"Beware of Sci-Fi Portfolios"

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Elysium
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Re: "Beware of Sci-Fi Portfolios"

Post by Elysium »

vineviz wrote: Sun May 16, 2021 4:26 pm
Elysium wrote: Sun May 16, 2021 4:18 pm You are diverting by talking about value of services provided by a firm to their average customer, from my question to one customer, Random Walker, who clearly can build & manage a portfolio at a much lower cost, and certainly will not fail for behavioral reasons.
And again you miss the key point: a BAM client is never JUST buying a portfolio, so their fee is not JUST an investment expense.
Nothing to miss here. That is the standard sales pitch over the years made by the advisors. In some instances they add value, when the advisor places the customers interest in front, on other instances it hurts such as the portfolio in question where the advisor placed clients in highly illiquid funds that costs more, and then they end up losing money when the fund liquidates, as happed to RW with Stone Ridge funds sold by BAM. If you'd like to defend BAM, go ahead, I won't argue.
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vineviz
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Re: "Beware of Sci-Fi Portfolios"

Post by vineviz »

Elysium wrote: Sun May 16, 2021 6:16 pm
vineviz wrote: Sun May 16, 2021 4:26 pm
Elysium wrote: Sun May 16, 2021 4:18 pm You are diverting by talking about value of services provided by a firm to their average customer, from my question to one customer, Random Walker, who clearly can build & manage a portfolio at a much lower cost, and certainly will not fail for behavioral reasons.
And again you miss the key point: a BAM client is never JUST buying a portfolio, so their fee is not JUST an investment expense.
Nothing to miss here. That is the standard sales pitch over the years made by the advisors. In some instances they add value, when the advisor places the customers interest in front, on other instances it hurts such as the portfolio in question where the advisor placed clients in highly illiquid funds that costs more, and then they end up losing money when the fund liquidates, as happed to RW with Stone Ridge funds sold by BAM. If you'd like to defend BAM, go ahead, I won't argue.
Yep, you’re still missing it.

The AUM fee and the fund fees are completely different items.
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james22
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Re: "Beware of Sci-Fi Portfolios"

Post by james22 »

Saw post where an advisor stated LENDX had ER of >5%, Anyone with knowledge of how ERs are required to be reported would know the true effective cost to the investor was <1.4%. And the fund has performed even better than was expected since inception.


What's really sad is it shows the author either doesn't understand the expenses and how the SEC requires them to be calculated and/or never even thought to do due diligence to understand the true costs, and the impact of the leverage used on the true ER.


Even other mistakes in article like Bridgeway small value fund has ER of 47 bp, not 55. And not understanding that Reinsurance fund is not like a mutual fund but running a reinsurance company and that ER is not high for running a company. And comparisons for AQR make no sense


https://twitter.com/larryswedroe/status ... 3349391360

RE LENDX fund management fee is actually 1.50% on NAV (been coming down as fund has grown). Taking 28% leverage assumption (no fees on levered asset) total assets), it’s equivalent to 1.08% on total assets (=1.50 x 0.72). Very different than 5% claimed.


Over its almost 5 years since inception fund returned over 11% pa, with very low volatility. (helped by some smart strategic investments). Good example of lots of people knowing the cost of everything and value of nothing. All mutual funds, even similar ones, not commodities.


I should add that there are some other expenses like paid to custodian (not management fee) and admin that bring effective total cost to investor to about 1.4. Expected return now about 7% p.a. or about 7% risk premium for low vol asset


https://twitter.com/larryswedroe/status ... 8456139781
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nedsaid
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Re: "Beware of Sci-Fi Portfolios"

Post by nedsaid »

Allan Roth wrote: Sun May 16, 2021 3:38 pm
nedsaid wrote: Sun May 16, 2021 12:33 am As far as I know neither Buckingham or AQR or DFA are publicly owned to my knowledge. What Alan is implying here is just factually incorrect.
While I did not note the name of the advisor or the firm, my understanding of what you inferred from my article is incorrect. Buckingham notes: "Buckingham is a wholly owned subsidiary of Focus Operating, LLC, a wholly owned subsidiary of Focus Financial Partners, LLC. The sole managing member of Focus Financial Partners, LLC is Focus Financial Partners, Inc." The symbol is FOCS: https://ir.focusfinancialpartners.com/

If my understanding is wrong, please let me know. Thanks Nedsaid.
Thank you for your response.
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nedsaid
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Re: "Beware of Sci-Fi Portfolios"

Post by nedsaid »

I give Allan Roth a lot of credit for responding to criticism here and I appreciate that. I also did not know that Buckingham was owned by a publicly traded company. I am pretty confident that DFA and AQR are privately held.

There are firms that I respect that are private like Fidelity and American Century. In theory at least, Vanguard is owned by its shareholders. Two firms that I respect are publicly owned, T Rowe Price and Blackrock. Being a private company does not isolate it from being subject to conflicts of interest. Being a public company does not automatically make one to be one of the bad guys. Buckingham probably needed additional capital to expand its business and the public markets must have been their best option. Would it be better if Buckingham was owned by a hedge fund?

In the real world, nothing is perfect, even Vanguard. Mr. Roth criticized Vanguard for lack of customer service and it seemed Vanguard was uninterested in an investment in excess of $100,000 he wanted to make. He even posted an image of the check on his Twitter feed. None of us are 100% objective, we all have our self interest and we all have our biases. But fee for service, paying for advice by the hour is probably about the best you can get and that is what Mr. Roth does.

I will also acknowledge that the Fiduciary standard isn't perfect, it is better than the suitability standard.

I do appreciate Mr. Roth's willingness to respond and to interact with other forum members. The give and take is how we all learn.
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Allan Roth
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Re: "Beware of Sci-Fi Portfolios"

Post by Allan Roth »

willthrill81 wrote: Sun May 16, 2021 5:55 pm If factors hadn't been lagging LCG and the like over the last few years, what is the likelihood that Allan would have written this article?

I'd say about zero.
You may want to do a google search f0r how long I've been writing against factor / smart beta, high fees, concentrated portfolios, alternative investments, etc.
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Re: "Beware of Sci-Fi Portfolios"

Post by willthrill81 »

Allan Roth wrote: Sun May 16, 2021 9:52 pm
willthrill81 wrote: Sun May 16, 2021 5:55 pm If factors hadn't been lagging LCG and the like over the last few years, what is the likelihood that Allan would have written this article?

I'd say about zero.
You may want to do a google search f0r how long I've been writing against factor / smart beta, high fees, concentrated portfolios, alternative investments, etc.
Were you warning people against SCV when it was far outperforming TSM in the early 2000s? I genuinely don't know.
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Allan Roth
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Re: "Beware of Sci-Fi Portfolios"

Post by Allan Roth »

nedsaid wrote: Sun May 16, 2021 8:53 pm I give Allan Roth a lot of credit for responding to criticism here and I appreciate that. I also did not know that Buckingham was owned by a publicly traded company. I am pretty confident that DFA and AQR are privately held.

There are firms that I respect that are private like Fidelity and American Century. In theory at least, Vanguard is owned by its shareholders. Two firms that I respect are publicly owned, T Rowe Price and Blackrock. Being a private company does not isolate it from being subject to conflicts of interest. Being a public company does not automatically make one to be one of the bad guys. Buckingham probably needed additional capital to expand its business and the public markets must have been their best option. Would it be better if Buckingham was owned by a hedge fund?

In the real world, nothing is perfect, even Vanguard. Mr. Roth criticized Vanguard for lack of customer service and it seemed Vanguard was uninterested in an investment in excess of $100,000 he wanted to make. He even posted an image of the check on his Twitter feed. None of us are 100% objective, we all have our self interest and we all have our biases. But fee for service, paying for advice by the hour is probably about the best you can get and that is what Mr. Roth does.

