Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

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Triple digit golfer
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Triple digit golfer »

I'm sure it's been said already, but a couple thoughts.

1. To my knowledge, factor investing does not have better expected risk-adjusted returns. Over the last 30+ years, it has outperformed, but the Sharpe and Sortino ratios are about the same as a total market fund. Slightly worse, actually. I'm sure different time periods will yield different results. It appears that this is simply a case of higher risk, higher reward. Not better risk-adjusted returns.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

2. Asking the question is a bit like asking people who hold bonds, why isn't everybody 100% stocks? And people who are 100% stocks, why doesn't everybody do 100% factors? And those people, why don't they leverage? And so on. It's just different levels of risk.
dbr
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by dbr »

Not everyone factor invests because

1. There is no clear case that there is any advantage to their financial planning to be had.

2. It's complicated and takes figuring out to implement.

3. Most investors, even here, don't know much about it and wouldn't care to learn.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by mrspock »

Because investing is as much a *psychological* game as it is about numbers and statistics. Why on earth would I introduce yet more reasons to second guess and doubt myself than might already exist?

Why would I put myself on a road which is very expensive to back out of? (Due to capital gains taxes) No doubt triggering some form of sunk cost fallacy along with borderline religious belief in a potentially under performing tilt strategy?

With my simple two fund portfolio, my life is easy. The mental game less taxing…. I look at one ticker, and if I want to figure out why it did what it did, I look at the s&p 500 index, and I go “ah… ok.” I don’t have to wring my hands if a “factor” still exists or “reversion to mean” might happen.

At worst I have to wring my hands over my AA, which is dictated by my IPS, so even that isn’t too bad.

Factor investing IMO, is the latest fad by an industry looking to stay relevant in an era where more investors are discovering AUM financial advisors and active management strategies add little value. In fact, most of the time they are nothing but dead weight/drag in one’s portfolio.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by lnp »

Triple digit golfer wrote: Wed Dec 01, 2021 11:24 am 1. To my knowledge, factor investing does not have better expected risk-adjusted returns. Over the last 30+ years, it has outperformed, but the Sharpe and Sortino ratios are about the same as a total market fund. Slightly worse, actually. I'm sure different time periods will yield different results. It appears that this is simply a case of higher risk, higher reward. Not better risk-adjusted returns.
But the sharpe ratio should be higher when combining the factors, right?
dbr
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by dbr »

larsnyborgpedersen wrote: Wed Dec 01, 2021 11:51 am
Triple digit golfer wrote: Wed Dec 01, 2021 11:24 am 1. To my knowledge, factor investing does not have better expected risk-adjusted returns. Over the last 30+ years, it has outperformed, but the Sharpe and Sortino ratios are about the same as a total market fund. Slightly worse, actually. I'm sure different time periods will yield different results. It appears that this is simply a case of higher risk, higher reward. Not better risk-adjusted returns.
But the sharpe ratio should be higher when combining the factors, right?
It could, but that would have to be established as a fact, keeping in mind those kinds of statistics vary over time.

But the real point there is whether or not a higher Sharpe ratio is a primary objective or even an objective at all for anyone in particular.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Triple digit golfer »

larsnyborgpedersen wrote: Wed Dec 01, 2021 11:51 am
Triple digit golfer wrote: Wed Dec 01, 2021 11:24 am 1. To my knowledge, factor investing does not have better expected risk-adjusted returns. Over the last 30+ years, it has outperformed, but the Sharpe and Sortino ratios are about the same as a total market fund. Slightly worse, actually. I'm sure different time periods will yield different results. It appears that this is simply a case of higher risk, higher reward. Not better risk-adjusted returns.
But the sharpe ratio should be higher when combining the factors, right?
I wouldn't think so, but I'm far from an expert in this stuff.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Apathizer »

mrspock wrote: Wed Dec 01, 2021 11:45 amFactor investing IMO, is the latest fad by an industry looking to stay relevant in an era where more investors are discovering AUM financial advisors and active management strategies add little value. In fact, most of the time they are nothing but dead weight/drag in one’s portfolio.
It's definitely not a fad. There's abundant evidence targeting factors improves overall returns, though the vast majority of investors will meet their goals just fine with index funds.

Oh, and in the long-term a global total market fund will likely produce more reliable returns than the S&P 500 which is only composed of large US equities.
https://www.youtube.com/watch?v=jKWbW7Wgm0w
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dbr
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by dbr »

Apathizer wrote: Wed Dec 01, 2021 12:00 pm
mrspock wrote: Wed Dec 01, 2021 11:45 amFactor investing IMO, is the latest fad by an industry looking to stay relevant in an era where more investors are discovering AUM financial advisors and active management strategies add little value. In fact, most of the time they are nothing but dead weight/drag in one’s portfolio.
It's definitely not a fad. There's abundant evidence targeting factors improves overall returns, though the vast majority of investors will meet their goals just fine with index funds.

Oh, and in the long-term a global total market fund will likely produce more reliable returns than the S&P 500 which is only composed of large US equities.
https://www.youtube.com/watch?v=jKWbW7Wgm0w
Yes. After all the basic concept goes back to the Fama-French model of equity returns, first published back in 1992. This is the original source for the documentation that small and value factors predict higher return than the total market, which by definition is loaded at zero on small and value factors. I think the concept of risk factors in addition to the market starts with F-F, but there are precursors in the literature.

A different issue is whether or not one can establish that factor portfolios have higher Sharpe ratios or something like that. The F-F model only addresses the statistic of expected return. There is extensive literature on what the understanding of risk in a risk factor is.

