Is a factor tilt warranted?

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Topic Author
TheContrarian
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Is a factor tilt warranted?

Post by TheContrarian »

Here is my current US equity portfolio:

33.33% Large Cap:
- 16.66% Large Value: AVLV
- 16.66% Large Cap (Blend): VV

33.33% Mid Cap:
- 16.66% Mid Value: VOE
- 16.66% Mid Cap (Blend): VO

33.33% Small Cap:
- 16.66% Small Value: AVUV
- 16.66% Small Cap (Blend): VB

In effect:

50% Value
50% Standard Large, Mid, Small index funds.


What do you think?
rkhusky
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Re: Is a factor tilt warranted?

Post by rkhusky »

No one can say whether your value or size bets will pay off or by how much. The trick is to stay with your allocation through thick and thin. You are essentially locked into this allocation until retirement, because if you switch, small value will start to outperform.
Tom_T
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Re: Is a factor tilt warranted?

Post by Tom_T »

Countless threads on factors in the Forum... but I'm sure this one will turn into a 100-post marathon. :wink:
dbr
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Re: Is a factor tilt warranted?

Post by dbr »

You have a factor loading of .37 on size and .33 on value with 1.03 on market.

What is your objective in devising this arbitrary 1/n asset allocation? 1/n means if there are n levels on some arbitrary parameter you divide the assets up equally across those levels. In this case for some reason you decided to stratify your assets according to three levels of size and separate on value by value vs blend, thus dividing the allocation evenly across the six resulting cells in a matrix. Is there a reason you did that?

You can see the various common factor analysis results here: https://www.portfoliovisualizer.com/fac ... sisResults
stan1
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Re: Is a factor tilt warranted?

Post by stan1 »

The Avantis funds are only a few years old so I substituted counterpart Vanguard Value ETFs, and compared to Total Stock Market back to 2007. I'll let you decide what if any takeaways to make.

https://www.portfoliovisualizer.com/bac ... on6_1=16.7
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Re: Is a factor tilt warranted?

Post by nisiprius »

I think you've added meaningless complexity that won't do you any particular good or harm if you actually stick to it.

But the fact that you did it first and are asking questions second suggests that you don't have a deep conviction about it. That means that you are in danger of tinkering and changing, particularly when it underperforms, which it surely occasionally will.

It somewhat resembles model factor portfolios published in the late 1990s, e.g. the Bill Schultheis Coffeehouse Portfolio, which included equal weights in large blend, large value, small blend, and small value. You've modified it by splitting the size factor into large, mid, and small-caps.

It's a moderate value tilt. It will do better than Total Market when value does better, it will do worse when value does worse.

The idea that value is almost sure to do better in the long run, going forward isn't the slam dunk some make it out to be. And even if it does, the long run is long, and your personal investing future may not be long enough for it to show up. The good or bad luck of a particular period of time, even several decades, can outweigh the intrinsic superiority of value if it really exists.

Older editions of Burton Malkiel's A Random Walk Down Wall Street used to a section called "Potshots at the Efficient Market Theory and Why They Miss." One of the "potshots" was "value will win." He though that the evidence existed but it wasn't really compelling. I'm just mentioning that to point out that the idea that "value will win" is broadly popular, particularly within factor investing circles, but not universal. There are many theories of the form "stocks in category XYZ are Just Plain Better than the rest," and it's just one of them.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
dbr
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Re: Is a factor tilt warranted?

Post by dbr »

nisiprius wrote: Mon Jun 05, 2023 8:49 am
It somewhat resembles model factor portfolios published in the late 1990s, e.g. the Bill Schultheis Coffeehouse Portfolio, which included equal weights in large blend, large value, small blend, and small value. You've modified it by splitting the size factor into large, mid, and small-caps.

It's a moderate value tilt.
It also has a tilt to small size, to which the OP appears oblivious. Using the M* or similar stratification on size 1/3, 1/3, 1/3 is not how the total market is aligned. Strangely they do define growth/blend/value to get 1/3 portions in the total market.
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TheContrarian
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Re: Is a factor tilt warranted?

Post by TheContrarian »

rkhusky wrote: Mon Jun 05, 2023 7:32 am No one can say whether your value or size bets will pay off or by how much. The trick is to stay with your allocation through thick and thin. You are essentially locked into this allocation until retirement, because if you switch, small value will start to outperform.
Agreed
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nedsaid
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Re: Is a factor tilt warranted?

Post by nedsaid »

isaachemingway wrote: Mon Jun 05, 2023 6:54 am Here is my current US equity portfolio:

33.33% Large Cap:
- 16.66% Large Value: AVLV
- 16.66% Large Cap (Blend): VV

33.33% Mid Cap:
- 16.66% Mid Value: VOE
- 16.66% Mid Cap (Blend): VO

33.33% Small Cap:
- 16.66% Small Value: AVUV
- 16.66% Small Cap (Blend): VB

In effect:

50% Value
50% Standard Large, Mid, Small index funds.


What do you think?
This is very similar to the approach that Paul Merriman uses when constructing portfolios. He has a website and a model portfolio which is called The Ultimate Buy and Hold Portfolio. Lots of material out there from Paul, if you want to know more check out his writings.
A fool and his money are good for business.
Topic Author
TheContrarian
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Re: Is a factor tilt warranted?

Post by TheContrarian »

dbr wrote: Mon Jun 05, 2023 7:45 am You have a factor loading of .37 on size and .33 on value with 1.03 on market.

What is your objective in devising this arbitrary 1/n asset allocation? 1/n means if there are n levels on some arbitrary parameter you divide the assets up equally across those levels. In this case for some reason you decided to stratify your assets according to three levels of size and separate on value by value vs blend, thus dividing the allocation evenly across the six resulting cells in a matrix. Is there a reason you did that?

You can see the various common factor analysis results here: https://www.portfoliovisualizer.com/fac ... sisResults
My reason for doing so is that, during various time periods, small, mid, and large caps have their time in the sun and their time out of the sun. For example:

'72-'82:
#1: small
#2: mid
#3: large

'82-'92:
#1: mid
#2: large
#3: small

'92-2002:
#1: mid
#2: large
#3: small

2002-2012
#1: small
#2: mid
#3: large

2012-2022:
#1: large
#2: mid
#3: small
(Portfolio Visualizer "Backtest Portfolio Asset Class Allocation" tool)

Also, empirical research has shown that a size premium does indeed exist in the markets if an investor is willing to stay the course during times of underperformance (the same fact holds true for the value premium).

Thus, my US Equity portfolio is built for the long-run (many decades).
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TheContrarian
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Re: Is a factor tilt warranted?

