Can value stocks mitigate sequence of returns risk?

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secondopinion
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Re: Can value stocks mitigate sequence of returns risk?

Post by secondopinion »

Logan Roy wrote: Wed Mar 29, 2023 4:31 pm The key with backtesting (if there is one) is to identify principles from simply expecting history to repeat. A principle may be an approach to diversification, or offsetting assets with low correlations in most situations, etc. But a *bet* on something like Value or Quality, because it's done well in the past, can just as easily be exactly the wrong thing to do, as it may just lead you to old anomalies that have been arbitraged away, or things that were never really anomalies, and are only on our radar because they've done better through sheer chance.. That's the dilemma active investors have always had. It's never been easy to solve that one. I think it's generally a mistake for passive investors to go down that rabbit hole. Better to focus on principles, like diversification, correlations, the relationship between asset classes and macroeconomics..
This is one of the reasons why I try to assess in what circumstances a "bet" against Value or Quality may be appropriate. If I can understand the fundamental strengths and weaknesses with tilting to each side, then I can determine if a tilt is good for myself and how much of one. If I cannot understand the tilt from both sides, then I do not tilt.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Logan Roy »

secondopinion wrote: Wed Mar 29, 2023 4:50 pm
Logan Roy wrote: Wed Mar 29, 2023 4:31 pm The key with backtesting (if there is one) is to identify principles from simply expecting history to repeat. A principle may be an approach to diversification, or offsetting assets with low correlations in most situations, etc. But a *bet* on something like Value or Quality, because it's done well in the past, can just as easily be exactly the wrong thing to do, as it may just lead you to old anomalies that have been arbitraged away, or things that were never really anomalies, and are only on our radar because they've done better through sheer chance.. That's the dilemma active investors have always had. It's never been easy to solve that one. I think it's generally a mistake for passive investors to go down that rabbit hole. Better to focus on principles, like diversification, correlations, the relationship between asset classes and macroeconomics..
This is one of the reasons why I try to assess in what circumstances a "bet" against Value or Quality may be appropriate. If I can understand the fundamental strengths and weaknesses with tilting to each side, then I can determine if a tilt is good for myself and how much of one. If I cannot understand the tilt from both sides, then I do not tilt.
Yes – I think the way traders use factors now, and the way they're talked about on Bloomberg, etc. they've become useful alternative ways to express opinions on, or hedge risks from, macroeconomic scenarios.. So obviously Quality is what you want when there's risk to margins/fundamentals (e.g. recession), Value is often an economic growth/recovery play, or a way to avoid overheated markets, Growth is a way to go ultra-long duration, when there's likely to be easing/low rates .. Tech's progress this year is being talked about directly as a bet on easing in the not-too-distant.

I think the idea of persistent premiums is extremely dubious, just because any grouping of stocks will likely have half beating the market, and half underperforming, over any period. And if we have a radically different set of macroeconomic circumstances this century, we should expect different sectors and styles to dominate. It's crazy to me we've got into the idea that some of these styles inevitably outperform.
secondopinion
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Re: Can value stocks mitigate sequence of returns risk?

Post by secondopinion »

Logan Roy wrote: Thu Mar 30, 2023 9:44 am
secondopinion wrote: Wed Mar 29, 2023 4:50 pm
Logan Roy wrote: Wed Mar 29, 2023 4:31 pm The key with backtesting (if there is one) is to identify principles from simply expecting history to repeat. A principle may be an approach to diversification, or offsetting assets with low correlations in most situations, etc. But a *bet* on something like Value or Quality, because it's done well in the past, can just as easily be exactly the wrong thing to do, as it may just lead you to old anomalies that have been arbitraged away, or things that were never really anomalies, and are only on our radar because they've done better through sheer chance.. That's the dilemma active investors have always had. It's never been easy to solve that one. I think it's generally a mistake for passive investors to go down that rabbit hole. Better to focus on principles, like diversification, correlations, the relationship between asset classes and macroeconomics..
This is one of the reasons why I try to assess in what circumstances a "bet" against Value or Quality may be appropriate. If I can understand the fundamental strengths and weaknesses with tilting to each side, then I can determine if a tilt is good for myself and how much of one. If I cannot understand the tilt from both sides, then I do not tilt.
Yes – I think the way traders use factors now, and the way they're talked about on Bloomberg, etc. they've become useful alternative ways to express opinions on, or hedge risks from, macroeconomic scenarios.. So obviously Quality is what you want when there's risk to margins/fundamentals (e.g. recession), Value is often an economic growth/recovery play, or a way to avoid overheated markets, Growth is a way to go ultra-long duration, when there's likely to be easing/low rates .. Tech's progress this year is being talked about directly as a bet on easing in the not-too-distant.

I think the idea of persistent premiums is extremely dubious, just because any grouping of stocks will likely have half beating the market, and half underperforming, over any period. And if we have a radically different set of macroeconomic circumstances this century, we should expect different sectors and styles to dominate. It's crazy to me we've got into the idea that some of these styles inevitably outperform.
That is why I have focused my discussion on tilting using factors for other reasons than a premium. Then either one has to speculate that the tilt will be more profitable for the investment timeframe only, or they invest because the tilt is more favorable from a personal risk assessment relevant to themselves only.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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HeavyChevy
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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

Logan Roy wrote: Thu Mar 30, 2023 9:44 am
secondopinion wrote: Wed Mar 29, 2023 4:50 pm
Logan Roy wrote: Wed Mar 29, 2023 4:31 pm The key with backtesting (if there is one) is to identify principles from simply expecting history to repeat. A principle may be an approach to diversification, or offsetting assets with low correlations in most situations, etc. But a *bet* on something like Value or Quality, because it's done well in the past, can just as easily be exactly the wrong thing to do, as it may just lead you to old anomalies that have been arbitraged away, or things that were never really anomalies, and are only on our radar because they've done better through sheer chance.. That's the dilemma active investors have always had. It's never been easy to solve that one. I think it's generally a mistake for passive investors to go down that rabbit hole. Better to focus on principles, like diversification, correlations, the relationship between asset classes and macroeconomics..
This is one of the reasons why I try to assess in what circumstances a "bet" against Value or Quality may be appropriate. If I can understand the fundamental strengths and weaknesses with tilting to each side, then I can determine if a tilt is good for myself and how much of one. If I cannot understand the tilt from both sides, then I do not tilt.
Yes – I think the way traders use factors now, and the way they're talked about on Bloomberg, etc. they've become useful alternative ways to express opinions on, or hedge risks from, macroeconomic scenarios.. So obviously Quality is what you want when there's risk to margins/fundamentals (e.g. recession), Value is often an economic growth/recovery play, or a way to avoid overheated markets, Growth is a way to go ultra-long duration, when there's likely to be easing/low rates .. Tech's progress this year is being talked about directly as a bet on easing in the not-too-distant.

I think the idea of persistent premiums is extremely dubious, just because any grouping of stocks will likely have half beating the market, and half underperforming, over any period. And if we have a radically different set of macroeconomic circumstances this century, we should expect different sectors and styles to dominate. It's crazy to me we've got into the idea that some of these styles inevitably outperform.
Just to be clear, my own interests in value were never to outperform other sectors of the market generally, but rather to hold up better than average for the specific case of a declining or level market where the relatively large 5.2% withdrawal rate could cause more rapid declines in a portfolio. If the market increases at a generally historic rate, I would generally expect value to fare no better than, and likely significantly worse than, other market sectors. But that is fine for a retiree with a decreasing investment timeframe. Not trying to beat the market, trying to stave off early portfolio depletion.
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Logan Roy
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Re: Can value stocks mitigate sequence of returns risk?