A different issue is whether or not the return predictions of F-F still persist. There is no doubt that in the data studied those results are robust as a statistical analysis involving regression methods on investment statistics.
Last edited by dbr on Wed Dec 01, 2021 12:10 pm, edited 1 time in total.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by mrspock »

Apathizer wrote: Wed Dec 01, 2021 12:00 pm
mrspock wrote: Wed Dec 01, 2021 11:45 amFactor investing IMO, is the latest fad by an industry looking to stay relevant in an era where more investors are discovering AUM financial advisors and active management strategies add little value. In fact, most of the time they are nothing but dead weight/drag in one’s portfolio.
It's definitely not a fad. There's abundant evidence targeting factors improves overall returns, though the vast majority of investors will meet their goals just fine with index funds.

Oh, and in the long-term a global total market fund will likely produce more reliable returns than the S&P 500 which is only composed of large US equities.
https://www.youtube.com/watch?v=jKWbW7Wgm0w
Really? How can you “definitely” know that? Fads are only evident when they are in the rear view mirror.

I’m not looking for “reliable” returns, I’m looking for a strategy I can reliably execute with the fewest return sucking mistakes possible. I have one, so far it’s handily beaten global total market in my investing lifetime.

If factor investing works for you, be my guest. Dump every last dollar you have into it, I wish you nothing but the best. Thankfully, investing isn’t a team sport.
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HomerJ
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by HomerJ »

larsnyborgpedersen wrote: Wed Dec 01, 2021 10:25 am
UpperNwGuy wrote: Tue Nov 30, 2021 6:58 am
larsnyborgpedersen wrote: Tue Nov 30, 2021 6:09 am Why doesn’t everybody factor invest?
Because my investment goal from the beginning has been to own the market, not to try to beat the market.
Why is beating the market bad?
Because when you try to beat the market, you also open up the possibility of doing worse than the market.

In fact, most investors, even most active managers with teams of PhDs do worse than the market.

Getting the market return is super easy. Just invest in an market index fund. That's it. You're done.

And you're guaranteed to get the market return. Could be high, could be low, but over the past 100+ years it's averaged around 9%-10% a year. Even INCLUDING the crashes and the bad years. Over the long run, you still got 9%-10% and easily became rich with those kind of returns.

Now, sure, if you could get more, higher returns, you could be even more rich, or rich faster.

But then you open the possibility of less rich, or even NEVER rich.
Last edited by HomerJ on Wed Dec 01, 2021 12:28 pm, edited 1 time in total.
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HomerJ
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by HomerJ »

Apathizer wrote: Wed Dec 01, 2021 12:00 pm
mrspock wrote: Wed Dec 01, 2021 11:45 amFactor investing IMO, is the latest fad by an industry looking to stay relevant in an era where more investors are discovering AUM financial advisors and active management strategies add little value. In fact, most of the time they are nothing but dead weight/drag in one’s portfolio.
It's definitely not a fad. There's abundant evidence targeting factors improves overall returns, though the vast majority of investors will meet their goals just fine with index funds.
There's a ton of evidence it worked in the past. When no one knew about it.

Since it was discovered, it hasn't improved overall returns.

And it's been 30 years. But maybe the next 30 years, factors will start out-performing again, and improve overall returns.

It's pretty typical that once some out-performance metric becomes known, it stops working.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by RSIdaho »

Along with increased risk you get increased volatility. In my situation not being in the accumulation phase I prefer to stay away from factors, but admittedly do have some value exposure.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by loukycpa »

Personally I agree with the following Warren Buffett quotes:

"Most analysts feel they must choose between two approaches customarily thought to be in opposition: "value" and "growth." Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing.

We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive."

"Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation, except to the extent they provide clues to the amount and timing of cash flows into and from the business. Indeed, growth can destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years. Market commentators and investment managers who glibly refer to "growth" and "value" styles as contrasting approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component - usually a plus, sometimes a minus - in the value equation."

Because I agree fundamentally with these quotes, breaking down the universe of public companies into a nine box grid doesn't seem like a useful exercise to me.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by UpperNwGuy »

larsnyborgpedersen wrote: Wed Dec 01, 2021 10:25 am
UpperNwGuy wrote: Tue Nov 30, 2021 6:58 am
larsnyborgpedersen wrote: Tue Nov 30, 2021 6:09 am Why doesn’t everybody factor invest?
Because my investment goal from the beginning has been to own the market, not to try to beat the market.
Why is beating the market bad?
Let me rephrase your question: Why is attempting to beat the market bad?

Answer: Because it is easier said than done, and the risks are greater than just owning the market.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by muffins14 »

UpperNwGuy wrote: Wed Dec 01, 2021 7:06 pm
larsnyborgpedersen wrote: Wed Dec 01, 2021 10:25 am
UpperNwGuy wrote: Tue Nov 30, 2021 6:58 am
larsnyborgpedersen wrote: Tue Nov 30, 2021 6:09 am Why doesn’t everybody factor invest?
Because my investment goal from the beginning has been to own the market, not to try to beat the market.
Why is beating the market bad?
Let me rephrase your question: Why is attempting to beat the market bad?

Answer: Because it is easier said than done, and the risks are greater than just owning the market.
I don’t think this is generally true. For example I think that some portfolios with factor loadings on SCV may have higher safe withdrawal rates in retirement. To me that means less risky.

You can play with those simulations in portfolio visualizer
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Apathizer
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Apathizer »

HomerJ wrote: Wed Dec 01, 2021 12:26 pmSince it was discovered, it hasn't improved overall returns.
That only appears to be the case for the US market, and that's only for the last decade or so. Such periods of under-performance are expected from time to time. But globally factors have produced market-beating returns even over the last decade.

As far as factor performance in the future, well, human cognitive failings tend to persist even in light of new info. In this case, it's likely many investors are overly optimistic about expensive, low-profit growth stocks like Tesla while imprudently disregarding cheaper, highly profitable stocks like Johnson & Johnson, and the multitude of cheap, highly profitable small companies.