Post by TheContrarian »

stan1 wrote: Mon Jun 05, 2023 7:50 am The Avantis funds are only a few years old so I substituted counterpart Vanguard Value ETFs, and compared to Total Stock Market back to 2007. I'll let you decide what if any takeaways to make.

https://www.portfoliovisualizer.com/bac ... on6_1=16.7
I prefer to look at a longer time horizon via Portfolio Visualizer's "Backtest Portfolio Asset Class Allocation" tool (goes back to 1972 for large, mid, and small value and blend indices): https://www.portfoliovisualizer.com/bac ... allocation
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WoodSpinner
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Re: Is a factor tilt warranted?

Post by WoodSpinner »

isaachemingway wrote: Mon Jun 05, 2023 10:02 am
Also, empirical research has shown that a size premium does indeed exist in the markets if an investor is willing to stay the course during times of underperformance (the same fact holds true for the value premium).

Thus, my US Equity portfolio is built for the long-run (many decades).
Are you familiar with this paper by Cliff Asnes?
https://www.aqr.com/Research-Archive/Pe ... ly-Edition
WoodSpinner
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Re: Is a factor tilt warranted?

Post by dcabler »

Tom_T wrote: Mon Jun 05, 2023 7:42 am Countless threads on factors in the Forum... but I'm sure this one will turn into a 100-post marathon. :wink:
And this time will be different. There will be consensus. :D
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burritoLover
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Re: Is a factor tilt warranted?

Post by burritoLover »

isaachemingway wrote: Mon Jun 05, 2023 6:54 am Here is my current US equity portfolio:

33.33% Large Cap:
- 16.66% Large Value: AVLV
- 16.66% Large Cap (Blend): VV

33.33% Mid Cap:
- 16.66% Mid Value: VOE
- 16.66% Mid Cap (Blend): VO

33.33% Small Cap:
- 16.66% Small Value: AVUV
- 16.66% Small Cap (Blend): VB

In effect:

50% Value
50% Standard Large, Mid, Small index funds.


What do you think?
I would NOT throw into the value factor or other non-market factors if you do not understand that you are taking more risk and there can be long periods of underperformance vs a market portfolio. You have to stick with these forever basically - you can't be getting out when they aren't performing. There is also the chance that the factor premiums are extremely reduced going forward or you end up worse off (net of fees/taxes) than you would have been with a total market portfolio. And there's no way to fix that along the way. You stick with it until you spend it (or de-risk for retirement), period.
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TheContrarian
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Re: Is a factor tilt warranted?

Post by TheContrarian »

nisiprius wrote: Mon Jun 05, 2023 8:49 am I think you've added meaningless complexity that won't do you any particular good or harm if you actually stick to it.

But the fact that you did it first and are asking questions second suggests that you don't have a deep conviction about it. That means that you are in danger of tinkering and changing, particularly when it underperforms, which it surely occasionally will.

It somewhat resembles model factor portfolios published in the late 1990s, e.g. the Bill Schultheis Coffeehouse Portfolio, which included equal weights in large blend, large value, small blend, and small value. You've modified it by splitting the size factor into large, mid, and small-caps.

It's a moderate value tilt. It will do better than Total Market when value does better, it will do worse when value does worse.

The idea that value is almost sure to do better in the long run, going forward isn't the slam dunk some make it out to be. And even if it does, the long run is long, and your personal investing future may not be long enough for it to show up. The good or bad luck of a particular period of time, even several decades, can outweigh the intrinsic superiority of value if it really exists.

Older editions of Burton Malkiel's A Random Walk Down Wall Street used to a section called "Potshots at the Efficient Market Theory and Why They Miss." One of the "potshots" was "value will win." He though that the evidence existed but it wasn't really compelling. I'm just mentioning that to point out that the idea that "value will win" is broadly popular, particularly within factor investing circles, but not universal. There are many theories of the form "stocks in category XYZ are Just Plain Better than the rest," and it's just one of them.
I happen to have a very deep conviction on the topic (after hours of research and dozens of books and academic papers studied), but love to hear the opinions of others (my reason for posting). I couldn't be more comfortable holding low-cost Vanguard (0.04% - 0.07% expense ratios) and Avantis (0.15% - 0.25% expense ratios) funds over the long run. I fully agree that the value and size tilts aren't guaranteed to outperform (even over many decades), but I am comfortable with the odds.

Best.
- @isaachemingway
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Re: Is a factor tilt warranted?

Post by dcabler »

isaachemingway wrote: Mon Jun 05, 2023 10:04 am
stan1 wrote: Mon Jun 05, 2023 7:50 am The Avantis funds are only a few years old so I substituted counterpart Vanguard Value ETFs, and compared to Total Stock Market back to 2007. I'll let you decide what if any takeaways to make.

https://www.portfoliovisualizer.com/bac ... on6_1=16.7
I prefer to look at a longer time horizon via Portfolio Visualizer's "Backtest Portfolio Asset Class Allocation" tool (goes back to 1972 for large, mid, and small value and blend indices): https://www.portfoliovisualizer.com/bac ... allocation
You can go back even farther than that with the Simba Spreadsheet - it is only annual data, however.
https://www.bogleheads.org/wiki/Simba%2 ... preadsheet

Cheers.
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Re: Is a factor tilt warranted?

Post by TheContrarian »

isaachemingway wrote: Mon Jun 05, 2023 10:02 am
dbr wrote: Mon Jun 05, 2023 7:45 am You have a factor loading of .37 on size and .33 on value with 1.03 on market.

What is your objective in devising this arbitrary 1/n asset allocation? 1/n means if there are n levels on some arbitrary parameter you divide the assets up equally across those levels. In this case for some reason you decided to stratify your assets according to three levels of size and separate on value by value vs blend, thus dividing the allocation evenly across the six resulting cells in a matrix. Is there a reason you did that?

You can see the various common factor analysis results here: https://www.portfoliovisualizer.com/fac ... sisResults
My reason for doing so is that, during various time periods, small, mid, and large caps have their time in the sun and their time out of the sun. For example:

'72-'82:
#1: small
#2: mid
#3: large

'82-'92:
#1: mid
#2: large
#3: small

'92-2002:
#1: mid
#2: large
#3: small

2002-2012
#1: small
#2: mid
#3: large

2012-2022:
#1: large
#2: mid
#3: small
(Portfolio Visualizer "Backtest Portfolio Asset Class Allocation" tool)

Also, empirical research has shown that a size premium does indeed exist in the markets if an investor is willing to stay the course during times of underperformance (the same fact holds true for the value premium).

Thus, my US Equity portfolio is built for the long-run (many decades).
It should also be noted that rebalancing (using 20% rebalancing bands) is a part of my investment plan (https://www.youtube.com/watch?v=rAjIiaN6zHM&t=791s).
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Re: Is a factor tilt warranted?

Post by watchnerd »

OP:

How much AI exposure are you going to get with that tilt?

AI hype may be overblown, or it may be the next big thing, but at least with total market one is not betting against it / tilting away from it.
Last edited by watchnerd on Mon Jun 05, 2023 10:21 am, edited 1 time in total.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Topic Author
TheContrarian
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Re: Is a factor tilt warranted?

