Why don't you factor tilt?

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Random Walker
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Re: Why don't you factor tilt?

Post by Random Walker »

markus75 wrote: Tue Sep 20, 2022 5:03 am
Nathan Drake wrote: Mon Sep 19, 2022 10:18 pm
But the market is smart, a drop in earnings would also cause an even steeper rise in the discount rate. Meaning, these companies are much riskier than previously thought and therefore should be priced for an even higher premium.
I think you have an incorrect understanding of discount rates and expected returns. A higher discount rate does not mean higher expected returns. A higher discount rate compensates for lower earnings/cash flows in the future. You end up getting the same expected return as you would from a company with higher future earnings/cash flow and a lower discount rate.
If not, the stock would be flashing up on everyone's screen, from hobbyist stockpickers to quant funds. In fact, this often happens, but today the stock price corrects too quickly. Too fast for any passive value fund.
Nathan Drake wrote: Mon Sep 19, 2022 10:18 pm So the only true way for Value to lose its premium is for there to be no reason that valuations should be lower, meaning the companies are not more risky. Thus the p/e expansion would cause huge short term returns for Value
No, that's very unlikely.
Short version:
Value can loose its premium if there are more companies in the Value universe which stock price will fall or never recover. It's normal in the world of capitalism that there are companies that are no longer successful and never recover. If the market is smart enough you have more of this companies in the Value universe.
Long version:
Value can lose its premium if the market is smart enough to only keep companies in the Value universe that have shaky earnings, unpredictable cash flows, or are extremely cyclical. It is very difficult for investors to determine the right discount rate and earnings/cashflows for these risky companies. My experience is that the stock price of those companies are even not low enough. It's more worth shorting those cheap companies, instead of buying it. But I don't invest like this way. The last seven years I have valued hundreds of companies, most in the Value universe and my impression is that the market is very smart because there are only companies left, where it's difficult to find a proper discount rate and the likelihood that the discount rate will increase in the future is much higher or the earings/cashflows will descrease. And analysts are overly optimistic about the future most of the time. Which means the stock price gets lower even more. This means that companies that look cheap today are actually still far too expensive. However, this will only become apparent in the future.
I think in the past that wasn't the case and there were more undiscovered good companies in the Value universe that were mispriced. But today forget it.

I think you are a very intelligent person. You should learn how to value companies with the valuation spreadsheets from Prof. Damodaran. Not for stock picking, but simply to broaden the horizon.
Hi Markus,
Clearly you have a lot of experience and knowledge I don’t have, but I’m going to disagree with you on a couple of points. I think first and foremost, markets price risk. When perceived risk increases, P/E multiples contract and expected returns increase. I agree with you, that most SV stocks probably don’t do well. But that is the nature of the beast and expected. It’s the rationale for passive asset class investing. The returns of any asset class, in fact the returns of the stock market as a whole, are generally the result of just a few big winners. That is not a reason to avoid an asset class. Instead it’s the reason to broadly diversify within the asset class and invest passively. We cannot predict the few winners that will determine the positive returns of the asset class as a whole. Lastly, and this is at the limits of my knowledge, I believe profitability screens help avoid the value traps you describe.

Dave

Dave
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Taylor Larimore
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Re: Why don't you factor tilt?

Post by Taylor Larimore »

Bogleheads:

My wife and I began investing in 1950 when the S&P 500 stocks were priced under 20. *

Today the S&P 500 index is priced above 3,800 (not including dividends).

If we had simply purchased the S&P 500 stocks and done nothing, I would be much wealthier today.

* Stock Trader's Almanac

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Put money in a stock market index fund and you balance it out with some bonds, depending on age and so on, and don’t look at it for 50 years. But when you retire, open the envelope. Be sure a doctor is nearby to revive you. You’ll go into a dead faint; you won’t believe there’s that much money in the world.”
"Simplicity is the master key to financial success." -- Jack Bogle
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enad
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Re: Why don't you factor tilt?

Post by enad »

patrick wrote: Tue Sep 20, 2022 8:06 am You are still tilting your stock portfolio, only in a different way. You are now tilting based on country rather than size/value.

Your new tilt is more intense than your previous one. You still kept some of the money in the broad market portfolio when you were tilting to SCV, but now you have 100% in US-only investments with nothing in the rest of the market.

I am sure some US-tilters have the conviction to stick with it if their chosen tilt underperforms for 16 years, but many will not.
The OP asked a question to those who have chosen not to factor tilt, and provided reasons for sticking to a Boglehead 3-fund or 4-fund that include:
Cannibly wrote: Fri Sep 16, 2022 4:04 pm -- Simplicity
-- To avoid tinkering
-- The potential for extra return is just not worth it (I like the "the extra juice is not worth the squeeze" analogy)
-- Easier to stick to it and maintain discipline
-- The market return is just fine with you

Is there something I missed - your personal reasons - that's not covered in some way by what I listed?