Anyway, here's a comparison of Vanguard Total World Stock and DFA Global Equity. Though DFA only out-performs by about 1%, remember, over this time US small cap value significantly under-performed the US market. I agree the difference is small enough not to matter to most investors, but they should still be aware factors are likely to increase expected return, albeit modestly.
https://www.portfoliovisualizer.com/bac ... sisResults
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Northern Flicker »

larsnyborgpedersen wrote: Tue Nov 30, 2021 6:09 am Why doesn’t everybody factor invest?
Is it because it only has better risk adjusted returns under the flawed CAPM model and actually would have similar risk adjusted returns under a five factor model?
Or why?
We don't actually know if any particular factor exposures increase expected returns on a risk-adjusted basis. Which factor model you use has no bearing on that.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Caduceus »

I can't speak for "everyone" but I don't because it simply does not make any sense to me. Let's say you identify a factor pertaining to price-to-book value. Well, you pick up the financial statements of two companies trading at the exact same price to book value ratio, and you'll probably identify a thousand things that make that price to book value ratio - superficially similar - completely non-comparable. Maybe one company's book is made up of fast-depreciating assets, while another has intangible assets not reflected in book value. Even more so for ratios like P/E - ten thousand things that make two putatively similar P/E ratios completely non-comparable.

So factor investing isolates these things and tells you to invest in them as a basket based on some historical correlation. No thank you.

This is why the people who say Warren Buffett is just practicing a style of "factor" investing completely misunderstand his approach.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by LilyFleur »

burritoLover wrote: Tue Nov 30, 2021 9:00 pm
Beensabu wrote: Tue Nov 30, 2021 8:43 pm
burritoLover wrote: Tue Nov 30, 2021 8:31 pm
Beensabu wrote: Tue Nov 30, 2021 8:18 pm It's been made clear to me that I simply don't understand it. Therefore, not doing it. How am I supposed to believe in something I don't understand?
So you fully understand everything you have invested in?
I hope so. I think I do. I know why I've made the choices I made, and I'm pretty confident that the reasons that I made them make sense. At least to me.

Why? Does it seem like I don't understand?
No - I just think most don’t fully understand what they invest in. I don’t think you have to have an academic level of understanding
to invest in something.
It's like a foreign language to me. Beta? Alpha? Tilts?
I read the Wall Street Journal every day and have done so the better part of my adult life.
I read Schwab fund and stock research online. There's a wealth of it.
Neither of those sources use the factor investing lingo.
It's unintelligible to me and is not simple. I said so once on this forum and Taylor agreed.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Nathan Drake »

HomerJ wrote: Wed Dec 01, 2021 12:26 pm
Apathizer wrote: Wed Dec 01, 2021 12:00 pm
mrspock wrote: Wed Dec 01, 2021 11:45 amFactor investing IMO, is the latest fad by an industry looking to stay relevant in an era where more investors are discovering AUM financial advisors and active management strategies add little value. In fact, most of the time they are nothing but dead weight/drag in one’s portfolio.
It's definitely not a fad. There's abundant evidence targeting factors improves overall returns, though the vast majority of investors will meet their goals just fine with index funds.
There's a ton of evidence it worked in the past. When no one knew about it.

Since it was discovered, it hasn't improved overall returns.

And it's been 30 years. But maybe the next 30 years, factors will start out-performing again, and improve overall returns.

It's pretty typical that once some out-performance metric becomes known, it stops working.
Why do people keep parroting this misinformation?

1. There was a premium for US SCV. Check PV.

2. US SCV is NOT the only Factor fund. Emerging and Developed markets have a huge premium over their market beta

2/3 markets with large premiums and 1/3 with a smaller premium looks good to me.

3. Did it “stop working” or did the expected returns from SCV going forward just increase?
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acegolfer
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by acegolfer »

Because according to Fama-French model, they don't have better risk-adjusted return. "Factor" means "risk factor".
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Forester
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Forester »

No one wants to tilt to boring low vol stocks, despite the avoidance of deep drawdowns as a popular objective. Investors *kind of* do this unconciously by holding tight to the S&P 500 vs ex-US. The problem with advocating low vol investing is it sits outside the Fama French research world, a relative poverty of white papers & literature, vs for example small cap and value.
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BitTooAggressive
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by BitTooAggressive »

onourway wrote: Tue Nov 30, 2021 7:06 am Any deviation from total market investing will inevitably cause the investor to be faced with the question “Is this period of under-performance (relative to the total market) ‘normal’ or are things different this time? It’s only possible to tell with the benefit of hindsight, and those periods of poor performance may last decades. Most investors don’t really have the ability to hold a stinking investment that long, so they will end up tinkering based on ‘new’ data that supports their current flavor of the month.
Not sure I would use the term poor performance. Just because you are not getting the expected factor premium does not mean you are under performing the market or your investments are performing terrible.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by lnp »

LilyFleur wrote: Thu Dec 02, 2021 2:18 am It's like a foreign language to me. Beta? Alpha? Tilts?
I read the Wall Street Journal every day and have done so the better part of my adult life.
I read Schwab fund and stock research online. There's a wealth of it.
Neither of those sources use the factor investing lingo.
It's unintelligible to me and is not simple. I said so once on this forum and Taylor agreed.
So you don't think Eugene Fama is a good researcher?
He was the one who came up with the initial 3 factor model (Market beta, size & value)
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by dbr »

larsnyborgpedersen wrote: Thu Dec 02, 2021 10:58 am
LilyFleur wrote: Thu Dec 02, 2021 2:18 am It's like a foreign language to me. Beta? Alpha? Tilts?
I read the Wall Street Journal every day and have done so the better part of my adult life.
I read Schwab fund and stock research online. There's a wealth of it.
Neither of those sources use the factor investing lingo.
It's unintelligible to me and is not simple. I said so once on this forum and Taylor agreed.
So you don't think Eugene Fama is a good researcher?
He was the one who came up with the initial 3 factor model (Market beta, size & value)
His Nobel Prize in Economics was not awarded for his factor model with Kenneth French, but this article suggests maybe it should be the other way around: https://www.fool.com/investing/general/ ... eason.aspx

Nevertheless, the Wall Street Journal probably does not spend a lot of time ruminating on academic finance.