Post by TheContrarian »

dbr wrote: Mon Jun 05, 2023 9:01 am
nisiprius wrote: Mon Jun 05, 2023 8:49 am
It somewhat resembles model factor portfolios published in the late 1990s, e.g. the Bill Schultheis Coffeehouse Portfolio, which included equal weights in large blend, large value, small blend, and small value. You've modified it by splitting the size factor into large, mid, and small-caps.

It's a moderate value tilt.
It also has a tilt to small size, to which the OP appears oblivious. Using the M* or similar stratification on size 1/3, 1/3, 1/3 is not how the total market is aligned. Strangely they do define growth/blend/value to get 1/3 portions in the total market.
My reason for splitting the portfolio into 1/3's for small, mid, and large caps is that, during various time periods, small, mid, and large caps have their time in the sun and their time out of the sun. For example:

'72-'82:
#1: small
#2: mid
#3: large

'82-'92:
#1: mid
#2: large
#3: small

'92-2002:
#1: mid
#2: large
#3: small

2002-2012
#1: small
#2: mid
#3: large

2012-2022:
#1: large
#2: mid
#3: small
(Portfolio Visualizer "Backtest Portfolio Asset Class Allocation" tool)

Also, empirical research has shown that a size premium does indeed exist in the markets if an investor is willing to stay the course during times of underperformance (the same fact holds true for the value premium).

Thus, my US Equity portfolio is built for the long-run (many decades).
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Beensabu
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Re: Is a factor tilt warranted?

Post by Beensabu »

isaachemingway wrote: Mon Jun 05, 2023 6:54 am What do you think?
Sure, why not?

As long as you'll stick to it.

Splits are simple and all funds are equal weighted in the port (or your US equity allocation), so it's easy to rebalance without thinking about it much.

Only thing is if this is only your US equity allocation, and you've still got an exUS equity allocation and fixed income allocation (and probably a couple funds in each of those), then you're getting into 10-fund territory and "clutter".

It kind of seems from your responses to others that you have conviction in the 3-way split by capitalization, but not really the 50% split to value. Sticking with large/mid/small blend funds would be simpler.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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TheContrarian
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Re: Is a factor tilt warranted?

Post by TheContrarian »

WoodSpinner wrote: Mon Jun 05, 2023 10:08 am
isaachemingway wrote: Mon Jun 05, 2023 10:02 am
Also, empirical research has shown that a size premium does indeed exist in the markets if an investor is willing to stay the course during times of underperformance (the same fact holds true for the value premium).

Thus, my US Equity portfolio is built for the long-run (many decades).
Are you familiar with this paper by Cliff Asnes?
https://www.aqr.com/Research-Archive/Pe ... ly-Edition
Yes, however, I do believe that the long-run outperformance of mid and small caps cannot be ignored. https://www.portfoliovisualizer.com/bac ... ion3_3=100

Also, as I mentioned, sometimes large caps do best, sometimes mid caps do best, and sometimes small caps do best. Selling one type when it's outperforming to buy the others while they are lagging has proved to be an effective rebalancing approach over the long-run. https://www.portfoliovisualizer.com/bac ... ion4_2=100
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Re: Is a factor tilt warranted?

Post by muffins14 »

isaachemingway wrote: Mon Jun 05, 2023 6:54 am
What do you think?
What are your goals?
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Topic Author
TheContrarian
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Re: Is a factor tilt warranted?

Post by TheContrarian »

Beensabu wrote: Mon Jun 05, 2023 10:20 am
isaachemingway wrote: Mon Jun 05, 2023 6:54 am What do you think?
Sure, why not?

As long as you'll stick to it.

Splits are simple and all funds are equal weighted in the port (or your US equity allocation), so it's easy to rebalance without thinking about it much.

Only thing is if this is only your US equity allocation, and you've still got an exUS equity allocation and fixed income allocation (and probably a couple funds in each of those), then you're getting into 10-fund territory and "clutter".

It kind of seems from your responses to others that you have conviction in the 3-way split by capitalization, but not really the 50% split to value. Sticking with large/mid/small blend funds would be simpler.
That's the key, to "stay the course" as Mr. Bogle so eloquently said. I'm not worried about the complexity issue because I use M1 finance (which automatically rebalances and uses dynamic rebalancing). Also, I have even more conviction in the value factor than I do in the size factor.

The old Bill Bernstein quote that "good companies [well-known growth companies] are often bad stocks to own and bad companies [struggling, lesser-known value companies] are often good stocks to own" (Bernstein, "The Intelligent Asset Allocator") has held true over the long-run.

Thanks for the input!
- @isaachemingway
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Re: Is a factor tilt warranted?

Post by nisiprius »

dbr wrote: Mon Jun 05, 2023 9:01 am
nisiprius wrote: Mon Jun 05, 2023 8:49 am
It somewhat resembles model factor portfolios published in the late 1990s, e.g. the Bill Schultheis Coffeehouse Portfolio, which included equal weights in large blend, large value, small blend, and small value. You've modified it by splitting the size factor into large, mid, and small-caps.

It's a moderate value tilt.
It also has a tilt to small size, to which the OP appears oblivious. Using the M* or similar stratification on size 1/3, 1/3, 1/3 is not how the total market is aligned. Strangely they do define growth/blend/value to get 1/3 portions in the total market.
I know. I'm just saying that Coffeehouse, for example, puts 10% each in large blend, large value, small blend and small value--splitting the size universe 50/50. Model portfolios published by Larry Swedroe in 2004 also show equal allocations to these four categories, see below.

I've never seen an explanation for including both "blend" and "value." (In the forum people have guessed that the answer is "timidity.") (Nor have I seen an explanation for splitting large and small 50/50. And for that matter it is far less than clear why Fama and French split value into three bins, but size into only two, or why value was split 30-40-30 rather than ⅓ each...)

I'm just saying that what isaachemingway is proposing is in line with suggestions factor mavens have made.

Image
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Re: Is a factor tilt warranted?

Post by Doctor Rhythm »

I feel the issue with empiric evidence for tilting is whether the outperformance is due to the factor or due to investor behavior in past eras. In other words, is the outperformance like [making this up] jockeys in a certain weight range being more likely to win horse races, or is it like actors performing in roles with a British accent being more likely to win an award. Latter makes the outperformance less likely to persist.
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Re: Is a factor tilt warranted?

Post by TheContrarian »

burritoLover wrote: Mon Jun 05, 2023 10:12 am
isaachemingway wrote: Mon Jun 05, 2023 6:54 am Here is my current US equity portfolio:

33.33% Large Cap:
- 16.66% Large Value: AVLV
- 16.66% Large Cap (Blend): VV

33.33% Mid Cap:
- 16.66% Mid Value: VOE
- 16.66% Mid Cap (Blend): VO

33.33% Small Cap:
- 16.66% Small Value: AVUV
- 16.66% Small Cap (Blend): VB

In effect:

50% Value
50% Standard Large, Mid, Small index funds.


