, and bears repeating, that another beneficial aspect of including an ample chunk of small cap value in a portfolio is that it allows the investor to decrease the overall percentage of equity as compared to bonds in a portfolio, thereby reducing volatility further.
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tiling

Post by pkcrafter »

MAFinvest, your comments are correct and well-stated.

woof, I am again surprised that you, or anyone, would agree with Trev's statements:
If you place that Bet on TSM, it could be the Best Performer because "possibility wise" it is extremely TILTED.
So the only logical (based on possibilities) No Tilt general equity mix is:

25% US Large
25% US Small
25% International Large
25% International Small
Trev calls the above 4 fund portfolio NOT tilted. This is just flat wrong. The total stock fund has no tilt—it is the market. Trev's example has a very big tilt. Do we want to tell forum readers Trev's portfolio is neutral regarding tilt. No. Such statements are not accurate nor constructive.

Trev, it's one thing to suggest or recommend a tilted portfolio and quite another to say TSM has a large cap tilt. You do know that TSM has no tilt, don't you?

woof wrote:
another beneficial aspect of including an ample chunk of small cap value in a portfolio is that it allows the investor to decrease the overall percentage of equity as compared to bonds in a portfolio, thereby reducing volatility further.
This is a different point altogether. Unseasoned investors who have not studied the workings of MPT and sophisticated portfolio construction—and many are not interested—may be mislead by this recommendation. This type of portfolio will have large tracking error, and the chance of behavioral mistakes is greatly increased.

I have no problem with investors tilting toward small, etc. but I don't think we can allow completely false statement to pass as correct.




Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Trev H
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Paul...

Post by Trev H »

.
Paul,

Again - you are stuck in the TSM box.

I am not.

Big difference.

When you say this:

==
Trev calls the above 4 fund portfolio NOT tilted. This is just flat wrong. The total stock fund has no tilt—it is the market.
==

You still seem to be thinking that when I say tilted, I am talking about tilting from the market. I am not saying that.

I am speaking of possibilities. Tilting from what is, or will be possible for any period of X # Years in the Future. The great unknown we are all facing.

In that respect TSM is absolutely tilted.

Same as a 100% SCV portfolil would be seriously tilted. Or 90% SCV, 10% TSM. Still quite seriously Tilted.

The closer you get to half large, half small the more balanced it gets (possibility wise). Not straying from performing smack dab in the middle of what is or will be possible.

The more you stray from Half Large, Half Small (and you can add Half US, Half International in there to) the more tilted it gets (possibility wise).

This is the starting point for being balanced possibility wise:

25% US Large
25% US Small
25% Intl Large
25% Intl Small

It is absolutely possible for any of the 4 substancially different equity components to be the best or worst performer for any future period of X # Years.

If you give them equal weight, the likelyhood of you having the best or worst mix vanishes. It will perform somewhere right in the middle. Has to.

If you shift the weight around, say

70% US Large
10% US Small
15% Intl Large
05% Intl Small

(you know, like Vanguards TR Funds do)
and like so many Lumpers here do...

Well you absolutely increase (Tilt) the possible outcomes to either Best or Worst.

In fact it will be best when LCB is Best, but will also be worst when LCB is worst and for example Intl Small is best.

Again, when I say Tilt, not talking about the Cap Weighted Market, talking about possibilities.

Check out the 50/50 mix in the 1927-2005 backtest results again (by 20 year span).

Show me 1 - 20 year span where 50/50 was the worst performer ?
Or the best performer ?

Did not happen, in fact, never will.

I can show you 3 - 20 year periods where a portfolio seriously tilted to LC was the worst performer. Absolutely no doubt it will happen again - over and over again - in the future.

What is possible is something I can grasp, something I can appreciate.

Cap Weighting and calling it the "Market" when the Market looks, smells, taste, feels, and acts just like LCB well that has no appeal to me at all, no cause for respect, or admiration, nothing I can appreciate. It is just a single asset class and does not represent diversification at all (possibility wise that is).

Trev H
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Post by LadyGeek »

Can somebody please explain what a Portfolio "Tilt" actually is? Value tilt, TSM, LCV, SCV....

I don't understand the concepts- nothing helpful in the forum or wiki. Background info, please.
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MAFinvest
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Post by MAFinvest »

MrMatt,

In the case of two funds having a very similar CAGR over time, sure, your hypothetical is possible, although highly improbable.

As for the fifth point about adding riskier asset classes...you're stuck thinking that standard deviation is risk of loss. It is not. It is volatility.

For the average investor, "risk" is a probability of loss. Higher risk means a higher chance of losing money. Adding an asset class more likely to lose money will always make the overall risk of losing money greater. Volatility may will be reduced, but risk isn't necessarily reduced.
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