I will also acknowledge that the Fiduciary standard isn't perfect, it is better than the suitability standard.

I do appreciate Mr. Roth's willingness to respond and to interact with other forum members. The give and take is how we all learn.
IMO, being a fiduciary is not about expanding business - it's about helping the client. FYI, Vanguard took my criticism well and let me know what they were doing to change things. That gave me a lot of hope. Finally, I don't think that any fee model is conflict free.
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nedsaid
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Re: "Beware of Sci-Fi Portfolios"

Post by nedsaid »

Allan Roth wrote: Sun May 16, 2021 9:59 pm
nedsaid wrote: Sun May 16, 2021 8:53 pm I give Allan Roth a lot of credit for responding to criticism here and I appreciate that. I also did not know that Buckingham was owned by a publicly traded company. I am pretty confident that DFA and AQR are privately held.

There are firms that I respect that are private like Fidelity and American Century. In theory at least, Vanguard is owned by its shareholders. Two firms that I respect are publicly owned, T Rowe Price and Blackrock. Being a private company does not isolate it from being subject to conflicts of interest. Being a public company does not automatically make one to be one of the bad guys. Buckingham probably needed additional capital to expand its business and the public markets must have been their best option. Would it be better if Buckingham was owned by a hedge fund?

In the real world, nothing is perfect, even Vanguard. Mr. Roth criticized Vanguard for lack of customer service and it seemed Vanguard was uninterested in an investment in excess of $100,000 he wanted to make. He even posted an image of the check on his Twitter feed. None of us are 100% objective, we all have our self interest and we all have our biases. But fee for service, paying for advice by the hour is probably about the best you can get and that is what Mr. Roth does.

I will also acknowledge that the Fiduciary standard isn't perfect, it is better than the suitability standard.

I do appreciate Mr. Roth's willingness to respond and to interact with other forum members. The give and take is how we all learn.
IMO, being a fiduciary is not about expanding business - it's about helping the client. FYI, Vanguard took my criticism well and let me know what they were doing to change things. That gave me a lot of hope. Finally, I don't think that any fee model is conflict free.
The sad fact is that the saying that the world will beat a path to your door if you build a better mousetrap just isn't true. The world will only beat a path to your door if that mousetrap is properly marketed. You could be the best advisor in the world but would have zero clients if nobody knew that. Fortunately, you are in the happy position of having a great reputation and more potential clients than you could ever handle.

If one has a sense of mission regarding helping as many people as possible, somehow the word has to get out. The Bogleheads forum got a big boost when Jason Zweig wrote his famous "Here Come The Bogleheads" article for Money Magazine. Even the Bogleheads benefitted from good old fashioned publicity.

Being a Fiduciary isn't about expanding your business, but it is hard to help clients that one doesn't have. Marketing is morally neutral, it can be used for good or bad purposes. Business really can be win-win, the client and the advisor can both win. An advisor can only win if he or she has enough clients to make a living and to keep the business economically viable. One cannot completely avoid self interest.
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nedsaid
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Re: "Beware of Sci-Fi Portfolios"

Post by nedsaid »

I will make one more post here and I will give it a rest.

First, it is important to get people to invest their money in the first place. Better to tell new investors to invest in a few Index Mutual funds rather than get a new investor involved in a discussion of factors and tilting portfolios towards certain types of securities. It is just too overwhelming for new people.

Second, one has to pick a good strategy and stick with it. One of the worst things an investor can do is chase performance, one can do this with individual stocks and with mutual funds and even with investing strategies. Performance chasing gets to be an exercise in buying high and selling low.

Recently, a thread was started by someone who wanted to start investing in Small Cap Value because of its recent hot performance. Though I like Small Value investments myself, I told the person who started the thread that this was not a good idea. Performance chasing often ends in tears.

Third, one needs a strong commitment to the Academic Research and a belief in factor premiums if they decide to factor tilt their portfolio. Strong convictions keep people from bailing out of a strategy just before it starts working again. Most people don't have these strong convictions and won't stick to a strategy.

Fourth, I realize that markets are dynamic. What was true a few years ago might not still be true today. I accept the possibility that I could be wrong and perhaps markets are now so efficient that factor premiums have disappeared. I personally don't buy this argument as I believe that factors are caused by investor behavior, over time the same behavioral errors are made over and over again. But I could be wrong.

Fifth, if you tilt, don't overdo it. I would never recommend a "Larry Portfolio" in which your stocks are all US and International Small Cap Value. I wouldn't recommend this even though such a portfolio is 30% Small Value and 70% US Treasuries. I would never put all of my chips in one corner of the stock market.

Finally, factors such as Size and Value can underperform the broad market for years at a time, a decade or more. If you don't have the patience to endure potentially years of underperformance, you are better off to be in the broad index funds such as Total Stock Market, Total International Stock Market, and Total Bond Market.

My own commitment to Academic Research was simply an extension of my longtime belief in the Value approach to investing. I believed in Value long before I heard of Fama and French. But that is another story.
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Elysium
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Re: "Beware of Sci-Fi Portfolios"

Post by Elysium »

vineviz wrote: Sun May 16, 2021 6:24 pm
Elysium wrote: Sun May 16, 2021 6:16 pm
vineviz wrote: Sun May 16, 2021 4:26 pm
Elysium wrote: Sun May 16, 2021 4:18 pm You are diverting by talking about value of services provided by a firm to their average customer, from my question to one customer, Random Walker, who clearly can build & manage a portfolio at a much lower cost, and certainly will not fail for behavioral reasons.
And again you miss the key point: a BAM client is never JUST buying a portfolio, so their fee is not JUST an investment expense.
Nothing to miss here. That is the standard sales pitch over the years made by the advisors. In some instances they add value, when the advisor places the customers interest in front, on other instances it hurts such as the portfolio in question where the advisor placed clients in highly illiquid funds that costs more, and then they end up losing money when the fund liquidates, as happed to RW with Stone Ridge funds sold by BAM. If you'd like to defend BAM, go ahead, I won't argue.
Yep, you’re still missing it.

The AUM fee and the fund fees are completely different items.
I understand, that when your paycheck is connected to financial services industry you have to say that, but mine isn't so I can say it.
Beehave
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Re: "Beware of Sci-Fi Portfolios"

Post by Beehave »

Kitty Telltales wrote: Sun May 16, 2021 3:52 pm
Beehave wrote: Sun May 16, 2021 2:43 pm Lots of interesting discussion in this thread. But almost completely off-topic of Taylor's original post.

The words "worst" and "sci-fi" are the least important parts of the post, and the ones which have driven the discourse in this thread. Roth makes it clear that what's grossly sub-optimal in the the portfolio he criticizes are the fees for some of the funds and their lack of liquidity.

The illiquidity factor is particularly concerning. According to Vanguard
(see https://advisors.vanguard.com/insights/ ... orpremiums)
factor investing requires rebalancing for max effect. If, during a volatile time, some of your portfolio is inaccessible, your hands are tied at the most critical time.

The three fund portfolio backed up (as Taylor has recommended) by an annuity (or pension) with rebalancing appropriate to the investor's interests provides for diversified "factor-enough" investing to make sense over time and encourage staying the course.
Patiently read through the entire thread too and your insights are the only actionable and most on topic. Perhaps you are reminding others to Beehave!
- Actually, the "Beehave" pseudonym was not intended as an exhortation to others, but (with the capitalized "Bee" as a tribute to John Bogle) intended as a reminder to myself to resist temptation and behave the Boglehead way.

