Who should not invest in the market portfolio

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muffins14
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Re: Who should not invest in the market portfolio

Post by muffins14 »

abc132 wrote: Wed May 17, 2023 10:21 pm
muffins14 wrote: Wed May 17, 2023 8:14 pm
km91 wrote: Wed May 17, 2023 5:23 pm
abc132 wrote: Wed May 17, 2023 4:57 pm My only point is that you don't get extra factor exposure without some additional risks. They are not imaginary or unimportant. Taking risks is why we invest in the first place, so I am definitely not saying not to take that risk.

I am saying to look at the risks in a portfolio and that we should all be willing to talk about them.
I don't think any factor investor denies this point. Their are very obvious risks if you tilt towards the factors. You can get long periods of underperformance vs TSM. You are exposed to more real world economic risks. There's more correlation to the business cycle and your human capital. You are exposed to more volatility. There's definitely real risks to talk about, I just don't think it has to do with factor ETF construction
I agree. I am 10000x more concerned about overall stock risk or value risk than I am about the possible risk that the derivatives that AVUV is allowed to use but does not actually use may not perfectly correlate with the target investment
The context was AVUV vs VIOV so any comments related to AVUV not talking about factor loadings are off-target.
You were the one who made a big deal about the other risks, like implementation risk and derivative risk.
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abc132
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Re: Who should not invest in the market portfolio

Post by abc132 »

muffins14 wrote: Thu May 18, 2023 9:07 am
abc132 wrote: Wed May 17, 2023 10:21 pm
muffins14 wrote: Wed May 17, 2023 8:14 pm
km91 wrote: Wed May 17, 2023 5:23 pm
abc132 wrote: Wed May 17, 2023 4:57 pm My only point is that you don't get extra factor exposure without some additional risks. They are not imaginary or unimportant. Taking risks is why we invest in the first place, so I am definitely not saying not to take that risk.

I am saying to look at the risks in a portfolio and that we should all be willing to talk about them.
I don't think any factor investor denies this point. Their are very obvious risks if you tilt towards the factors. You can get long periods of underperformance vs TSM. You are exposed to more real world economic risks. There's more correlation to the business cycle and your human capital. You are exposed to more volatility. There's definitely real risks to talk about, I just don't think it has to do with factor ETF construction
I agree. I am 10000x more concerned about overall stock risk or value risk than I am about the possible risk that the derivatives that AVUV is allowed to use but does not actually use may not perfectly correlate with the target investment
The context was AVUV vs VIOV so any comments related to AVUV not talking about factor loadings are off-target.
You were the one who made a big deal about the other risks, like implementation risk and derivative risk.
My premise here was that factor investors in general don't seem to talk about risks despite factor investing being heavily based on risk analysis. My opinion is that this thread validated that assumption. You will notice that people decidedly do not want to talk about risks. Somehow they have a portfolio where we can consider the factor advantage without considering the risks.

"But it's a small part of my portfolio" means the returns or difference vs a market investor also don't matter. There is no point in factor investing if you don't see a benefit. If there is a benefit the factor portion of the portfolio is large enough to consider the risks.
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Re: Who should not invest in the market portfolio

Post by km91 »

abc132 wrote: Thu May 18, 2023 2:45 pm
muffins14 wrote: Thu May 18, 2023 9:07 am
abc132 wrote: Wed May 17, 2023 10:21 pm
muffins14 wrote: Wed May 17, 2023 8:14 pm
km91 wrote: Wed May 17, 2023 5:23 pm

I don't think any factor investor denies this point. Their are very obvious risks if you tilt towards the factors. You can get long periods of underperformance vs TSM. You are exposed to more real world economic risks. There's more correlation to the business cycle and your human capital. You are exposed to more volatility. There's definitely real risks to talk about, I just don't think it has to do with factor ETF construction
I agree. I am 10000x more concerned about overall stock risk or value risk than I am about the possible risk that the derivatives that AVUV is allowed to use but does not actually use may not perfectly correlate with the target investment
The context was AVUV vs VIOV so any comments related to AVUV not talking about factor loadings are off-target.
You were the one who made a big deal about the other risks, like implementation risk and derivative risk.
My premise here was that factor investors in general don't seem to talk about risks despite factor investing being heavily based on risk analysis. My opinion is that this thread validated that assumption. You will notice that people decidedly do not want to talk about risks. Somehow they have a portfolio where we can consider the factor advantage without considering the risks.

"But it's a small part of my portfolio" means the returns or difference vs a market investor also don't matter. There is no point in factor investing if you don't see a benefit. If there is a benefit the factor portion of the portfolio is large enough to consider the risks.
Again, I'll repeat some risks of factor investing: You can get long periods of underperformance vs TSM. You are exposed to more real world economic risks. There's more correlation to the business cycle and your human capital. You are exposed to more volatility. Do the factor models actually describe asset returns in a meaningful way. These are tough risks for investors to grapple with. I think most factor investors would gladly invite more discussion of these risks to better sharpen our understanding of them. Instead we're stuck arguing about boilerplate prospectus disclosures that are largely inconsequential
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Re: Who should not invest in the market portfolio

Post by secondopinion »

abc132 wrote: Thu May 18, 2023 2:45 pm
muffins14 wrote: Thu May 18, 2023 9:07 am
abc132 wrote: Wed May 17, 2023 10:21 pm
muffins14 wrote: Wed May 17, 2023 8:14 pm
km91 wrote: Wed May 17, 2023 5:23 pm

I don't think any factor investor denies this point. Their are very obvious risks if you tilt towards the factors. You can get long periods of underperformance vs TSM. You are exposed to more real world economic risks. There's more correlation to the business cycle and your human capital. You are exposed to more volatility. There's definitely real risks to talk about, I just don't think it has to do with factor ETF construction
I agree. I am 10000x more concerned about overall stock risk or value risk than I am about the possible risk that the derivatives that AVUV is allowed to use but does not actually use may not perfectly correlate with the target investment
The context was AVUV vs VIOV so any comments related to AVUV not talking about factor loadings are off-target.
You were the one who made a big deal about the other risks, like implementation risk and derivative risk.
My premise here was that factor investors in general don't seem to talk about risks despite factor investing being heavily based on risk analysis. My opinion is that this thread validated that assumption. You will notice that people decidedly do not want to talk about risks. Somehow they have a portfolio where we can consider the factor advantage without considering the risks.

"But it's a small part of my portfolio" means the returns or difference vs a market investor also don't matter. There is no point in factor investing if you don't see a benefit. If there is a benefit the factor portion of the portfolio is large enough to consider the risks.
I know I care about risks; but not all risks are going to surface in the same magnitude if they even surface. I will gladly talk about risk; I will gladly consider the cases where a Growth tilt is better than a Value tilt (or vice versa), and who benefits from which tilt from a risk standpoint. How derivatives get used is not on the top of my list; this ranks about in the same category as Vanguard and others using securities lending. It is a distraction to the discussion in question.
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muffins14
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Re: Who should not invest in the market portfolio

Post by muffins14 »

abc132 wrote: Thu May 18, 2023 2:45 pm
My premise here was that factor investors in general don't seem to talk about risks despite factor investing being heavily based on risk analysis. My opinion is that this thread validated that assumption. You will notice that people decidedly do not want to talk about risks. Somehow they have a portfolio where we can consider the factor advantage without considering the risks.
I spent a long time on this thread talking to you about risks.
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abc132
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Re: Who should not invest in the market portfolio

Post by abc132 »

muffins14 wrote: Thu May 18, 2023 5:30 pm
abc132 wrote: Thu May 18, 2023 2:45 pm
My premise here was that factor investors in general don't seem to talk about risks despite factor investing being heavily based on risk analysis. My opinion is that this thread validated that assumption. You will notice that people decidedly do not want to talk about risks. Somehow they have a portfolio where we can consider the factor advantage without considering the risks.
I spent a long time on this thread talking to you about risks.
I did get about 3 actionable hits for the entire thread.