Post by Logan Roy »

HeavyChevy wrote: Thu Mar 30, 2023 12:14 pm
Logan Roy wrote: Thu Mar 30, 2023 9:44 am
secondopinion wrote: Wed Mar 29, 2023 4:50 pm
Logan Roy wrote: Wed Mar 29, 2023 4:31 pm The key with backtesting (if there is one) is to identify principles from simply expecting history to repeat. A principle may be an approach to diversification, or offsetting assets with low correlations in most situations, etc. But a *bet* on something like Value or Quality, because it's done well in the past, can just as easily be exactly the wrong thing to do, as it may just lead you to old anomalies that have been arbitraged away, or things that were never really anomalies, and are only on our radar because they've done better through sheer chance.. That's the dilemma active investors have always had. It's never been easy to solve that one. I think it's generally a mistake for passive investors to go down that rabbit hole. Better to focus on principles, like diversification, correlations, the relationship between asset classes and macroeconomics..
This is one of the reasons why I try to assess in what circumstances a "bet" against Value or Quality may be appropriate. If I can understand the fundamental strengths and weaknesses with tilting to each side, then I can determine if a tilt is good for myself and how much of one. If I cannot understand the tilt from both sides, then I do not tilt.
Yes – I think the way traders use factors now, and the way they're talked about on Bloomberg, etc. they've become useful alternative ways to express opinions on, or hedge risks from, macroeconomic scenarios.. So obviously Quality is what you want when there's risk to margins/fundamentals (e.g. recession), Value is often an economic growth/recovery play, or a way to avoid overheated markets, Growth is a way to go ultra-long duration, when there's likely to be easing/low rates .. Tech's progress this year is being talked about directly as a bet on easing in the not-too-distant.

I think the idea of persistent premiums is extremely dubious, just because any grouping of stocks will likely have half beating the market, and half underperforming, over any period. And if we have a radically different set of macroeconomic circumstances this century, we should expect different sectors and styles to dominate. It's crazy to me we've got into the idea that some of these styles inevitably outperform.
Just to be clear, my own interests in value were never to outperform other sectors of the market generally, but rather to hold up better than average for the specific case of a declining or level market where the relatively large 5.2% withdrawal rate could cause more rapid declines in a portfolio. If the market increases at a generally historic rate, I would generally expect value to fare no better than, and likely significantly worse than, other market sectors. But that is fine for a retiree with a decreasing investment timeframe. Not trying to beat the market, trying to stave off early portfolio depletion.
I think the problem with running the numbers is that, because Value has a history of outperformance, it's giving you the impression there'll be more to spend. It's why I try never to use Small-Cap Value in backtests, because the historic premium gives any portfolio or drawdown plan a hefty (but not necessarily reliable) boost.

Rather, I think as secondopinion says, the usefulness of things like Value may be as tilts to diversify a portfolio. So Value tends to overweight cyclicals, like banks, and there are interesting relationships with banks doing better on the carry trade, with higher rates, which usually means stronger dollar; whereas as asset like gold typically does better on a weak dollar.. So Value stocks and gold have a slightly useful relationship at some level (to give a random example) – and it's those relationships I think you can build diversification around in a portfolio, and reduce the chances of a bad outcome (which is what I think portfolio planning is largely about).
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dogagility
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Re: Can value stocks mitigate sequence of returns risk?

Post by dogagility »

abc132 wrote: Fri Mar 24, 2023 1:26 pm Your definition is totally unactionable - we need to look at SORR in the context of a reasonable retirement plan.
A good way to solve SORR is to use a reasonable retirement withdrawal plan like variable portfolio withdrawal.
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Charles Joseph
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Re: Can value stocks mitigate sequence of returns risk?

Post by Charles Joseph »

All a waste of time. Just buy and hold the total market at an asset allocation which lets you sleep at night.

I have 12 years of fixed income, and almost two years in cash. The rest in stocks. Works out to 50/50. I'm done slicing and dicing and analyzing.

I languished in the Complexity stage of Rick Ferri's Index Investing Stages for many years. Now I'm basking in the Simplicity stage.

Also, see my sig.
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abc132
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Re: Can value stocks mitigate sequence of returns risk?

Post by abc132 »

dogagility wrote: Thu Mar 30, 2023 7:04 pm
abc132 wrote: Fri Mar 24, 2023 1:26 pm Your definition is totally unactionable - we need to look at SORR in the context of a reasonable retirement plan.
A good way to solve SORR is to use a reasonable retirement withdrawal plan like variable portfolio withdrawal.
Personally I think this is even more unrealistic for planning purposes than using a constant inflation-adjusted withdrawal rate. Spending should be expected to be lumpy but it should not be expected to match portfolio ups and downs. You may need to spend more in the years when the market is down and pretending you have the flexibility to simply use a percentage withdrawal provides a false sense of control. I think we adjust naturally based on our expected outcome and seeing returns higher or lower than expected without needing a variable withdrawal rule.

Backtesting shows that even CAPE-based predictions can't tell you what to spend annually within a factor of 2 using a stock portfolio. The only way to reliably control spending is using something like a TIPS ladder but that comes at a high expected cost. Lifestyle may only be 1/2 as much to guarantee future spending with a TIPS ladder and historically we already achieve this in a stock portfolio by controlling our spend rate naturally in response to outcomes.

In short, we can't control spend rate within a factor of 2 without lowering spend rate by a factor of 2. Choose your poison.
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dogagility
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Re: Can value stocks mitigate sequence of returns risk?

Post by dogagility »

abc132 wrote: Fri Mar 31, 2023 11:50 am
dogagility wrote: Thu Mar 30, 2023 7:04 pm
abc132 wrote: Fri Mar 24, 2023 1:26 pm Your definition is totally unactionable - we need to look at SORR in the context of a reasonable retirement plan.
A good way to solve SORR is to use a reasonable retirement withdrawal plan like variable portfolio withdrawal.
Personally I think this is even more unrealistic for planning purposes than using a constant inflation-adjusted withdrawal rate. Spending should be expected to be lumpy but it should not be expected to match portfolio ups and downs.
If a retiree's withdrawal amount is static (i.e. no discretionary spending including) and the portfolio is just able to support that withdrawal amount, then the retiree's portfolio might be too small to support their retirement should a significant portfolio decline occur.
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abc132
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Re: Can value stocks mitigate sequence of returns risk?

Post by abc132 »

dogagility wrote: Fri Mar 31, 2023 4:00 pm
abc132 wrote: Fri Mar 31, 2023 11:50 am
dogagility wrote: Thu Mar 30, 2023 7:04 pm
abc132 wrote: Fri Mar 24, 2023 1:26 pm Your definition is totally unactionable - we need to look at SORR in the context of a reasonable retirement plan.
A good way to solve SORR is to use a reasonable retirement withdrawal plan like variable portfolio withdrawal.
Personally I think this is even more unrealistic for planning purposes than using a constant inflation-adjusted withdrawal rate. Spending should be expected to be lumpy but it should not be expected to match portfolio ups and downs.
If a retiree's withdrawal amount is static (i.e. no discretionary spending including) and the portfolio is just able to support that withdrawal amount, then the retiree's portfolio might be too small to support their retirement should a significant portfolio decline occur.
Of course. But we can also say to spend 0$ and have an even better method. It is simply not a good idea to form a plan around a 0% chance of failure based on spending. You should have had zero dollars invested during accumulation if you had the goal of no chance of running out of investment money.