- Now much more interesting would be the story (mystery) behind the "Kitty Telltales" name. However, I suspect, and it is probably for the best, that Kitty does not tell tales!
Allan Roth
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Re: "Beware of Sci-Fi Portfolios"

Post by Allan Roth »

james22 wrote: Sun May 16, 2021 6:39 pm Saw post where an advisor stated LENDX had ER of >5%, Anyone with knowledge of how ERs are required to be reported would know the true effective cost to the investor was <1.4%. And the fund has performed even better than was expected since inception.


What's really sad is it shows the author either doesn't understand the expenses and how the SEC requires them to be calculated and/or never even thought to do due diligence to understand the true costs, and the impact of the leverage used on the true ER.
of

Even other mistakes in article like Bridgeway small value fund has ER of 47 bp, not 55. And not understanding that Reinsurance fund is not like a mutual fund but running a reinsurance company and that ER is not high for running a company. And comparisons for AQR make no sense


https://twitter.com/larryswedroe/status ... 3349391360

RE LENDX fund management fee is actually 1.50% on NAV (been coming down as fund has grown). Taking 28% leverage assumption (no fees on levered asset) total assets), it’s equivalent to 1.08% on total assets (=1.50 x 0.72). Very different than 5% claimed.


Over its almost 5 years since inception fund returned over 11% pa, with very low volatility. (helped by some smart strategic investments). Good example of lots of people knowing the cost of everything and value of nothing. All mutual funds, even similar ones, not commodities.


I should add that there are some other expenses like paid to custodian (not management fee) and admin that bring effective total cost to investor to about 1.4. Expected return now about 7% p.a. or about 7% risk premium for low vol asset


https://twitter.com/larryswedroe/status ... 8456139781
What matters is the total fee being paid by the consumer. That is why the SEC mandates the methodology. So the total fee is the 1) SEC mandated expense ratio + 2) Fees being paid to the advisor + 3) trading costs such as bid-ask spreads which can be large, especially for individual muni bonds.

For the LENDX fund, look on page 29 of the company's prospectus: https://www.stoneridgefunds.com/?tab=altlending

As far as the Bridgeway BOTSX fund goes, the prospectus actually shows something higher than what I pulled from Morningstar - it shows 0.61%. https://bridgewayfunds.com/wp-content/u ... /BOTSX.pdf

I suspect you will disagree but you may want to check facts before you post that someone is "idiotic" and incorrect. It's easer to reach an opinion before reviewing facts, especially if one is anonymous.
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Re: "Beware of Sci-Fi Portfolios"

Post by Dottie57 »

averagedude wrote: Sat May 15, 2021 10:53 pm I am a big believer in simplicity. Total US, Total International, and Total bond is a reasonable investment strategy. I do have a problem with "academic research". Is their research a proven fact, or is it a flawed academic exercise that is based on the past that in no way would be replicated in a real world example? Could investors have really been able to invest in the micro cap stocks in the past with rock bottom trading costs like they are able to do now? Could investors in the past know what the real value stock companies are and actually invest in them like we all know today? I believe that your asset allocation is the real driver of long term investment returns. Tilting your portfolio to factors that "academic research" have shown to produce alpha will more than likely not produce higher returns, compared to a portfolio that is just simply tilted heavier to equities.
+1. I use three fund strategy. Simple and easy to manage.
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Re: "Beware of Sci-Fi Portfolios"

Post by nisiprius »

With regard to a tweet from Larry Swedroe that james22 copied and posted here, I do not think it is appropriate to criticize Allan Roth or anybody else for relying on the published numbers in a prospectus when choosing investments.

I understand that Larry Swedroe believes the expense ratio should be calculated in a different way, one more favorable to Stone Ridge, but that's a matter between Stone Ridge and the SEC.

I have no doubt that the providers of triple-leveraged ETFs would like to divide their expense ratios by three. Perhaps the all-short ProShares UltraBear fund, URPIX, would like to publish a negative expense ratio.

"Yes, the expense ratio is 5.03%, as shown on page 29, but it's worth every penny because of the returns" or "5.03% isn't actually a high expense ratio for what you are getting" or something like that would be a perfectly proper thing to say.
Last edited by nisiprius on Mon May 17, 2021 10:52 am, edited 4 times in total.
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nedsaid
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Re: "Beware of Sci-Fi Portfolios"

Post by nedsaid »

I said that I wouldn't post more here but I will make an exception.

First, Larry Swedroe did write a book about this exact issue, How to Avoid Black Swans or something like that. He laid out the case for using Alternatives for creating sources of return for a portfolio unrelated and uncorrelated to the stock market. This strategy was supposed to give you a better distribution of returns from a portfolio and reduce volatility. He even named the specific products used. So agree with it or not, it was a well thought out approach. This "Sci-Fi Portfolio" wasn't just thrown against the wall to see what would stick, there was a lot of thinking and research behind this. This wasn't something created by a stockbroker on a whim on the back of an envelope.

Second, I did check Larry's Twitter feed and learned that Larry had responded to this article. I have a lot of respect for Allan and I also respect Larry a lot. I really don't want to get in the middle of a flame war on Twitter. Intelligent people can disagree and disagree strongly on a topic. It turned out that the Alternatives mentioned in the book have not performed too well, only one of the four, the Alternative Lending fund has met expectations. Two others were disappointments and another was folded into another Stone Ridge fund. I feel badly about this as this was a factor in an important contributor leaving the forum. This shows that things don't always work out, investments can disappoint. What seems like a good idea can go sour.

Allan has a sterling reputation and it is quite well deserved. He is well thought of here. As much as I respect him, I thought this article was a bit over the top. I also want to say that I appreciate his willingness to interact with posters on this forum. So that is about it.
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Elysium
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Re: "Beware of Sci-Fi Portfolios"

Post by Elysium »

nedsaid wrote: Mon May 17, 2021 10:46 am First, Larry Swedroe did write a book about this exact issue, How to Avoid Black Swans or something like that. He laid out the case for using Alternatives for creating sources of return for a portfolio unrelated and uncorrelated to the stock market. This strategy was supposed to give you a better distribution of returns from a portfolio and reduce volatility. He even named the specific products used. So agree with it or not, it was a well thought out approach.
Alas, nedsaid, if there was any truth to the last statement, evidence shows it was a very poor plan, and I am on record for saying it when he recommended it here. Instead of avoiding Black Swan, one of the alternatives he recommended became the victim of one, and took down the investors with it. We all remember the thread where Random Walker admitted (to his credit) to having been liquidated from one of the Stone Ridge funds, when last March financial crisis took down the fund. The lesson learned is that these alternatives were never designed to protect against Black Swan events, but in fact only promise investors of it, then collect fat fees, with hope nothing happens for many years and they will keep collecting the fees, giving false hope to investors at some point they will need these. They did not expect the fund to be taken down like this so early, giving away the game, they can no longer fool at least some investors who have been burned already. Matter of fact it proved these are the ones to go down first in a crisis. If not for that, they would still be promising the benefits from "other sources of risk" and collecting those 2.5% to 5% fees. To borrow one of Swedroe's own terms, these are products to be sold not bought, and no one really needs them.
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Re: "Beware of Sci-Fi Portfolios"

Post by nedsaid »