If those were from you, thank you.
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Re: Who should not invest in the market portfolio

Post by averagedude »

The 18-25 year olds on Reddit should never invest in the market portfolio. They are so smart that they can do much better by stock picking on their own.
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Re: Who should not invest in the market portfolio

Post by loukycpa »

Banks, insurance companies, pension plans invest large sums of money. They have very different objectives and goals than I do, in some cases trying to match very specific nominal liabilities over time frames that look nothing like the time frame my family and I will be drawing from my portfolio.

Given the above, why would it be rational for me to mimic the market portfolio?
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Re: Who should not invest in the market portfolio

Post by muffins14 »

loukycpa wrote: Fri May 19, 2023 10:19 am Banks, insurance companies, pension plans invest large sums of money. They have very different objectives and goals than I do, in some cases trying to match very specific nominal liabilities over time frames that look nothing like the time frame my family and I will be drawing from my portfolio.

Given the above, why would it be rational for me to mimic the market portfolio?
Because a list of experts told you so
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BrooklynInvest
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Re: Who should not invest in the market portfolio

Post by BrooklynInvest »

averagedude wrote: Thu May 18, 2023 9:44 pm The 18-25 year olds on Reddit should never invest in the market portfolio. They are so smart that they can do much better by stock picking on their own.
This. On discussion boards and in Lake Wobegon everyone is above average.
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Re: Who should not invest in the market portfolio

Post by 000 »

loukycpa wrote: Fri May 19, 2023 10:19 am Banks, insurance companies, pension plans invest large sums of money. They have very different objectives and goals than I do, in some cases trying to match very specific nominal liabilities over time frames that look nothing like the time frame my family and I will be drawing from my portfolio.

Given the above, why would it be rational for me to mimic the market portfolio?
It's rational to mimic the market for many investors simply due to costs and risk of abandoning the tilt. Many of the examples you mention are more relevant to the fixed income market than the equities market, whereas this thread appears to concern the "market portfolio" of publicly traded equities.

I do agree with you that investors are heterogeneous and theoretically benefit from portfolio exposures tailored to their own situations. With value/growth I think there are some plausible arguments concerning valuation of cashflows relative to investment horizon and sensitivity to inflation/rates. Other academically defined factors are of less clear benefit.

To clearly show that factors correspond to investor situations, someone should really craft some basic rules about the correspondence between personal investor situations and the over- or under-weighting of specific factors. Without that, there really is nothing substantive for us to analyze. We can't determine the legitimacy of the "factors are for specific investor situations" argument without even seeing the claims about which are for which.
Wwwdotcom
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Re: Who should not invest in the market portfolio

Post by Wwwdotcom »

Just for kicks I saw a nice infographic by generation on their holdings. Maybe some of you want to mimic the holding patterns of your generation or the generation that precedes you?

https://ritholtz.com/wp-content/uploads ... ansfer.png
loukycpa
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Re: Who should not invest in the market portfolio

Post by loukycpa »

000 wrote: Fri May 19, 2023 9:14 pm
loukycpa wrote: Fri May 19, 2023 10:19 am Banks, insurance companies, pension plans invest large sums of money. They have very different objectives and goals than I do, in some cases trying to match very specific nominal liabilities over time frames that look nothing like the time frame my family and I will be drawing from my portfolio.

Given the above, why would it be rational for me to mimic the market portfolio?
It's rational to mimic the market for many investors simply due to costs and risk of abandoning the tilt. Many of the examples you mention are more relevant to the fixed income market than the equities market, whereas this thread appears to concern the "market portfolio" of publicly traded equities.
I had understood what is being discussed here as the market portfolio as being global stocks AND global bonds. Each at market cap weight, so that stock versus bond allocation would also be set by market weight.

In the OP the last link is to another thread, which links to a video where Sharpe describes the market portfolio and this is clearly what he means. He describes such a portfolio as his perfect or ideal portfolio.

In the rational reminder podcast video around the 16:30 minute market Fama responds to Felix with the same. Global stocks and global bonds each at market cap weight is their definition of the market portfolio.
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Charles Joseph
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Re: Who should not invest in the market portfolio

Post by Charles Joseph »

People who want to underperform the market return.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
secondopinion
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Re: Who should not invest in the market portfolio

Post by secondopinion »

Charles Joseph wrote: Wed May 24, 2023 8:24 pm People who want to underperform the market return.
Now, is the market portfolio the market-weighting of all assets, the market-weighting of just stocks and bonds (leaving the tilt away from anything else and towards your favorite assets), or the market-weighting of the assets that Bogleheads have selected, or...?

What about municipal bonds? Oh, everyone should include them, even people who pay no taxes. Because it is market portfolio, it should be good for everyone, right? Or is that exclude them because everyone's favorite bond fund does not have them, but then it is not the market (but it is the market according to... I am not sure). I guess Bogleheads are destined to underperform... (Reality check: depending on your tax situation, they should be included, overweighted, or excluded from bond holdings. There is well-documented proof of this, and one can do some of the numbers themselves).

What about high-yield bonds? Oh, everyone should exclude them, even though they are part of the market. Why? Because everyone's favorite bond fund does not include them. No questions asked, accepted as fact, yet we have already deviated from the market. I guess Bogleheads are destined to underperform... (Reality check: who knows if this helps or hurts the portfolio; regardless, it is often seen as an in between for stock and bond holdings.)

What about TIPS? Oh, everyone should exclude them, even though they are part of the market. Why? Because everyone's favorite bond fund does not include them. And it is not because of credit risk; it is because it is not taking inflation risk (I guess we love inflation risk :P ). Run away. But then we have already deviated from the market. I guess Bogleheads are destined to underperform... (Reality check: there is well-documented research that TIPS can help hedge inflation risk, which is problematic in high-bond portfolios.)

What about convertible bonds and preferred stock? Are they part of the market and yet almost no one has them? I guess Bogleheads are destined to underperform... (Reality check: very small markets; but nevertheless, we are not seeing much here.)

What if I have a need for money in one year? Is the market portfolio suitable for it? Uh, no. But we tilt towards cashlike bonds to fix most of it.

What if I have a need for money in 100 years? Is the market portfolio suitable for it? Uh, no. But we tilt away from cashlike bonds to fix some of it.


I guess I got a little satirical here, but I am not going to bother removing the text.

In all honesty, define risk for me in the most concrete terms possible according to your personal situation. If you cannot explain it, then how can you fairly assess that your own portfolio is even suitable for yourself? Even your stock/bond split is suspect if you cannot do that; the market already determines a stock/bond split, so why are you not using that?

If you cannot do this then why, in all honesty, are you even speaking against tilting? You have hearsay only. "Proof" that speaks nothing of personal risk assessment; experts quoted out of context; numerous logical errors that all stem from the definition of risk being equal for all investors (which is actually uniquely personal).
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Charles Joseph
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Re: Who should not invest in the market portfolio

Post by Charles Joseph »

secondopinion wrote: Thu May 25, 2023 12:42 pm
Charles Joseph wrote: Wed May 24, 2023 8:24 pm People who want to underperform the market return.
Now, is the market portfolio the market-weighting of all assets, the market-weighting of just stocks and bonds (leaving the tilt away from anything else and towards your favorite assets), or the market-weighting of the assets that Bogleheads have selected, or...?