As I have noted in previous posts, we're late 60's, retired, no debt, COLA indexed pension that covers living expenses, only one of us taking SS now and the other will at 70, more than we'll likely ever need in sheltered retirement and emergency funds. Retirement funds are 60/40 Vanguard LifeStrategy Moderate Growth style. We had a small position in Vanguard Managed Allocation Fund (about 5% of our total) but moved that to LSMG in the interest of what I outlined above. I ask the question to get a little more information from experienced investors. Thanks.
He also stated that they were in their late 60's, retired, no debt, COLA indexed pensions, and only one of them is taking SS now, the other at 70, and are using a balanced 60/40 portfolio. His question is directed at experienced investors

Having over 40 years of investing experienced, being retired myself, with no debt, a COLA index pension and IRA's, I chimed in. I mentioned that I tried factor tilting for 16 years and it just didn't pan out for me, if anything it was a drag on returns. It was a carve out from my main portfolio and my conclusion was that it was not worth the risk. Others have pointed out that it works and cited earlier time periods, but the problem as we all know is you can't invest in those time periods and hoping that the past repeats itself is where the belief in factors lay. It may, it may not. If you have time time horizon and are willing to try it out, go for it. Like the OP, I am retired and I don't have the time horizon to continue the experiment.

Mr. Bogle explained in his 2002 speech titled The Telltale Chart why things tend to revert to the mean and he spoke of factors as well. If you haven't read the speech, I suggest you do as it is highly illuminating.

I have held the S&P 500 and the Total US Stock Market in my portfolio for a long time, and I carved out a portion of my portfolio that included SCV and International for 16 years and it just didn't work. The folks pushing factor tilting think I gave up too early, but if it was going to show up it should have shown up in that 16 year period and it did not.

Let's turn the tables around: How many of them would have the conviction to carve out a portion of their portfolio and try Jack's 2-Fund or the Boglehead 3-Fund portfolio for 16 years? If they did (during that 16 year period), many probably would have abandoned factor long before those 16 years.

Holding the S&P 500 or the Total US Stock Market still gives one plenty of exposure to the International Market as many of the companies in the index derive a lot of their income internationally. So I feel I am not missing out. Jack Bogle himself echoed these sentiments as recently as 2017. Yes some will point out that having international exposure is not the same as diversification.

In those 16 years (Sep 2006 to July 2022), the

Vanguard S&P500 Index Fund returned 9.02% CAGR,
The Vanguard Total Stock Market Index fund returned 2.98% CAGR

So while I may have had the diversification at the time, part of my portfolio had sub-par returns. Was this worth it to me? I decided it was not. Again, the purists would say it's worth holding onto the "loser" because it gives one true diversification.

But getting back to the OP, you have seen a fierce back and forth on factor titling and on International diversification. Only you can decide if at this point in your life it's worth taking on the additional risk for possibly lower returns until SCV shines again, only to revert to the mean. I have decided it's not worth the risk and actually carved out a portion of my portfolio to test it for 16 years. It wasn't there, nor was "International". This won't sit right with many people, but it's my portfolio and I sleep well at night.

Best Wishes
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Marseille07
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Re: Why don't you factor tilt?

Post by Marseille07 »

burritoLover wrote: Tue Sep 20, 2022 7:59 am Most here shouldn't factor tilt because they really can't handle the tracking error regret. You can throw the rest of the arguments out the window - if you are wishy-washy about factors and just somewhat convinced to try it your portfolio, you won't make it. You have to have a very strong conviction/belief about the non-market factors you are investing in with a robot-like emotionless contribution/rebalancing plan that you never deviate from. And you have to have the understanding that it is possible, even over your entire investment period, that you may underperform a market-only portfolio.
You won't make "what" exactly? If you read enad, their perf improved after they stopped tilting. That's making money not losing.

You can have all the conviction you want but this doesn't necessarily help your bottom line.
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burritoLover
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Re: Why don't you factor tilt?

Post by burritoLover »

Marseille07 wrote: Tue Sep 20, 2022 10:23 am
burritoLover wrote: Tue Sep 20, 2022 7:59 am Most here shouldn't factor tilt because they really can't handle the tracking error regret. You can throw the rest of the arguments out the window - if you are wishy-washy about factors and just somewhat convinced to try it your portfolio, you won't make it. You have to have a very strong conviction/belief about the non-market factors you are investing in with a robot-like emotionless contribution/rebalancing plan that you never deviate from. And you have to have the understanding that it is possible, even over your entire investment period, that you may underperform a market-only portfolio.
You won't make "what" exactly? If you read enad, their perf improved after they stopped tilting. That's making money not losing.

You can have all the conviction you want but this doesn't necessarily help your bottom line.
Thanks - you just made my point for me.
rkhusky
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Re: Why don't you factor tilt?

Post by rkhusky »

Random Walker wrote: Tue Sep 20, 2022 8:35 am When perceived risk increases, P/E multiples contract and expected returns increase.
Are you using "expected return" in the mathematical/statistical sense of an integral over a probability density function, or in the colloquial sense of something you think will happen?
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Re: Why don't you factor tilt?

Post by patrick »

enad wrote: Tue Sep 20, 2022 9:56 am
patrick wrote: Tue Sep 20, 2022 8:06 am You are still tilting your stock portfolio, only in a different way. You are now tilting based on country rather than size/value.

Your new tilt is more intense than your previous one. You still kept some of the money in the broad market portfolio when you were tilting to SCV, but now you have 100% in US-only investments with nothing in the rest of the market.