Elysium wrote: Mon May 17, 2021 11:28 am
nedsaid wrote: Mon May 17, 2021 10:46 am First, Larry Swedroe did write a book about this exact issue, How to Avoid Black Swans or something like that. He laid out the case for using Alternatives for creating sources of return for a portfolio unrelated and uncorrelated to the stock market. This strategy was supposed to give you a better distribution of returns from a portfolio and reduce volatility. He even named the specific products used. So agree with it or not, it was a well thought out approach.
Alas, nedsaid, if there was any truth to the last statement, evidence shows it was a very poor plan, and I am on record for saying it when he recommended it here. Instead of avoiding Black Swan, one of the alternatives he recommended became the victim of one, and took down the investors with it. We all remember the thread where Random Walker admitted (to his credit) to having been liquidated from one of the Stone Ridge funds, when last March financial crisis took down the fund. The lesson learned is that these alternatives were never designed to protect against Black Swan events, but in fact only promise investors of it, then collect fat fees, with hope nothing happens for many years and they will keep collecting the fees, giving false hope to investors at some point they will need these. They did not expect the fund to be taken down like this so early, giving away the game, they can no longer fool at least some investors who have been burned already. Matter of fact it proved these are the ones to go down first in a crisis. If not for that, they would still be promising the benefits from "other sources of risk" and collecting those 2.5% to 5% fees. To borrow one of Swedroe's own terms, these are products to be sold not bought, and no one really needs them.
I started a thread on the Stone Ridge Variance Risk Premium fund which was folded into another Stone Ridge Fund. Lots of discussion there. So I am aware of this issue. Best wishes, Ned.
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Re: "Beware of Sci-Fi Portfolios"

Post by Random Walker »

nedsaid wrote: Mon May 17, 2021 10:46 am First, Larry Swedroe did write a book about this exact issue, How to Avoid Black Swans or something like that. He laid out the case for using Alternatives for creating sources of return for a portfolio unrelated and uncorrelated to the stock market. This strategy was supposed to give you a better distribution of returns from a portfolio and reduce volatility. He even named the specific products used. So agree with it or not, it was a well thought out approach. This "Sci-Fi Portfolio" wasn't just thrown against the wall to see what would stick, there was a lot of thinking and research behind this. This wasn't something created by a stockbroker on a whim on the back of an envelope.
Yes this is a very well thought out strategy for the long run based on the fundamentals of MPT. It is basically being condemned here based on maybe 4-6 years worth of results during a long equity bull market which has been exceptionally strong for large growth. I think the portfolio needs to be given the opportunity to experience the ups and downs of the markets for more years.

Dave

P.S. if a variance risk premium fund becomes available again, I’d be highly interested in signing up. The logic behind it makes complete sense to me. Just need to appreciate, almost definitionally, that the correlation to equity markets will rise dramatically at the worst time. Of course, that’s why there is a premium, and the premium hardens after the volatility is realized.
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Re: "Beware of Sci-Fi Portfolios"

Post by whereskyle »

nedsaid wrote: Mon May 17, 2021 10:46 am I said that I wouldn't post more here but I will make an exception.

First, Larry Swedroe did write a book about this exact issue, How to Avoid Black Swans or something like that. He laid out the case for using Alternatives for creating sources of return for a portfolio unrelated and uncorrelated to the stock market. This strategy was supposed to give you a better distribution of returns from a portfolio and reduce volatility. He even named the specific products used. So agree with it or not, it was a well thought out approach. This "Sci-Fi Portfolio" wasn't just thrown against the wall to see what would stick, there was a lot of thinking and research behind this. This wasn't something created by a stockbroker on a whim on the back of an envelope.

Second, I did check Larry's Twitter feed and learned that Larry had responded to this article. I have a lot of respect for Allan and I also respect Larry a lot. I really don't want to get in the middle of a flame war on Twitter. Intelligent people can disagree and disagree strongly on a topic. It turned out that the Alternatives mentioned in the book have not performed too well, only one of the four, the Alternative Lending fund has met expectations. Two others were disappointments and another was folded into another Stone Ridge fund. I feel badly about this as this was a factor in an important contributor leaving the forum. This shows that things don't always work out, investments can disappoint. What seems like a good idea can go sour.

Allan has a sterling reputation and it is quite well deserved. He is well thought of here. As much as I respect him, I thought this article was a bit over the top. I also want to say that I appreciate his willingness to interact with posters on this forum. So that is about it.
The problem with academic research is that it is built on selective backtesting. Thus, even though Larry and others are doing more than back of the envelope math, we would be foolish to think that their backtesting will yield reliable evidence for future performance. If it takes 100s of years of evidence before we can be confident that an active manager's strategies are the result of skill and not luck, I think the same thing should be said about the newly discovered "factors" that Larry and others write about every few years when it's time to publish their next books.

I don't think Mr. Roth's point is that the math is inaccurate. His point is that the math does not provide sufficiently reliable information on which to invest.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: "Beware of Sci-Fi Portfolios"

Post by Allan Roth »

nedsaid wrote: Mon May 17, 2021 10:46 am
Second, I did check Larry's Twitter feed and learned that Larry had responded to this article.
I cannot read Larry's tweets. He has had me blocked for some time. Thus I cannot respond.
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Re: "Beware of Sci-Fi Portfolios"

Post by vineviz »

Elysium wrote: Mon May 17, 2021 7:11 am I understand, that when your paycheck is connected to financial services industry you have to say that, but mine isn't so I can say it.
I don't have to say anything that isn't true, thankfully, and I resent the implication to the contrary. In fact, integrity is so important to me that I often go out of my way to correct misinformation that gets posted about fee models I don't actually use or support.

I don't like or use the AUM fee model, for reasons, but I've spent enough time with clients and prospects to understand why many of them embrace it.
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Re: "Beware of Sci-Fi Portfolios"

Post by nisiprius »

Random Walker wrote: Mon May 17, 2021 11:53 am...Yes this is a very well thought out strategy for the long run based on the fundamentals of MPT...
How can you have a "strategy for the long run based on the fundamentals of MPT"...

...that includes peer-to-peer lending as one of the asset classes...

when LENDX only had inception in 06/01/2016? And the oldest platform mentioned in the Wikipedia article on peer-to-peer lending appears to be Zopa in the United Kingdom in 2005, and Prosper, in 2006.

Peer-to-peer lending is only about fifteen years old. We can't have more than fifteen years of data from which return, standard deviation, and correlations could be estimated. And the first few years are likely anomalous.

But we probably don't even have that much. The Stone Ridge LENDX prospectus and annual report benchmark to 3-month Treasury bills! They don't mention any kind of benchmark index for peer-to-peer lending.

The only peer-to-peer lending index I was able to find in a quick Google search is the Crowdbureau Online Lending and Digital Banking Index. And it had a launch data of October 20th, 2020!

Where did Swedroe and his firm get the data from which they could get solid estimates of the MPT parameters for peer-to-peer lending?
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Re: "Beware of Sci-Fi Portfolios"

Post by secondopinion »

nisiprius wrote: Mon May 17, 2021 4:12 pm Peer-to-peer lending is only about fifteen years old. We can't have more than fifteen years of data from which return, standard deviation, and correlations could be estimated. And the first few years are likely anomalous.

...

The Stone Ridge LENDX prospectus and annual report benchmark to 3-month Treasury bills! They don't mention any kind of benchmark index for peer-to-peer lending.

...

Where did Swedroe and his firm get the data from which they could get solid estimates of the MPT parameters for peer-to-peer lending?
When there is no data, 3-month Treasury bills appear to be the goto. I would use a high-yield bond index instead, personally.

Maybe they are getting the return and default data from the P2P lending companies? One could get reasonable estimates from that.
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Re: "Beware of Sci-Fi Portfolios"

Post by Allan Roth »

secondopinion wrote: Mon May 17, 2021 4:56 pm
nisiprius wrote: Mon May 17, 2021 4:12 pm Peer-to-peer lending is only about fifteen years old. We can't have more than fifteen years of data from which return, standard deviation, and correlations could be estimated. And the first few years are likely anomalous.