What about municipal bonds? Oh, everyone should include them, even people who pay no taxes. Because it is market portfolio, it should be good for everyone, right? Or is that exclude them because everyone's favorite bond fund does not have them, but then it is not the market (but it is the market according to... I am not sure). I guess Bogleheads are destined to underperform... (Reality check: depending on your tax situation, they should be included, overweighted, or excluded from bond holdings. There is well-documented proof of this, and one can do some of the numbers themselves).

What about high-yield bonds? Oh, everyone should exclude them, even though they are part of the market. Why? Because everyone's favorite bond fund does not include them. No questions asked, accepted as fact, yet we have already deviated from the market. I guess Bogleheads are destined to underperform... (Reality check: who knows if this helps or hurts the portfolio; regardless, it is often seen as an in between for stock and bond holdings.)

What about TIPS? Oh, everyone should exclude them, even though they are part of the market. Why? Because everyone's favorite bond fund does not include them. And it is not because of credit risk; it is because it is not taking inflation risk (I guess we love inflation risk :P ). Run away. But then we have already deviated from the market. I guess Bogleheads are destined to underperform... (Reality check: there is well-documented research that TIPS can help hedge inflation risk, which is problematic in high-bond portfolios.)

What about convertible bonds and preferred stock? Are they part of the market and yet almost no one has them? I guess Bogleheads are destined to underperform... (Reality check: very small markets; but nevertheless, we are not seeing much here.)

What if I have a need for money in one year? Is the market portfolio suitable for it? Uh, no. But we tilt towards cashlike bonds to fix most of it.

What if I have a need for money in 100 years? Is the market portfolio suitable for it? Uh, no. But we tilt away from cashlike bonds to fix some of it.


I guess I got a little satirical here, but I am not going to bother removing the text.

In all honesty, define risk for me in the most concrete terms possible according to your personal situation. If you cannot explain it, then how can you fairly assess that your own portfolio is even suitable for yourself? Even your stock/bond split is suspect if you cannot do that; the market already determines a stock/bond split, so why are you not using that?

If you cannot do this then why, in all honesty, are you even speaking against tilting? You have hearsay only. "Proof" that speaks nothing of personal risk assessment; experts quoted out of context; numerous logical errors that all stem from the definition of risk being equal for all investors (which is actually uniquely personal).
You are seemingly making innumerable assumptions about my very short and simple statement. Please read the subject of the thread again, and then re-read my response. Then, tell me if I am incorrect.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Re: Who should not invest in the market portfolio

Post by Trance »

Should we be tilting away from the total market for cases in which the market has long periods of negative or almost 0% returns?

Image

That's 13 years to break even. Is there a term for this and is this a good argument for factor investing or maybe investing in longer term bonds? They both continued to grow. I'd also say REITs but they crashed hard in 2008 and are crashing hard now.
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Re: Who should not invest in the market portfolio

Post by 000 »

Trance wrote: Thu May 25, 2023 8:04 pm Should we be tilting away from the total market for cases in which the market has long periods of negative or almost 0% returns?

[...]

That's 13 years to break even. Is there a term for this and is this a good argument for factor investing or maybe investing in longer term bonds? They both continued to grow. I'd also say REITs but they crashed hard in 2008 and are crashing hard now.
Well if all you care about is Jan 2000 - Dec 2012 :D, then... https://www.portfoliovisualizer.com/bac ... ion3_3=100
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Re: Who should not invest in the market portfolio

Post by PoorHomieQuan »

km91 wrote: Thu May 11, 2023 6:03 pm . 30% concentration to 10 names is risky
Why do we know this is true?

Aren't enormous companies with strong balance sheets inherently less risky?

I agree it seems risky because the number of companies is small, but the risk of each company is less. I don't think you'd reduce risk if the SEC broke up Apple into four slices.
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Re: Who should not invest in the market portfolio

Post by PoorHomieQuan »

km91 wrote: Sat May 13, 2023 3:39 pm
abc132 wrote: Sat May 13, 2023 3:23 pm
km91 wrote: Sat May 13, 2023 2:05 pm
abc132 wrote: Sat May 13, 2023 2:03 pm I'm not sure how buying based on your preferences is factor investing.
It's not, my preferences led me to the decision to pursue factor investing
There is no factor that you have based on your comments that lets you buy Coca-Cola while ignoring its price/valuation.
km91 wrote: Sat May 13, 2023 1:57 pm Coca Cola doesn't care about my preference and desire to avoid things either. I buy it because it aligns with my preferences, not because I know something about fair prices in the cola market
The good news is you will have factor exposure even if what you are saying is not what factors do.
I meant the soda. My preferences lead me to the things I buy. The same is true for investing. I have a preference for profitable companies at cheaper prices. That academic models predict that such a strategy is expected to earn a higher return than the market would seem to confirm the common sense that paying expensive prices for unproductive assets isn't a good way to grow your wealth
I have a factor tilt to my portfolio but sometimes I worry that it's a cognitive trap. Cheap is good when you're buying something, why wouldn't I want that? Profitable is good right, why would I want to buy an unprofitable company? But maybe there's actually a reason. Maybe it's not actually a good deal. The seller must know something I don't. And in particular, one day I will want to sell these companies. I don't want to sell them for cheap! How can I make sure they're expensive by the time I sell them?

If I could undo my factor tilt I probably would, but it's too late for that. Also, knowing myself, if I didn't have a factor tilt I would probably yearn for one. Grass is never green where I'm standing.
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Charles Joseph
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Re: Who should not invest in the market portfolio

Post by Charles Joseph »

secondopinion wrote: Thu May 25, 2023 12:42 pm
Charles Joseph wrote: Wed May 24, 2023 8:24 pm People who want to underperform the market return.
Now, is the market portfolio the market-weighting of all assets, the market-weighting of just stocks and bonds (leaving the tilt away from anything else and towards your favorite assets), or the market-weighting of the assets that Bogleheads have selected, or...?

What about municipal bonds? Oh, everyone should include them, even people who pay no taxes. Because it is market portfolio, it should be good for everyone, right? Or is that exclude them because everyone's favorite bond fund does not have them, but then it is not the market (but it is the market according to... I am not sure). I guess Bogleheads are destined to underperform... (Reality check: depending on your tax situation, they should be included, overweighted, or excluded from bond holdings. There is well-documented proof of this, and one can do some of the numbers themselves).

What about high-yield bonds? Oh, everyone should exclude them, even though they are part of the market. Why? Because everyone's favorite bond fund does not include them. No questions asked, accepted as fact, yet we have already deviated from the market. I guess Bogleheads are destined to underperform... (Reality check: who knows if this helps or hurts the portfolio; regardless, it is often seen as an in between for stock and bond holdings.)

What about TIPS? Oh, everyone should exclude them, even though they are part of the market. Why? Because everyone's favorite bond fund does not include them. And it is not because of credit risk; it is because it is not taking inflation risk (I guess we love inflation risk :P ). Run away. But then we have already deviated from the market. I guess Bogleheads are destined to underperform... (Reality check: there is well-documented research that TIPS can help hedge inflation risk, which is problematic in high-bond portfolios.)

What about convertible bonds and preferred stock? Are they part of the market and yet almost no one has them? I guess Bogleheads are destined to underperform... (Reality check: very small markets; but nevertheless, we are not seeing much here.)

What if I have a need for money in one year? Is the market portfolio suitable for it? Uh, no. But we tilt towards cashlike bonds to fix most of it.

What if I have a need for money in 100 years? Is the market portfolio suitable for it? Uh, no. But we tilt away from cashlike bonds to fix some of it.


I guess I got a little satirical here, but I am not going to bother removing the text.