It is true that small cap and value investing goes back to that three factor research model.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by BrooklynInvest »

wickywack wrote: Tue Nov 30, 2021 7:58 am I think it's more accurate to say factors *had* better risk-adjusted returns in the past. They may or may not in the future. There are a lot of differences of opinion on how likely that is. Some are confident that factors are fundamental and will persist, some believe they'll be arbitraged now that they're well-known, and some believe they were somewhat random / data-mined in the first place.
This is where my confusion lies. How is the past outperformance of Factor X any more significant to me than the past outperformance of Sector X? I still buy the market 'cause I dunno what's gonna happen next.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Soon2BXProgrammer »

larsnyborgpedersen wrote: Tue Nov 30, 2021 6:09 am Why doesn’t everybody factor invest?
Is it because it only has better risk adjusted returns under the flawed CAPM model and actually would have similar risk adjusted returns under a five factor model?
Or why?
It seems that once a strategy is heavily promoted, the premium disappears and is better integrated into beta itself, as more people attempt to leverage the strategy.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Nathan Drake »

Soon2BXProgrammer wrote: Thu Dec 02, 2021 11:42 am
larsnyborgpedersen wrote: Tue Nov 30, 2021 6:09 am Why doesn’t everybody factor invest?
Is it because it only has better risk adjusted returns under the flawed CAPM model and actually would have similar risk adjusted returns under a five factor model?
Or why?
It seems that once a strategy is heavily promoted, the premium disappears and is better integrated into beta itself, as more people attempt to leverage the strategy.
Seems this theory doesn’t hold up when using actual data. It’s just an often stated reason why one asset class in one region underperformed, when underperformance has always been part of a strategy

I guess market beta is going to go away since passive TSM investing is heavily promoted
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by abc132 »

My concern is that any methodology that changes the definition of individual factors will never be a provable strategy.

What is small?

What is value?

If these definitions change or are used loosely people can just change the definition to data mine the past outperformance. It is impossible not to be able to data mine past outperformance and it always surprises me with the amount of time spent doing so and the weight given to having done so.

There are 1000's of methods with better past risk adjusted returns. Very few of them are forward predictive.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by LilyFleur »

larsnyborgpedersen wrote: Thu Dec 02, 2021 10:58 am
LilyFleur wrote: Thu Dec 02, 2021 2:18 am It's like a foreign language to me. Beta? Alpha? Tilts?
I read the Wall Street Journal every day and have done so the better part of my adult life.
I read Schwab fund and stock research online. There's a wealth of it.
Neither of those sources use the factor investing lingo.
It's unintelligible to me and is not simple. I said so once on this forum and Taylor agreed.
So you don't think Eugene Fama is a good researcher?
He was the one who came up with the initial 3 factor model (Market beta, size & value)
I am interested in practical knowledge, and that is what I get here, with Schwab research and articles, and from the Wall Street Journal. One of the tenets of the Boglehead philosophy is simplicity. You don't have to read Fama's academic approach to economics to be a wise Boglehead investor who doesn't run out of money. Do you read the Wall Street Journal? I am referring to its news, not editorial, pages. It's a Pulitzer-prize winning publication with excellent, up-to-date coverage of news, including economics. I find it much more relevant to my investments than Fama, along with this forum and the Schwab resources.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Northern Flicker »

Forester wrote: Thu Dec 02, 2021 6:31 am No one wants to tilt to boring low vol stocks, despite the avoidance of deep drawdowns as a popular objective. Investors *kind of* do this unconciously by holding tight to the S&P 500 vs ex-US. The problem with advocating low vol investing is it sits outside the Fama French research world, a relative poverty of white papers & literature, vs for example small cap and value.
Min vol has lowered volatility, but drawdowns have only been improved a little bit in the US market:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Non-US equity has been a different story, with a much lower drawdown so far:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

https://www.portfoliovisualizer.com/bac ... ion2_2=100
Northern Flicker
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Northern Flicker »

LilyFleur wrote: Thu Dec 02, 2021 3:53 pm
larsnyborgpedersen wrote: Thu Dec 02, 2021 10:58 am
LilyFleur wrote: Thu Dec 02, 2021 2:18 am It's like a foreign language to me. Beta? Alpha? Tilts?
I read the Wall Street Journal every day and have done so the better part of my adult life.
I read Schwab fund and stock research online. There's a wealth of it.
Neither of those sources use the factor investing lingo.
It's unintelligible to me and is not simple. I said so once on this forum and Taylor agreed.
So you don't think Eugene Fama is a good researcher?
He was the one who came up with the initial 3 factor model (Market beta, size & value)
I am interested in practical knowledge, and that is what I get here, with Schwab research and articles, and from the Wall Street Journal. One of the tenets of the Boglehead philosophy is simplicity. You don't have to read Fama's academic approach to economics to be a wise Boglehead investor who doesn't run out of money. Do you read the Wall Street Journal? I am referring to its news, not editorial, pages. It's a Pulitzer-prize winning publication with excellent, up-to-date coverage of news, including economics. I find it much more relevant to my investments than Fama, along with this forum and the Schwab resources.
Honestly, I've never seen a WSJ article that was in any way actionable for my portfolio.
Socal77
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Socal77 »

IMHO, factors do not exist.