We have the 1/CAPE prediction that tells us we can often spend a higher percentage after a decline and a lower percentage when valuations become high. You are doing the opposite of this when you employ a variable withdrawal plan. Static real spending is not perfect but it will be closer than cutting your spending in half after a 50% decline. The reasonable person would cut spending by 20% or so even with a static plan. Planning a budget with some fat that can be trimmed is much more reasonable than saying you can always cut spending to match the market returns.

It is the ability to cut spending that increases success rates, not the wildly fluctuating expenses of a variable plan. A static plan with some fat to trim will optimize far more goals for most investors.
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dogagility
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Re: Can value stocks mitigate sequence of returns risk?

Post by dogagility »

abc132 wrote: Tue Apr 04, 2023 11:55 am
dogagility wrote: Fri Mar 31, 2023 4:00 pm
abc132 wrote: Fri Mar 31, 2023 11:50 am
dogagility wrote: Thu Mar 30, 2023 7:04 pm
abc132 wrote: Fri Mar 24, 2023 1:26 pm Your definition is totally unactionable - we need to look at SORR in the context of a reasonable retirement plan.
A good way to solve SORR is to use a reasonable retirement withdrawal plan like variable portfolio withdrawal.
Personally I think this is even more unrealistic for planning purposes than using a constant inflation-adjusted withdrawal rate. Spending should be expected to be lumpy but it should not be expected to match portfolio ups and downs.
If a retiree's withdrawal amount is static (i.e. no discretionary spending including) and the portfolio is just able to support that withdrawal amount, then the retiree's portfolio might be too small to support their retirement should a significant portfolio decline occur.
Of course. But we can also say to spend 0$ and have an even better method. It is simply not a good idea to form a plan around a 0% chance of failure based on spending. You should have had zero dollars invested during accumulation if you had the goal of no chance of running out of investment money.

We have the 1/CAPE prediction that tells us we can often spend a higher percentage after a decline and a lower percentage when valuations become high. You are doing the opposite of this when you employ a variable withdrawal plan. Static real spending is not perfect but it will be closer than cutting your spending in half after a 50% decline. The reasonable person would cut spending by 20% or so even with a static plan. Planning a budget with some fat that can be trimmed is much more reasonable than saying you can always cut spending to match the market returns.

It is the ability to cut spending that increases success rates, not the wildly fluctuating expenses of a variable plan. A static plan with some fat to trim will optimize far more goals for most investors.
I assume you either haven't read longinvest's treatises on VPW in this forum or don't agree with these because what you wrote above about variable withdrawal methods is hyperbole.
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abc132
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Re: Can value stocks mitigate sequence of returns risk?

Post by abc132 »

dogagility wrote: Tue Apr 04, 2023 1:04 pm
abc132 wrote: Tue Apr 04, 2023 11:55 am
dogagility wrote: Fri Mar 31, 2023 4:00 pm
abc132 wrote: Fri Mar 31, 2023 11:50 am
dogagility wrote: Thu Mar 30, 2023 7:04 pm
A good way to solve SORR is to use a reasonable retirement withdrawal plan like variable portfolio withdrawal.
Personally I think this is even more unrealistic for planning purposes than using a constant inflation-adjusted withdrawal rate. Spending should be expected to be lumpy but it should not be expected to match portfolio ups and downs.
If a retiree's withdrawal amount is static (i.e. no discretionary spending including) and the portfolio is just able to support that withdrawal amount, then the retiree's portfolio might be too small to support their retirement should a significant portfolio decline occur.
Of course. But we can also say to spend 0$ and have an even better method. It is simply not a good idea to form a plan around a 0% chance of failure based on spending. You should have had zero dollars invested during accumulation if you had the goal of no chance of running out of investment money.

We have the 1/CAPE prediction that tells us we can often spend a higher percentage after a decline and a lower percentage when valuations become high. You are doing the opposite of this when you employ a variable withdrawal plan. Static real spending is not perfect but it will be closer than cutting your spending in half after a 50% decline. The reasonable person would cut spending by 20% or so even with a static plan. Planning a budget with some fat that can be trimmed is much more reasonable than saying you can always cut spending to match the market returns.

It is the ability to cut spending that increases success rates, not the wildly fluctuating expenses of a variable plan. A static plan with some fat to trim will optimize far more goals for most investors.
I assume you either haven't read longinvest's treatises on VPW in this forum or don't agree with these because what you wrote above about variable withdrawal methods is hyperbole.
I would assume you would have a specific actionable comment if you have read longinvest's treatises so I consider your response hyperbole.
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dogagility
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Re: Can value stocks mitigate sequence of returns risk?

Post by dogagility »

abc132 wrote: Tue Apr 04, 2023 1:11 pm
dogagility wrote: Tue Apr 04, 2023 1:04 pm
abc132 wrote: Tue Apr 04, 2023 11:55 am
dogagility wrote: Fri Mar 31, 2023 4:00 pm
abc132 wrote: Fri Mar 31, 2023 11:50 am
Personally I think this is even more unrealistic for planning purposes than using a constant inflation-adjusted withdrawal rate. Spending should be expected to be lumpy but it should not be expected to match portfolio ups and downs.
If a retiree's withdrawal amount is static (i.e. no discretionary spending including) and the portfolio is just able to support that withdrawal amount, then the retiree's portfolio might be too small to support their retirement should a significant portfolio decline occur.
Of course. But we can also say to spend 0$ and have an even better method. It is simply not a good idea to form a plan around a 0% chance of failure based on spending. You should have had zero dollars invested during accumulation if you had the goal of no chance of running out of investment money.

We have the 1/CAPE prediction that tells us we can often spend a higher percentage after a decline and a lower percentage when valuations become high. You are doing the opposite of this when you employ a variable withdrawal plan. Static real spending is not perfect but it will be closer than cutting your spending in half after a 50% decline. The reasonable person would cut spending by 20% or so even with a static plan. Planning a budget with some fat that can be trimmed is much more reasonable than saying you can always cut spending to match the market returns.

It is the ability to cut spending that increases success rates, not the wildly fluctuating expenses of a variable plan. A static plan with some fat to trim will optimize far more goals for most investors.
I assume you either haven't read longinvest's treatises on VPW in this forum or don't agree with these because what you wrote above about variable withdrawal methods is hyperbole.
I would assume you would have a specific actionable comment if you have read longinvest's treatises so I consider your response hyperbole.
You've been on the forum for many years; you can do the work to find and read threads on variable portfolio withdrawal methods. These methods do not include what I consider hyperbolic comments like "spending 0$", implying the goal is to have a "0% chance of failure", or that variable withdrawal methods have "wildly fluctuating" withdrawals.

One thing we can agree on is that "the ability to cut spending increases success rates". Variable portfolio withdrawal methods provide a means to calculate how much to cut spending.
Make sure you check out my list of certifications. The list is short, and there aren't any. - Eric 0. from SMA
Nathan Drake
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

Logan Roy wrote: Thu Mar 30, 2023 9:44 am Yes – I think the way traders use factors now, and the way they're talked about on Bloomberg, etc. they've become useful alternative ways to express opinions on, or hedge risks from, macroeconomic scenarios.. So obviously Quality is what you want when there's risk to margins/fundamentals (e.g. recession), Value is often an economic growth/recovery play, or a way to avoid overheated markets, Growth is a way to go ultra-long duration, when there's likely to be easing/low rates .. Tech's progress this year is being talked about directly as a bet on easing in the not-too-distant.

I think the idea of persistent premiums is extremely dubious, just because any grouping of stocks will likely have half beating the market, and half underperforming, over any period. And if we have a radically different set of macroeconomic circumstances this century, we should expect different sectors and styles to dominate. It's crazy to me we've got into the idea that some of these styles inevitably outperform.
This is far too simplistic and Research Affiliates and AQR had dispelled this notion that certain factors are only persistent during certain "regimes".
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Re: Can value stocks mitigate sequence of returns risk?