In all honesty, define risk for me in the most concrete terms possible according to your personal situation. If you cannot explain it, then how can you fairly assess that your own portfolio is even suitable for yourself? Even your stock/bond split is suspect if you cannot do that; the market already determines a stock/bond split, so why are you not using that?

If you cannot do this then why, in all honesty, are you even speaking against tilting? You have hearsay only. "Proof" that speaks nothing of personal risk assessment; experts quoted out of context; numerous logical errors that all stem from the definition of risk being equal for all investors (which is actually uniquely personal).
I've removed my signature quote because you're right -- the term "market" is way too nuanced and can be argued about endlessly.

In terms of "defining risk in the most concrete terms according to my personal situation," that is indeed intensely personal for each of us and for me involves two things and two things only: do I spend my days worrying and can I sleep at night. Through trial and error I've reached the point where I do neither. So I'm good. My time horizon is the rest of my life and my portfolio is large enough that I don't save for long- and short-term goals anymore. I just pluck the fruit when I need to eat. I'm by no means wealthy but I have enough.

This all really isn't that complicated. I'm a satisficer, not an optimizer.

Speaking of food, thanks for the food for thought re: market. I've thought about it a lot. Glad you struck through your comments above and didn't delete!
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
secondopinion
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Re: Who should not invest in the market portfolio

Post by secondopinion »

Charles Joseph wrote: Fri May 26, 2023 8:40 am
secondopinion wrote: Thu May 25, 2023 12:42 pm
Charles Joseph wrote: Wed May 24, 2023 8:24 pm People who want to underperform the market return.
Now, is the market portfolio the market-weighting of all assets, the market-weighting of just stocks and bonds (leaving the tilt away from anything else and towards your favorite assets), or the market-weighting of the assets that Bogleheads have selected, or...?

What about municipal bonds? Oh, everyone should include them, even people who pay no taxes. Because it is market portfolio, it should be good for everyone, right? Or is that exclude them because everyone's favorite bond fund does not have them, but then it is not the market (but it is the market according to... I am not sure). I guess Bogleheads are destined to underperform... (Reality check: depending on your tax situation, they should be included, overweighted, or excluded from bond holdings. There is well-documented proof of this, and one can do some of the numbers themselves).

What about high-yield bonds? Oh, everyone should exclude them, even though they are part of the market. Why? Because everyone's favorite bond fund does not include them. No questions asked, accepted as fact, yet we have already deviated from the market. I guess Bogleheads are destined to underperform... (Reality check: who knows if this helps or hurts the portfolio; regardless, it is often seen as an in between for stock and bond holdings.)

What about TIPS? Oh, everyone should exclude them, even though they are part of the market. Why? Because everyone's favorite bond fund does not include them. And it is not because of credit risk; it is because it is not taking inflation risk (I guess we love inflation risk :P ). Run away. But then we have already deviated from the market. I guess Bogleheads are destined to underperform... (Reality check: there is well-documented research that TIPS can help hedge inflation risk, which is problematic in high-bond portfolios.)

What about convertible bonds and preferred stock? Are they part of the market and yet almost no one has them? I guess Bogleheads are destined to underperform... (Reality check: very small markets; but nevertheless, we are not seeing much here.)

What if I have a need for money in one year? Is the market portfolio suitable for it? Uh, no. But we tilt towards cashlike bonds to fix most of it.

What if I have a need for money in 100 years? Is the market portfolio suitable for it? Uh, no. But we tilt away from cashlike bonds to fix some of it.


I guess I got a little satirical here, but I am not going to bother removing the text.

In all honesty, define risk for me in the most concrete terms possible according to your personal situation. If you cannot explain it, then how can you fairly assess that your own portfolio is even suitable for yourself? Even your stock/bond split is suspect if you cannot do that; the market already determines a stock/bond split, so why are you not using that?

If you cannot do this then why, in all honesty, are you even speaking against tilting? You have hearsay only. "Proof" that speaks nothing of personal risk assessment; experts quoted out of context; numerous logical errors that all stem from the definition of risk being equal for all investors (which is actually uniquely personal).
I've removed my signature quote because you're right -- the term "market" is way too nuanced and can be argued about endlessly.

In terms of "defining risk in the most concrete terms according to my personal situation," that is indeed intensely personal for each of us and for me involves two things and two things only: do I spend my days worrying and can I sleep at night. Through trial and error I've reached the point where I do neither. So I'm good. My time horizon is the rest of my life and my portfolio is large enough that I don't save for long- and short-term goals anymore. I just pluck the fruit when I need to eat. I'm by no means wealthy but I have enough.

This all really isn't that complicated. I'm a satisficer, not an optimizer.

Speaking of food, thanks for the food for thought re: market. I've thought about it a lot. Glad you struck through your comments above and didn't delete!
Right. If one risk assessment is close to what can be satisfied by a simple portfolio, then that is a strong benefit.

But some investors are highly sensitive to inflation (more than the market), so some TIPS rather than nominal bonds makes sense. Some investors are high tax bracket, so tax-exempt bonds are rather valuable. Some investor are low tax bracket, so they stay away from such bonds. Some need the extra yield while taking a bit more risk without taking the variable returns of stocks, so they elect for more corporate bonds and even some "junk" bonds (generally, the higher-quality side of that class of bonds because they still need a good likelihood of payment). So, there are reasons to tilt towards certain kinds of bonds. Bond duration might be considered as well, but this is a topic addressed elsewhere.

At the end of the day, if the market has a mix close to what one needs, then buy it. If it deviates drastically, then it has to be remedied. That is why there is a market; it is not just about the active traders trading like crazy but also the investors who truly need something different than the entire market.

As far as stock factors go...

Bogle has never denied that factors can be useful, but he has spoken against the seeking of greater returns with them; hence, he "does not believe in factors" in the alpha-seeking context. The very quote comes from an interview where he explains where a factor tilt could be justified; early workers could benefit from growth, later on and value is more valuable. The video shared at the start of this thread tries to do the same (not the same risk assessment but kind of close in the effective recommendation).

I see factors having the potential of having some benefits to a portfolio; it is a zero-sum game with respect to the stock market to tilt, but zero-sum does not mean pointless. Over the years, I have gained more and more appreciation for Bogle and the power of staying with a decision; and actually less about having the market portfolio. In short, I am more Boglehead in the sense that my trading frequency has decreased considerably; but less Boglehead in the sense that I am slightly less diversified (but in some matters, I am more diversified; it depends on the context). If one is more vulnerable to a given risk, then it is perfectly alright to take slightly more of other risks of which one is less vulnerable.

My goal is not to uproot Bogleheads, but rather to present a second opinion into when the "market portfolio" does not make sense (including the definition of it). My hope is to stress that it is about risk management and not hopes of a greater return.
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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FoundingFather
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Re: Who should not invest in the market portfolio

Post by FoundingFather »

PoorHomieQuan wrote: Fri May 26, 2023 1:07 am I have a factor tilt to my portfolio but sometimes I worry that it's a cognitive trap. Cheap is good when you're buying something, why wouldn't I want that? Profitable is good right, why would I want to buy an unprofitable company? But maybe there's actually a reason. Maybe it's not actually a good deal. The seller must know something I don't. And in particular, one day I will want to sell these companies. I don't want to sell them for cheap! How can I make sure they're expensive by the time I sell them?

