"Does it Pay to Diversify by Style?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
Taylor Larimore
Posts: 32839
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

"Does it Pay to Diversify by Style?

Post by Taylor Larimore »

Bogleheads:

"Does it Pay to Diversify by Style?" Bogleheads love to discuss this topic. We do not need to wait any longer. Morningstar has completed a study on the subject and this is their finding:

"Because it’s impossible to predict which style will fare best in any particular market, it’s prudent to maintain a diversified portfolio and avoid overweighting either value or growth."


This is the link: https://www.morningstar.com/portfolios/ ... y-by-style

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk."
"Simplicity is the master key to financial success." -- Jack Bogle
ChinchillaWhiplash
Posts: 1574
Joined: Sat Jan 20, 2018 4:40 pm
Location: Land of Hypoxia

Re: "Does it Pay to Diversify by Style?

Post by ChinchillaWhiplash »

Here is where the problem is. TSM as in VTI has a LCG tilt with 32% in this category. Tech tilt to with highest % in this sector at >24%. Might be a good argument for a “tilt” towards Small and Value to balance things out. Pretty easy and cheap to slice and dice nowadays. Is there a fund that does this already that is still relatively passive?
User avatar
Topic Author
Taylor Larimore
Posts: 32839
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

Re: "Does it Pay to Diversify by Style?

Post by Taylor Larimore »

ChinchillaWhiplash wrote: Fri May 26, 2023 1:40 pm Here is where the problem is. TSM as in VTI has a LCG tilt with 32% in this category. Tech tilt to with highest % in this sector at >24%. Might be a good argument for a “tilt” towards Small and Value to balance things out. Pretty easy and cheap to slice and dice nowadays. Is there a fund that does this already that is still relatively passive?
ChinchillaWhiplash:

In my opinion when we hold nearly every stock in the total stock market there is no "tilt". Adding weight to a particular category is a "tilt."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Never think you know more than the market, nobody does."
Last edited by Taylor Larimore on Fri May 26, 2023 1:51 pm, edited 1 time in total.
"Simplicity is the master key to financial success." -- Jack Bogle
RationalWalk
Posts: 474
Joined: Sun May 07, 2023 12:31 pm

Re: "Does it Pay to Diversify by Style?

Post by RationalWalk »

One way to balance growth and value is to own total world (VT) instead of VTI. You get better style diversification as well as international diversification. Still a tilt toward large cap though.
“Meteorologists” are the MOST accurate predictors of the future -- for the next 3-days...
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: "Does it Pay to Diversify by Style?

Post by nedsaid »

Style investing and sector investing were the precursors to factor investing. As a younger investor, my style was predominantly Value oriented though I had a taste for aggressive growth investments. I found that with my individual stocks that I favored certain industries over others.

Diversifying by style makes some sense but you want to make certain that you aren't just recreating the Total Stock Market Index with higher expenses. The whole purpose of style investing, sector investing, or factor investing is to favor certain stocks over other stocks. In other words, this doesn't make sense unless you are tilting away from Total Stock Market Index in some fashion. Otherwise, just buy the index.
A fool and his money are good for business.
bendix
Posts: 777
Joined: Thu Feb 16, 2023 9:35 pm

Re: "Does it Pay to Diversify by Style?

Post by bendix »

I could imagine that if you hold a Value ETF and a Growth ETF of otherwise identical scope, you could use this to your benefit in situations where e.g. Growth gains a lot over Value, you could sell Growth and buy Value or the other way around, which you couldnt do if you have an ETF that has both Growth and Value in one ETF. I am not sure I would get into that, though.
User avatar
nisiprius
Advisory Board
Posts: 52105
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: "Does it Pay to Diversify by Style?

Post by nisiprius »

ChinchillaWhiplash wrote: Fri May 26, 2023 1:40 pm Here is where the problem is. TSM as in VTI has a LCG tilt with 32% in this category. Tech tilt to with highest % in this sector at >24%. Might be a good argument for a “tilt” towards Small and Value to balance things out. Pretty easy and cheap to slice and dice nowadays. Is there a fund that does this already that is still relatively passive?
There is virtually no "tilt." Of course it depends on how you choose to define and measure growth/value and large/small. But, for example, according to the way Morningstar chooses to define and measure them, it is darned close to the center point on seven factors.