They get arbitraged away just like anything else and you will not be able to time them properly over a lifetime of investing.
Last edited by Socal77 on Thu Dec 02, 2021 5:55 pm, edited 3 times in total.
Marseille07
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Marseille07 »

Socal77 wrote: Thu Dec 02, 2021 5:31 pm IMHO, factors do not exist.

They get arbitraged away just like anything else and you will not be able to time them properly over a lifetime of investing.
Yup, you're absolutely correct.
Triple digit golfer
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Triple digit golfer »

Marseille07 wrote: Thu Dec 02, 2021 5:34 pm
Socal77 wrote: Thu Dec 02, 2021 5:31 pm IMHO, factors do not exist.

They get arbitraged away just like anything else and you will not be able to time them properly over a lifetime of investing.
Yup, you're absolutely correct.
While I think he may be correct, why do you believe this with such certainty?

I personally don't factor invest because I don't have conviction that it'll be successful. I wouldn't be able to stick with it and really just don't have an interest in it.

Reputable guys like Merriman and Swedroe feel that even if known, they don't get arbitraged away, just like the equity risk premium doesn't.

Just curious on your thoughts and the thoughts of Socal77.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Socal77 »

Triple digit golfer wrote: Thu Dec 02, 2021 5:35 pm
Marseille07 wrote: Thu Dec 02, 2021 5:34 pm
Socal77 wrote: Thu Dec 02, 2021 5:31 pm IMHO, factors do not exist.

They get arbitraged away just like anything else and you will not be able to time them properly over a lifetime of investing.
Yup, you're absolutely correct.
While I think he may be correct, why do you believe this with such certainty?

I personally don't factor invest because I don't have conviction that it'll be successful. I wouldn't be able to stick with it and really just don't have an interest in it.

Reputable guys like Merriman and Swedroe feel that even if known, they don't get arbitraged away, just like the equity risk premium doesn't.

Just curious on your thoughts and the thoughts of Socal77.
Because of human behavior and that the future is unknown, including the efficient market hypothesis.

Individual investors that try will fail for the above reasons. People that make a living giving investing advice even if they mean well are incentivized to act like they can do it for you.
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arcticpineapplecorp.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by arcticpineapplecorp. »

tracking error (more specifically, the anxiety and behavioral errors that ensue when tracking error occurs).

also from Jack Bogle:
In any event, place me squarely in the camp of the contrarians who don’t accept the
inherent superiority of value strategies over growth strategies. I’ve been excoriated for my views,
but I’m comforted by this reported exchange between Dr. Fama and a participant at a recent
investment conference: “What do you say to otherwise intelligent people like Jack Bogle who
examine this same data and conclude that there is no size or value premium?” His response:
“How far are they from the slide? If I get far enough away, I don’t see it either . . . Whether you
decide to tilt towards value depends on whether you are willing to bear the associated risk . . .
The market portfolio is always efficient . . . For most people, the market portfolio is the most
sensible decision.” Amen!

source: http://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
Socal77
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Socal77 »

Triple digit golfer wrote: Thu Dec 02, 2021 5:35 pm
Reputable guys like Merriman and Swedroe feel that even if known, they don't get arbitraged away, just like the equity risk premium doesn't.
Again IMHO,

This is due to the Theory of Asset Demand and our inflationary based economy and financial system.

A dollar, or capital if it is to be invested (because we are incentivized to because of an inflation based economy and financial system) will compete against all other assets that respond to again, a well engineered inflationary based economy.

We have to put those dollars somewhere based on those incentives. We base our whole financial life biased by these ideas intertemporally and by personal risk/reward profiles.
Marseille07
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Marseille07 »

Triple digit golfer wrote: Thu Dec 02, 2021 5:35 pm
Marseille07 wrote: Thu Dec 02, 2021 5:34 pm
Socal77 wrote: Thu Dec 02, 2021 5:31 pm IMHO, factors do not exist.

They get arbitraged away just like anything else and you will not be able to time them properly over a lifetime of investing.
Yup, you're absolutely correct.
While I think he may be correct, why do you believe this with such certainty?

I personally don't factor invest because I don't have conviction that it'll be successful. I wouldn't be able to stick with it and really just don't have an interest in it.

Reputable guys like Merriman and Swedroe feel that even if known, they don't get arbitraged away, just like the equity risk premium doesn't.

Just curious on your thoughts and the thoughts of Socal77.
Well, factors as defined by parties like Morningstar, do exist. The question is if there's anything to see here in terms of tradable edge.

My view is that factor picking is no different than stock picking. You may get it right or wrong, but it's not worth trying because we can just own the whole thing.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Northern Flicker »

Factors are not market segments. When you own the market, you have full exposure to the market factor and zero exposure to other factors. That is a perfectly viable choice, but it is not getting exposure to all factors.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Taylor Larimore »

Northern Flicker wrote: Thu Dec 02, 2021 6:04 pm Factors are not market segments. When you own the market, you have full exposure to the market factor and zero exposure to other factors. That is a perfectly viable choice, but it is not getting exposure to all factors.
Northern Flicker:

Inasmuch as the U.S. total stock market contains nearly ALL U.S. stocks (growth, value, large, small, momentum, etc.), how do you explain your statement about "not getting exposure to all factors"?

It seems to me that the only way to get exposure to all factors is to invest in the total stock market. These experts agree:

What Experts Say About Total Market Index Funds

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- "Never think you know more than the market. Nobody does."
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by donaldfair71 »

Triple digit golfer wrote: Thu Dec 02, 2021 5:35 pm
Marseille07 wrote: Thu Dec 02, 2021 5:34 pm
Socal77 wrote: Thu Dec 02, 2021 5:31 pm IMHO, factors do not exist.

They get arbitraged away just like anything else and you will not be able to time them properly over a lifetime of investing.
Yup, you're absolutely correct.
While I think he may be correct, why do you believe this with such certainty?