If I could undo my factor tilt I probably would, but it's too late for that. Also, knowing myself, if I didn't have a factor tilt I would probably yearn for one. Grass is never green where I'm standing.
This is about where I fall. After becoming a boglehead, I first did VTI/VXUS, but I was constantly researching and worrying about the US vs international ratio. I then became somewhat convinced about a small/mid cap and value tilt. After adding this complexity and worrying about it for a bit, I decided to simplify and I just put everything into VT. However, small/mid cap and value tilts continued to make sense to me... then, AVGE (Avantis All Equity Markets ETF) opened up. It hits the sweet spot for me by being a single fund, being global (half way between the 40% international global market cap and the Bogle's 20% international), and having a slight mid/small and value tilt. For me, AVGE is the ultimate "I believe in low cost, broad market indexing, but I also kinda believe in size, value, international, etc., but not enough to bet everything on it." fund. I put all of my equity money into AVGE. So far, I feel no further urge to tinker.

TL;DR - I tinker less with a slightly non-market portfolio, so that is why I invest in it. As long as the non-market portfolio isn't too far from the market, I think it is better for investors if it keeps them from tinkering and second guessing.

Founding Father
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Re: Who should not invest in the market portfolio

Post by rkhusky »

FoundingFather wrote: Fri May 26, 2023 3:09 pm .. then, AVGE (Avantis All Equity Markets ETF) opened up. It hits the sweet spot for me by being a single fund, being global (half way between the 40% international global market cap and the Bogle's 20% international), and having a slight mid/small and value tilt. For me, AVGE is the ultimate "I believe in low cost, broad market indexing, but I also kinda believe in size, value, international, etc., but not enough to bet everything on it." fund. I put all of my equity money into AVGE. So far, I feel no further urge to tinker.
AVGE (which is comprised of 10 other Advantis funds) might have more tilt to value than you think, since their ordinary funds also have a value tilt, especially their small cap fund. AVGE also might have a larger tilt to Emerging Markets than you might expect.
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Re: Who should not invest in the market portfolio

Post by PoorHomieQuan »

FoundingFather wrote: Fri May 26, 2023 3:09 pm
This is about where I fall. After becoming a boglehead, I first did VTI/VXUS, but I was constantly researching and worrying about the US vs international ratio. I then became somewhat convinced about a small/mid cap and value tilt. After adding this complexity and worrying about it for a bit, I decided to simplify and I just put everything into VT. However, small/mid cap and value tilts continued to make sense to me... then, AVGE (Avantis All Equity Markets ETF) opened up. It hits the sweet spot for me by being a single fund, being global (half way between the 40% international global market cap and the Bogle's 20% international), and having a slight mid/small and value tilt. For me, AVGE is the ultimate "I believe in low cost, broad market indexing, but I also kinda believe in size, value, international, etc., but not enough to bet everything on it." fund. I put all of my equity money into AVGE. So far, I feel no further urge to tinker.

TL;DR - I tinker less with a slightly non-market portfolio, so that is why I invest in it. As long as the non-market portfolio isn't too far from the market, I think it is better for investors if it keeps them from tinkering and second guessing.

Founding Father
rkhusky wrote: Fri May 26, 2023 3:52 pm.
Yea, I switched from TDF to AVGE in my retirement accounts, and I have already been surprised by how much of a tilt it created, because it has had enormous tracking error this year. From inception to the banking crisis, it had small tracking error, like <1% from the benchmark. Then it exploded to around 5%. I think the problem is that AVUS is already overweight smalls and value, then you add AVLV and even more smalls. AVGE underweights the megacaps quite heavily and that has lead to an explosion in short-term tracking error.

I don't want to make changes at all, but I also don't want to stick with this fund for the next ten years if it continues to drift and eat away at my psyche. So my current plan to bring the tracking error down while maintaining a strong factor tilt is to switch to LCG:AVGV in a 1:3 ratio. By my reckoning, that keeps international at 30% and it applies factor magic to the parts of the market that are supposed to act logically. It also diversifies risk in that AVGV or AVGE alone is all full of the same kind of risk, i.e. economic risk, whereas LCG is prone to discount rate risk or "bubble" risk (which isn't really a risk as long as you get in before it inflates). Plus I think the LCG addition pretty much has to reduce tracking error when the top few names in LCG make up such a large percent of the market. I have also considered using SP500 instead of LCG, but we'll see. I have until next year to decide.

The comparison of these two portfolios and the benchmark is [url ="https://www.portfoliovisualizer.com/bac ... ion13_3=30"]here[/url]. So far they behave quite similarly, as one would hope, but the VUG/AVGV one survives better when there's a flight to megacap safety.

That said I am licking my lips waiting for small caps to revert to their historical valuation norms. Based on forward earnings already priced for a recession. I don't always believe mean reversion has to happen but it seems illogical that they'd go on being priced that way indefinitely.
Last edited by PoorHomieQuan on Fri May 26, 2023 4:59 pm, edited 1 time in total.
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Re: Who should not invest in the market portfolio

Post by burritoLover »

PoorHomieQuan wrote: Fri May 26, 2023 4:47 pm
FoundingFather wrote: Fri May 26, 2023 3:09 pm
This is about where I fall. After becoming a boglehead, I first did VTI/VXUS, but I was constantly researching and worrying about the US vs international ratio. I then became somewhat convinced about a small/mid cap and value tilt. After adding this complexity and worrying about it for a bit, I decided to simplify and I just put everything into VT. However, small/mid cap and value tilts continued to make sense to me... then, AVGE (Avantis All Equity Markets ETF) opened up. It hits the sweet spot for me by being a single fund, being global (half way between the 40% international global market cap and the Bogle's 20% international), and having a slight mid/small and value tilt. For me, AVGE is the ultimate "I believe in low cost, broad market indexing, but I also kinda believe in size, value, international, etc., but not enough to bet everything on it." fund. I put all of my equity money into AVGE. So far, I feel no further urge to tinker.

TL;DR - I tinker less with a slightly non-market portfolio, so that is why I invest in it. As long as the non-market portfolio isn't too far from the market, I think it is better for investors if it keeps them from tinkering and second guessing.

Founding Father
rkhusky wrote: Fri May 26, 2023 3:52 pm.
Yea, I actually switched from TDF to AVGE in my retirement accounts, and I have already been surprised by how much of a tilt it created, because it has had enormous tracking error this year. I think the problem is that AVUS is already factor tilted (tracks poorly with VTI), then you add on AVLV and overweight smalls. It underweights the megacaps quite heavily and that has lead to tracking error that I regret. (In my head, "tracking" means straying no more than one percent a year, or so. I guess we haven't seen how the rest of 2023 pans out, but it is off by 5% in the last few months which is annoying.)

I don't want to make changes at all, but I also don't want to stick with this fund for the next ten years if it continues to eat at me. So my current plan to bring the tracking error down while maintaining a strong factor tilt is to switch to SCHG:AVGV in a 1:3 ratio. By my calculation, that keeps international at 30% and it applies factor magic to the parts of the market that are supposed to act logically. It also diversifies risk in that AVGV or AVGE alone is all full of the same kind of risk, i.e. economic risk, whereas LCG is prone to discount rate risk (I guess). Plus I think it pretty much has to reduce tracking error when the top few names in LCG make up such a large percent of the market. I have also considered using SP500 instead of LCG, but we'll see. I have until next year to decide.
You aren't a good candidate for tilting if half a year is getting you antsy. Value can underperform for more than a decade. Sounds like you just don't want to take on more risk than the market.
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Re: Who should not invest in the market portfolio

Post by PoorHomieQuan »

burritoLover wrote: Fri May 26, 2023 4:55 pm You aren't a good candidate for tilting if half a year is getting you antsy. Value can underperform for more than a decade. Sounds like you just don't want to take on more risk than the market.
Like I said, I wish I had not tilted. But now that I have, I'm not locking in losses that quickly. I am finding a way to minimize future tracking error regret while maintaining a factor tilt. Also note that it's not underperformance that bothers me, outperformance by this magnitude would also be worrisome, although it would feel nicer. It's the size of the difference that is worrisome because if it's this much every year, then I'm going on a wild ride and have no idea where it ends up. If the idea is to start with MCW and tilt from there, I simply think that AVGE is more tilted than my taste allows, and probably doesn't really stick to the "start at MCW" philosophy since it has basically zero TSLA, for better or worse.