...

The Stone Ridge LENDX prospectus and annual report benchmark to 3-month Treasury bills! They don't mention any kind of benchmark index for peer-to-peer lending.

...

Where did Swedroe and his firm get the data from which they could get solid estimates of the MPT parameters for peer-to-peer lending?
When there is no data, 3-month Treasury bills appear to be the goto. I would use a high-yield bond index instead, personally.

Maybe they are getting the return and default data from the P2P lending companies? One could get reasonable estimates from that.
Consider adding a 4% illiquidity premium to the high-yield bond index as one can sell the high-yield bond index fund.
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Re: "Beware of Sci-Fi Portfolios"

Post by afan »

whereskyle wrote: Mon May 17, 2021 12:16 pm
The problem with academic research is that it is built on selective backtesting. Thus, even though Larry and others are doing more than back of the envelope math, we would be foolish to think that their backtesting will yield reliable evidence for future performance. If it takes 100s of years of evidence before we can be confident that an active manager's strategies are the result of skill and not luck, I think the same thing should be said about the newly discovered "factors" that Larry and others write about every few years when it's time to publish their next books.

I don't think Mr. Roth's point is that the math is inaccurate. His point is that the math does not provide sufficiently reliable information on which to invest.
Everyone please read this post carefully and understand what whereskyle is saying.
The studies are inherently limited because they have to use the same data over and over again. They have to do this because those are all the data there are. It would take another century to accumulate another 100 years of out of sample data.

The academics who study these characteristics of securities markets ALREADY KNOW what happened in the last 100 years. They cannot enter a study based on that knowledge and apply conventional tests of significance to them. Statistics do not work that way.

They would have to test for all the possible outcomes that they know did not happen as well as the one that they already know did. That would highlight the confounder in these analyses.

One solution, complicated but still quick and dirty, is to require a much higher t-statistic to make inferences about significance. This still makes many unsupported assumptions about the underlying distribution of returns and, for these sorts of multiparameter studies, about covariances. But it is far better than ignoring the problem.

Since I have no intention of buying a fund WHOSE ISSUER says it has a 5% expense ratio, I am happy to wait the rest of my life, without buying, to see what further data comes down the road. There is no hurry. If this alt lending thing really has magical powers, then my great, great grandchildren can buy an index fund based on it.

By the way. From Stone Ridge
Annual Fund Operating Expenses
(as a percentage of net assets attributable to the Shares)
Management Fees .................................................................. 1.50%
Interest Payments on Borrowed Funds(1) ................................................ 1.83%
Distribution and/or Service Fees(2) ..................................................... 0.10%
Other Expenses
Loan Servicing Fees ............................................................ 1.14%
Recoupment .................................................................. 0.07%
All Other Expenses(3) ........................................................... 0.39%
Total Other Expenses 1.60%
Total Annual Fund Operating Expenses ................................................. 5.03%
(Fee Waiver and/or Expense Reimbursement)(4) .......................................... 0.00%
Total Annual Fund Operating Expenses After
(Fee Waiver/Expense Reimbursement) ................................................. 5.03%
If you don't agree, don't argue with Mr. Roth.
Take it up with Stone Ridge, which created and runs the fund. Or with the SEC.
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Re: "Beware of Sci-Fi Portfolios"

Post by Random Walker »

nisiprius wrote: Mon May 17, 2021 4:12 pm
Random Walker wrote: Mon May 17, 2021 11:53 am...Yes this is a very well thought out strategy for the long run based on the fundamentals of MPT...
How can you have a "strategy for the long run based on the fundamentals of MPT"...

...that includes peer-to-peer lending as one of the asset classes...

when LENDX only had inception in 06/01/2016? And the oldest platform mentioned in the Wikipedia article on peer-to-peer lending appears to be Zopa in the United Kingdom in 2005, and Prosper, in 2006.

Peer-to-peer lending is only about fifteen years old. We can't have more than fifteen years of data from which return, standard deviation, and correlations could be estimated. And the first few years are likely anomalous.

But we probably don't even have that much. The Stone Ridge LENDX prospectus and annual report benchmark to 3-month Treasury bills! They don't mention any kind of benchmark index for peer-to-peer lending.

The only peer-to-peer lending index I was able to find in a quick Google search is the Crowdbureau Online Lending and Digital Banking Index. And it had a launch data of October 20th, 2020!

Where did Swedroe and his firm get the data from which they could get solid estimates of the MPT parameters for peer-to-peer lending?
Don’t have specific answer for you. I know the loans include personal, small business, student. They are very short duration and I believe the credit quality screen is pretty solid. I’m not qualified to evaluate that; that’s why I have an advisor. When I make the comment regarding MPT, I’m simply commenting on how loans of this sort would be expected to mix in a portfolio with all the other assets described. I’m simply generalizing that we should expect all the assets to mix well in a portfolio. Evaluate potential portfolio additions by expected returns, expected volatilities, expected correlations. Of course costs are a huge factor to evaluate too, and I understand that is the biggest issue here.

Dave
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Re: "Beware of Sci-Fi Portfolios"

Post by moontower »

This is my own Sci-FI portfolio backtested to Dec 31, 2009. It beats S&P 500 by 1.5 points (16.12% v 14.52% for SPY) with HALF the drawdown/volatility. I know folks will protest and cite "volatility decay" but it works, related to HEDGEFUNDIE adventure. Thoughts??

VUG (Vanguard growth) 50%
SSO (2x SPY) 10%
STPZ (Pimco 1-5yr TIPS) 10%
LTPZ (Pimco 15+ TIPS) 10%
TYD (3x 7-10 yr Tbills) 10%
TMF (3x 20+ yr Tbills) 10%
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Re: "Beware of Sci-Fi Portfolios"

Post by hyperon »

afan wrote: Mon May 17, 2021 5:22 pm
whereskyle wrote: Mon May 17, 2021 12:16 pm
The problem with academic research is that it is built on selective backtesting. Thus, even though Larry and others are doing more than back of the envelope math, we would be foolish to think that their backtesting will yield reliable evidence for future performance. If it takes 100s of years of evidence before we can be confident that an active manager's strategies are the result of skill and not luck, I think the same thing should be said about the newly discovered "factors" that Larry and others write about every few years when it's time to publish their next books.

I don't think Mr. Roth's point is that the math is inaccurate. His point is that the math does not provide sufficiently reliable information on which to invest.
Everyone please read this post carefully and understand what whereskyle is saying.
The studies are inherently limited because they have to use the same data over and over again. They have to do this because those are all the data there are. It would take another century to accumulate another 100 years of out of sample data.

The academics who study these characteristics of securities markets ALREADY KNOW what happened in the last 100 years. They cannot enter a study based on that knowledge and apply conventional tests of significance to them. Statistics do not work that way.

They would have to test for all the possible outcomes that they know did not happen as well as the one that they already know did. That would highlight the confounder in these analyses.

One solution, complicated but still quick and dirty, is to require a much higher t-statistic to make inferences about significance. This still makes many unsupported assumptions about the underlying distribution of returns and, for these sorts of multiparameter studies, about covariances. But it is far better than ignoring the problem.
Ok. If you know the problems and the solutions, feel free to suggest a widely cited article from a reputable financial or economics journal, and critique it. Provide your insights as to the flaws in methodology. Then I might listen to anything you have to say regarding the academic research.
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Re: "Beware of Sci-Fi Portfolios"

Post by afan »

Upthread I did cite just such an article.