What do you think?
I would NOT throw into the value factor or other non-market factors if you do not understand that you are taking more risk and there can be long periods of underperformance vs a market portfolio. You have to stick with these forever basically - you can't be getting out when they aren't performing. There is also the chance that the factor premiums are extremely reduced going forward or you end up worse off (net of fees/taxes) than you would have been with a total market portfolio. And there's no way to fix that along the way. You stick with it until you spend it (or de-risk for retirement), period.
I fully understand the added risks and potential for long-run underperformance. As you said, it's a "forever" portfolio.
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Re: Is a factor tilt warranted?

Post by TheContrarian »

muffins14 wrote: Mon Jun 05, 2023 10:30 am
isaachemingway wrote: Mon Jun 05, 2023 6:54 am
What do you think?
What are your goals?
To outperform the market by 0.25% - 0.5%+ over the long-run by taking on added risks (value, size, etc.) in addition to market risk. Even an added 25 bps over the long run adds a ton of value.

However, I fully recognize that, when investing in factor premiums, you must be content with long-run underperformance and continue to hold on during those underperforming seasons.
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Re: Is a factor tilt warranted?

Post by TheContrarian »

nisiprius wrote: Mon Jun 05, 2023 10:34 am
dbr wrote: Mon Jun 05, 2023 9:01 am
nisiprius wrote: Mon Jun 05, 2023 8:49 am
It somewhat resembles model factor portfolios published in the late 1990s, e.g. the Bill Schultheis Coffeehouse Portfolio, which included equal weights in large blend, large value, small blend, and small value. You've modified it by splitting the size factor into large, mid, and small-caps.

It's a moderate value tilt.
It also has a tilt to small size, to which the OP appears oblivious. Using the M* or similar stratification on size 1/3, 1/3, 1/3 is not how the total market is aligned. Strangely they do define growth/blend/value to get 1/3 portions in the total market.
I know. I'm just saying that Coffeehouse, for example, puts 10% each in large blend, large value, small blend and small value--splitting the size universe 50/50. Model portfolios published by Larry Swedroe in 2004 also show equal allocations to these four categories, see below.

I've never seen an explanation for including both "blend" and "value." (In the forum people have guessed that the answer is "timidity.") (Nor have I seen an explanation for splitting large and small 50/50. And for that matter it is far less than clear why Fama and French split value into three bins, but size into only two, or why value was split 30-40-30 rather than ⅓ each...)

I'm just saying that what isaachemingway is proposing is in line with suggestions factor mavens have made.

Image
The size factor tilt is intentional.
secondopinion
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Re: Is a factor tilt warranted?

Post by secondopinion »

burritoLover wrote: Mon Jun 05, 2023 10:12 am
isaachemingway wrote: Mon Jun 05, 2023 6:54 am Here is my current US equity portfolio:

33.33% Large Cap:
- 16.66% Large Value: AVLV
- 16.66% Large Cap (Blend): VV

33.33% Mid Cap:
- 16.66% Mid Value: VOE
- 16.66% Mid Cap (Blend): VO

33.33% Small Cap:
- 16.66% Small Value: AVUV
- 16.66% Small Cap (Blend): VB

In effect:

50% Value
50% Standard Large, Mid, Small index funds.


What do you think?
I would NOT throw into the value factor or other non-market factors if you do not understand that you are taking more risk and there can be long periods of underperformance vs a market portfolio. You have to stick with these forever basically - you can't be getting out when they aren't performing. There is also the chance that the factor premiums are extremely reduced going forward or you end up worse off (net of fees/taxes) than you would have been with a total market portfolio. And there's no way to fix that along the way. You stick with it until you spend it (or de-risk for retirement), period.
A value tilt takes more of some risks and less of others (which a growth tilt takes the contrary). Unless one accepts the tilt with its risks given/taken without the expectation of a premium, I cannot say it is wise.
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.
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burritoLover
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Re: Is a factor tilt warranted?

Post by burritoLover »

isaachemingway wrote: Mon Jun 05, 2023 10:38 am
burritoLover wrote: Mon Jun 05, 2023 10:12 am
isaachemingway wrote: Mon Jun 05, 2023 6:54 am Here is my current US equity portfolio:

33.33% Large Cap:
- 16.66% Large Value: AVLV
- 16.66% Large Cap (Blend): VV

33.33% Mid Cap:
- 16.66% Mid Value: VOE
- 16.66% Mid Cap (Blend): VO

33.33% Small Cap:
- 16.66% Small Value: AVUV
- 16.66% Small Cap (Blend): VB

In effect:

50% Value
50% Standard Large, Mid, Small index funds.


What do you think?
I would NOT throw into the value factor or other non-market factors if you do not understand that you are taking more risk and there can be long periods of underperformance vs a market portfolio. You have to stick with these forever basically - you can't be getting out when they aren't performing. There is also the chance that the factor premiums are extremely reduced going forward or you end up worse off (net of fees/taxes) than you would have been with a total market portfolio. And there's no way to fix that along the way. You stick with it until you spend it (or de-risk for retirement), period.
I fully understand the added risks and potential for long-run underperformance. As you said, it's a "forever" portfolio.
In your mind, what is the likelihood that you will underperform the market portfolio over the investing period you would keep these assets? Is it extremely unlikely, unlikely, 50/50, ?
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Re: Is a factor tilt warranted?

Post by nisiprius »

isaachemingway wrote: Mon Jun 05, 2023 10:26 am...Yes, however, I do believe that the long-run outperformance of mid and small caps cannot be ignored. https://www.portfoliovisualizer.com/bac ... ion3_3=100...
It's a lot easier to ignore if you go back to the inception of the oldest fund specifically designed to capture the size premium, the DFA US Micro Cap Portfolio (DFSCX). This fund has been widely praised for dipping deeper into small-caps than competitors, and it's from the firm most associated with factor investing.

The following chart is not quite fair because it doesn't quite go back to inception, and the first three years of the fund's life were great. But it's easy for you to verify for yourself:

DFSCX versus VFINX

This chart does go back to inception, but I haven't updated it past 2022... but nothing particular dramatic has happened to change the overall picture:

Image

1981 is virtually the "discovery" of the size effect. People investing in DFSCX did very well for three years, but then fell behind the S&P, wiping out all the outperformance and not getting back to even with the S&P until 2003. Then there were periods of outperformance and underperformance, but anyone who diligently stayed the course through 17 years of underperformance would not have really been rewarded. Add "yet" if you wish...
Last edited by nisiprius on Mon Jun 05, 2023 10:49 am, edited 1 time in total.
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Re: Is a factor tilt warranted?