I am sure some US-tilters have the conviction to stick with it if their chosen tilt underperforms for 16 years, but many will not.
The OP asked a question to those who have chosen not to factor tilt, and provided reasons for sticking to a Boglehead 3-fund or 4-fund that include:
The beginning of the original post said:
Cannibly wrote: Fri Sep 16, 2022 4:04 pm This is to those Bogleheads who stick pretty closely to a globally diversified portfolio of stocks and bonds (indexed) and have decided not to factor tilt
And I pointed out that very few are experienced with a truly tilt-free globally diversified portfolio. Many avoid small/value tilts, but even those who include non-US stocks usually include them below market weight and so are tilted to the US.
I have held the S&P 500 and the Total US Stock Market in my portfolio for a long time, and I carved out a portion of my portfolio that included SCV and International for 16 years and it just didn't work. The folks pushing factor tilting think I gave up too early, but if it was going to show up it should have shown up in that 16 year period and it did not.
I don't think anyone guaranteed it would show up in any 16-year period. There have been 16-year periods in the past where non-US stocks outperformed US stocks, but that fact has not convinced you to abandon your US tilt.
Let's turn the tables around: How many of them would have the conviction to carve out a portion of their portfolio and try Jack's 2-Fund or the Boglehead 3-Fund portfolio for 16 years? If they did (during that 16 year period), many probably would have abandoned factor long before those 16 years.
I'm guess that by "carve out" you mean to have a separate account (or at least separate mental accounting) dedicated to tilt-free investing. Most factor tilters have some assets in TSM. That is closer to your suggestions than US tilters get, because factor tilters at least see if TSM outperforms SCV within their own portfolios. US-only investors would not be similarly confronted if globally diversified portfolios outperform.
So while I may have had the diversification at the time, part of my portfolio had sub-par returns. Was this worth it to me? I decided it was not. Again, the purists would say it's worth holding onto the "loser" because it gives one true diversification.
The reason for diversification is that you don't know in advance which asset will perform best. Many people try to figure that out by looking at past performance. Long-term past performance showed benefits from US, small, and value tilts. As you've noted, only the US tilt worked in the last 16 years, but will that continue?
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Re: Why don't you factor tilt?

Post by patrick »

burritoLover wrote: Tue Sep 20, 2022 7:59 am Most here shouldn't factor tilt because they really can't handle the tracking error regret. You can throw the rest of the arguments out the window - if you are wishy-washy about factors and just somewhat convinced to try it your portfolio, you won't make it. You have to have a very strong conviction/belief about the non-market factors you are investing in with a robot-like emotionless contribution/rebalancing plan that you never deviate from. And you have to have the understanding that it is possible, even over your entire investment period, that you may underperform a market-only portfolio.
A similar problem could happen for someone investing in the market-only portfolio. No doubt some subset of the market will outperform the total market. One who invests in the total market without total conviction risks deviating towards an outperforming style, sector, country, or individual stock due to regret over not buying it earlier.
Apathizer
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Re: Why don't you factor tilt?

Post by Apathizer »

patrick wrote: Tue Sep 20, 2022 11:35 am
burritoLover wrote: Tue Sep 20, 2022 7:59 am Most here shouldn't factor tilt because they really can't handle the tracking error regret. You can throw the rest of the arguments out the window - if you are wishy-washy about factors and just somewhat convinced to try it your portfolio, you won't make it. You have to have a very strong conviction/belief about the non-market factors you are investing in with a robot-like emotionless contribution/rebalancing plan that you never deviate from. And you have to have the understanding that it is possible, even over your entire investment period, that you may underperform a market-only portfolio.
A similar problem could happen for someone investing in the market-only portfolio. No doubt some subset of the market will outperform the total market. One who invests in the total market without total conviction risks deviating towards an outperforming style, sector, country, or individual stock due to regret over not buying it earlier.
Well said. As I keep saying, most of are probably doing ourselves a psychological disservice by focusing so much on investing. It's pretty simple. Check and re-balance our portfolio at most quarterly and that's about it. For investing aspiring to be pragmatically robotic is a good thing.
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GP813
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Re: Why don't you factor tilt?

Post by GP813 »

I find the research unconvincing and it seems more like people using past results to indicate future performance.
afan
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Re: Why don't you factor tilt?

Post by afan »

Apathizer wrote: Mon Sep 19, 2022 8:13 pm
What if the TSM under-performs over the next decade and SV does well? Historically that's more likely than the TSM out-performing the SV. What if TSM under-performs for a decade? That's unlikely, but still more likely than SV under-performing over the same interval. In that case, TSM investors with no slant would be regretful. I'll be fine either way.
I have no basis for predicting which will produce higher nominal returns or higher risk adjusted returns. We still have not come to agreement on how to define risk or to weight its components in a performance metric.

Even if there were a definition, I do not believe there is a basis for predicting which will do better.

Are we assuming that the relative returns are noisy but stationary? Or that the underlying means may change over time? Is so, how might they change?

A few years ago, FF, published a paper in which they said that returns are noisy enough they could not come to a conclusion as to whether the relative returns have changed. I have not seen a new analysis to update this. Of course, there have only been a few more years of data...
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Marseille07
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Re: Why don't you factor tilt?