Post by Logan Roy »

Nathan Drake wrote: Tue Apr 04, 2023 10:30 pm
Logan Roy wrote: Thu Mar 30, 2023 9:44 am Yes – I think the way traders use factors now, and the way they're talked about on Bloomberg, etc. they've become useful alternative ways to express opinions on, or hedge risks from, macroeconomic scenarios.. So obviously Quality is what you want when there's risk to margins/fundamentals (e.g. recession), Value is often an economic growth/recovery play, or a way to avoid overheated markets, Growth is a way to go ultra-long duration, when there's likely to be easing/low rates .. Tech's progress this year is being talked about directly as a bet on easing in the not-too-distant.

I think the idea of persistent premiums is extremely dubious, just because any grouping of stocks will likely have half beating the market, and half underperforming, over any period. And if we have a radically different set of macroeconomic circumstances this century, we should expect different sectors and styles to dominate. It's crazy to me we've got into the idea that some of these styles inevitably outperform.
This is far too simplistic and Research Affiliates and AQR had dispelled this notion that certain factors are only persistent during certain "regimes".
I think the problem with ideas that aren't simplistic – when we've only really had one example of each basic economic regime over the past 50 years – is that you're possibly just looking at noise. I know the thrust with factors is to make them mathematical entities, but I work in a similar field, and I don't think the work on factors is anywhere near robust enough to make those claims.. I think it's much more that people in this area of finance are woefully uneducated/uninterested in economics and analytics. That's just me. And it's traders. Traders use them to express macro views. I don't think anyone outside the cult of financial academia is using factors for long-term style premia. The evidence just isn't there. (imo)

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Re: Can value stocks mitigate sequence of returns risk?

Post by watchnerd »

Logan Roy wrote: Wed Apr 05, 2023 9:20 am
Nathan Drake wrote: Tue Apr 04, 2023 10:30 pm
Logan Roy wrote: Thu Mar 30, 2023 9:44 am Yes – I think the way traders use factors now, and the way they're talked about on Bloomberg, etc. they've become useful alternative ways to express opinions on, or hedge risks from, macroeconomic scenarios.. So obviously Quality is what you want when there's risk to margins/fundamentals (e.g. recession), Value is often an economic growth/recovery play, or a way to avoid overheated markets, Growth is a way to go ultra-long duration, when there's likely to be easing/low rates .. Tech's progress this year is being talked about directly as a bet on easing in the not-too-distant.

I think the idea of persistent premiums is extremely dubious, just because any grouping of stocks will likely have half beating the market, and half underperforming, over any period. And if we have a radically different set of macroeconomic circumstances this century, we should expect different sectors and styles to dominate. It's crazy to me we've got into the idea that some of these styles inevitably outperform.
This is far too simplistic and Research Affiliates and AQR had dispelled this notion that certain factors are only persistent during certain "regimes".
I think the problem with ideas that aren't simplistic – when we've only really had one example of each basic economic regime over the past 50 years – is that you're possibly just looking at noise. I know the thrust with factors is to make them mathematical entities, but I work in a similar field, and I don't think the work on factors is anywhere near robust enough to make those claims.. I think it's much more that people in this area of finance are woefully uneducated/uninterested in economics and analytics. That's just me. And it's traders. Traders use them to express macro views. I don't think anyone outside the cult of financial academia is using factors for long-term style premia. The evidence just isn't there. (imo)

Image
Factor tilting just seem like another rationale for active investing.

Which, last I checked, still wasn't out performing passive.
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Nathan Drake
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

Logan Roy wrote: Wed Apr 05, 2023 9:20 am
Nathan Drake wrote: Tue Apr 04, 2023 10:30 pm
Logan Roy wrote: Thu Mar 30, 2023 9:44 am Yes – I think the way traders use factors now, and the way they're talked about on Bloomberg, etc. they've become useful alternative ways to express opinions on, or hedge risks from, macroeconomic scenarios.. So obviously Quality is what you want when there's risk to margins/fundamentals (e.g. recession), Value is often an economic growth/recovery play, or a way to avoid overheated markets, Growth is a way to go ultra-long duration, when there's likely to be easing/low rates .. Tech's progress this year is being talked about directly as a bet on easing in the not-too-distant.

I think the idea of persistent premiums is extremely dubious, just because any grouping of stocks will likely have half beating the market, and half underperforming, over any period. And if we have a radically different set of macroeconomic circumstances this century, we should expect different sectors and styles to dominate. It's crazy to me we've got into the idea that some of these styles inevitably outperform.
This is far too simplistic and Research Affiliates and AQR had dispelled this notion that certain factors are only persistent during certain "regimes".
I think the problem with ideas that aren't simplistic – when we've only really had one example of each basic economic regime over the past 50 years – is that you're possibly just looking at noise. I know the thrust with factors is to make them mathematical entities, but I work in a similar field, and I don't think the work on factors is anywhere near robust enough to make those claims.. I think it's much more that people in this area of finance are woefully uneducated/uninterested in economics and analytics. That's just me. And it's traders. Traders use them to express macro views. I don't think anyone outside the cult of financial academia is using factors for long-term style premia. The evidence just isn't there. (imo)

Image
This post is pretty hilarious. Imagine calling Fama woefully uneducated in economics and analytics.
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Re: Can value stocks mitigate sequence of returns risk?

Post by watchnerd »

Nathan Drake wrote: Wed Apr 05, 2023 10:26 am

This post is pretty hilarious. Imagine calling Fama woefully uneducated in economics and analytics.
Fama himself isn't sure that SV is persistent enough to be exploitable within reasonable individual investor timeframes.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

watchnerd wrote: Wed Apr 05, 2023 10:31 am
Nathan Drake wrote: Wed Apr 05, 2023 10:26 am

This post is pretty hilarious. Imagine calling Fama woefully uneducated in economics and analytics.
Fama himself isn't sure that SV is persistent enough to be exploitable within reasonable individual investor timeframes.
He’s probably also not sure the market is persistent enough to be exploitable over bonds within reasonable investor timeframes.

Doesn’t mean that historically it generally hasn’t or that there isn’t an intuitive rationale for the existence of a premium
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Re: Can value stocks mitigate sequence of returns risk?

Post by watchnerd »

Nathan Drake wrote: Wed Apr 05, 2023 10:33 am

He’s probably also not sure the market is persistent enough to be exploitable over bonds within reasonable investor timeframes.

Doesn’t mean that historically it generally hasn’t or that there isn’t an intuitive rationale for the existence of a premium
I have a similar POV on bonds vs stocks.

And have doubts about the breadth of the spread on the US equity risk premium vs TIPS.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

watchnerd wrote: Wed Apr 05, 2023 10:38 am
Nathan Drake wrote: Wed Apr 05, 2023 10:33 am

He’s probably also not sure the market is persistent enough to be exploitable over bonds within reasonable investor timeframes.

Doesn’t mean that historically it generally hasn’t or that there isn’t an intuitive rationale for the existence of a premium
I have a similar POV on bonds vs stocks.

And have doubts about the breadth of the spread on the US equity risk premium vs TIPS.
We’ve seen long periods where premiums vanish. Sometimes the market must adjust to new realities which cause premiums to get wiped out for a long time

That’s not a reason to think they don’t exist, rather it’s more justification to investing in a highly diversified manner across regions and risk factors since the chance that everything is “mispriced” is unlikely
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Re: Can value stocks mitigate sequence of returns risk?