Post by TheContrarian »

secondopinion wrote: Mon Jun 05, 2023 10:45 am
burritoLover wrote: Mon Jun 05, 2023 10:12 am
isaachemingway wrote: Mon Jun 05, 2023 6:54 am Here is my current US equity portfolio:

33.33% Large Cap:
- 16.66% Large Value: AVLV
- 16.66% Large Cap (Blend): VV

33.33% Mid Cap:
- 16.66% Mid Value: VOE
- 16.66% Mid Cap (Blend): VO

33.33% Small Cap:
- 16.66% Small Value: AVUV
- 16.66% Small Cap (Blend): VB

In effect:

50% Value
50% Standard Large, Mid, Small index funds.


What do you think?
I would NOT throw into the value factor or other non-market factors if you do not understand that you are taking more risk and there can be long periods of underperformance vs a market portfolio. You have to stick with these forever basically - you can't be getting out when they aren't performing. There is also the chance that the factor premiums are extremely reduced going forward or you end up worse off (net of fees/taxes) than you would have been with a total market portfolio. And there's no way to fix that along the way. You stick with it until you spend it (or de-risk for retirement), period.
A value tilt takes more of some risks and less of others (which a growth tilt takes the contrary). Unless one accepts the tilt with its risks given/taken without the expectation of a premium, I cannot say it is wise.
My growth stock exposure would be through the blend funds (VV, VO, VB) which tend to overweight growth stocks compared to value stocks (because investors are more likely to invest in a hot, high-growth company than a boring, "declining" business).

The old Bill Bernstein quote that "good companies [well-known growth companies] are often bad stocks to own and bad companies [struggling, lesser-known value companies] are often good stocks to own" (Bernstein, "The Intelligent Asset Allocator") has held true over the long-run.

Thanks for the input!
- @isaachemingway
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Re: Is a factor tilt warranted?

Post by TheContrarian »

burritoLover wrote: Mon Jun 05, 2023 10:45 am
isaachemingway wrote: Mon Jun 05, 2023 10:38 am
burritoLover wrote: Mon Jun 05, 2023 10:12 am
isaachemingway wrote: Mon Jun 05, 2023 6:54 am Here is my current US equity portfolio:

33.33% Large Cap:
- 16.66% Large Value: AVLV
- 16.66% Large Cap (Blend): VV

33.33% Mid Cap:
- 16.66% Mid Value: VOE
- 16.66% Mid Cap (Blend): VO

33.33% Small Cap:
- 16.66% Small Value: AVUV
- 16.66% Small Cap (Blend): VB

In effect:

50% Value
50% Standard Large, Mid, Small index funds.


What do you think?
I would NOT throw into the value factor or other non-market factors if you do not understand that you are taking more risk and there can be long periods of underperformance vs a market portfolio. You have to stick with these forever basically - you can't be getting out when they aren't performing. There is also the chance that the factor premiums are extremely reduced going forward or you end up worse off (net of fees/taxes) than you would have been with a total market portfolio. And there's no way to fix that along the way. You stick with it until you spend it (or de-risk for retirement), period.
I fully understand the added risks and potential for long-run underperformance. As you said, it's a "forever" portfolio.
In your mind, what is the likelihood that you will underperform the market portfolio over the investing period you would keep these assets? Is it extremely unlikely, unlikely, 50/50, ?
Compared to what I need invested to have a comfortable retirement, I am drastically overinvested and will have much more than I need at age 65+. Therefore, I plan to maintain a 100% equity portfolio for the rest of my life (50+ years). I believe that the chances of value and size factor underperformance over such a period are very unlikely.
Topic Author
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Re: Is a factor tilt warranted?

Post by TheContrarian »

nisiprius wrote: Mon Jun 05, 2023 10:48 am
isaachemingway wrote: Mon Jun 05, 2023 10:26 am...Yes, however, I do believe that the long-run outperformance of mid and small caps cannot be ignored. https://www.portfoliovisualizer.com/bac ... ion3_3=100...
It's a lot easier to ignore if you go back to the inception of the oldest fund specifically designed to capture the size premium, the DFA US Micro Cap Portfolio (DFSCX). This fund has been widely praised for dipping deeper into small-caps than competitors, and it's from the firm most associated with factor investing.

The following chart is not quite fair because it doesn't quite go back to inception, and the first three years of the fund's life were great. But it's easy for you to verify for yourself:

DFSCX versus VFINX

This chart does go back to inception, but I haven't updated it past 2022... but nothing particular dramatic has happened to change the overall picture:

Image

1981 is virtually the "discovery" of the size effect. People investing in DFSCX did very well for three years, but then fell behind the S&P, wiping out all the outperformance and not getting back to even with the S&P until 2003. Then there were periods of outperformance and underperformance, but anyone who diligently stayed the course through 17 years of underperformance would not have really been rewarded. Add "yet" if you wish...
One of the reasons for the underperformance of that fund is the high expense ratio that it had for the first few decades of it's existence. Meanwhile, you would have profited handsomely by investing in a simple small cap index fund: https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: Is a factor tilt warranted?

Post by RetiredAL »

nisiprius wrote: Mon Jun 05, 2023 8:49 am
I think you've added meaningless complexity that won't do you any particular good or harm if you actually stick to it.
+1

5 years ago, I worked with my Dad to take one his accounts to a largely slice/dice model. At the time, we both thought it was good portfolio.

Dad passed last year and as I have been reviewing the holdings now in my account. Last week I came to the same conclusion as nisiprius's opinion about needless complexity with little overall effect. Due to basis-reset and current market conditions, I have a decent opportunity to do a redo. Today I am planning on selling the SCHA (small-cap), SCHB (broad), SCHD (dividend), SCHM (mid-cap). The net will be a small CG loss. I will buy SCHK (Schwab 1000) as replacements.

Additionally, I need to reset the AA to my nominal 65/35. When this account was split with my sister 2 months ago, she took most of the fixed income, which was inflated by the estate sale of a long held Janis Fund, and I took all the equities and the remaining fixed income.
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Re: Is a factor tilt warranted?

Post by secondopinion »

isaachemingway wrote: Mon Jun 05, 2023 10:48 am
secondopinion wrote: Mon Jun 05, 2023 10:45 am
burritoLover wrote: Mon Jun 05, 2023 10:12 am
isaachemingway wrote: Mon Jun 05, 2023 6:54 am Here is my current US equity portfolio:

33.33% Large Cap:
- 16.66% Large Value: AVLV
- 16.66% Large Cap (Blend): VV

33.33% Mid Cap:
- 16.66% Mid Value: VOE
- 16.66% Mid Cap (Blend): VO

33.33% Small Cap:
- 16.66% Small Value: AVUV
- 16.66% Small Cap (Blend): VB

In effect:

50% Value
50% Standard Large, Mid, Small index funds.


What do you think?
I would NOT throw into the value factor or other non-market factors if you do not understand that you are taking more risk and there can be long periods of underperformance vs a market portfolio. You have to stick with these forever basically - you can't be getting out when they aren't performing. There is also the chance that the factor premiums are extremely reduced going forward or you end up worse off (net of fees/taxes) than you would have been with a total market portfolio. And there's no way to fix that along the way. You stick with it until you spend it (or de-risk for retirement), period.
A value tilt takes more of some risks and less of others (which a growth tilt takes the contrary). Unless one accepts the tilt with its risks given/taken without the expectation of a premium, I cannot say it is wise.
My growth stock exposure would be through the blend funds (VV, VO, VB) which tend to overweight growth stocks compared to value stocks (because investors are more likely to invest in a hot, high-growth company than a boring, "declining" business).