Post by Marseille07 »

burritoLover wrote: Tue Sep 20, 2022 10:29 am
Marseille07 wrote: Tue Sep 20, 2022 10:23 am
burritoLover wrote: Tue Sep 20, 2022 7:59 am Most here shouldn't factor tilt because they really can't handle the tracking error regret. You can throw the rest of the arguments out the window - if you are wishy-washy about factors and just somewhat convinced to try it your portfolio, you won't make it. You have to have a very strong conviction/belief about the non-market factors you are investing in with a robot-like emotionless contribution/rebalancing plan that you never deviate from. And you have to have the understanding that it is possible, even over your entire investment period, that you may underperform a market-only portfolio.
You won't make "what" exactly? If you read enad, their perf improved after they stopped tilting. That's making money not losing.

You can have all the conviction you want but this doesn't necessarily help your bottom line.
Thanks - you just made my point for me.
Oh right, I did. I missed that you said it's possible that you might underperform your entire investment period.

But I guess my question would then be...why even do it? The whole point of passive investing is to take whatever the market gives you so that you don't overperform or underperform.
Last edited by Marseille07 on Tue Sep 20, 2022 12:22 pm, edited 1 time in total.
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burritoLover
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Re: Why don't you factor tilt?

Post by burritoLover »

patrick wrote: Tue Sep 20, 2022 11:35 am
burritoLover wrote: Tue Sep 20, 2022 7:59 am Most here shouldn't factor tilt because they really can't handle the tracking error regret. You can throw the rest of the arguments out the window - if you are wishy-washy about factors and just somewhat convinced to try it your portfolio, you won't make it. You have to have a very strong conviction/belief about the non-market factors you are investing in with a robot-like emotionless contribution/rebalancing plan that you never deviate from. And you have to have the understanding that it is possible, even over your entire investment period, that you may underperform a market-only portfolio.
A similar problem could happen for someone investing in the market-only portfolio. No doubt some subset of the market will outperform the total market. One who invests in the total market without total conviction risks deviating towards an outperforming style, sector, country, or individual stock due to regret over not buying it earlier.
The difference is the conviction is already much higher with US S&P 500/TSM than anything else among US investors. Unlikely they would abandon it entirely and it is the metric to which all else is compared by the world which only reinforces that conviction. Whereas something like international or SCV, they could easily divest themselves of it entirely when things aren't going well.
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enad
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Re: Why don't you factor tilt?

Post by enad »

GP813 wrote: Tue Sep 20, 2022 11:58 am I find the research unconvincing and it seems more like people using past results to indicate future performance.
You summed it up, and when it fails it will be because you haven't held onto it long enough or someone will uncover a new factor to explain it all. Many it seems are very critical about how others invest
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Da5id
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Re: Why don't you factor tilt?

Post by Da5id »

patrick wrote: Tue Sep 20, 2022 11:35 am
burritoLover wrote: Tue Sep 20, 2022 7:59 am Most here shouldn't factor tilt because they really can't handle the tracking error regret. You can throw the rest of the arguments out the window - if you are wishy-washy about factors and just somewhat convinced to try it your portfolio, you won't make it. You have to have a very strong conviction/belief about the non-market factors you are investing in with a robot-like emotionless contribution/rebalancing plan that you never deviate from. And you have to have the understanding that it is possible, even over your entire investment period, that you may underperform a market-only portfolio.
A similar problem could happen for someone investing in the market-only portfolio. No doubt some subset of the market will outperform the total market. One who invests in the total market without total conviction risks deviating towards an outperforming style, sector, country, or individual stock due to regret over not buying it earlier.
The problem isn't really similar IMO. I think given that US total stock market is the benchmark most people use, it is easy to be OK with receiving what TSM offers as it matches that benchmark closely. People are perhaps much less inclined to compare TSM to other portfolios (which ones exactly anyway, there isn't a single other dominant portfolio?) that is one inclined to compare other portfolios to TSM.

Which isn't to say one or the other strategies is better. I invest in ex-US myself, and think people who invest in factors may well have a reasonable case for choosing to do so.
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enad
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Re: Why don't you factor tilt?

Post by enad »

Marseille07 wrote: Tue Sep 20, 2022 12:11 pm
burritoLover wrote: Tue Sep 20, 2022 10:29 am
Marseille07 wrote: Tue Sep 20, 2022 10:23 am
burritoLover wrote: Tue Sep 20, 2022 7:59 am Most here shouldn't factor tilt because they really can't handle the tracking error regret. You can throw the rest of the arguments out the window - if you are wishy-washy about factors and just somewhat convinced to try it your portfolio, you won't make it. You have to have a very strong conviction/belief about the non-market factors you are investing in with a robot-like emotionless contribution/rebalancing plan that you never deviate from. And you have to have the understanding that it is possible, even over your entire investment period, that you may underperform a market-only portfolio.
You won't make "what" exactly? If you read enad, their perf improved after they stopped tilting. That's making money not losing.

You can have all the conviction you want but this doesn't necessarily help your bottom line.
Thanks - you just made my point for me.
Oh right, I did. I missed that you said it's possible that you might underperform your entire investment period.