Published in the Review of Financial Studies.

Which is among the top economic journals in the world.

Ranked 7th last time I checked among academic economics journals.

2nd among academic finance journals.

Google says the paper has been cited 975 times since publication in January 2016. You can decide for yourself whether this counts as widely cited. In my opinion, it does.

It is a good read.

I have no intention of critiquing it. I think it is a great article.

Read it. And the references. And more of Harvey's work.
Last edited by afan on Mon May 17, 2021 7:00 pm, edited 1 time in total.
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Re: "Beware of Sci-Fi Portfolios"

Post by hyperon »

You're missing my point. Reading an article an expert does not make. Reading 20 articles an expert does not make. Reading 100 articles...

I'm certain there is plenty of garbage published out there, but being from academia myself (not finance) I can say I'm pretty tired of weekend warriors acting like they are experts.
The first culprit is academia. To be published, one must come up with new research of new discoveries. These discoveries are based on “backtesting” performance and developing theories on why the outperformance will persist. This methodology is flawed, and underperformance typically follows as reversion to the mean takes over.
This is my problem. "These discoveries are based on backtesting..." Really? That's it? That's the whole story?

Edit: Stop blaming Newton for missiles.
Last edited by hyperon on Mon May 17, 2021 7:16 pm, edited 2 times in total.
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Re: "Beware of Sci-Fi Portfolios"

Post by Taylor Larimore »

willthrill81 wrote: Sun May 16, 2021 9:56 pm
Allan Roth wrote: Sun May 16, 2021 9:52 pm
willthrill81 wrote: Sun May 16, 2021 5:55 pm If factors hadn't been lagging LCG and the like over the last few years, what is the likelihood that Allan would have written this article?

I'd say about zero.
You may want to do a google search for how long I've been writing against factor / smart beta, high fees, concentrated portfolios, alternative investments, etc.
Were you warning people against SCV when it was far outperforming TSM in the early 2000s? I genuinely don't know.
willthrill81:

In his book copyighted in 2009, "How a Second-Grader Beats Wall Street," Allan Roth wrote:

"If you are betting on sectors or even countries, you are speculating rather than investing."

Bogleheads can read "Investment Gems" from Allan's great book here.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "In the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw therefrom."
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Re: "Beware of Sci-Fi Portfolios"

Post by vineviz »

afan wrote: Mon May 17, 2021 6:33 pm Upthread I did cite just such an article.
The article you cited does not support the claims being made in its name.
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Re: "Beware of Sci-Fi Portfolios"

Post by willthrill81 »

Taylor Larimore wrote: Mon May 17, 2021 6:55 pm
willthrill81 wrote: Sun May 16, 2021 9:56 pm
Allan Roth wrote: Sun May 16, 2021 9:52 pm
willthrill81 wrote: Sun May 16, 2021 5:55 pm If factors hadn't been lagging LCG and the like over the last few years, what is the likelihood that Allan would have written this article?

I'd say about zero.
You may want to do a google search for how long I've been writing against factor / smart beta, high fees, concentrated portfolios, alternative investments, etc.
Were you warning people against SCV when it was far outperforming TSM in the early 2000s? I genuinely don't know.
willthrill81:

In his book copyighted in 2009, "How a Second-Grader Beats Wall Street," Allan Roth wrote:

"If you are betting on sectors or even countries, you are speculating rather than investing."

Bogleheads can read "Investment Gems" from Allan's great book here.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "In the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw therefrom."
Thanks Taylor. I stand corrected. At least Allan has been consistent in his recommendations.
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Re: "Beware of Sci-Fi Portfolios"

Post by snailderby »

moontower wrote: Mon May 17, 2021 6:20 pm This is my own Sci-FI portfolio backtested to Dec 31, 2009. It beats S&P 500 by 1.5 points (16.12% v 14.52% for SPY) with HALF the drawdown/volatility. I know folks will protest and cite "volatility decay" but it works, related to HEDGEFUNDIE adventure. Thoughts??

VUG (Vanguard growth) 50%
SSO (2x SPY) 10%
STPZ (Pimco 1-5yr TIPS) 10%
LTPZ (Pimco 15+ TIPS) 10%
TYD (3x 7-10 yr Tbills) 10%
TMF (3x 20+ yr Tbills) 10%
moontower, you've asked for feedback on your portfolio in many different threads, including the Three-Fund Portfolio thread, the WisdomTree 90/60 U.S. Balanced Fund [NTSX] thread, the HEDGEFUNDIE's excellent adventure thread, and several others. You might get more helpful input if you created your own thread asking for feedback on your proposed portfolio. If you would like that...
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Re: "Beware of Sci-Fi Portfolios"

Post by protagonist »

nisiprius wrote: Sat May 15, 2021 2:52 pm
vineviz wrote: Sat May 15, 2021 2:32 pm
Dale_G wrote: Sat May 15, 2021 2:29 pm
james22 wrote: Sat May 15, 2021 1:57 pm You believe one should ignore academia/science and judge portfolios on their last five year's performance, Taylor?
Data mining is not science. And yes, five years of serious underperformance of an alleged superior portfolio (compared to the broad market) is enough to chuck it to the wind.

Dale
Academic research isn’t “data mining”.
Some isn't and some is.

Why Most Published Research Findings are False

It's bad enough when all that is at stake is reputation, but when money is involved I suspect the problems are worse.

Economics is a social science.
Or pretends to be.

Plenty of social scientific research adheres to scientific methods...double blind studies, testing a null hypothesis with methods and statistical parameters chosen a priori, attempts to eliminate confounding variables, falsifiability, studies that are theoretically reproducible, etc., etc. It may not be physics and definitely has its limitations but when done rigorously, it is science and can be good science.

All that is lacking in studies of finance. It's just looking at limited amounts of past data and trying to draw conclusions based on it that support an untestable idea. My slot machine paid off better than the surrounding ones over the past twenty pulls so it will probably continue to do so for the next ten. How that ever got glorified by the term "science" is beyond me. Because of that, people can be arguing their point of view for eternity without ever convincing their opponent that they are right. From my vantage point it really is closer to philosophy than science, except without the rigor of logic. The most that one can really say is that some investment ideas make more common sense than others. That is why I follow basic Boglehead principles....they make more common sense to me than the alternative ones that I have encountered (and, in some cases, tried and failed).

From Taylor's article: "“Minimizing expenses and emotions; maximizing diversification and discipline.” makes a LOT of sense to me. I have a tremendous amount of respect for good science done by academics. I , sadly, have yet to see an example of that in the world of finance. If I ever encounter it I will adjust my portfolio accordingly.
Last edited by protagonist on Mon May 17, 2021 8:07 pm, edited 9 times in total.
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Re: "Beware of Sci-Fi Portfolios"

Post by Horton »

This seems like a welcome message for us all. Look for ways to be more like a scout and less like a soldier:

https://youtu.be/T1ER_758DIE
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Re: "Beware of Sci-Fi Portfolios"

Post by willthrill81 »

protagonist wrote: Mon May 17, 2021 7:48 pm
nisiprius wrote: Sat May 15, 2021 2:52 pm
vineviz wrote: Sat May 15, 2021 2:32 pm
Dale_G wrote: Sat May 15, 2021 2:29 pm
james22 wrote: Sat May 15, 2021 1:57 pm You believe one should ignore academia/science and judge portfolios on their last five year's performance, Taylor?
Data mining is not science. And yes, five years of serious underperformance of an alleged superior portfolio (compared to the broad market) is enough to chuck it to the wind.

Dale
Academic research isn’t “data mining”.
Some isn't and some is.