Source

Image

For comparison, here's an example of a fund which does have significant factor tilts in Morningstar's chart:

Image

You can only be "tilted" with respect to some standard for what is "level," and the whole market is the only reasonable reference for "level."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: "Does it Pay to Diversify by Style?

Post by nedsaid »

Taylor Larimore wrote: Fri May 26, 2023 1:50 pm

In my opinion when we hold nearly every stock in the total stock market there is no "tilt". Adding weight to a particular category is a "tilt."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Never think you know more than the market, nobody does."
Ding, ding, ding, ding, ding, ding, ding.

You got it Taylor. You go to the head of the class.

I think you are starting to understand that if you invest by style or factor, whatever one wants to call it,
you have to tilt away from the Total Stock Market Index. When you own Total Stock Market Index, by definition there is no tilt, it should be a very, very, very close proxy to the Market factor itself.

Odd, someone ran a Total Stock Market Index fund through Portfolio Visualizer and found that the fund had a very, very small Quality factor loading, I think it was something like 0.05. I had often wondered about this myself and someone actually tested this idea. But safe to say that Total Stock Market Index should be factor and style neutral except for the Market factor itself.
A fool and his money are good for business.
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: "Does it Pay to Diversify by Style?

Post by nedsaid »

nisiprius wrote: Fri May 26, 2023 2:07 pm
ChinchillaWhiplash wrote: Fri May 26, 2023 1:40 pm Here is where the problem is. TSM as in VTI has a LCG tilt with 32% in this category. Tech tilt to with highest % in this sector at >24%. Might be a good argument for a “tilt” towards Small and Value to balance things out. Pretty easy and cheap to slice and dice nowadays. Is there a fund that does this already that is still relatively passive?
There is virtually no "tilt." Of course it depends on how you choose to define and measure growth/value and large/small. But, for example, according to the way Morningstar chooses to define and measure them, it is darned close to the center point on seven factors.

Source

Image

For comparison, here's an example of a fund which does have significant factor tilts in Morningstar's chart:

Image

You can only be "tilted" with respect to some standard for what is "level," and the whole market is the only reasonable reference for "level."
Keep in mind, the Thermometer graphs at Morningstar give a good visual picture of factor loadings but you also should look at Portfolio Visualizer which will give a somewhat different answer. I wonder if Portfolio Visualizer does a better job of capturing factor loadings. In practice, I would look at both.
A fool and his money are good for business.
User avatar
Topic Author
Taylor Larimore
Posts: 32839
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

Re: "Does it Pay to Diversify by Style?

Post by Taylor Larimore »

Taylor Larimore wrote: ↑Fri May 26, 2023 6:50 pm
In my opinion when we hold nearly every stock in the total stock market there is no "tilt". Adding weight to a particular category is a "tilt."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Never think you know more than the market, nobody does."
nedsaid wrote:
Ding, ding, ding, ding, ding, ding, ding.

You got it Taylor. You go to the head of the class.
Thank you, nedsaid. I'm learning.

Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: "Does it Pay to Diversify by Style?

Post by nedsaid »

Taylor Larimore wrote: Fri May 26, 2023 2:40 pm Taylor Larimore wrote: ↑Fri May 26, 2023 6:50 pm
In my opinion when we hold nearly every stock in the total stock market there is no "tilt". Adding weight to a particular category is a "tilt."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Never think you know more than the market, nobody does."
nedsaid wrote:
Ding, ding, ding, ding, ding, ding, ding.

You got it Taylor. You go to the head of the class.
Thank you, nedsaid. I'm learning.

Taylor
I am still learning too. Great teachers like you are great teachers in part because they were great
students. Speaking for myself, there is an awful lot that I don't know, something I found out when I
was buying individual TIPS. The minute I think I have all this figured out, I find out there are vast
amounts of things that I just don't know.
A fool and his money are good for business.
ChinchillaWhiplash
Posts: 1574
Joined: Sat Jan 20, 2018 4:40 pm
Location: Land of Hypoxia

Re: "Does it Pay to Diversify by Style?

Post by ChinchillaWhiplash »

So with this conclusion from the article it seems that one should diversify with “style”. I would think that the heaviest weight should be MCB with = parts of the surrounding styles.