The old Bill Bernstein quote that "good companies [well-known growth companies] are often bad stocks to own and bad companies [struggling, lesser-known value companies] are often good stocks to own" (Bernstein, "The Intelligent Asset Allocator") has held true over the long-run.

Thanks for the input!
- @isaachemingway
But could you explain to me how value is riskier? If it is not riskier, then why should it pay you a premium? Dare I say, if it is not riskier, then it is you that should be the one paying the premium.

Some of this is more a probe of understanding than I need to know the answers.
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.
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burritoLover
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Re: Is a factor tilt warranted?

Post by burritoLover »

isaachemingway wrote: Mon Jun 05, 2023 10:52 am
burritoLover wrote: Mon Jun 05, 2023 10:45 am
isaachemingway wrote: Mon Jun 05, 2023 10:38 am
burritoLover wrote: Mon Jun 05, 2023 10:12 am
isaachemingway wrote: Mon Jun 05, 2023 6:54 am Here is my current US equity portfolio:

33.33% Large Cap:
- 16.66% Large Value: AVLV
- 16.66% Large Cap (Blend): VV

33.33% Mid Cap:
- 16.66% Mid Value: VOE
- 16.66% Mid Cap (Blend): VO

33.33% Small Cap:
- 16.66% Small Value: AVUV
- 16.66% Small Cap (Blend): VB

In effect:

50% Value
50% Standard Large, Mid, Small index funds.


What do you think?
I would NOT throw into the value factor or other non-market factors if you do not understand that you are taking more risk and there can be long periods of underperformance vs a market portfolio. You have to stick with these forever basically - you can't be getting out when they aren't performing. There is also the chance that the factor premiums are extremely reduced going forward or you end up worse off (net of fees/taxes) than you would have been with a total market portfolio. And there's no way to fix that along the way. You stick with it until you spend it (or de-risk for retirement), period.
I fully understand the added risks and potential for long-run underperformance. As you said, it's a "forever" portfolio.
In your mind, what is the likelihood that you will underperform the market portfolio over the investing period you would keep these assets? Is it extremely unlikely, unlikely, 50/50, ?
Compared to what I need invested to have a comfortable retirement, I am drastically overinvested and will have much more than I need at age 65+. Therefore, I plan to maintain a 100% equity portfolio for the rest of my life (50+ years). I believe that the chances of value and size factor underperformance over such a period are very unlikely.
Sounds like you take on a risky portfolio, although I'd be more concerned about the lack of lower-risk assets (like bonds) than the value tilt. And to a lesser degree, the entire portfolio in US stocks. I would say "very unlikely" is overstating things here, even over long periods.
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Re: Is a factor tilt warranted?

Post by TheContrarian »

RetiredAL wrote: Mon Jun 05, 2023 11:00 am
nisiprius wrote: Mon Jun 05, 2023 8:49 am
I think you've added meaningless complexity that won't do you any particular good or harm if you actually stick to it.
+1

5 years ago, I worked with my Dad to take one his accounts to a largely slice/dice model. At the time, we both thought it was good portfolio.

Dad passed last year and as I have been reviewing the holdings now in my account. Last week I came to the same conclusion as nisiprius's opinion about needless complexity with little overall effect. Due to basis-reset and current market conditions, I have a decent opportunity to do a redo. Today I am planning on selling the SCHA (small-cap), SCHB (broad), SCHD (dividend), SCHM (mid-cap). The net will be a small CG loss. I will buy SCHK (Schwab 1000) as replacements.

Additionally, I need to reset the AA to my nominal 65/35. When this account was split with my sister 2 months ago, she took most of the fixed income, which was inflated by the estate sale of a long held Janis Fund, and I took all the equities and the remaining fixed income.
Sorry for your loss. I'm not worried about complexity because I use M1 Finance (which does automatic rebalancing). However, as I age, I will definetly consider the complexity that my heirs may be stressed out by.
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Re: Is a factor tilt warranted?

Post by TheContrarian »

burritoLover wrote: Mon Jun 05, 2023 11:34 am
isaachemingway wrote: Mon Jun 05, 2023 10:52 am
burritoLover wrote: Mon Jun 05, 2023 10:45 am
isaachemingway wrote: Mon Jun 05, 2023 10:38 am
burritoLover wrote: Mon Jun 05, 2023 10:12 am
I would NOT throw into the value factor or other non-market factors if you do not understand that you are taking more risk and there can be long periods of underperformance vs a market portfolio. You have to stick with these forever basically - you can't be getting out when they aren't performing. There is also the chance that the factor premiums are extremely reduced going forward or you end up worse off (net of fees/taxes) than you would have been with a total market portfolio. And there's no way to fix that along the way. You stick with it until you spend it (or de-risk for retirement), period.
I fully understand the added risks and potential for long-run underperformance. As you said, it's a "forever" portfolio.
In your mind, what is the likelihood that you will underperform the market portfolio over the investing period you would keep these assets? Is it extremely unlikely, unlikely, 50/50, ?
Compared to what I need invested to have a comfortable retirement, I am drastically overinvested and will have much more than I need at age 65+. Therefore, I plan to maintain a 100% equity portfolio for the rest of my life (50+ years). I believe that the chances of value and size factor underperformance over such a period are very unlikely.
Sounds like you take on a risky portfolio, although I'd be more concerned about the lack of lower-risk assets (like bonds) than the value tilt. And to a lesser degree, the entire portfolio in US stocks. I would say "very unlikely" is overstating things here, even over long periods.
Why exactly would factor tilts be unlikely to outperform over a 50+ year time horizon?

Also, even with a moderate return expectation of 5%, I am set to have slightly more than $10,000,000 at retirement. Thus, even if my 100% stock portfolio dropped by 90% in retirement (which would be highly unlikely), I would still have $1,000,000 to live off of.

With that amount of starting retirement capital, would I really need any fixed-income investments?
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Re: Is a factor tilt warranted?

Post by TheContrarian »

secondopinion wrote: Mon Jun 05, 2023 11:10 am
isaachemingway wrote: Mon Jun 05, 2023 10:48 am
secondopinion wrote: Mon Jun 05, 2023 10:45 am
burritoLover wrote: Mon Jun 05, 2023 10:12 am
isaachemingway wrote: Mon Jun 05, 2023 6:54 am Here is my current US equity portfolio:

33.33% Large Cap:
- 16.66% Large Value: AVLV
- 16.66% Large Cap (Blend): VV

33.33% Mid Cap:
- 16.66% Mid Value: VOE
- 16.66% Mid Cap (Blend): VO

33.33% Small Cap:
- 16.66% Small Value: AVUV
- 16.66% Small Cap (Blend): VB

In effect:

50% Value
50% Standard Large, Mid, Small index funds.