I personally don't factor invest because I don't have conviction that it'll be successful. I wouldn't be able to stick with it and really just don't have an interest in it.

Reputable guys like Merriman and Swedroe feel that even if known, they don't get arbitraged away, just like the equity risk premium doesn't.

Just curious on your thoughts and the thoughts of Socal77.
Reputable guys like Merriman and Swedroe could be correct, and I tend to be persuaded by them. Let’s operate from the assumption that small and value premiums have been arbitraged away, then…

If this were true, we’d expect the market factor to be similarly arbitraged away (and it very well might be at some point, but you have to believe it could conceivably happen at the least).

If this were true, we’d see small value multiples bid up at approximately the rate of the rest of the market. We haven’t, not even close, and not because earnings haven’t been robust; they’ve been very robust, people just aren’t buying them right now.

We’d also have to accept that the recent underperforming, which really only started to diverge from growth in 2016/17, is due to some new info introduced at or around that time. The knowledge of small and value factor premiums is decades old and was several years old during the 2000s, when a value and/or small premium was well known AND providing premiums of several %/year. The theory is that small has been arbitraged away. Perhaps, but I recall 66-82 providing almost 2 decades of evidence that the market factor premium had been arbitraged away. In retrospect it wasn’t at all.

Having said all that, I don’t tilt to factors. Primarily out of inertia, though I don’t blame anyone for doing so. Many roads to Dublin.

Anyway, as I hope I was able to convey, I try to keep an open mind about the things we discuss on this site. I think there are well- grounded arguments in all/both directions.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by donaldfair71 »

Northern Flicker wrote: Thu Dec 02, 2021 6:04 pm Factors are not market segments. When you own the market, you have full exposure to the market factor and zero exposure to other factors. That is a perfectly viable choice, but it is not getting exposure to all factors.
This is a wonderful point. You own the whole market, but not every factor exposure.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by JSPECO9 »

1-) If I wanted to increase beta, I would decrease my bond position.

2-) I believe in owning the market and accepting average returns gross of fees. Net of fees, above average.

3-) The easier it is to invest in factors, and the more popular it becomes, the higher the chance any significant premium goes away. I suspect that is definitely a factor in the current underperformance. And when it does eventually outperform (like all asset classes eventually do), the premium might not make up for the long dry spells. With so many SCV funds available now, I highly doubt that owning SCV today is the same as owning SCV 30+ years ago (when few investors were able to access SCV).
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by donaldfair71 »

JSPECO9 wrote: Thu Dec 02, 2021 8:22 pm 1-) If I wanted to increase beta, I would decrease my bond position.

2-) I believe in owning the market and accepting average returns gross of fees. Net of fees, above average.

3-) The easier it is to invest in factors, and the more popular it becomes, the higher the chance any significant premium goes away. I suspect that is definitely a factor in the current underperformance. And when it does eventually outperform (like all asset classes eventually do), the premium might not make up for the long dry spells. With so many SCV funds available now, I highly doubt that owning SCV today is the same as owning SCV 30+ years ago (when few investors were able to access SCV).
To your point 2, additionally, how much of what formerly chased SV is now chasing private equity?
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by garlandwhizzer »

Northern Flicker wrote:

Factors are not market segments. When you own the market, you have full exposure to the market factor and zero exposure to other factors.
I believe this is a matter of semantics. The above statement is true if we accept the factor definition as defined by factor models. There is a different way of looking at it if you substitute the world style for the word factor which is what Taylor was saying. Value investing is in this view a style of investing looking for cheap mis-priced assets. Momentum investing is a an investing style that follows current winning stocks and avoids current losers until these trends reverse. In this view TSM (beta) is a multi-style fund that accepts the judgement of market participants as to the relative weighting of each vestment style. TSM holds a mixture of investing styles (value, size, momentum, low volatility, etc.,) and weights the relative portion of each style according to the aggregate wisdom, or lack of it, by market participants. 90%+ of those participants are professionals who are fully aware of factor theory and weight their relative styles according to what they perceive to produce the best risk-adjusted returns. In addition the market participants and are fully aware of something that is 100% neglected by factor theory, expected future profit growth of every given stock and the reliability of that growth.

In point of fact, one factor beta has massively outperformed all multi-factor offerings since inception and done so with lower volatility and lower maximum drawdowns. There has been abject failure of multi-factor funds whose portfolios are created by factor experts since inception. One factor beta, TSM, is a lot more than "simply one more factor" like the factor model suggests. The market has done a better job so far than the factor experts with their multiple factors. If you get to write all the rules and define all the terms like factor models do, it's not that hard to make it look plausible and compelling. Why go with one factor (beta) when you can have 5? It's only when the investing rubber hits the road, execution of strategy, that the problem pop up. Those factor experts who set up the initial multi-factor funds quite clearly did not have a clue where future returns, or future volatility, or future risk were going to come from. One factor beta, a multi-style fund, had a lot more than a clue. It provided all 3 much better and much cheaper.

Two things that many of us have learned NOT to do for too long when investing. First, don't fight the FED. Second, don't fight the tape. Theory is cold bed companion relative to money.

Garland Whizzer
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Nathan Drake »

garlandwhizzer wrote: Thu Dec 02, 2021 8:41 pm
Northern Flicker wrote:

Factors are not market segments. When you own the market, you have full exposure to the market factor and zero exposure to other factors.
I believe this is a matter of semantics. The above statement is true if we accept the factor definition as defined by factor models. There is a different way of looking at it if you substitute the world style for the word factor which is what Taylor was saying. Value investing is in this view a style of investing looking for cheap mis-priced assets. Momentum investing is a an investing style that follows current winning stocks and avoids current losers until these trends reverse. In this view TSM (beta) is a multi-style fund that accepts the judgement of market participants as to the relative weighting of each vestment style. TSM holds a mixture of investing styles (value, size, momentum, low volatility, etc.,) and weights the relative portion of each style according to the aggregate wisdom, or lack of it, by market participants. 90%+ of those participants are professionals who are fully aware of factor theory and weight their relative styles according to what they perceive to produce the best risk-adjusted returns. In addition the market participants and are fully aware of something that is 100% neglected by factor theory, expected future profit growth of every given stock and the reliability of that growth.