Why Most Published Research Findings are False

It's bad enough when all that is at stake is reputation, but when money is involved I suspect the problems are worse.

Economics is a social science.
Or pretends to be.

Plenty of social scientific research adheres to scientific methods...double blind studies, testing a null hypothesis with methods and statistical parameters chosen a priori, attempts to eliminate confounding variables, falsifiability, studies that are theoretically reproducible, etc., etc. It may not be physics and definitely has its limitations but when done rigorously, it is science and can be good science.

All that is lacking in studies of finance.
Social sciences are not limited to those disciplines that can utilize certain investigative techniques. Further, the scientific method does not actually require that any specific investigative technique be utilized.

Brittanica says the following about the scientific method:
The process of observing, asking questions, and seeking answers through tests and experiments is not unique to any one field of science. In fact, the scientific method is applied broadly in science, across many different fields. Many empirical sciences, especially the social sciences, use mathematical tools borrowed from probability theory and statistics, together with outgrowths of these, such as decision theory, game theory, utility theory, and operations research. Philosophers of science have addressed general methodological problems, such as the nature of scientific explanation and the justification of induction.
https://www.britannica.com/science/scientific-method
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Re: "Beware of Sci-Fi Portfolios"

Post by afan »

vineviz wrote: Mon May 17, 2021 6:58 pm
afan wrote: Mon May 17, 2021 6:33 pm Upthread I did cite just such an article.
The article you cited does not support the claims being made in its name.
I disagree. Did you read it?
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Re: "Beware of Sci-Fi Portfolios"

Post by afan »

hyperon wrote: Mon May 17, 2021 6:51 pm You're missing my point. Reading an article an expert does not make. Reading 20 articles an expert does not make. Reading 100 articles...

I'm certain there is plenty of garbage published out there, but being from academia myself (not finance) I can say I'm pretty tired of weekend warriors acting like they are experts.
You asked for an article and I pointed out that I cited an article.
You asked that it be widely cited in a major journal and I pointed out that it was.

Did you read it?
I have 100's of articles on the characteristics of financial markets. There is plenty more where that one I cited came from.

I can provide you with far more than one. But lets get to # 2 after you read #1.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Re: "Beware of Sci-Fi Portfolios"

Post by countmein »

vineviz wrote: Sun May 16, 2021 5:38 pm
afan wrote: Sun May 16, 2021 5:07 pm
vineviz wrote: Sun May 16, 2021 4:26 pm

And again you miss the key point: a BAM client is never JUST buying a portfolio, so their fee is not JUST an investment expense.
OK. To repeat my question, what else are customers getting in return for their fees?
They are getting an ongoing professional relationship. The same thing that anyone who outsources any task they MIGHT dog themselves but don’t want to do.

That could be as simple as the client having someone to blame when markets go south, having someone to talk them out of their worst impulses, someone to bounce ideas off of, or just not having to worry about something they prefer not to worry about.

More tangible services might include tax preparation, estate planning, insurance analysis, etc.

I’m not recommending that anyone hire an advisor with an AUM fee any more than I’d suggest people go out to a fancy restaurant instead of cooking at home.

Rather, I’m merely pointing out that some people prefer dining out to cooking at home and that the value of the former can’t be evaluated by simply comparing the restaurant bill to the cost of the groceries.
No no no no no.

I am a former Buckingham client.

I can tell you resolutely that they did not offer tax advice (let alone preparation), estate planning, or insurance analysis. They did not offer any financial planning to speak of. I tried to bring up "financial planning" with my Buckingham advisor on multiple occasions and all I got was hem haw, hem haw. The service is standard investment advisory, and that's it: you get your DFA/AQR/Stone Ridge access, a muni ladder (IF your AUM is high enough), and an advisor's shoulder to cry on.

Another thing that should be mentioned is that Random Walker's portfolio contains a heretofore unconsidered excess expense that I'll bet is at least another 1% a year if not 2%: Taxes. These DFA and Bridgeway funds (God help him if Random Walker holds the alts in taxable)-- yes, including the ones with "Tax Aware" in the title-- are NOT tax efficient. They distribute cap gains just like any other non-Vanguard mutual fund does. Now that ETFs with lower cost per unit exposure are available, how does a "fiduciary" defend these relatively tax-inefficient, high ER funds?
Last edited by countmein on Mon May 17, 2021 10:46 pm, edited 1 time in total.
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Re: "Beware of Sci-Fi Portfolios"

Post by willthrill81 »

countmein wrote: Mon May 17, 2021 10:27 pm(God help him if Random Walker holds the alts in taxable)
I learned the hard way that P2P lending (including funds like LENDX) in a taxable account is a tax nightmare. I had to list dozens of notes individually on tax forms, and it was highly tax inefficient.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
whereskyle
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Re: "Beware of Sci-Fi Portfolios"

Post by whereskyle »

protagonist wrote: Mon May 17, 2021 7:48 pm
nisiprius wrote: Sat May 15, 2021 2:52 pm
vineviz wrote: Sat May 15, 2021 2:32 pm
Dale_G wrote: Sat May 15, 2021 2:29 pm
james22 wrote: Sat May 15, 2021 1:57 pm You believe one should ignore academia/science and judge portfolios on their last five year's performance, Taylor?
Data mining is not science. And yes, five years of serious underperformance of an alleged superior portfolio (compared to the broad market) is enough to chuck it to the wind.

Dale
Academic research isn’t “data mining”.
Some isn't and some is.

Why Most Published Research Findings are False

It's bad enough when all that is at stake is reputation, but when money is involved I suspect the problems are worse.

Economics is a social science.
Or pretends to be.

Plenty of social scientific research adheres to scientific methods...double blind studies, testing a null hypothesis with methods and statistical parameters chosen a priori, attempts to eliminate confounding variables, falsifiability, studies that are theoretically reproducible, etc., etc. It may not be physics and definitely has its limitations but when done rigorously, it is science and can be good science.

All that is lacking in studies of finance. It's just looking at limited amounts of past data and trying to draw conclusions based on it that support an untestable idea. My slot machine paid off better than the surrounding ones over the past twenty pulls so it will probably continue to do so for the next ten. How that ever got glorified by the term "science" is beyond me. Because of that, people can be arguing their point of view for eternity without ever convincing their opponent that they are right. From my vantage point it really is closer to philosophy than science, except without the rigor of logic. The most that one can really say is that some investment ideas make more common sense than others. That is why I follow basic Boglehead principles....they make more common sense to me than the alternative ones that I have encountered (and, in some cases, tried and failed).

From Taylor's article: "“Minimizing expenses and emotions; maximizing diversification and discipline.” makes a LOT of sense to me. I have a tremendous amount of respect for good science done by academics. I , sadly, have yet to see an example of that in the world of finance. If I ever encounter it I will adjust my portfolio accordingly.
+1.

I have been primarily a straightforward total-market investor. I have flirted recently with tilting gently toward US and ex-US smallcaps and investing in long-term treasuries. The sole basis I have for doing either is to increase the diversification of my portfolio by exposing it to different sources of risk

Still, I cannot determine how I can "tell for sure" that doing these things will actually increase my diversification.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
dogagility
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Re: "Beware of Sci-Fi Portfolios"

Post by dogagility »

nisiprius wrote: Sat May 15, 2021 2:52 pm
vineviz wrote: Sat May 15, 2021 2:32 pm
Dale_G wrote: Sat May 15, 2021 2:29 pm
james22 wrote: Sat May 15, 2021 1:57 pm You believe one should ignore academia/science and judge portfolios on their last five year's performance, Taylor?
Data mining is not science. And yes, five years of serious underperformance of an alleged superior portfolio (compared to the broad market) is enough to chuck it to the wind.