What do you think?
I would NOT throw into the value factor or other non-market factors if you do not understand that you are taking more risk and there can be long periods of underperformance vs a market portfolio. You have to stick with these forever basically - you can't be getting out when they aren't performing. There is also the chance that the factor premiums are extremely reduced going forward or you end up worse off (net of fees/taxes) than you would have been with a total market portfolio. And there's no way to fix that along the way. You stick with it until you spend it (or de-risk for retirement), period.
A value tilt takes more of some risks and less of others (which a growth tilt takes the contrary). Unless one accepts the tilt with its risks given/taken without the expectation of a premium, I cannot say it is wise.
My growth stock exposure would be through the blend funds (VV, VO, VB) which tend to overweight growth stocks compared to value stocks (because investors are more likely to invest in a hot, high-growth company than a boring, "declining" business).

The old Bill Bernstein quote that "good companies [well-known growth companies] are often bad stocks to own and bad companies [struggling, lesser-known value companies] are often good stocks to own" (Bernstein, "The Intelligent Asset Allocator") has held true over the long-run.

Thanks for the input!
- @isaachemingway
But could you explain to me how value is riskier? If it is not riskier, then why should it pay you a premium? Dare I say, if it is not riskier, then it is you that should be the one paying the premium.

Some of this is more a probe of understanding than I need to know the answers.
I would highly recommend this resource: https://www.youtube.com/watch?v=zlexP0hIprg&t=37s
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Re: Is a factor tilt warranted?

Post by dogagility »

isaachemingway wrote: Mon Jun 05, 2023 10:13 am I happen to have a very deep conviction on the topic (after hours of research and dozens of books and academic papers studied), but love to hear the opinions of others (my reason for posting). I couldn't be more comfortable holding low-cost Vanguard (0.04% - 0.07% expense ratios) and Avantis (0.15% - 0.25% expense ratios) funds over the long run. I fully agree that the value and size tilts aren't guaranteed to outperform (even over many decades), but I am comfortable with the odds.
Opinions in this thread won't change your opinion it seems, so I'm not sure of the purpose of this thread.

Still, I'll give you my opinion. :D

I have worked in the academic scientific research world for three decades. I've seen conclusions that have been made across hundreds/thousands of different questions using backtesting and model fitting (machine learning to the rescue!) techniques. In the vast majority of cases, these have no predictive power since the data were overfit within the model to make the results appear causal.

I don't trust the economic academic conclusions either on factor outperformance, so I don't tilt.

You do you though. Just stick with the plan and don't performance chase.

ETA: There is another active thread extolling the virtues of growth tech stocks. viewtopic.php?p=7294205#p7294205 So much factor chatter...

One of the few investing folks I trust implicitly to give unbiased advice is Ben Felix. He does factor investing. In a recent RR podcast discussing factor investing, he wondered if factor investing would provide higher returns over a total market index fund. His answer was... I'm not sure, but I think so. Nobody knows the future.
Last edited by dogagility on Mon Jun 05, 2023 12:59 pm, edited 2 times in total.
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secondopinion
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Re: Is a factor tilt warranted?

Post by secondopinion »

isaachemingway wrote: Mon Jun 05, 2023 11:44 am
secondopinion wrote: Mon Jun 05, 2023 11:10 am
isaachemingway wrote: Mon Jun 05, 2023 10:48 am
secondopinion wrote: Mon Jun 05, 2023 10:45 am
burritoLover wrote: Mon Jun 05, 2023 10:12 am
I would NOT throw into the value factor or other non-market factors if you do not understand that you are taking more risk and there can be long periods of underperformance vs a market portfolio. You have to stick with these forever basically - you can't be getting out when they aren't performing. There is also the chance that the factor premiums are extremely reduced going forward or you end up worse off (net of fees/taxes) than you would have been with a total market portfolio. And there's no way to fix that along the way. You stick with it until you spend it (or de-risk for retirement), period.
A value tilt takes more of some risks and less of others (which a growth tilt takes the contrary). Unless one accepts the tilt with its risks given/taken without the expectation of a premium, I cannot say it is wise.
My growth stock exposure would be through the blend funds (VV, VO, VB) which tend to overweight growth stocks compared to value stocks (because investors are more likely to invest in a hot, high-growth company than a boring, "declining" business).

The old Bill Bernstein quote that "good companies [well-known growth companies] are often bad stocks to own and bad companies [struggling, lesser-known value companies] are often good stocks to own" (Bernstein, "The Intelligent Asset Allocator") has held true over the long-run.

Thanks for the input!
- @isaachemingway
But could you explain to me how value is riskier? If it is not riskier, then why should it pay you a premium? Dare I say, if it is not riskier, then it is you that should be the one paying the premium.

Some of this is more a probe of understanding than I need to know the answers.
I would highly recommend this resource: https://www.youtube.com/watch?v=zlexP0hIprg&t=37s
But this does not describe how that value is riskier for yourself or that you understand how the risks relate to you favorably or not. I have read it; still does not explain the personal portfolio choice. e.g. Should you be taking the risk in the first place? Is it even a risk in composite to your situation?
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.
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Re: Is a factor tilt warranted?

Post by rkhusky »

isaachemingway wrote: Mon Jun 05, 2023 10:42 am
muffins14 wrote: Mon Jun 05, 2023 10:30 am
isaachemingway wrote: Mon Jun 05, 2023 6:54 am
What do you think?
What are your goals?
To outperform the market by 0.25% - 0.5%+ over the long-run by taking on added risks (value, size, etc.) in addition to market risk. Even an added 25 bps over the long run adds a ton of value.

However, I fully recognize that, when investing in factor premiums, you must be content with long-run underperformance and continue to hold on during those underperforming seasons.
And you could also lose 25 bps over the long run, which would lose a ton of value.
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Re: Is a factor tilt warranted?

Post by RetiredAL »

isaachemingway wrote: Mon Jun 05, 2023 11:36 am
Sorry for your loss.
Thank You! This recent Memorial Day was hard on me. Dad was born 9 month's after our revered Taylor Larimore. Dad was career Navy and saw action at Iwo Jima and Okinawa. He started as a Seaman and retired as a LCDR.
smooth_rough
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Re: Is a factor tilt warranted?

Post by smooth_rough »

Vanguard claims to have some factor tilted funds. Slightly higher ER. Do you come out ahead after 10 years? Your mileage may vary.
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Re: Is a factor tilt warranted?

Post by TheContrarian »

RetiredAL wrote: Mon Jun 05, 2023 1:29 pm
isaachemingway wrote: Mon Jun 05, 2023 11:36 am
Sorry for your loss.
Thank You! This recent Memorial Day was hard on me. Dad was born 9 month's after our revered Taylor Larimore. Dad was career Navy and saw action at Iwo Jima and Okinawa. He started as a Seaman and retired as a LCDR.
Sounds like an honorable man. Have a great week!
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Re: Is a factor tilt warranted?