But I guess my question would then be...why even do it? The whole point of passive investing is to take whatever the market gives you so that you don't overperform or underperform.
You also hit the nail on the head, when you said:

"But I guess my question would then be...why even do it? The whole point of passive investing is to take whatever the market gives you so that you don't overperform or underperform."

Why indeed? Jack Bogle knew far more about investing than anyone I know. His advice was that the average American family would do well holding a 60/40 portfolio of S&P500 (or Total US Stock Market) and Total (US) Bond Market". Maybe there are a lot of people in this thread who are "above" average and seek something else?
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Re: Why don't you factor tilt?

Post by Apathizer »

afan wrote: Tue Sep 20, 2022 12:08 pm A few years ago, FF, published a paper in which they said that returns are noisy enough they could not come to a conclusion as to whether the relative returns have changed. I have not seen a new analysis to update this. Of course, there have only been a few more years of data...
Link?
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Re: Why don't you factor tilt?

Post by Marseille07 »

enad wrote: Tue Sep 20, 2022 12:37 pm You also hit the nail on the head, when you said:

"But I guess my question would then be...why even do it? The whole point of passive investing is to take whatever the market gives you so that you don't overperform or underperform."

Why indeed? Jack Bogle knew far more about investing than anyone I know. His advice was that the average American family would do well holding a 60/40 portfolio of S&P500 (or Total US Stock Market) and Total (US) Bond Market". Maybe there are a lot of people in this thread who are "above" average and seek something else?
Yeah, the idea of having "conviction" on something then turn around and say you might underperform your entire investment period...sounds odd to me.

Now, if they want to use their "funny money" 5~10% AA space, fine, go for it.
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Re: Why don't you factor tilt?

Post by Da5id »

Marseille07 wrote: Tue Sep 20, 2022 12:41 pm
enad wrote: Tue Sep 20, 2022 12:37 pm You also hit the nail on the head, when you said:

"But I guess my question would then be...why even do it? The whole point of passive investing is to take whatever the market gives you so that you don't overperform or underperform."

Why indeed? Jack Bogle knew far more about investing than anyone I know. His advice was that the average American family would do well holding a 60/40 portfolio of S&P500 (or Total US Stock Market) and Total (US) Bond Market". Maybe there are a lot of people in this thread who are "above" average and seek something else?
Yeah, the idea of having "conviction" on something then turn around and say you might underperform your entire investment period...sounds odd to me.

Now, if they want to use their "funny money" 5~10% AA space, fine, go for it.
I think many diversify to protect against risks they perceive rather than to get a better return. That those risks didn't come to pass (say sustained international outperformance) in hindsight is OK with us. Obviously YMMV.

To get away from stocks. I own some nominal bonds and some TIPs/I-bonds. I'm not sad about owning whichever does worse over any particular period.
Last edited by Da5id on Tue Sep 20, 2022 12:47 pm, edited 1 time in total.
Random Walker
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Re: Why don't you factor tilt?

Post by Random Walker »

rkhusky wrote: Tue Sep 20, 2022 11:09 am
Random Walker wrote: Tue Sep 20, 2022 8:35 am When perceived risk increases, P/E multiples contract and expected returns increase.
Are you using "expected return" in the mathematical/statistical sense of an integral over a probability density function, or in the colloquial sense of something you think will happen?
I’ll go with the second option :-)

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enad
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Re: Why don't you factor tilt?

Post by enad »

patrick wrote: Tue Sep 20, 2022 11:12 am As you've noted, only the US tilt worked in the last 16 years, but will that continue?
Here's my 2 cents on your last line.

Given how interconnected our economy is with many International economies, what do you suppose will happen to those economies if ours goes into the toilet and they have no place to sell their goods and services? Where will they sell them and do you expect their stock market will perform much better than ours?

Then there is the Jason Zweig answer:

I don't know and I don't care.

Pick one

I hope the OP's questions have been answered.

Best Wishes.
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Re: Why don't you factor tilt?

Post by Marseille07 »

Da5id wrote: Tue Sep 20, 2022 12:45 pm I think many diversify to protect against risks they perceive rather than to get a better return. That those risks didn't come to pass (say sustained international outperformance) in hindsight is OK with us. Obviously YMMV.
Aren't you speaking about international diversification though? In this thread, I thought we're talking about tilting.

What risks are you exactly protecting by holding SCV? And, why even SCV to begin with and not MCV or LCV?
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enad
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Re: Why don't you factor tilt?

Post by enad »

Marseille07 wrote: Tue Sep 20, 2022 12:41 pm
enad wrote: Tue Sep 20, 2022 12:37 pm You also hit the nail on the head, when you said:

"But I guess my question would then be...why even do it? The whole point of passive investing is to take whatever the market gives you so that you don't overperform or underperform."

Why indeed? Jack Bogle knew far more about investing than anyone I know. His advice was that the average American family would do well holding a 60/40 portfolio of S&P500 (or Total US Stock Market) and Total (US) Bond Market". Maybe there are a lot of people in this thread who are "above" average and seek something else?
Yeah, the idea of having "conviction" on something then turn around and say you might underperform your entire investment period...sounds odd to me.