Dale
Academic research isn’t “data mining”.
Some isn't and some is.

Why Most Published Research Findings are False

It's bad enough when all that is at stake is reputation, but when money is involved I suspect the problems are worse.
Bingo. As a former academic doing grant-funded research for a couple of decades as a PI, I can attest that Academia is not Pure As The Driven Snow.

Academics need to publish for career advancement, need to publish to obtain grant funding, need to publish and get money for the university (i.e grants) to obtain tenure, need to publish to keep their jobs in many cases (non-tenured).

This results in a conflict of interest where rigorous evaluation of one's data can be secondary to getting it published. Peer-review at journals is often cursory, and one can always find a journal in which to publish.

Bottom line, academic research is needed for society, but don't trust conclusions made in one-off publications or news releases from universities based upon such studies.
The more flexibility you have the less you need to know what happens next. -- Morgan Housel
dogagility
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Re: "Beware of Sci-Fi Portfolios"

Post by dogagility »

Tony-S wrote: Sat May 15, 2021 3:59 pm I wouldn’t pay too much attention to Ioannidis‘ opinion piece.
His publications have certainly been politicized by others during the pandemic. IMO, he's the best kind of academic... looks at the data critically and doesn't let emotion guide his conclusions.
The more flexibility you have the less you need to know what happens next. -- Morgan Housel
dogagility
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Re: "Beware of Sci-Fi Portfolios"

Post by dogagility »

vineviz wrote: Sat May 15, 2021 4:08 pm
nisiprius wrote: Sat May 15, 2021 2:52 pm
vineviz wrote: Sat May 15, 2021 2:32 pm Academic research isn’t “data mining”.
Some isn't and some is.
The fact that some research isn’t reproducible isn’t evidence that the research was “data mined”.
There's a saying... if you torture the data long enough, it will confess (to anything). This is very true.

Lack of reproducibility of academic research is not necessarily nefarious. However, there are plenty of academics who either don't know how to analyze data properly or analyze data until it fits their hypothesis. The incentive to do this in academia is insidious.
The more flexibility you have the less you need to know what happens next. -- Morgan Housel
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Re: "Beware of Sci-Fi Portfolios"

Post by nisiprius »

By the way... in the course of trying to find out what index could be used to analyze the usefulness of LENDX in an MPT-based portfolio design, I happened to look at the LENDX annual report dated February 28th, 2021. It has an eighteen-page shareholder letter, dated December 2020, apparently the same one for all funds. It is probably worth reading to understand where Stone Ridge is coming from, but I don't think I can say much about it without violating forum policy. Well, OK: there is quite a lot in it about the fundamental nature of money, the Federal Reserve, taxes, and Bitcoin. If I am reading it correctly, Bitcoin's heavy use of energy is seen as beneficial.
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.
afan
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Re: "Beware of Sci-Fi Portfolios"

Post by afan »

countmein wrote: Mon May 17, 2021 10:27 pm
vineviz wrote: Sun May 16, 2021 5:38 pm
afan wrote: Sun May 16, 2021 5:07 pm
vineviz wrote: Sun May 16, 2021 4:26 pm

And again you miss the key point: a BAM client is never JUST buying a portfolio, so their fee is not JUST an investment expense.
OK. To repeat my question, what else are customers getting in return for their fees?
They are getting an ongoing professional relationship. The same thing that anyone who outsources any task they MIGHT dog themselves but don’t want to do.

That could be as simple as the client having someone to blame when markets go south, having someone to talk them out of their worst impulses, someone to bounce ideas off of, or just not having to worry about something they prefer not to worry about.

More tangible services might include tax preparation, estate planning, insurance analysis, etc.

I’m not recommending that anyone hire an advisor with an AUM fee any more than I’d suggest people go out to a fancy restaurant instead of cooking at home.

Rather, I’m merely pointing out that some people prefer dining out to cooking at home and that the value of the former can’t be evaluated by simply comparing the restaurant bill to the cost of the groceries.
No no no no no.

I am a former Buckingham client.

I can tell you resolutely that they did not offer tax advice (let alone preparation), estate planning, or insurance analysis. They did not offer any financial planning to speak of. I tried to bring up "financial planning" with my Buckingham advisor on multiple occasions and all I got was hem haw, hem haw. The service is standard investment advisory, and that's it: you get your DFA/AQR/Stone Ridge access, a muni ladder (IF your AUM is high enough), and an advisor's shoulder to cry on.

Another thing that should be mentioned is that Random Walker's portfolio contains a heretofore unconsidered excess expense that I'll bet is at least another 1% a year if not 2%: Taxes. These DFA and Bridgeway funds (God help him if Random Walker holds the alts in taxable)-- yes, including the ones with "Tax Aware" in the title-- are NOT tax efficient. They distribute cap gains just like any other non-Vanguard mutual fund does. Now that ETFs with lower cost per unit exposure are available, how does a "fiduciary" defend these relatively tax-inefficient, high ER funds?
WOW! If all they provide is investment management, then one could get the same service from Vanguard PAS at a far lower price, with less expensive funds and greater tax efficiency. Add in not investing in illiquid interval funds, commodities and other exotic investments, and what little appeal Buckingham may have had has disappeared.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
Random Walker
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Re: "Beware of Sci-Fi Portfolios"

Post by Random Walker »

willthrill81 wrote: Mon May 17, 2021 10:46 pm
countmein wrote: Mon May 17, 2021 10:27 pm(God help him if Random Walker holds the alts in taxable)
I learned the hard way that P2P lending (including funds like LENDX) in a taxable account is a tax nightmare. I had to list dozens of notes individually on tax forms, and it was highly tax inefficient.
I certainly have a strong preference for Alts in tax advantaged accounts, but also hold a substantial amount in taxable. As I’ve said before, one needs to consider what he is trying to accomplish when he makes a portfolio addition. In my case, the Alts in taxable replace a portion of my muni bond allocation. I’m looking for a higher after tax return than munis and improved portfolio efficiency. I would not hold Alts in taxable as alternative to equities.

Dave
afan
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Re: "Beware of Sci-Fi Portfolios"

Post by afan »

dogagility wrote: Tue May 18, 2021 6:31 am

Lack of reproducibility of academic research is not necessarily nefarious. However, there are plenty of academics who either don't know how to analyze data properly or analyze data until it fits their hypothesis. The incentive to do this in academia is insidious.
Which is exactly what the paper I cited, the one people want to argue about without reading, concerns. The limitations in inferences drawn from the available dataset and how to correct for the challenges outlined.

Academics have to publish. Junior people need to get tenure. This is like a test of your whole life. Get it and you have a high prestige, potentially high paying. lifetime job with near perfect security. Fail and you have little chance of getting back onto that pipeline.

For finance faculty there is also the opportunity to consult with investment firms, or start your own, and make far more than a university will pay you. Many of the academic finance leaders have become seriously wealthy doing this. But you have to publish.

The problem is not that reviewers are lazy or that professors are dishonest. The problem is that the statistical analysis under these circumstances is hard. As evidenced by the fact that a high level academic like Harvey can publish major works on who to do it in the 2010's. If it were straightforward then there would be nothing for him to do.

The problems with many academic papers only become apparent in retrospect. A method missed an issue that no one had thought about. There were systematic errors in the dataset that no one realized. There were omitted variables that no one knew were relevant. A large share of the earlier work on the size effect was confounded by stale prices for thinly traded small stocks and by ignoring transaction costs. No one recognized initially how important these factors were. So no one objected to the data or the analyses based on them.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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