In point of fact, one factor beta has massively outperformed all multi-factor offerings since inception and done so with lower volatility and lower maximum drawdowns. There has been abject failure of multi-factor funds whose portfolios are created by factor experts since inception. One factor beta, TSM, is a lot more than "simply one more factor" like the factor model suggests. The market has done a better job so far than the factor experts with their multiple factors. If you get to write all the rules and define all the terms like factor models do, it's not that hard to make it look plausible and compelling. Why go with one factor (beta) when you can have 5? It's only when the investing rubber hits the road, execution of strategy, that the problem pop up. Those factor experts who set up the initial multi-factor funds quite clearly did not have a clue where future returns, or future volatility, or future risk were going to come from. One factor beta, a multi-style fund, had a lot more than a clue. It provided all 3 much better and much cheaper.

Two things that many of us have learned NOT to do for too long when investing. First, don't fight the FED. Second, don't fight the tape. Theory is cold bed companion relative to money.

Garland Whizzer
Never let facts get in the way of a good narrative.

50:50 US/exUS TSM vs 50:50 US/exUS SCV

Significantly higher annualized returns, sortino ratio, and sharpe ratio for the factor-only global portfolio.

https://www.portfoliovisualizer.com/bac ... tion5_2=25

Or, 100% US TSM vs 100% US SCV:

https://www.portfoliovisualizer.com/bac ... ion3_2=100

Factor underperformance is part of any natural cycle of investment asset classes - INCLUDING market factor. Remember, the Market was dead in 1979 and 2009 allegedly. Anti-factor proponents believe that this is somehow "new" and it's now proof that the factor is dead. Nope. It's just dormant while EXPECTED returns increase as spreads between Growth and Value grow.

Image
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Triple digit golfer
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Triple digit golfer »

Nathan Drake wrote: Thu Dec 02, 2021 9:04 pm
garlandwhizzer wrote: Thu Dec 02, 2021 8:41 pm
Northern Flicker wrote:

Factors are not market segments. When you own the market, you have full exposure to the market factor and zero exposure to other factors.
I believe this is a matter of semantics. The above statement is true if we accept the factor definition as defined by factor models. There is a different way of looking at it if you substitute the world style for the word factor which is what Taylor was saying. Value investing is in this view a style of investing looking for cheap mis-priced assets. Momentum investing is a an investing style that follows current winning stocks and avoids current losers until these trends reverse. In this view TSM (beta) is a multi-style fund that accepts the judgement of market participants as to the relative weighting of each vestment style. TSM holds a mixture of investing styles (value, size, momentum, low volatility, etc.,) and weights the relative portion of each style according to the aggregate wisdom, or lack of it, by market participants. 90%+ of those participants are professionals who are fully aware of factor theory and weight their relative styles according to what they perceive to produce the best risk-adjusted returns. In addition the market participants and are fully aware of something that is 100% neglected by factor theory, expected future profit growth of every given stock and the reliability of that growth.

In point of fact, one factor beta has massively outperformed all multi-factor offerings since inception and done so with lower volatility and lower maximum drawdowns. There has been abject failure of multi-factor funds whose portfolios are created by factor experts since inception. One factor beta, TSM, is a lot more than "simply one more factor" like the factor model suggests. The market has done a better job so far than the factor experts with their multiple factors. If you get to write all the rules and define all the terms like factor models do, it's not that hard to make it look plausible and compelling. Why go with one factor (beta) when you can have 5? It's only when the investing rubber hits the road, execution of strategy, that the problem pop up. Those factor experts who set up the initial multi-factor funds quite clearly did not have a clue where future returns, or future volatility, or future risk were going to come from. One factor beta, a multi-style fund, had a lot more than a clue. It provided all 3 much better and much cheaper.

Two things that many of us have learned NOT to do for too long when investing. First, don't fight the FED. Second, don't fight the tape. Theory is cold bed companion relative to money.

Garland Whizzer
Never let facts get in the way of a good narrative.

50:50 US/exUS TSM vs 50:50 US/exUS SCV

Significantly higher annualized returns, sortino ratio, and sharpe ratio for the factor-only global portfolio.

https://www.portfoliovisualizer.com/bac ... tion5_2=25

Or, 100% US TSM vs 100% US SCV:

https://www.portfoliovisualizer.com/bac ... ion3_2=100

Factor underperformance is part of any natural cycle of investment asset classes - INCLUDING market factor. Remember, the Market was dead in 1979 and 2009 allegedly. Anti-factor proponents believe that this is somehow "new" and it's now proof that the factor is dead. Nope. It's just dormant while EXPECTED returns increase as spreads between Growth and Value grow.

Image
The first link, which is kind of a strange comparison (why not emerging markets SCV if you're doing a comparison of total markets to SCV?) is basically the same for the last 15 years. The first few years had outperformance. That's the problem with these factors, in my opinion. There are only brief spurts of outperformance, historically, and I feel like if you miss them, you're probably not going to benefit much, or maybe not at all.

The second link shows a 0.75% annual premium over almost 30 years. Higher risk, higher return. No big surprise there, kind of like stocks outperforming bonds.