Post by burritoLover »

isaachemingway wrote: Mon Jun 05, 2023 11:42 am
burritoLover wrote: Mon Jun 05, 2023 11:34 am
isaachemingway wrote: Mon Jun 05, 2023 10:52 am
burritoLover wrote: Mon Jun 05, 2023 10:45 am
isaachemingway wrote: Mon Jun 05, 2023 10:38 am

I fully understand the added risks and potential for long-run underperformance. As you said, it's a "forever" portfolio.
In your mind, what is the likelihood that you will underperform the market portfolio over the investing period you would keep these assets? Is it extremely unlikely, unlikely, 50/50, ?
Compared to what I need invested to have a comfortable retirement, I am drastically overinvested and will have much more than I need at age 65+. Therefore, I plan to maintain a 100% equity portfolio for the rest of my life (50+ years). I believe that the chances of value and size factor underperformance over such a period are very unlikely.
Sounds like you take on a risky portfolio, although I'd be more concerned about the lack of lower-risk assets (like bonds) than the value tilt. And to a lesser degree, the entire portfolio in US stocks. I would say "very unlikely" is overstating things here, even over long periods.
Why exactly would factor tilts be unlikely to outperform over a 50+ year time horizon?

Also, even with a moderate return expectation of 5%, I am set to have slightly more than $10,000,000 at retirement. Thus, even if my 100% stock portfolio dropped by 90% in retirement (which would be highly unlikely), I would still have $1,000,000 to live off of.

With that amount of starting retirement capital, would I really need any fixed-income investments?
Factors are a model - they are not reality. There are many reasons it could underperform the market portfolio, even over very long periods. Keep in mind that I have a 30% SCV tilt so I'm not the typical factor-basher here:
1. The premium was the result of behavioral biases of investors that can be arbitraged away once known.
2. A portion of the premium was the result of trading frictions that do not exist today - illiquidity in small stocks, transactions costs of maintaining a value-sorted portfolio (vs market-cap weight).
3. The sorts and screenings that Avantis (or other fund providers) uses may end up excluding some value stocks that perform extremely well.
4. The funds you are planning to invest in do not invest in academic long-short factors - there is already an expectation of a lower premium in a long-only fund (probably by half depending on the fund).
5. There is more drag on a value concentrated portfolio which typically has larger dividends (especially larger value stocks) so higher tax consequences and funds generally have a higher expense ratio.
6. Long periods of underperformance can occur with value - think periods of 10-20-ish years historically where you would be constantly rebalancing into the underperforming value side of the portfolio. Think what you were doing 20 years ago and now imagine that every year practically until today, you having to sell the blend portion of your portfolio to buy more value. And these periods of underperformance could be even longer or more severe in the future. That takes nerves of absolute steel - a robot-like consistency that few have.
swilgu1
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Re: Is a factor tilt warranted?

Post by swilgu1 »

nisiprius wrote: Mon Jun 05, 2023 10:34 am I've never seen an explanation for including both "blend" and "value." (In the forum people have guessed that the answer is "timidity.") (Nor have I seen an explanation for splitting large and small 50/50. And for that matter it is far less than clear why Fama and French split value into three bins, but size into only two, or why value was split 30-40-30 rather than ⅓ each...)
One explanation is to tilt towards value while still holding all the other non-value companies, both for diversification and rebalancing. Periods of growth (found in the blend) doing better than value or vice versa can offer an opportunity to rebalance back into an out of favor asset. The maximum rebalancing benefit within stocks would be holding an equal amount of both growth and value (this has does better than the market due to the rebalancing benefit), but then you're back to a non-tilted portfolio. By instead holding blend and value, you can achieve a similar result while still maintaining a value tilt.

You're also right about timidity, although this is a valid reason the same as why people hold bonds instead of 100% stocks. Risk in a portfolio isn't an on or off switch and can be tailored to an investors appetite for tracking error by mixing blend with value.

As for the seemingly arbitrary thresholds for the size and value factors, Fama and French acknowledge that they are, indeed, arbitrary, but reflect the finding that value explains more variance in stock returns than size, so splitting into a high, medium, and low group captures stock returns better than just a high and low group. To quote Fama and French:

"Our decision to sort firms into three groups on BE/ME and only two on ME follows evidence in Fama and French (1992b) that book-to-market equity has a stronger role in average stock returns than size. The splits are arbitrary, however, and we have not searched over alternatives. The hope is that the tests here and in Fama and French (1992b) are not sensitive to these choices. We see no reason to argue that they are."

In other words, Fama and French made a call to give more levels to the stronger factor and decided to do so arbitrarily rather than data mine for the "optimal" levels. I hope this helps!
Last edited by swilgu1 on Tue Jun 06, 2023 8:40 am, edited 1 time in total.
swilgu1
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Re: Is a factor tilt warranted?

Post by swilgu1 »

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TheContrarian
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Re: Is a factor tilt warranted?

Post by TheContrarian »

dogagility wrote: Mon Jun 05, 2023 11:52 am
isaachemingway wrote: Mon Jun 05, 2023 10:13 am I happen to have a very deep conviction on the topic (after hours of research and dozens of books and academic papers studied), but love to hear the opinions of others (my reason for posting). I couldn't be more comfortable holding low-cost Vanguard (0.04% - 0.07% expense ratios) and Avantis (0.15% - 0.25% expense ratios) funds over the long run. I fully agree that the value and size tilts aren't guaranteed to outperform (even over many decades), but I am comfortable with the odds.
Opinions in this thread won't change your opinion it seems, so I'm not sure of the purpose of this thread.

Still, I'll give you my opinion. :D

I have worked in the academic scientific research world for three decades. I've seen conclusions that have been made across hundreds/thousands of different questions using backtesting and model fitting (machine learning to the rescue!) techniques. In the vast majority of cases, these have no predictive power since the data were overfit within the model to make the results appear causal.

I don't trust the economic academic conclusions either on factor outperformance, so I don't tilt.

You do you though. Just stick with the plan and don't performance chase.

ETA: There is another active thread extolling the virtues of growth tech stocks. viewtopic.php?p=7294205#p7294205 So much factor chatter...

One of the few investing folks I trust implicitly to give unbiased advice is Ben Felix. He does factor investing. In a recent RR podcast discussing factor investing, he wondered if factor investing would provide higher returns over a total market index fund. His answer was... I'm not sure, but I think so. Nobody knows the future.
Love this! Thanks for sharing! I also love the RR Podcast and couldn't agree more. NOBODY knows the future, but it's probably safe to assume that I won't go broke by investing in widely diversified, low-cost value funds like VOE and AVLV. With that in mind, I'm very comfortable with the prospect of underperforming the market over long periods of time (like the past decade).

Thanks again for your insight!
- @isaachemingway
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