“But the huge performance differential between value and growth during the 2022 bear market is a testament to the value of style-based diversification. Because it’s impossible to predict which style will fare best in any particular market, it’s prudent to maintain a diversified portfolio and avoid overweighting either value or growth.”

Doesn’t TSM have a natural tilt to it due to outperformance of one of the style boxes? Is the difference being that the tilts are dynamic and constantly changing so you do not have to keep adjusting your %s? This way you don’t worry about which box is doing the best. I still say that it has a bit of a tilt, at least at this point in time.
User avatar
grabiner
Advisory Board
Posts: 35265
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: "Does it Pay to Diversify by Style?

Post by grabiner »

ChinchillaWhiplash wrote: Fri May 26, 2023 3:26 pm Doesn’t TSM have a natural tilt to it due to outperformance of one of the style boxes? Is the difference being that the tilts are dynamic and constantly changing so you do not have to keep adjusting your %s? This way you don’t worry about which box is doing the best. I still say that it has a bit of a tilt, at least at this point in time.
The reason TSM doesn't tilt is that it follows the market changes. If growth stocks outperformed value stocks last year, then more than 50% of the market is in last year's growth stocks. However, with growth defined as half the market, some of those stocks have been reclassified as value, so that 50% of the market is in this year's growth stocks and TSM has no overweight.

In contrast, if you held a separate growth index and value index and growth outperformed, you would now hold more in the growth index than in the value index. The growth index would sell those growth stocks that were reclassified as value stocks, and buy more of those that are still growth stocks.

The lack of tilt is separate from the fact that TSM is dominated by the large stocks. This is the result of the way the market works; if you define the market to be 85% large-cap (as Vanguard Large-Cap Index does), then TSM's returns will be close to the large-cap return, even if small-caps underperform or outperform. A portfolio with equal weights in small-caps and large-caps has a substantial overweight in small-caps.
Wiki David Grabiner
RationalWalk
Posts: 474
Joined: Sun May 07, 2023 12:31 pm

Re: "Does it Pay to Diversify by Style?

Post by RationalWalk »

nedsaid wrote: Fri May 26, 2023 2:25 pm
Taylor Larimore wrote: Fri May 26, 2023 1:50 pm

In my opinion when we hold nearly every stock in the total stock market there is no "tilt". Adding weight to a particular category is a "tilt."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Never think you know more than the market, nobody does."
Ding, ding, ding, ding, ding, ding, ding.

You got it Taylor. You go to the head of the class.

I think you are starting to understand that if you invest by style or factor, whatever one wants to call it,
you have to tilt away from the Total Stock Market Index. When you own Total Stock Market Index, by definition there is no tilt, it should be a very, very, very close proxy to the Market factor itself.

Odd, someone ran a Total Stock Market Index fund through Portfolio Visualizer and found that the fund had a very, very small Quality factor loading, I think it was something like 0.05. I had often wondered about this myself and someone actually tested this idea. But safe to say that Total Stock Market Index should be factor and style neutral except for the Market factor itself.
To which "market factor" are you referring? There isn't just one market factor. What about the global market? TSM isn't neutral with respect to that "market factor" is it? Which benchmark is the right one? Methinks, Prof. Sharpe has an opinion about this.
“Meteorologists” are the MOST accurate predictors of the future -- for the next 3-days...
seajay
Posts: 1644
Joined: Sat May 01, 2021 3:26 pm
Contact:

Re: "Does it Pay to Diversify by Style?

Post by seajay »

grabiner wrote: Fri May 26, 2023 10:24 pm
ChinchillaWhiplash wrote: Fri May 26, 2023 3:26 pm Doesn’t TSM have a natural tilt to it due to outperformance of one of the style boxes? Is the difference being that the tilts are dynamic and constantly changing so you do not have to keep adjusting your %s? This way you don’t worry about which box is doing the best. I still say that it has a bit of a tilt, at least at this point in time.
The reason TSM doesn't tilt is that it follows the market changes. If growth stocks outperformed value stocks last year, then more than 50% of the market is in last year's growth stocks. However, with growth defined as half the market, some of those stocks have been reclassified as value, so that 50% of the market is in this year's growth stocks and TSM has no overweight.