Post by watchnerd »

Nathan Drake wrote: Wed Apr 05, 2023 10:44 am
We’ve seen long periods where premiums vanish. Sometimes the market must adjust to new realities which cause premiums to get wiped out for a long time

That’s not a reason to think they don’t exist, rather it’s more justification to investing in a highly diversified manner across regions and risk factors since the chance that everything is “mispriced” is unlikely
This is why I invest in global market caps and don't try to factor tilt.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

watchnerd wrote: Wed Apr 05, 2023 10:47 am
Nathan Drake wrote: Wed Apr 05, 2023 10:44 am
We’ve seen long periods where premiums vanish. Sometimes the market must adjust to new realities which cause premiums to get wiped out for a long time

That’s not a reason to think they don’t exist, rather it’s more justification to investing in a highly diversified manner across regions and risk factors since the chance that everything is “mispriced” is unlikely
This is why I invest in global market caps and don't try to factor tilt.
I do both since I am capturing more risk premiums that way, but to each their own
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Re: Can value stocks mitigate sequence of returns risk?

Post by Poe22 »

Great thread! Am I wrong in believing that only diversification between asset classes matters, not diversification within asset classes?

Regarding factors: You might just aswell invest in other subsets of the market like sectors to gain pseudo-diversification. Or try an equal-weight S&P 500 fund. Or, hypothetically, equal weight every single stock on this planet.

In the end, it will always be a zero sum game. It's all equity risk after all.

Market cap is the only factor-neutral way of investing. Anything else is just betting ("tilting") on some factor-subset of the market.
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Re: Can value stocks mitigate sequence of returns risk?

Post by watchnerd »

Poe22 wrote: Wed Apr 05, 2023 11:14 am Great thread! Am I wrong in believing that only diversification between asset classes matters, not diversification within asset classes?
You're not wrong.

At the end of the day, all stocks carry the systemic risk of being stocks.

Thus assets that are "not stocks" do more to defease that risk.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

watchnerd wrote: Wed Apr 05, 2023 11:34 am
Poe22 wrote: Wed Apr 05, 2023 11:14 am Great thread! Am I wrong in believing that only diversification between asset classes matters, not diversification within asset classes?
You're not wrong.

At the end of the day, all stocks carry the systemic risk of being stocks.

Thus assets that are "not stocks" do more to defease that risk.
Those risks are different within stocks and can manifest at certain periods

S&P500 went nowhere for 13 years but SCV did very well
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Re: Can value stocks mitigate sequence of returns risk?

Post by Logan Roy »

Nathan Drake wrote: Wed Apr 05, 2023 10:26 am
Logan Roy wrote: Wed Apr 05, 2023 9:20 am
Nathan Drake wrote: Tue Apr 04, 2023 10:30 pm
Logan Roy wrote: Thu Mar 30, 2023 9:44 am Yes – I think the way traders use factors now, and the way they're talked about on Bloomberg, etc. they've become useful alternative ways to express opinions on, or hedge risks from, macroeconomic scenarios.. So obviously Quality is what you want when there's risk to margins/fundamentals (e.g. recession), Value is often an economic growth/recovery play, or a way to avoid overheated markets, Growth is a way to go ultra-long duration, when there's likely to be easing/low rates .. Tech's progress this year is being talked about directly as a bet on easing in the not-too-distant.

I think the idea of persistent premiums is extremely dubious, just because any grouping of stocks will likely have half beating the market, and half underperforming, over any period. And if we have a radically different set of macroeconomic circumstances this century, we should expect different sectors and styles to dominate. It's crazy to me we've got into the idea that some of these styles inevitably outperform.
This is far too simplistic and Research Affiliates and AQR had dispelled this notion that certain factors are only persistent during certain "regimes".
I think the problem with ideas that aren't simplistic – when we've only really had one example of each basic economic regime over the past 50 years – is that you're possibly just looking at noise. I know the thrust with factors is to make them mathematical entities, but I work in a similar field, and I don't think the work on factors is anywhere near robust enough to make those claims.. I think it's much more that people in this area of finance are woefully uneducated/uninterested in economics and analytics. That's just me. And it's traders. Traders use them to express macro views. I don't think anyone outside the cult of financial academia is using factors for long-term style premia. The evidence just isn't there. (imo)

Image
This post is pretty hilarious. Imagine calling Fama woefully uneducated in economics and analytics.
Because you deify him. Asness is very open about how little he knows/cares about macroeconomics. I can't speak for Eugene Fama's education, but his work doesn't really deal with macroeconomics, and in general, the standard of analytics in finance is very crude compared to subjects like physics and math. Which is why groups like RenTech specifically employ people from STEM, rather than finance/economics.. Also, you've got a chart there, from a Bloomberg analyst, showing the historic correlation between style factors and macro regimes. Think maybe there's something in it?
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Re: Can value stocks mitigate sequence of returns risk?

Post by watchnerd »

Nathan Drake wrote: Wed Apr 05, 2023 12:09 pm
watchnerd wrote: Wed Apr 05, 2023 11:34 am
Poe22 wrote: Wed Apr 05, 2023 11:14 am Great thread! Am I wrong in believing that only diversification between asset classes matters, not diversification within asset classes?
You're not wrong.

At the end of the day, all stocks carry the systemic risk of being stocks.

Thus assets that are "not stocks" do more to defease that risk.
Those risks are different within stocks and can manifest at certain periods

S&P500 went nowhere for 13 years but SCV did very well
They're not as different as they are for things that aren't stocks at all.

You can't eliminate stock market risk by holding stocks.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

Logan Roy wrote: Wed Apr 05, 2023 12:16 pm
Nathan Drake wrote: Wed Apr 05, 2023 10:26 am
Logan Roy wrote: Wed Apr 05, 2023 9:20 am
Nathan Drake wrote: Tue Apr 04, 2023 10:30 pm
Logan Roy wrote: Thu Mar 30, 2023 9:44 am Yes – I think the way traders use factors now, and the way they're talked about on Bloomberg, etc. they've become useful alternative ways to express opinions on, or hedge risks from, macroeconomic scenarios.. So obviously Quality is what you want when there's risk to margins/fundamentals (e.g. recession), Value is often an economic growth/recovery play, or a way to avoid overheated markets, Growth is a way to go ultra-long duration, when there's likely to be easing/low rates .. Tech's progress this year is being talked about directly as a bet on easing in the not-too-distant.

I think the idea of persistent premiums is extremely dubious, just because any grouping of stocks will likely have half beating the market, and half underperforming, over any period. And if we have a radically different set of macroeconomic circumstances this century, we should expect different sectors and styles to dominate. It's crazy to me we've got into the idea that some of these styles inevitably outperform.
This is far too simplistic and Research Affiliates and AQR had dispelled this notion that certain factors are only persistent during certain "regimes".
I think the problem with ideas that aren't simplistic – when we've only really had one example of each basic economic regime over the past 50 years – is that you're possibly just looking at noise. I know the thrust with factors is to make them mathematical entities, but I work in a similar field, and I don't think the work on factors is anywhere near robust enough to make those claims.. I think it's much more that people in this area of finance are woefully uneducated/uninterested in economics and analytics. That's just me. And it's traders. Traders use them to express macro views. I don't think anyone outside the cult of financial academia is using factors for long-term style premia. The evidence just isn't there. (imo)

Image
This post is pretty hilarious. Imagine calling Fama woefully uneducated in economics and analytics.
Because you deify him. Asness is very open about how little he knows/cares about macroeconomics. I can't speak for Eugene Fama's education, but his work doesn't really deal with macroeconomics, and in general, the standard of analytics in finance is very crude compared to subjects like physics and math. Which is why groups like RenTech specifically employ people from STEM, rather than finance/economics.. Also, you've got a chart there, from a Bloomberg analyst, showing the historic correlation between style factors and macro regimes. Think maybe there's something in it?
I don’t deify him at all, and disagree with some of his statements, but to claim he’s not educated on this topic when he’s basically the founder of it through rigorous research is just completely inaccurate
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

watchnerd wrote: Wed Apr 05, 2023 12:17 pm
Nathan Drake wrote: Wed Apr 05, 2023 12:09 pm
watchnerd wrote: Wed Apr 05, 2023 11:34 am
Poe22 wrote: Wed Apr 05, 2023 11:14 am Great thread! Am I wrong in believing that only diversification between asset classes matters, not diversification within asset classes?
You're not wrong.