And TBH it doesn't matter whether I tilt or not; the chances of me feeling regret are determined by whether AVGE or VT outperforms the other and which one I chose. I would say it's a toss-up. I'm just as likely to give up on VT and go with AVGE after years of underperformance as the other way around. And my taxable account is not tilted, except in the small cap space (it's VUG/VBR/VTV/VXUS), so whether market or brainy academic tilting is has the best outcome, I guess I'm set either way.

Besides, you always have to choose something for a portfolio, and you'll find someone else who chose a different thing and claims it's the benchmark. Why is MCW the benchmark? And is it SPY, VTI, VT, or somewhere in between? Why not throw AVGE in the mix? There's literally no way to pick the best one without a time machine.
Last edited by PoorHomieQuan on Fri May 26, 2023 6:00 pm, edited 1 time in total.
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Re: Who should not invest in the market portfolio

Post by secondopinion »

PoorHomieQuan wrote: Fri May 26, 2023 5:06 pm
burritoLover wrote: Fri May 26, 2023 4:55 pm You aren't a good candidate for tilting if half a year is getting you antsy. Value can underperform for more than a decade. Sounds like you just don't want to take on more risk than the market.
Like I said, I wish I had not tilted. But now that I have, I'm not locking in losses that quickly. I am finding a way to minimize future tracking error regret while maintaining a factor tilt.

And TBH it doesn't matter whether I tilt or not; the chances of me feeling regret are determined by whether AVGE or VT outperforms the other and which one I chose. I would say it's a toss-up. I'm just as likely to give up on VT and go with AVGE after years of underperformance as the other way around. And my taxable account is not tilted, except in the small cap space (it's VUG/VBR/VTV/VXUS), so whether market or brainy academic tilting is has the best outcome, I guess I'm set either way.

Besides, you always have to choose something for a portfolio, and you'll find someone else who chose a different thing and claims it's the benchmark. Why is MCW the benchmark? And is it SPY, VTI, VT, or somewhere in between? Why not throw AVGE in the mix? There's literally no way to pick the best one without a time machine.
For a given set of investments, the statistically unbiased way to select the "invested dollars" as a means to construct a portfolio is to use market-cap weighting. That is, you will obtain the true average of that set of investments. As far as what set of investments to start with in the first place, that is where it is tricky. But at the end of the day, a benchmark only makes sense if you are trying to beat it. I do not tilt for better returns; it is solely for risk management. Therefore, I see no sense in using a benchmark.
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Re: Who should not invest in the market portfolio

Post by PoorHomieQuan »

One advantage of MCW is that you can probably stick with it your whole life, even if you switch jobs and get a new 401k or merge two individuals' investing accounts. It's always an easily-accessible option, wherever you are.

Am I going to be physically able to hold avantis funds for 25 years? Well, let's see...
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Re: Who should not invest in the market portfolio

Post by Marseille07 »

PoorHomieQuan wrote: Fri May 26, 2023 5:06 pm Like I said, I wish I had not tilted. But now that I have, I'm not locking in losses that quickly. I am finding a way to minimize future tracking error regret while maintaining a factor tilt. Also note that it's not underperformance that bothers me, outperformance by this magnitude would also be worrisome, although it would feel nicer. It's the size of the difference that is worrisome because if it's this much every year, then I'm going on a wild ride and have no idea where it ends up. If the idea is to start with MCW and tilt from there, I simply think that AVGE is more tilted than my taste allows, and probably doesn't really stick to the "start at MCW" philosophy since it has basically zero TSLA, for better or worse.

And TBH it doesn't matter whether I tilt or not; the chances of me feeling regret are determined by whether AVGE or VT outperforms the other and which one I chose. I would say it's a toss-up. I'm just as likely to give up on VT and go with AVGE after years of underperformance as the other way around. And my taxable account is not tilted, except in the small cap space (it's VUG/VBR/VTV/VXUS), so whether market or brainy academic tilting is has the best outcome, I guess I'm set either way.

Besides, you always have to choose something for a portfolio, and you'll find someone else who chose a different thing and claims it's the benchmark. Why is MCW the benchmark? And is it SPY, VTI, VT, or somewhere in between? Why not throw AVGE in the mix? There's literally no way to pick the best one without a time machine.
Who said MCW is the benchmark? When people here bash financial advisors not beating the benchmark, I'm pretty sure they're talking about S&P500, not VT.
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Re: Who should not invest in the market portfolio

Post by PoorHomieQuan »

Marseille07 wrote: Fri May 26, 2023 7:00 pm
PoorHomieQuan wrote: Fri May 26, 2023 5:06 pm Like I said, I wish I had not tilted. But now that I have, I'm not locking in losses that quickly. I am finding a way to minimize future tracking error regret while maintaining a factor tilt. Also note that it's not underperformance that bothers me, outperformance by this magnitude would also be worrisome, although it would feel nicer. It's the size of the difference that is worrisome because if it's this much every year, then I'm going on a wild ride and have no idea where it ends up. If the idea is to start with MCW and tilt from there, I simply think that AVGE is more tilted than my taste allows, and probably doesn't really stick to the "start at MCW" philosophy since it has basically zero TSLA, for better or worse.

And TBH it doesn't matter whether I tilt or not; the chances of me feeling regret are determined by whether AVGE or VT outperforms the other and which one I chose. I would say it's a toss-up. I'm just as likely to give up on VT and go with AVGE after years of underperformance as the other way around. And my taxable account is not tilted, except in the small cap space (it's VUG/VBR/VTV/VXUS), so whether market or brainy academic tilting is has the best outcome, I guess I'm set either way.

Besides, you always have to choose something for a portfolio, and you'll find someone else who chose a different thing and claims it's the benchmark. Why is MCW the benchmark? And is it SPY, VTI, VT, or somewhere in between? Why not throw AVGE in the mix? There's literally no way to pick the best one without a time machine.
Who said MCW is the benchmark? When people here bash financial advisors not beating the benchmark, I'm pretty sure they're talking about S&P500, not VT.
"MCW within your chosen investible universe" as opposed to fundamentally weighted or equal weighted.

I wonder how much returns are driven by FOMO. Like after the dotcom bust, were small cap returns driven by SPY investors piling into smalls for a few years? Is the current rather dramatic divergence between small cap valuations and large cap valuations driven by investors piling into what's worked recently? If so we need to find the cycle length of FOMO so we can align our rebalance cadence with it.
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Re: Who should not invest in the market portfolio

Post by Marseille07 »

PoorHomieQuan wrote: Fri May 26, 2023 7:08 pm "MCW within your chosen investible universe" as opposed to fundamentally weighted or equal weighted.

I wonder how much returns are driven by FOMO. Like after the dotcom bust, were small cap returns driven by SPY investors piling into smalls for a few years? Is the current rather dramatic divergence between small cap valuations and large cap valuations driven by investors piling into what's worked recently? If so we need to find the cycle length of FOMO so we can align our rebalance cadence with it.
Gotcha, I misunderstood then.

As far as FOMO, I don't think so. The way I view value stocks is that they are more resilient during a downturn, but they also don't grow as much. PE being low means investors don't like the stocks, not that they are implying crazy returns in the future.
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Re: Who should not invest in the market portfolio

Post by PoorHomieQuan »

Marseille07 wrote: Fri May 26, 2023 7:32 pm
PoorHomieQuan wrote: Fri May 26, 2023 7:08 pm "MCW within your chosen investible universe" as opposed to fundamentally weighted or equal weighted.