In contrast, if you held a separate growth index and value index and growth outperformed, you would now hold more in the growth index than in the value index. The growth index would sell those growth stocks that were reclassified as value stocks, and buy more of those that are still growth stocks.

The lack of tilt is separate from the fact that TSM is dominated by the large stocks. This is the result of the way the market works; if you define the market to be 85% large-cap (as Vanguard Large-Cap Index does), then TSM's returns will be close to the large-cap return, even if small-caps underperform or outperform. A portfolio with equal weights in small-caps and large-caps has a substantial overweight in small-caps.
For 30 year SWR, historic bad case misalignment for 100% stock and 50/50 stock/bonds are apparent, better to hold equal amounts of each. Ditto value/growth. 37.5% small cap value, 37.5% large cap growth, 25% bonds for instance may be overweight in small cap in cap weighted terms, however equal weighting is the more neutral, independently optimizes the 'rebalance bonus'. Cap weighting weights to rear-view out-performers, is the more tilted.
User avatar
bertilak
Posts: 10711
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: "Does it Pay to Diversify by Style?

Post by bertilak »

nedsaid wrote: Fri May 26, 2023 3:01 pm
I am still learning too. Great teachers like you are great teachers in part because they were great
students. Speaking for myself, there is an awful lot that I don't know, something I found out when I
was buying individual TIPS. The minute I think I have all this figured out, I find out there are vast
amounts of things that I just don't know.
One of my favorite quotes, spoken by John Dortmunder in one of Donald E. Westlake's crime novels:
Whenever things sound easy it turns out there's one part you didn't hear.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
rkhusky
Posts: 17654
Joined: Thu Aug 18, 2011 8:09 pm

Re: "Does it Pay to Diversify by Style?

Post by rkhusky »

RationalWalk wrote: Sat May 27, 2023 1:18 pm To which "market factor" are you referring? There isn't just one market factor. What about the global market? TSM isn't neutral with respect to that "market factor" is it? Which benchmark is the right one? Methinks, Prof. Sharpe has an opinion about this.
If you use PortfolioVisualizer’s Int’l Developed market, VT’s loading on the market is 1.02, size loading is -0.08, and value loading is 0.01. Unfortunately, PV doesn’t have a global market.
Logan Roy
Posts: 1794
Joined: Sun May 29, 2022 10:15 am

Re: "Does it Pay to Diversify by Style?

Post by Logan Roy »

ChinchillaWhiplash wrote: Fri May 26, 2023 3:26 pm So with this conclusion from the article it seems that one should diversify with “style”. I would think that the heaviest weight should be MCB with = parts of the surrounding styles.

“But the huge performance differential between value and growth during the 2022 bear market is a testament to the value of style-based diversification. Because it’s impossible to predict which style will fare best in any particular market, it’s prudent to maintain a diversified portfolio and avoid overweighting either value or growth.”

Doesn’t TSM have a natural tilt to it due to outperformance of one of the style boxes? Is the difference being that the tilts are dynamic and constantly changing so you do not have to keep adjusting your %s? This way you don’t worry about which box is doing the best. I still say that it has a bit of a tilt, at least at this point in time.
I think any apparent tilt from a broad market index is going to be more a calibration issue than a style issue. We have to decide what 'neutral' is, based on something like TSM. But we're obviously not measuring something real – it's an abstract. Like deciding who's tall: compared to whom?

The big problem I have with most/all research on styles is how easy it is to generate compelling results. We can divide stocks by any arbitrary rule – vowels and consonants, moustaches in boardrooms, etc. And because long-term results are so dependent on a small number of businesses, it's very easy to over or underweight those. So we might find tickers that start in vowels hedge portfolios against recessions, and diversify consonant portfolios at certain weightings.. And because we can invent a reason for why it works, after we've data-mined that it did work, it can be elevated to some kind of academic status.

I think value is useful in that it overweights economically sensitive sectors (energy, financials, etc.), and if you build a portfolio that uses things like treasuries and gold, which react in different but predictable ways to economic swings, it should be possible to achieve lower correlations between stocks and other assets. But I think sectors are a more useful way of dividing businesses than this abstract fundamentals weighting stuff.
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: "Does it Pay to Diversify by Style?

