Beensabu wrote: ↑Tue Oct 04, 2022 10:11 am
rkhusky wrote: ↑Tue Oct 04, 2022 8:13 am
Beensabu wrote: ↑Mon Oct 03, 2022 9:32 pm
rkhusky wrote: ↑Mon Oct 03, 2022 9:03 pm
Apathizer wrote: ↑Mon Oct 03, 2022 8:51 pm
Exactly. The likelihood of six different asset classes underperforming is lower than the likelihood of only two underperforming over the same period.
With cap weight stocks and bonds you only hold two asset classes. With a factor slanted portfolio you hold six if you include bonds: market, the other four equity factors, and bonds. The likelihood that all six of these asset classes will underperform is lower than the likelihood of only two underperforming over the same period.
No, you only own two asset classes: stocks and bonds. For example, small value stocks are stocks. If you want a different asset class, you need precious metals, or commodities, or physical real estate, or micro-loans, or a small business, etc.
Sub-asset classes, then. Stuff that's just different from each other that it tends to behave differently at times.
Long-term treasuries and cash are both fixed income. Would you say they have behaved differently, lately?
Same deal.
It's not the same deal. Long-term treasuries and cash are different things, which behave differently. When you pile factor upon factor, you are not adding different things together, you are making your single group of stocks more and more alike. So you end up with one thing - a single group of stocks that all have the same factor characteristics and all behave the same way.
Who's piling factors upon factors? I'm talking about diversification within an asset class by having a non-negligible holding in sub-asset classes that behave differently at times. Whether or not you wish to do it by factor tilting, it is possible to do within your equity allocation. I don't factor tilt, but I spread the risk around to different areas than just large cap growth. Because if the opposite of large growth can languish for a long period of time (after having clearly done quite well for a long period of time), so can large growth.
I don't want just one kind of thing. I don't want to pin everything on a large growth momentum strategy. That doesn't seem wise to me. If I survive all the things that could get me out of here along the way, I'm looking at 50+ more years based on family longevity. That's a long time, during which lots of stuff could happen.
Also, those people who do factor tilt will hit two factors with one fund, or try to avoid additional loading on a particular factor on purpose in order to avoid exactly what you're talking about. That's why you'll see the "X load on Y" thing from them. It's personalized - balanced to taste.
You don't have to want to do it yourself. But it's silly to avoid understanding why other people do. And if you're going to argue against it, then go read the link I posted upthread a bit. Because that argument has weight to it, but your current one doesn't.
If you are using more than one factor, such as a small value fund, you are applying a small filter on top of a value filter. If you apply a momentum filter, that further reduces the stocks in your fund.
I have no problem with people investing in factors, but I object to misleading descriptions of it. Factor investing is not investing in different asset classes or different asset sub-classes or having different sources of return. A factor fund has one source of return, which is the basket of stocks in the fund. The stocks in that basket all have the same factor characteristics and should therefore behave the same.
If you want to add your factor fund(s) to a TSM fund, which dilutes the factor characteristics of your portfolio, that is fine. Diluting the factor characteristics lowers the risk.
If you want to overweight certain components of your portfolio, by, for example, equal weighting LG, SG, LV, and SV funds, that would be fine too. Those four are true examples of sub-classes of stocks, which, when added together, increase your portfolio diversification.