At the end of the day, all stocks carry the systemic risk of being stocks.

Thus assets that are "not stocks" do more to defease that risk.
Those risks are different within stocks and can manifest at certain periods

S&P500 went nowhere for 13 years but SCV did very well
They're not as different as they are for things that aren't stocks at all.

You can't eliminate stock market risk by holding stocks.
They’re certainly different. You aren’t eliminating stock risk, you are diversifying stock risk through factors
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Re: Can value stocks mitigate sequence of returns risk?

Post by watchnerd »

Nathan Drake wrote: Wed Apr 05, 2023 12:32 pm
watchnerd wrote: Wed Apr 05, 2023 12:17 pm
Nathan Drake wrote: Wed Apr 05, 2023 12:09 pm
watchnerd wrote: Wed Apr 05, 2023 11:34 am
Poe22 wrote: Wed Apr 05, 2023 11:14 am Great thread! Am I wrong in believing that only diversification between asset classes matters, not diversification within asset classes?
You're not wrong.

At the end of the day, all stocks carry the systemic risk of being stocks.

Thus assets that are "not stocks" do more to defease that risk.
Those risks are different within stocks and can manifest at certain periods

S&P500 went nowhere for 13 years but SCV did very well
They're not as different as they are for things that aren't stocks at all.

You can't eliminate stock market risk by holding stocks.
They’re certainly different. You aren’t eliminating stock risk, you are diversifying stock risk through factors
Are factors diversifying stock risk to any greater degree than just holding the total market?

Or are you just tilting the risk in different directions?
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

watchnerd wrote: Wed Apr 05, 2023 12:35 pm
Nathan Drake wrote: Wed Apr 05, 2023 12:32 pm
watchnerd wrote: Wed Apr 05, 2023 12:17 pm
Nathan Drake wrote: Wed Apr 05, 2023 12:09 pm
watchnerd wrote: Wed Apr 05, 2023 11:34 am

You're not wrong.

At the end of the day, all stocks carry the systemic risk of being stocks.

Thus assets that are "not stocks" do more to defease that risk.
Those risks are different within stocks and can manifest at certain periods

S&P500 went nowhere for 13 years but SCV did very well
They're not as different as they are for things that aren't stocks at all.

You can't eliminate stock market risk by holding stocks.
They’re certainly different. You aren’t eliminating stock risk, you are diversifying stock risk through factors
Are factors diversifying stock risk to any greater degree than just holding the total market?

Or are you just tilting the risk in different directions?
Yes, the value premium manifests differently than market beta

It won’t prevent acute crisis from hitting both, but longer term it can mean the difference of a dead decade or 10% annualized returns like in the 00s
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Re: Can value stocks mitigate sequence of returns risk?

Post by watchnerd »

Nathan Drake wrote: Wed Apr 05, 2023 12:54 pm Yes, the value premium manifests differently than market beta

It won’t prevent acute crisis from hitting both, but longer term it can mean the difference of a dead decade or 10% annualized returns like in the 00s
Or it can lead to value under-performing growth for long periods, too.

That doesn't sound like SOR risk mitigation to me.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

watchnerd wrote: Wed Apr 05, 2023 12:57 pm
Nathan Drake wrote: Wed Apr 05, 2023 12:54 pm Yes, the value premium manifests differently than market beta

It won’t prevent acute crisis from hitting both, but longer term it can mean the difference of a dead decade or 10% annualized returns like in the 00s
Or it can lead to value under-performing growth for long periods, too.

That doesn't sound like SOR risk mitigation to me.
It can, that’s part of the “risk” in “risk premium”, but it tends to outperform 80% of the time, similar to how the market beats bonds 80% of the time but can occasionally underperform for decades

Taking more risk in a diversified fashion is exactly what you want for SOR risk mitigation

SCV has less start date sensitivity than total market, meaning generally has a positive return in a shorter horizon
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Re: Can value stocks mitigate sequence of returns risk?

Post by watchnerd »

Nathan Drake wrote: Wed Apr 05, 2023 1:04 pm

It can, that’s part of the “risk” in “risk premium”, but it tends to outperform 80% of the time, similar to how the market beats bonds 80% of the time but can occasionally underperform for decades

Taking more risk in a diversified fashion is exactly what you want for SOR risk mitigation

SCV has less start date sensitivity than total market, meaning generally has a positive return in a shorter horizon
SCV outperforms 80% of the time????

Source?
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Re: Can value stocks mitigate sequence of returns risk?

Post by phoroner »

For a year 2000 retiree, value tilting (especially SCV) within US equities reduced SORR, as opposed to only holding market cap weight. For a year 2010 retiree, value tilting resulted in under performance relative to US TSM, but still had good returns. So in this time period, the answer was a resounding yes. This is easy to see on Portfolio Visualizer, https://www.portfoliovisualizer.com/bac ... tion4_3=40

The future is harder to predict. Over long period (30+ years), I anticipate any low-cost broadly diversified equity investment to have positive returns and maybe even fairly similar returns. Over short periods (5-10 years), equity returns are unpredictable, making portfolio diversification with non-equity investments essential. I believe that in the intermediate time period (e.g., 10-30 years), including international and factor-tilt in equity investments will decrease the probability of poor returns.

To tilt or not to tilt is reasonable, as long as broad-based, low cost funds are used, and it is a long-term (preferably life-long) strategy. Still, one should not go too far.
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Re: Can value stocks mitigate sequence of returns risk?

Post by abc132 »

dogagility wrote: Tue Apr 04, 2023 7:39 pm
abc132 wrote: Tue Apr 04, 2023 1:11 pm
dogagility wrote: Tue Apr 04, 2023 1:04 pm
abc132 wrote: Tue Apr 04, 2023 11:55 am
dogagility wrote: Fri Mar 31, 2023 4:00 pm
If a retiree's withdrawal amount is static (i.e. no discretionary spending including) and the portfolio is just able to support that withdrawal amount, then the retiree's portfolio might be too small to support their retirement should a significant portfolio decline occur.
Of course. But we can also say to spend 0$ and have an even better method. It is simply not a good idea to form a plan around a 0% chance of failure based on spending. You should have had zero dollars invested during accumulation if you had the goal of no chance of running out of investment money.

We have the 1/CAPE prediction that tells us we can often spend a higher percentage after a decline and a lower percentage when valuations become high. You are doing the opposite of this when you employ a variable withdrawal plan. Static real spending is not perfect but it will be closer than cutting your spending in half after a 50% decline. The reasonable person would cut spending by 20% or so even with a static plan. Planning a budget with some fat that can be trimmed is much more reasonable than saying you can always cut spending to match the market returns.

It is the ability to cut spending that increases success rates, not the wildly fluctuating expenses of a variable plan. A static plan with some fat to trim will optimize far more goals for most investors.
I assume you either haven't read longinvest's treatises on VPW in this forum or don't agree with these because what you wrote above about variable withdrawal methods is hyperbole.
I would assume you would have a specific actionable comment if you have read longinvest's treatises so I consider your response hyperbole.
You've been on the forum for many years; you can do the work to find and read threads on variable portfolio withdrawal methods. These methods do not include what I consider hyperbolic comments like "spending 0$", implying the goal is to have a "0% chance of failure", or that variable withdrawal methods have "wildly fluctuating" withdrawals.