I wonder how much returns are driven by FOMO. Like after the dotcom bust, were small cap returns driven by SPY investors piling into smalls for a few years? Is the current rather dramatic divergence between small cap valuations and large cap valuations driven by investors piling into what's worked recently? If so we need to find the cycle length of FOMO so we can align our rebalance cadence with it.
Gotcha, I misunderstood then.

As far as FOMO, I don't think so. The way I view value stocks is that they are more resilient during a downturn, but they also don't grow as much. PE being low means investors don't like the stocks, not that they are implying crazy returns in the future.
This is a common misconception, but rather than explain how this is basically the opposite of the truth, I recommend you carry on with your current understanding because being a value investor is a very frustrating ordeal.
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Re: Who should not invest in the market portfolio

Post by Marseille07 »

PoorHomieQuan wrote: Fri May 26, 2023 8:05 pm This is a common misconception, but rather than explain how this is basically the opposite of the truth, I recommend you carry on with your current understanding because being a value investor is a very frustrating ordeal.
OK...I hope you realize a giant contradiction in your statement.
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Re: Who should not invest in the market portfolio

Post by PoorHomieQuan »

Marseille07 wrote: Fri May 26, 2023 8:18 pm
PoorHomieQuan wrote: Fri May 26, 2023 8:05 pm This is a common misconception, but rather than explain how this is basically the opposite of the truth, I recommend you carry on with your current understanding because being a value investor is a very frustrating ordeal.
OK...I hope you realize a giant contradiction in your statement.
I'm not sure what you mean?

"Not liking the stock" and expected returns go hand in hand. Look at Meta last year. Was the company's expected returns greater when it was trading at p/e of 9 or now, after the stock price has tripled?

Would AAPL have higher expected returns in 2018 at PE of 12 or now, at PE of 30?

There's a lot more to it than that, but higher p/e generally makes it harder to meet or exceed expectations, and therefore for stock price to grow. Also, running with the AAPL example, its price growth has been more due to p/e expansion than due to earnings growth. Some theorize that multiples can't expand forever, but then again there's NVDA.
Last edited by PoorHomieQuan on Fri May 26, 2023 8:45 pm, edited 1 time in total.
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Re: Who should not invest in the market portfolio

Post by Marseille07 »

PoorHomieQuan wrote: Fri May 26, 2023 8:40 pm I'm not sure what you mean?

"Not liking the stock" and expected returns go hand in hand. Look at Meta last year. Was the company's expected returns greater when it was trading at p/e of 9 or now, after the stock price has tripled?
They don't go hand in hand. By your logic, companies never go belly up; which is obviously false.

Meta is a different beast because they were one of the FAANGs at the end of the day, not a SCV.
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Re: Who should not invest in the market portfolio

Post by PoorHomieQuan »

Marseille07 wrote: Fri May 26, 2023 8:43 pm
PoorHomieQuan wrote: Fri May 26, 2023 8:40 pm I'm not sure what you mean?

"Not liking the stock" and expected returns go hand in hand. Look at Meta last year. Was the company's expected returns greater when it was trading at p/e of 9 or now, after the stock price has tripled?
They don't go hand in hand. By your logic, companies never go belly up; which is obviously false.

Meta is a different beast because they were one of the FAANGs at the end of the day, not a SCV.
Small caps are unloved at the moment exactly because of the fear that many may go belly up. And the worry is not ill-founded, but if you buy a whole lot of them, you find most don't go out of business and a few go on to become much larger (then your fund sells them after a lot of price appreciation; see SMCI for example).
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Re: Who should not invest in the market portfolio

Post by Marseille07 »

PoorHomieQuan wrote: Fri May 26, 2023 8:47 pm Small caps are unloved at the moment exactly because of the fear that many may go belly up. And the worry is not ill-founded, but if you buy a whole lot of them, you find most don't go out of business and a few go on to become much larger (then your fund sells them after a lot of price appreciation; see SMCI for example).
You and I don't know that. AVUV holds Macy's, a struggling department store. Let that sink in.
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Re: Who should not invest in the market portfolio

Post by PoorHomieQuan »

Marseille07 wrote: Fri May 26, 2023 8:53 pm
PoorHomieQuan wrote: Fri May 26, 2023 8:47 pm Small caps are unloved at the moment exactly because of the fear that many may go belly up. And the worry is not ill-founded, but if you buy a whole lot of them, you find most don't go out of business and a few go on to become much larger (then your fund sells them after a lot of price appreciation; see SMCI for example).
You and I don't know that. AVUV holds Macy's, a struggling department store. Let that sink in.
I'm not trying to convince you of anything. Obviously everything in AVUV can't be SMCI. But you are not the only one who's figured out that Macy's is struggling. I suppose the idea is that there's a turnaround story here. Look at Crocs. Companies that are priced for bankruptcy sometimes don't go bankrupt and then you make money off them.

No one is asking you to buy AVUV, but you can't say they aren't risky.
The way I view [X] is that they are more resilient during a downturn
Now do you think the sentence makes more sense if [X] is a struggling department store or a megacap with a market cap greater than the entire russell 2k?
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Re: Who should not invest in the market portfolio

Post by Marseille07 »

PoorHomieQuan wrote: Fri May 26, 2023 8:57 pm I'm not trying to convince you of anything. Obviously everything in AVUV can't be SMCI. But you are not the only one who's figured out that Macy's is struggling. I suppose the idea is that there's a turnaround story here. Look at Crocs. Companies that are priced for bankruptcy sometimes don't go bankrupt and then you make money off them.

No one is asking you to buy AVUV, but you can't say they aren't risky.
The way I view [X] is that they are more resilient during a downturn
Now do you think the sentence makes more sense if [X] is a struggling department store or a megacap with a market cap greater than the entire russell 2k?
I'm not talking about risk. I'm talking about businesses going south and the so-called "value stocks" might present them as opportunities when they are not.

I think the first step out of factor curse is to realize that risk premium is hogwash. It might make *some* sense when you are talking about risk-free assets vs equities, but not one factor of equities vs another.
BigDGB
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Re: Who should not invest in the market portfolio

Post by BigDGB »

I moved my VTI/VXUS portfolio to 100% AVGE in the first week of January, theorizing that the “ mild “ value factor tilt and the diminished exposure to the large US growth stocks with high PE’s intuitively made sense, along with the simplicity of one fund.

Even though I’m not a real patient person, I expected the tracking error to be mild, say 1 % underperformance to VT at times and .5-1% improved performance over long periods of time.

The current YTD under performance gap is over 4%.

Perhaps the unusual head winds combo of the uncertainty of the debt ceiling negotiations contributing to the big tech run to large, stable companies and the regional bank instability are causing this big performance gap and once these issues run their course we could have a performance reversion .

I also don’t want to make an amateurish move by moving back to a simple VTI/VXUS combo and losing those $ , however I will make that move if the gap closes to even and not look back.

It would be interesting to learn if someone more data savvy than me could really analyze the components of AVGE to offer an idea of the maximum tracking error to VT, or better yet, a 70/30 VTI/VXUS combo?

Thank You
LeoB
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Re: Who should not invest in the market portfolio

Post by LeoB »

BigDGB wrote: Sat May 27, 2023 9:49 am I moved my VTI/VXUS portfolio to 100% AVGE in the first week of January, theorizing that the “ mild “ value factor tilt and the diminished exposure to the large US growth stocks with high PE’s intuitively made sense, along with the simplicity of one fund.

Even though I’m not a real patient person, I expected the tracking error to be mild, say 1 % underperformance to VT at times and .5-1% improved performance over long periods of time.