Post by nedsaid »

RationalWalk wrote: Sat May 27, 2023 1:18 pm
nedsaid wrote: Fri May 26, 2023 2:25 pm
Taylor Larimore wrote: Fri May 26, 2023 1:50 pm

In my opinion when we hold nearly every stock in the total stock market there is no "tilt". Adding weight to a particular category is a "tilt."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Never think you know more than the market, nobody does."
Ding, ding, ding, ding, ding, ding, ding.

You got it Taylor. You go to the head of the class.

I think you are starting to understand that if you invest by style or factor, whatever one wants to call it,
you have to tilt away from the Total Stock Market Index. When you own Total Stock Market Index, by definition there is no tilt, it should be a very, very, very close proxy to the Market factor itself.

Odd, someone ran a Total Stock Market Index fund through Portfolio Visualizer and found that the fund had a very, very small Quality factor loading, I think it was something like 0.05. I had often wondered about this myself and someone actually tested this idea. But safe to say that Total Stock Market Index should be factor and style neutral except for the Market factor itself.
To which "market factor" are you referring? There isn't just one market factor. What about the global market? TSM isn't neutral with respect to that "market factor" is it? Which benchmark is the right one? Methinks, Prof. Sharpe has an opinion about this.
At one time, the S&P 500 was considered to be the market. Beta under the Capital Asset Pricing Model was
considered to be the volatility of the S&P 500. The Market Factor was represented by S&P 500, today it would be the Total Stock Market Index. Keep in mind that "Total" isn't really total as there are a bunch of stocks that are publicly traded that aren't represented in a Total Stock Market Index fund, one reason being is that many Micro-Caps are not investable for institutional investors. My guess is that maybe 10,000 stocks trade in the U.S. but a bit less than 4,000 are represented in a Total Stock Market Index. The market cap of the other 6,000 stocks would be negligible compared to the 4,000 or so in a Total Stock Market Index fund.
A fool and his money are good for business.
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: "Does it Pay to Diversify by Style?

Post by nedsaid »

bertilak wrote: Sat May 27, 2023 2:54 pm
nedsaid wrote: Fri May 26, 2023 3:01 pm
I am still learning too. Great teachers like you are great teachers in part because they were great
students. Speaking for myself, there is an awful lot that I don't know, something I found out when I
was buying individual TIPS. The minute I think I have all this figured out, I find out there are vast
amounts of things that I just don't know.
One of my favorite quotes, spoken by John Dortmunder in one of Donald E. Westlake's crime novels:
Whenever things sound easy it turns out there's one part you didn't hear.
Yep.
A fool and his money are good for business.
User avatar
Charles Joseph
Posts: 2366
Joined: Tue Apr 05, 2022 10:49 pm

Re: "Does it Pay to Diversify by Style?

Post by Charles Joseph »

No it does not.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
seajay
Posts: 1644
Joined: Sat May 01, 2021 3:26 pm
Contact:

Re: "Does it Pay to Diversify by Style?

Post by seajay »

Less a case of paying, more a case of concentration risk-reduction.

Because it’s impossible to predict what will fare best, it’s prudent to maintain a diversified portfolio and avoid overweighting value or growth or size or currency or asset or market or brokerage ...
User avatar
White Coat Investor
Posts: 17338
Joined: Fri Mar 02, 2007 8:11 pm
Location: Greatest Snow On Earth

Re: "Does it Pay to Diversify by Style?

Post by White Coat Investor »

Charles Joseph wrote: Sun May 28, 2023 6:39 pm No it does not.
I think the proper answer is "No it did not in the last 15ish years." None of us know what the future holds and this article makes the classic error of projecting the recent past into the future.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
User avatar
Charles Joseph
Posts: 2366
Joined: Tue Apr 05, 2022 10:49 pm

Re: "Does it Pay to Diversify by Style?

Post by Charles Joseph »

White Coat Investor wrote: Mon May 29, 2023 5:01 am
Charles Joseph wrote: Sun May 28, 2023 6:39 pm No it does not.
I think the proper answer is "No it did not in the last 15ish years." None of us know what the future holds and this article makes the classic error of projecting the recent past into the future, so just hold both growth and value in equal weight. That way you're covered.
No, doc? Maybe I'm wrong. My thoughts change by the day, it seems.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
User avatar
White Coat Investor
Posts: 17338
Joined: Fri Mar 02, 2007 8:11 pm
Location: Greatest Snow On Earth

Re: "Does it Pay to Diversify by Style?