One thing we can agree on is that "the ability to cut spending increases success rates". Variable portfolio withdrawal methods provide a means to calculate how much to cut spending.
A common reason given for variable withdrawal rate on this forum is in fact that money can't run out. That is the one-liner that draws people to this method and the one-liner used by some of its proponents.

Having actually tested probability based withdrawals myself, I can tell you that someone planning on spending 80k annually may end up spending 160k followed by a reduction to 40k within a 30 year period based on historical outcomes. A factor of 4 decrease in standard of living means 75% of that 160k budget needs to be optional. Those that want to spend 80k generally don't benefit as much from spending 160k and the increase in lifestyle makes the cutback more difficult. I consider a factor of 4 decrease in standard of living significant.

This can be decreased through fixed income products, annuities, and other methods but the reality is we can't control our standard of living without giving up expected returns on the order of our entire portfolio.

Most peoples spending will be lumpy and unlikely to match the variable withdrawal calculation. Most people will be better off spending what they need to when they need to and not dramatically increasing or decreasing a standard of living and retirement goal they have chosen based on their preferences.

You can post a year 2000 retiree spending graph for VPW and we can compare it to constant spending. Let us know how much of our original budget has to be optional. I will assert the optimum is somewhere between the two but closer to constant spending, and with a much more reasonable amount of optional spending.

When we don't know how much we will be spending 10 years in the future and we don't know our death date, we simply don't have tools to make good real time estimates of spending. VPW is unlikely to optimize anything, but it takes a recognition of what we can and can not control. Thee is no harm in using it as a tool, but in my opinion suggesting it as a solution shows limited understanding of what know about the future.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Logan Roy »

Nathan Drake wrote: Wed Apr 05, 2023 12:31 pm
Logan Roy wrote: Wed Apr 05, 2023 12:16 pm
Nathan Drake wrote: Wed Apr 05, 2023 10:26 am
Logan Roy wrote: Wed Apr 05, 2023 9:20 am
Nathan Drake wrote: Tue Apr 04, 2023 10:30 pm

This is far too simplistic and Research Affiliates and AQR had dispelled this notion that certain factors are only persistent during certain "regimes".
I think the problem with ideas that aren't simplistic – when we've only really had one example of each basic economic regime over the past 50 years – is that you're possibly just looking at noise. I know the thrust with factors is to make them mathematical entities, but I work in a similar field, and I don't think the work on factors is anywhere near robust enough to make those claims.. I think it's much more that people in this area of finance are woefully uneducated/uninterested in economics and analytics. That's just me. And it's traders. Traders use them to express macro views. I don't think anyone outside the cult of financial academia is using factors for long-term style premia. The evidence just isn't there. (imo)

Image
This post is pretty hilarious. Imagine calling Fama woefully uneducated in economics and analytics.
Because you deify him. Asness is very open about how little he knows/cares about macroeconomics. I can't speak for Eugene Fama's education, but his work doesn't really deal with macroeconomics, and in general, the standard of analytics in finance is very crude compared to subjects like physics and math. Which is why groups like RenTech specifically employ people from STEM, rather than finance/economics.. Also, you've got a chart there, from a Bloomberg analyst, showing the historic correlation between style factors and macro regimes. Think maybe there's something in it?
I don’t deify him at all, and disagree with some of his statements, but to claim he’s not educated on this topic when he’s basically the founder of it through rigorous research is just completely inaccurate
No one claimed he was uneducated on those things. I said people who work in that space tend to be – which is true, because it's self-admittedly true in the case of AQR, and I use a hedge fund from Man Group, and it's true there too. Quants are not typically macro guys. So if they don't find macro solutions to things, it's probably because they're not looking for them; don't know how to look for them; or don't want to find them.

Re: analytics. Finance has a much lower bar than we'd have in machine learning or mathematics. The FF factor models are a very vague fit. And when that first occurred to me, I said: if this is as loose as I think it is, we'll have 1,000+ factors within 10 years.. Now we do. We've got more factors in the S&P 500 than there are stocks.. And the problem is, the level of 'proof' for what constitutes a 'factor' (which is meant to be some kind of anomaly or mechanism in markets) is just too low. So I think what we needed way back with the 3-factor model was proper testing: does it account for all alpha in random/equal-weight portfolios (the most basic test, which wasn't done until several decades later); and how easy is it to invent factors using arbitrary/random/nonsensical rules? And I think academia in recent years has answered that. They're running into all the most basic issues around active stock picking and screening – which is another problem with them not taking an interest in the real functioning of markets.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

watchnerd wrote: Wed Apr 05, 2023 1:09 pm
Nathan Drake wrote: Wed Apr 05, 2023 1:04 pm

It can, that’s part of the “risk” in “risk premium”, but it tends to outperform 80% of the time, similar to how the market beats bonds 80% of the time but can occasionally underperform for decades

Taking more risk in a diversified fashion is exactly what you want for SOR risk mitigation

SCV has less start date sensitivity than total market, meaning generally has a positive return in a shorter horizon
SCV outperforms 80% of the time????

Source?
11 minutes in

https://youtu.be/2MVSsVi1_e4
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Re: Can value stocks mitigate sequence of returns risk?

Post by watchnerd »

Nathan Drake wrote: Thu Apr 06, 2023 12:18 am
watchnerd wrote: Wed Apr 05, 2023 1:09 pm
Nathan Drake wrote: Wed Apr 05, 2023 1:04 pm

It can, that’s part of the “risk” in “risk premium”, but it tends to outperform 80% of the time, similar to how the market beats bonds 80% of the time but can occasionally underperform for decades

Taking more risk in a diversified fashion is exactly what you want for SOR risk mitigation

SCV has less start date sensitivity than total market, meaning generally has a positive return in a shorter horizon
SCV outperforms 80% of the time????

Source?
11 minutes in

https://youtu.be/2MVSsVi1_e4
He didn't say it outperforms 80% of the time.

He says it exhibits a size and value premium, but both of those are less persistent than the market premium (85%).

He then notes that the size and value premium are less persistent than the market premium itself.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

watchnerd wrote: Thu Apr 06, 2023 12:36 am
Nathan Drake wrote: Thu Apr 06, 2023 12:18 am
watchnerd wrote: Wed Apr 05, 2023 1:09 pm
Nathan Drake wrote: Wed Apr 05, 2023 1:04 pm

It can, that’s part of the “risk” in “risk premium”, but it tends to outperform 80% of the time, similar to how the market beats bonds 80% of the time but can occasionally underperform for decades

Taking more risk in a diversified fashion is exactly what you want for SOR risk mitigation

SCV has less start date sensitivity than total market, meaning generally has a positive return in a shorter horizon
SCV outperforms 80% of the time????

Source?
11 minutes in

https://youtu.be/2MVSsVi1_e4
He didn't say it outperforms 80% of the time.

He says it exhibits a size and value premium, but both of those are less persistent than the market premium (85%).

He then notes that the size and value premium are less persistent than the market premium itself.
He says the Value Premium is 84% of the time with Size 72%

That’s roughly 80% of the time for the blend

He does not say they are less persistent than the market premiums, he says they are roughly equivalent
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watchnerd
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Re: Can value stocks mitigate sequence of returns risk?