Now, if they want to use their "funny money" 5~10% AA space, fine, go for it.
That's what I did and with not very good results. Some have said "Well you didn't wait long enough"? Really, what I am supposed to do, wait my entire investment lifetime? Go for it if you think its wise for you. It's not for me and I am fine with that. Others will say I picked the wrong 16 year investment period (as if this could be known in the advance)?
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Marseille07
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Re: Why don't you factor tilt?

Post by Marseille07 »

enad wrote: Tue Sep 20, 2022 12:51 pm That's what I did and with not very good results. Some have said "Well you didn't wait long enough"? Really, what I am supposed to do, wait my entire investment lifetime? Go for it if you think its wise for you. It's not for me and I am fine with that. Others will say I picked the wrong 16 year investment period (as if this could be known in the advance)?
You put in enough years. 16 years. And of course, you didn't pick anything so you can very much ignore that nonsense. In fact, this "picking" argument doesn't even make sense because those who told you that didn't pick theirs either.
Logan Roy
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Re: Why don't you factor tilt?

Post by Logan Roy »

enad wrote: Tue Sep 20, 2022 12:37 pm
Marseille07 wrote: Tue Sep 20, 2022 12:11 pm
burritoLover wrote: Tue Sep 20, 2022 10:29 am
Marseille07 wrote: Tue Sep 20, 2022 10:23 am
burritoLover wrote: Tue Sep 20, 2022 7:59 am Most here shouldn't factor tilt because they really can't handle the tracking error regret. You can throw the rest of the arguments out the window - if you are wishy-washy about factors and just somewhat convinced to try it your portfolio, you won't make it. You have to have a very strong conviction/belief about the non-market factors you are investing in with a robot-like emotionless contribution/rebalancing plan that you never deviate from. And you have to have the understanding that it is possible, even over your entire investment period, that you may underperform a market-only portfolio.
You won't make "what" exactly? If you read enad, their perf improved after they stopped tilting. That's making money not losing.

You can have all the conviction you want but this doesn't necessarily help your bottom line.
Thanks - you just made my point for me.
Oh right, I did. I missed that you said it's possible that you might underperform your entire investment period.

But I guess my question would then be...why even do it? The whole point of passive investing is to take whatever the market gives you so that you don't overperform or underperform.
You also hit the nail on the head, when you said:

"But I guess my question would then be...why even do it? The whole point of passive investing is to take whatever the market gives you so that you don't overperform or underperform."

Why indeed? Jack Bogle knew far more about investing than anyone I know. His advice was that the average American family would do well holding a 60/40 portfolio of S&P500 (or Total US Stock Market) and Total (US) Bond Market". Maybe there are a lot of people in this thread who are "above" average and seek something else?
The difficult thing is accepting 'average'. Many people who've accumulated any wealth will be Type A personalities – keen to manage, analyse, and built to climb hierarchies and beat their peers. Of course, investing in the market, you will beat most of your peers – but it won't feel like it, and you often won't feel like you're winning in the short-term.

This is why factors seemed like a panacea to me. It's a whole new world of variables to introduce, and analysis and academia to absorb. The prospect of market-beating absolute returns. Of genius. Of the latest 'cutting edge' research. It's repackaging passive investing in a way that activates all the reward mechanisms of stock picking and hedge funds.

My salvation was realising that the thing Bogle (and really no one) has cracked yet is asset allocation. You can use academic arguments to prove 60:40 is not particularly efficient, and not necessarily passive. It can be passive in execution, but there are basic decisions you're making that the market might not be making. It also doesn't help that we don't have a good definition of what the market is. So if our benchmark is stocks and bonds, there's a much larger market out there that might be doing a lot better, esp. at handling inflation. An efficient market requires a lot of people making smart decisions – and the world of financial and real assets beyond stocks and bonds are parts of those decisions, more so today than ever. So that's something to think about. And I think it's more beneficial than thinking about factors (unless you're in academia, and need to publish).
Da5id
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Re: Why don't you factor tilt?

Post by Da5id »

Marseille07 wrote: Tue Sep 20, 2022 12:48 pm
Da5id wrote: Tue Sep 20, 2022 12:45 pm I think many diversify to protect against risks they perceive rather than to get a better return. That those risks didn't come to pass (say sustained international outperformance) in hindsight is OK with us. Obviously YMMV.
Aren't you speaking about international diversification though? In this thread, I thought we're talking about tilting.

What risks are you exactly protecting by holding SCV? And, why even SCV to begin with and not MCV or LCV?
The person I was responding to was advocating TSM/Total Bond because Bogle said so. I was arguing with that viewpoint.

I'm not a good advocate for factors as I don't invest in them. I think believers in investing in factors think that the diversification provides protection against one factor (the market) doing worse than other factors. That diversifying amongst the factors can decrease risks.
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Re: Why don't you factor tilt?

Post by Marseille07 »

Da5id wrote: Tue Sep 20, 2022 12:56 pm The person I was responding to was advocating TSM/Total Bond because Bogle said so. I was arguing with that viewpoint.

I'm not a good advocate for factors as I don't invest in them. I think believers in investing in factors think that the diversification provides protection against one factor (the market) doing worse than other factors. That diversifying amongst the factors can decrease risks.
See, this idea that the market underperforms other factors just sounds bizarre to me.