The current YTD under performance gap is over 4%.

Perhaps the unusual head winds combo of the uncertainty of the debt ceiling negotiations contributing to the big tech run to large, stable companies and the regional bank instability are causing this big performance gap and once these issues run their course we could have a performance reversion .

I also don’t want to make an amateurish move by moving back to a simple VTI/VXUS combo and losing those $ , however I will make that move if the gap closes to even and not look back.

It would be interesting to learn if someone more data savvy than me could really analyze the components of AVGE to offer an idea of the maximum tracking error to VT, or better yet, a 70/30 VTI/VXUS combo?

Thank You
I think AVGE has performed similar to a 45-50% small-cap value tilt.

Here’s a portfoliovisualizer factor analysis: https://www.portfoliovisualizer.com/fa ... ation4_1=7. And a performance backtest: https://www.portfoliovisualizer.com/ba ... ion12_2=15. I used some of AVGE’s underlying funds to get a longer history.
BigDGB
Posts: 146
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Re: Who should not invest in the market portfolio

Post by BigDGB »

LeoB wrote: Sat May 27, 2023 1:18 pm
BigDGB wrote: Sat May 27, 2023 9:49 am I moved my VTI/VXUS portfolio to 100% AVGE in the first week of January, theorizing that the “ mild “ value factor tilt and the diminished exposure to the large US growth stocks with high PE’s intuitively made sense, along with the simplicity of one fund.

Even though I’m not a real patient person, I expected the tracking error to be mild, say 1 % underperformance to VT at times and .5-1% improved performance over long periods of time.

The current YTD under performance gap is over 4%.

Perhaps the unusual head winds combo of the uncertainty of the debt ceiling negotiations contributing to the big tech run to large, stable companies and the regional bank instability are causing this big performance gap and once these issues run their course we could have a performance reversion .

I also don’t want to make an amateurish move by moving back to a simple VTI/VXUS combo and losing those $ , however I will make that move if the gap closes to even and not look back.

It would be interesting to learn if someone more data savvy than me could really analyze the components of AVGE to offer an idea of the maximum tracking error to VT, or better yet, a 70/30 VTI/VXUS combo?

Thank You
I think AVGE has performed similar to a 45-50% small-cap value tilt.

Here’s a portfoliovisualizer factor analysis: https://www.portfoliovisualizer.com/fa ... ation4_1=7. And a performance backtest: https://www.portfoliovisualizer.com/ba ... ion12_2=15. I used some of AVGE’s underlying funds to get a longer history.
Thank You LeoB!

Appreciated.

I’ll patiently hang on a bit to see if we get some broadening out in the market.
FactorsForLife
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Re: Who should not invest in the market portfolio

Post by FactorsForLife »

Marseille07 wrote: Fri May 26, 2023 10:41 pm I'm not talking about risk. I'm talking about businesses going south and the so-called "value stocks" might present them as opportunities when they are not.
Yes, a pure value index will own "value trap" stocks. Not every stock will survive, but that's exactly why a value investor would want to own a large basket of value stocks. The ones that do go on to outperform should more than make up for the value traps that were owned. That's also why I like Avantis' methodology. They equal weight value and profitability so they can (hopefully) avoid the value traps.
I think the first step out of factor curse is to realize that risk premium is hogwash. It might make *some* sense when you are talking about risk-free assets vs equities, but not one factor of equities vs another.
Can you expand on the "risk premiums are hogwash" part?
Marseille07
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Re: Who should not invest in the market portfolio

Post by Marseille07 »

FactorsForLife wrote: Mon Jun 26, 2023 9:33 am
I think the first step out of factor curse is to realize that risk premium is hogwash. It might make *some* sense when you are talking about risk-free assets vs equities, but not one factor of equities vs another.
Can you expand on the "risk premiums are hogwash" part?
Well, if you look at the risk metrics such as stdev, max drawdown, worst year etc etc the difference between S&P500 and SCV isn't much. Investors aren't buying SCV because SCV is riskier. In fact such reasoning is inherently nonsensical.
secondopinion
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Joined: Wed Dec 02, 2020 12:18 pm

Re: Who should not invest in the market portfolio

Post by secondopinion »

FactorsForLife wrote: Mon Jun 26, 2023 9:33 am
Marseille07 wrote: Fri May 26, 2023 10:41 pm I'm not talking about risk. I'm talking about businesses going south and the so-called "value stocks" might present them as opportunities when they are not.
Yes, a pure value index will own "value trap" stocks. Not every stock will survive, but that's exactly why a value investor would want to own a large basket of value stocks. The ones that do go on to outperform should more than make up for the value traps that were owned. That's also why I like Avantis' methodology. They equal weight value and profitability so they can (hopefully) avoid the value traps.
I think the first step out of factor curse is to realize that risk premium is hogwash. It might make *some* sense when you are talking about risk-free assets vs equities, but not one factor of equities vs another.
Can you expand on the "risk premiums are hogwash" part?
Why should we expect a premium for selecting value stocks over that of growth stocks? Factors are meant to slice a market into parts that are likely to deviate from each other significantly. Let me ask a question, can you justify a value tilt even if it meant long-term that a negative premium existed for value stocks? Furthermore, can you justify a growth tilt even if it meant long-term that a negative premium existed?
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.
Marseille07
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Re: Who should not invest in the market portfolio

Post by Marseille07 »

secondopinion wrote: Mon Jun 26, 2023 10:58 am Let me ask a question, can you justify a value tilt even if it meant long-term that a negative premium existed for value stocks? Furthermore, can you justify a growth tilt even if it meant long-term that a negative premium existed?
There's no premium. Volatility is not a source of premium.

We hold equities because their return expectation is superior, not because they go up and down more than bonds (and the same line of reasoning applies for US TSM vs SCV).
Topic Author
exodusing
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Re: Who should not invest in the market portfolio

Post by exodusing »

Marseille07 wrote: Mon Jun 26, 2023 11:03 am
secondopinion wrote: Mon Jun 26, 2023 10:58 am Let me ask a question, can you justify a value tilt even if it meant long-term that a negative premium existed for value stocks? Furthermore, can you justify a growth tilt even if it meant long-term that a negative premium existed?
There's no premium. Volatility is not a source of premium.

We hold equities because their return expectation is superior, not because they go up and down more than bonds (and the same line of reasoning applies for US TSM vs SCV).
More (undiversifiable) risk should lead to more expected return. Volatility is typically regarded as a risk metric.
secondopinion
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Re: Who should not invest in the market portfolio

Post by secondopinion »

Marseille07 wrote: Mon Jun 26, 2023 11:03 am
secondopinion wrote: Mon Jun 26, 2023 10:58 am Let me ask a question, can you justify a value tilt even if it meant long-term that a negative premium existed for value stocks? Furthermore, can you justify a growth tilt even if it meant long-term that a negative premium existed?
There's no premium. Volatility is not a source of premium.

We hold equities because their return expectation is superior, not because they go up and down more than bonds.
Notice the "if"s; I am not convinced there is a premium. I also said "why should we expect a premium?" I asked for there was a negative premium, then what justification would there be to tilt that way? There can be such a justification; but it truly is relevant to only some of the investors; and there must be enough investors that can likewise justify an opposite 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.
Marseille07
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Re: Who should not invest in the market portfolio

Post by Marseille07 »

exodusing wrote: Mon Jun 26, 2023 11:12 am More (undiversifiable) risk should lead to more expected return. Volatility is typically regarded as a risk metric.
Volatility is a risk metric but high volatility does not promise higher returns. This argument has been brought up before - SCG's volatility is higher than any other factors but the return isn't there. And the small cap camp started calling SCG a poison because SCG doesn't fit their narrative.
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