I just can't see why anybody would completely exclude growth stocks from a portfolio. Similar to excluding international, which is a huge part of the overall world stock market, so too are growth stocks. What rationale is there for completely excluding them other than past performance? Isn't this the same fallacy as excluding international because of past U.S. outperformance? There are periods of major outperformance with growth stocks, as the last decade has shown.
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Nathan Drake »

Triple digit golfer wrote: Thu Dec 02, 2021 9:18 pm
Nathan Drake wrote: Thu Dec 02, 2021 9:04 pm
garlandwhizzer wrote: Thu Dec 02, 2021 8:41 pm
Northern Flicker wrote:

Factors are not market segments. When you own the market, you have full exposure to the market factor and zero exposure to other factors.
I believe this is a matter of semantics. The above statement is true if we accept the factor definition as defined by factor models. There is a different way of looking at it if you substitute the world style for the word factor which is what Taylor was saying. Value investing is in this view a style of investing looking for cheap mis-priced assets. Momentum investing is a an investing style that follows current winning stocks and avoids current losers until these trends reverse. In this view TSM (beta) is a multi-style fund that accepts the judgement of market participants as to the relative weighting of each vestment style. TSM holds a mixture of investing styles (value, size, momentum, low volatility, etc.,) and weights the relative portion of each style according to the aggregate wisdom, or lack of it, by market participants. 90%+ of those participants are professionals who are fully aware of factor theory and weight their relative styles according to what they perceive to produce the best risk-adjusted returns. In addition the market participants and are fully aware of something that is 100% neglected by factor theory, expected future profit growth of every given stock and the reliability of that growth.

In point of fact, one factor beta has massively outperformed all multi-factor offerings since inception and done so with lower volatility and lower maximum drawdowns. There has been abject failure of multi-factor funds whose portfolios are created by factor experts since inception. One factor beta, TSM, is a lot more than "simply one more factor" like the factor model suggests. The market has done a better job so far than the factor experts with their multiple factors. If you get to write all the rules and define all the terms like factor models do, it's not that hard to make it look plausible and compelling. Why go with one factor (beta) when you can have 5? It's only when the investing rubber hits the road, execution of strategy, that the problem pop up. Those factor experts who set up the initial multi-factor funds quite clearly did not have a clue where future returns, or future volatility, or future risk were going to come from. One factor beta, a multi-style fund, had a lot more than a clue. It provided all 3 much better and much cheaper.

Two things that many of us have learned NOT to do for too long when investing. First, don't fight the FED. Second, don't fight the tape. Theory is cold bed companion relative to money.

Garland Whizzer
Never let facts get in the way of a good narrative.

50:50 US/exUS TSM vs 50:50 US/exUS SCV

Significantly higher annualized returns, sortino ratio, and sharpe ratio for the factor-only global portfolio.

https://www.portfoliovisualizer.com/bac ... tion5_2=25

Or, 100% US TSM vs 100% US SCV:

https://www.portfoliovisualizer.com/bac ... ion3_2=100

Factor underperformance is part of any natural cycle of investment asset classes - INCLUDING market factor. Remember, the Market was dead in 1979 and 2009 allegedly. Anti-factor proponents believe that this is somehow "new" and it's now proof that the factor is dead. Nope. It's just dormant while EXPECTED returns increase as spreads between Growth and Value grow.

Image
The first link, which is kind of a strange comparison (why not emerging markets SCV if you're doing a comparison of total markets to SCV?) is basically the same for the last 15 years. The first few years had outperformance. That's the problem with these factors, in my opinion. There are only brief spurts of outperformance, historically, and I feel like if you miss them, you're probably not going to benefit much, or maybe not at all.

The second link shows a 0.75% annual premium over almost 30 years. Higher risk, higher return. No big surprise there, kind of like stocks outperforming bonds.

I just can't see why anybody would completely exclude growth stocks from a portfolio. Similar to excluding international, which is a huge part of the overall world stock market, so too are growth stocks. What rationale is there for completely excluding them other than past performance? Isn't this the same fallacy as excluding international because of past U.S. outperformance? There are periods of major outperformance with growth stocks, as the last decade has shown.
EM SCV funds are hard to come by due to trading costs, have to compromise on Value alone - which is really the only "factor" that tends to matter. Smaller companies just generally allow you to get deeper value loadings.

I see 1 decade of overperformance, and 1 decade of generally flat performance. Given the tell-tale chart, that seems reasonable. Same thing happens with the Market vs. Bonds.

You are correct that the premiums can manifest in a short period of time (few years to a decade), but staying flat with the market or evenly slightly below still allows you to generally be far ahead over time. The market also has similar spurts - most gains occur on a limited number of trading days. SO YES - if you are a factor investor it needs to be part of your entire asset allocation for the long-term, even into retirement, where the main risk lever to adjust is Bonds to reduce the increase of Factor fund volatility.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
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Forester
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Re: Why doesn’t everybody factor invest? (If it has better risk-adjusted returns, then why not?)

Post by Forester »

Northern Flicker wrote: Thu Dec 02, 2021 5:27 pm
Forester wrote: Thu Dec 02, 2021 6:31 am No one wants to tilt to boring low vol stocks, despite the avoidance of deep drawdowns as a popular objective. Investors *kind of* do this unconciously by holding tight to the S&P 500 vs ex-US. The problem with advocating low vol investing is it sits outside the Fama French research world, a relative poverty of white papers & literature, vs for example small cap and value.
Min vol has lowered volatility, but drawdowns have only been improved a little bit in the US market:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Non-US equity has been a different story, with a much lower drawdown so far:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

https://www.portfoliovisualizer.com/bac ... ion2_2=100
Q1 2020 was unusual in that the economy being turned off "artifically", supported Big Tech which was already prominent in the S&P 500, so the low vol indexes didn't offer any benefit. Looking across the MSCI & S&P low vol research, defensive stocks have fared much better in every other drawdown.
Amateur Self-Taught Senior Macro Strategist
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