Do you say "the average test score underperformed Student A's score"? That's how it sounds to me...awkward.

The usual way of framing is of course, "Student A was above average." And, seeking this is market timing, plain and simple.
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Re: Why don't you factor tilt?

Post by dbr »

I think people worry about factor tilting or about how much to allocate to international stocks out of concern that not doing so may involve a mistake or result in not holding an optimum investment in some sense. That is so regardless of whether or not either really is a mistake or how big or how certain a mistake it is. It is certainly easy to worry that investing in nothing except US TSM or even just S&P 500 might somehow be the wrong thing to do.
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Re: Why don't you factor tilt?

Post by acegolfer »

Da5id wrote: Tue Sep 20, 2022 12:35 pm The problem isn't really similar IMO. I think given that US total stock market is the benchmark most people use, it is easy to be OK with receiving what TSM offers as it matches that benchmark closely. People are perhaps much less inclined to compare TSM to other portfolios (which ones exactly anyway, there isn't a single other dominant portfolio?) that is one inclined to compare other portfolios to TSM.

Which isn't to say one or the other strategies is better. I invest in ex-US myself, and think people who invest in factors may well have a reasonable case for choosing to do so.
Excellent writing. Agreed. TSM investors don't compare because they are holding the benchmark. But SCV investors will often compare against TSM.
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Re: Why don't you factor tilt?

Post by Da5id »

Marseille07 wrote: Tue Sep 20, 2022 1:00 pm
Da5id wrote: Tue Sep 20, 2022 12:56 pm The person I was responding to was advocating TSM/Total Bond because Bogle said so. I was arguing with that viewpoint.

I'm not a good advocate for factors as I don't invest in them. I think believers in investing in factors think that the diversification provides protection against one factor (the market) doing worse than other factors. That diversifying amongst the factors can decrease risks.
See, this idea that the market underperforms other factors just sounds bizarre to me.

Do you say "the average test score underperformed Student A's score"? That's how it sounds to me...awkward.

The usual way of framing is of course, "Student A was above average." And, seeking this is market timing, plain and simple.
I don't find the idea that one can break the market into categories of stocks (by size, value, momentum, quality, etc) and by investing in those categories -- rather than a cap weighted average of the market like TSM -- decrease risk compared to TSM to be inherently silly. Though I don't choose to do it. You appear to think it is just silly and trivialize it with what seems to me a not very on point analogy.
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Re: Why don't you factor tilt?

Post by Marseille07 »

Da5id wrote: Tue Sep 20, 2022 1:12 pm I don't find the idea that one can break the market into categories of stocks (by size, value, momentum, quality, etc) and by investing in those categories -- rather than a cap weighted average of the market like TSM -- decrease risk compared to TSM to be inherently silly. Though I don't choose to do it. You appear to think it is just silly and trivialize it with what seems to me a not very on point analogy.
It depends on how you define risk. Over the long-term, tilting actually increases risk because you're loading up something more volatile, especially SCV which is a tiny piece of the market.

However, SCV can be beneficial because their downside is generally capped, as valuations can only go down so much.
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Re: Why don't you factor tilt?

Post by patrick »

enad wrote: Tue Sep 20, 2022 12:48 pm
patrick wrote: Tue Sep 20, 2022 11:12 am As you've noted, only the US tilt worked in the last 16 years, but will that continue?
Here's my 2 cents on your last line.

Given how interconnected our economy is with many International economies, what do you suppose will happen to those economies if ours goes into the toilet and they have no place to sell their goods and services? Where will they sell them and do you expect their stock market will perform much better than ours?

Then there is the Jason Zweig answer:

I don't know and I don't care.

Pick one

I hope the OP's questions have been answered.

Best Wishes.
I don't know which stock market will perform best, so I don't restrict my investments to one country. I do know that non-US companies have a lower fraction of sales in the US than US companies do. To the extent stock returns track economic conditions in the countries to which a company sells, non-US stocks would outperform US stocks in scenarios of US economic trouble.

The original question has mostly been answered regarding factor tilts. In addition to the originally stated reasons, many people reject factor tiling because it has underperformed in the recent past. Recent past outperformance of the US stock market is probably a large portion of the reason why most of us have US tilts, but I doubt it is the whole reason.

However, the original reference to those "who stick pretty closely to a globally diversified portfolio of stocks and bonds" is something few if any of us can answer. Unless I missed something, which is possible given the large number of replies, not even one person here has responded that they have a global diversified bond portfolio.
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Re: Why don't you factor tilt?

Post by Apathizer »

Da5id wrote: Tue Sep 20, 2022 12:45 pmI think many diversify to protect against risks they perceive rather than to get a better return. That those risks didn't come to pass (say sustained international outperformance) in hindsight is OK with us. Obviously YMMV.
That's very much my perspective. Currently about 1/3 of the TSM is large growth. That seems like a high allocation for one asset class, so shifting some allocation to other assets seems like it should reduce risk. It also seems likely to me a factor-slanted portfolio will have higher returns, but if I know it might not and might have lower returns, and accept that.
enad wrote: Tue Sep 20, 2022 12:48 pm Given how interconnected our economy is with many International economies, what do you suppose will happen to those economies if ours goes into the toilet and they have no place to sell their goods and services? Where will they sell them and do you expect their stock market will perform much better than ours?
Correlation isn't the same as dispersion. The global market is usually less volatile than any individual country, even the US. Also, small cap stocks tend to be more responsive to their local-national economies, so holding them is likely to provide beneficial diversification.