Post by watchnerd »

Nathan Drake wrote: Thu Apr 06, 2023 12:40 am

He says the Value Premium is 84% of the time with Size 72%

That’s roughly 80% of the time for the blend

He does not say they are less persistent than the market premiums, he says they are roughly equivalent “market beats risk free at roughly the same rate as Small and Value beat the market”
It the market premium exists 85% of the time (which he said), and the blend of SCV persists 80% of the time, that doesn't mean SCV is beating the market 80% of the time.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

watchnerd wrote: Thu Apr 06, 2023 12:42 am
Nathan Drake wrote: Thu Apr 06, 2023 12:40 am

He says the Value Premium is 84% of the time with Size 72%

That’s roughly 80% of the time for the blend

He does not say they are less persistent than the market premiums, he says they are roughly equivalent “market beats risk free at roughly the same rate as Small and Value beat the market”
It the market premium exists 85% of the time (which he said), and the blend of SCV persists 80% of the time, that doesn't mean SCV is beating the market 80% of the time.
The distinction needs to be made that value beats growth 84% of the time

Growth isn’t the same as “the market”, but it’s not too far off.
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Re: Can value stocks mitigate sequence of returns risk?

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Nathan Drake wrote: Thu Apr 06, 2023 12:43 am
watchnerd wrote: Thu Apr 06, 2023 12:42 am
Nathan Drake wrote: Thu Apr 06, 2023 12:40 am

He says the Value Premium is 84% of the time with Size 72%

That’s roughly 80% of the time for the blend

He does not say they are less persistent than the market premiums, he says they are roughly equivalent “market beats risk free at roughly the same rate as Small and Value beat the market”
It the market premium exists 85% of the time (which he said), and the blend of SCV persists 80% of the time, that doesn't mean SCV is beating the market 80% of the time.
The distinction needs to be made that value beats growth 84% of the time

Growth isn’t the same as “the market”, but it’s not too far off.
Growth and the market as a whole a very different.

Image
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

watchnerd wrote: Thu Apr 06, 2023 12:47 am
Nathan Drake wrote: Thu Apr 06, 2023 12:43 am
watchnerd wrote: Thu Apr 06, 2023 12:42 am
Nathan Drake wrote: Thu Apr 06, 2023 12:40 am

He says the Value Premium is 84% of the time with Size 72%

That’s roughly 80% of the time for the blend

He does not say they are less persistent than the market premiums, he says they are roughly equivalent “market beats risk free at roughly the same rate as Small and Value beat the market”
It the market premium exists 85% of the time (which he said), and the blend of SCV persists 80% of the time, that doesn't mean SCV is beating the market 80% of the time.
The distinction needs to be made that value beats growth 84% of the time

Growth isn’t the same as “the market”, but it’s not too far off.
Growth and the market as a whole a very different.

Image
Not really. It’s a blend that tends to be growththier.

You can look at rolling 10-20 year heat maps of SCV vs S&P 500 and the “win rate” for SCV is roughly in line with that 80% figure I stated earlier

Your chart seems to prove my point, by the way, though the size factor is considered weak
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Re: Can value stocks mitigate sequence of returns risk?

Post by watchnerd »

Nathan Drake wrote: Thu Apr 06, 2023 12:51 am
watchnerd wrote: Thu Apr 06, 2023 12:47 am
Nathan Drake wrote: Thu Apr 06, 2023 12:43 am
watchnerd wrote: Thu Apr 06, 2023 12:42 am
Nathan Drake wrote: Thu Apr 06, 2023 12:40 am

He says the Value Premium is 84% of the time with Size 72%

That’s roughly 80% of the time for the blend

He does not say they are less persistent than the market premiums, he says they are roughly equivalent “market beats risk free at roughly the same rate as Small and Value beat the market”
It the market premium exists 85% of the time (which he said), and the blend of SCV persists 80% of the time, that doesn't mean SCV is beating the market 80% of the time.
The distinction needs to be made that value beats growth 84% of the time

Growth isn’t the same as “the market”, but it’s not too far off.
Growth and the market as a whole a very different.

Image
Not really. It’s a blend that tends to be growththier.

You can look at rolling 10-20 year heat maps of SCV vs S&P 500 and the “win rate” for SCV is roughly in line with that 80% figure I stated earlier

Your chart seems to prove my point, by the way, though the size factor is considered weak
The chart doesn't prove your point at all.

Small Cap + Value is a narrower intersection than just Small Cap factor by itself.

The *magnitude* of the outperformance might increase when you add the Value factor to Small, but SCV is still going to be tied to the frequency of small cap itself.

I haven't seen any data saying SCV outperforms the market 80% of the time and I don't interpret what Flex said as saying so, either.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

watchnerd wrote: Thu Apr 06, 2023 12:55 am
Nathan Drake wrote: Thu Apr 06, 2023 12:51 am
watchnerd wrote: Thu Apr 06, 2023 12:47 am
Nathan Drake wrote: Thu Apr 06, 2023 12:43 am
watchnerd wrote: Thu Apr 06, 2023 12:42 am

It the market premium exists 85% of the time (which he said), and the blend of SCV persists 80% of the time, that doesn't mean SCV is beating the market 80% of the time.
The distinction needs to be made that value beats growth 84% of the time

Growth isn’t the same as “the market”, but it’s not too far off.
Growth and the market as a whole a very different.

Image
Not really. It’s a blend that tends to be growththier.

You can look at rolling 10-20 year heat maps of SCV vs S&P 500 and the “win rate” for SCV is roughly in line with that 80% figure I stated earlier

Your chart seems to prove my point, by the way, though the size factor is considered weak
The chart doesn't prove your point at all.

Small Cap + Value is a narrower intersection than just Small Cap factor by itself.

The *magnitude* of the outperformance might increase when you add the Value factor to Small, but SCV is still going to be tied to the frequency of small cap itself.

I haven't seen any data saying SCV outperforms the market 80% of the time and I don't interpret what Flex said as saying so, either.
It shows small caps outperforming 80% of the time, just eye balling it

I don’t know what else to tell you

Ben Felix says SCV lessens time sensitivity, increases returns and diversification, and leads to more reliable portfolio outcomes. That’s why he personally invests in factors. He says it all there in the video
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Re: Can value stocks mitigate sequence of returns risk?

Post by watchnerd »

Nathan Drake wrote: Thu Apr 06, 2023 12:58 am

It shows small caps outperforming 80% of the time, just eye balling it

I don’t know what else to tell you

Ben Felix says SCV lessens time sensitivity, increases returns and diversification, and leads to more reliable portfolio outcomes. That’s why he personally invests in factors. He says it all there in the video
Not to my eye, it doesn't.

And, no offense, neither your eyes nor mine eyeballing a graph are citation-worthy sources.
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Re: Can value stocks mitigate sequence of returns risk?

Post by muffins14 »

watchnerd wrote: Thu Apr 06, 2023 1:01 am
Not to my eye, it doesn't.

And, no offense, neither your eyes nor mine eyeballing a graph are citation-worthy sources.
what % does it look like to you, if you had to estimate it?
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Re: Can value stocks mitigate sequence of returns risk?

Post by Nathan Drake »

watchnerd wrote: Thu Apr 06, 2023 1:01 am
Nathan Drake wrote: Thu Apr 06, 2023 12:58 am

It shows small caps outperforming 80% of the time, just eye balling it

I don’t know what else to tell you

Ben Felix says SCV lessens time sensitivity, increases returns and diversification, and leads to more reliable portfolio outcomes. That’s why he personally invests in factors. He says it all there in the video
Not to my eye, it doesn't.

And, no offense, neither your eyes nor mine eyeballing a graph are citation-worthy sources.
You can look at the years, small caps underperform 20 out of roughly 80 years.

Small caps outperform 75% of the time. Almost identical to what Ben says in the video
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