Post by White Coat Investor »

Charles Joseph wrote: Mon May 29, 2023 6:15 am
White Coat Investor wrote: Mon May 29, 2023 5:01 am
Charles Joseph wrote: Sun May 28, 2023 6:39 pm No it does not.
I think the proper answer is "No it did not in the last 15ish years." None of us know what the future holds and this article makes the classic error of projecting the recent past into the future, so just hold both growth and value in equal weight. That way you're covered.
No, doc? Maybe I'm wrong. My thoughts change by the day, it seems.
Not sure I'd do that. I'd just go all TSM rather than try some weird equal weight thing between a value and a growth fund.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
secondopinion
Posts: 6008
Joined: Wed Dec 02, 2020 12:18 pm

Re: "Does it Pay to Diversify by Style?

Post by secondopinion »

Logan Roy wrote: Sun May 28, 2023 4:59 am
ChinchillaWhiplash wrote: Fri May 26, 2023 3:26 pm So with this conclusion from the article it seems that one should diversify with “style”. I would think that the heaviest weight should be MCB with = parts of the surrounding styles.

“But the huge performance differential between value and growth during the 2022 bear market is a testament to the value of style-based diversification. Because it’s impossible to predict which style will fare best in any particular market, it’s prudent to maintain a diversified portfolio and avoid overweighting either value or growth.”

Doesn’t TSM have a natural tilt to it due to outperformance of one of the style boxes? Is the difference being that the tilts are dynamic and constantly changing so you do not have to keep adjusting your %s? This way you don’t worry about which box is doing the best. I still say that it has a bit of a tilt, at least at this point in time.
I think any apparent tilt from a broad market index is going to be more a calibration issue than a style issue. We have to decide what 'neutral' is, based on something like TSM. But we're obviously not measuring something real – it's an abstract. Like deciding who's tall: compared to whom?

The big problem I have with most/all research on styles is how easy it is to generate compelling results. We can divide stocks by any arbitrary rule – vowels and consonants, moustaches in boardrooms, etc. And because long-term results are so dependent on a small number of businesses, it's very easy to over or underweight those. So we might find tickers that start in vowels hedge portfolios against recessions, and diversify consonant portfolios at certain weightings.. And because we can invent a reason for why it works, after we've data-mined that it did work, it can be elevated to some kind of academic status.

I think value is useful in that it overweights economically sensitive sectors (energy, financials, etc.), and if you build a portfolio that uses things like treasuries and gold, which react in different but predictable ways to economic swings, it should be possible to achieve lower correlations between stocks and other assets. But I think sectors are a more useful way of dividing businesses than this abstract fundamentals weighting stuff.
This is merely a different way to slice the same watermelon into pieces that one will accept. Since I really do not think the market rewards a particular tilt in the very long-term, one must merely overweight those risks that they can tolerate and underweight those they cannot (unless one is deliberately seeking risk, then flip the recommendation; one is bound to get what they pay for).
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.
AlwaysLearningMore
Posts: 1914
Joined: Sun Jul 26, 2020 2:29 pm

Re: "Does it Pay to Diversify by Style?

Post by AlwaysLearningMore »

Taylor Larimore wrote: Fri May 26, 2023 1:50 pm
ChinchillaWhiplash wrote: Fri May 26, 2023 1:40 pm Here is where the problem is. TSM as in VTI has a LCG tilt with 32% in this category. Tech tilt to with highest % in this sector at >24%. Might be a good argument for a “tilt” towards Small and Value to balance things out. Pretty easy and cheap to slice and dice nowadays. Is there a fund that does this already that is still relatively passive?
ChinchillaWhiplash:

In my opinion when we hold nearly every stock in the total stock market there is no "tilt". Adding weight to a particular category is a "tilt."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Never think you know more than the market, nobody does."
Vanguard Total Stock Market vs Vanguard Large-Cap Index Fund

Image

Vanguard Large-Cap Index Fund https://investor.vanguard.com/investmen ... mance-fees
Image
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
User avatar
Charles Joseph
Posts: 2366
Joined: Tue Apr 05, 2022 10:49 pm

Re: "Does it Pay to Diversify by Style?

Post by Charles Joseph »

White Coat Investor wrote: Mon May 29, 2023 4:53 pm
Charles Joseph wrote: Mon May 29, 2023 6:15 am
White Coat Investor wrote: Mon May 29, 2023 5:01 am
Charles Joseph wrote: Sun May 28, 2023 6:39 pm No it does not.
I think the proper answer is "No it did not in the last 15ish years." None of us know what the future holds and this article makes the classic error of projecting the recent past into the future, so just hold both growth and value in equal weight. That way you're covered.
No, doc? Maybe I'm wrong. My thoughts change by the day, it seems.
Not sure I'd do that. I'd just go all TSM rather than try some weird equal weight thing between a value and a growth fund.
I stand corrected. I meant market weight.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
RationalWalk
Posts: 474
Joined: Sun May 07, 2023 12:31 pm

Re: "Does it Pay to Diversify by Style?

Post by RationalWalk »

White Coat Investor wrote: Mon May 29, 2023 4:53 pm
Charles Joseph wrote: Mon May 29, 2023 6:15 am
White Coat Investor wrote: Mon May 29, 2023 5:01 am
Charles Joseph wrote: Sun May 28, 2023 6:39 pm No it does not.
I think the proper answer is "No it did not in the last 15ish years." None of us know what the future holds and this article makes the classic error of projecting the recent past into the future, so just hold both growth and value in equal weight. That way you're covered.
No, doc? Maybe I'm wrong. My thoughts change by the day, it seems.
Not sure I'd do that. I'd just go all TSM rather than try some weird equal weight thing between a value and a growth fund.
The interesting thing about a "total" fund is that there is never any rebalancing of components (whatever is of interest to you). The component weights are simply allowed to drift to wherever they might drift. For example, "total world" has drifted from about 30% U.S. in 2010 to nearly 60% U.S. currently. Is this good or bad? Difficult to say; regardless, investors in the "total world" equity index have been trend followers and not re-balancers. Such is the nature of cap-weighted indexes, for good or for evil. Also the case with the "growth" vs. "value" components of TSM. If rebalancing is a good thing, then we have to decide what is worth rebalancing, put a stake in the ground and adhere to our discipline. Otherwise, let's just drift along. Mr. Bogle didn't much believe that rebalancing was necessary, except maybe at the extremes of irrational exuberance, and maybe that's right. We just have to decide when we've reached an extreme.
“Meteorologists” are the MOST accurate predictors of the future -- for the next 3-days...
User avatar
burritoLover
Posts: 4097
Joined: Sun Jul 05, 2020 12:13 pm

Re: "Does it Pay to Diversify by Style?

Post by burritoLover »

Someone at another forum said Taylor once had a small-cap tilt back in the day. True? If so, curious what convinced you to go total market.
User avatar
Topic Author
Taylor Larimore
Posts: 32839
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

Re: "Does it Pay to Diversify by Style?

Post by Taylor Larimore »

burritoLover wrote: Tue May 30, 2023 6:22 am Someone at another forum said Taylor once had a small-cap tilt back in the day. True? If so, curious what convinced you to go total market.
burritoLover:

My small-cap fund was underperforming and I learned what experts recommend (simple, low-cost, tax-efficient, total market index funds) -- not what fund salesmen recommend hoping to get higher commissions.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.”
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
burritoLover
Posts: 4097
Joined: Sun Jul 05, 2020 12:13 pm

Re: "Does it Pay to Diversify by Style?

Post by burritoLover »

Taylor Larimore wrote: Tue May 30, 2023 2:12 pm
burritoLover wrote: Tue May 30, 2023 6:22 am Someone at another forum said Taylor once had a small-cap tilt back in the day. True? If so, curious what convinced you to go total market.
burritoLover:

My small-cap fund was underperforming and I learned what experts recommend (simple, low-cost, tax-efficient, total market index funds) -- not what fund salesmen recommend hoping to get higher commissions.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.”
Interesting.
Post Reply