That said, the volatility difference between US-only and global markets is small enough that it seems likely a US-only investor will be fine, though investing in only one national market is riskier than investing in all of them.
patrick wrote: Tue Sep 20, 2022 1:32 pm Unless I missed something, which is possible given the large number of replies, not even one person here has responded that they have a global diversified bond portfolio.
I do. To me global diversification benefits apply to bonds as well as stocks. Historically, USD hedged ex-US bonds have out-performed US bonds. Of course I don't know if this will continue, so I hold both.
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afan
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Re: Why don't you factor tilt?

Post by afan »

Apathizer wrote: Tue Sep 20, 2022 12:40 pm
afan wrote: Tue Sep 20, 2022 12:08 pm A few years ago, FF, published a paper in which they said that returns are noisy enough they could not come to a conclusion as to whether the relative returns have changed. I have not seen a new analysis to update this. Of course, there have only been a few more years of data...
Link?
https://papers.ssrn.com/sol3/papers.cfm ... id=3525096
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Marseille07
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Re: Why don't you factor tilt?

Post by Marseille07 »

Apathizer wrote: Tue Sep 20, 2022 1:36 pm Correlation isn't the same as dispersion. The global market is usually less volatile than any individual country, even the US.
How did you arrive at the conclusion from this? https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: Why don't you factor tilt?

Post by stan1 »

dbr wrote: Tue Sep 20, 2022 1:06 pm I think people worry about factor tilting or about how much to allocate to international stocks out of concern that not doing so may involve a mistake or result in not holding an optimum investment in some sense. That is so regardless of whether or not either really is a mistake or how big or how certain a mistake it is. It is certainly easy to worry that investing in nothing except US TSM or even just S&P 500 might somehow be the wrong thing to do.
So many of these discussions are people seeking an optimal answer, and not being willing to accept an answer that there may be more than one good answer and no optimal answer. Some go further in feeling the need to defend that their choice is optimal no matter what it is, which leads to silly rationalizations like statements that the S&P 500 is actually a global index or that market beta is by definition optimally diversified.

Desire to optimize and at the same time prove one is right applies to factors, international, paying off mortgage, Roth vs Traditional 401k contribution, etc. Maybe its just human nature that we have to convince ourselves we've made the best choice and have to defend it to make sure we maintain our own confidence in our choices. Maybe there's a Ph.D. in psychology on here who can further explain this phenomenon.
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Re: Why don't you factor tilt?

Post by rkhusky »

And things get even more confused when people use different definitions for the same word, like diversification or factor or risk.
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Re: Why don't you factor tilt?

Post by Da5id »

stan1 wrote: Tue Sep 20, 2022 3:03 pm
dbr wrote: Tue Sep 20, 2022 1:06 pm I think people worry about factor tilting or about how much to allocate to international stocks out of concern that not doing so may involve a mistake or result in not holding an optimum investment in some sense. That is so regardless of whether or not either really is a mistake or how big or how certain a mistake it is. It is certainly easy to worry that investing in nothing except US TSM or even just S&P 500 might somehow be the wrong thing to do.
So many of these discussions are people seeking an optimal answer, and not being willing to accept an answer that there may be more than one good answer and no optimal answer. Some go further in feeling the need to defend that their choice is optimal no matter what it is, which leads to silly rationalizations like statements that the S&P 500 is actually a global index or that market beta is by definition optimally diversified.

Desire to optimize and at the same time prove one is right applies to factors, international, paying off mortgage, Roth vs Traditional 401k contribution, etc. Maybe its just human nature that we have to convince ourselves we've made the best choice and have to defend it to make sure we maintain our own confidence in our choices. Maybe there's a Ph.D. in psychology on here who can further explain this phenomenon.
Some of that, some of this:

Image

There are optimal answers based on past data. Whether those carry forward into the future...
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burritoLover
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Re: Why don't you factor tilt?

Post by burritoLover »

Marseille07 wrote: Tue Sep 20, 2022 12:53 pm
enad wrote: Tue Sep 20, 2022 12:51 pm That's what I did and with not very good results. Some have said "Well you didn't wait long enough"? Really, what I am supposed to do, wait my entire investment lifetime? Go for it if you think its wise for you. It's not for me and I am fine with that. Others will say I picked the wrong 16 year investment period (as if this could be known in the advance)?
You put in enough years. 16 years.
So, I guess when US TSM underperformed short-term treasuries for 17 years, you would have suggested it was the right time to dump US TSM altogether - after all, "you put in enough years".
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enad
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Re: Why don't you factor tilt?

Post by enad »

Apathizer wrote: Tue Sep 20, 2022 1:36 pm
enad wrote: Tue Sep 20, 2022 12:48 pm Given how interconnected our economy is with many International economies, what do you suppose will happen to those economies if ours goes into the toilet and they have no place to sell their goods and services? Where will they sell them and do you expect their stock market will perform much better than ours?
Correlation isn't the same as dispersion. The global market is usually less volatile than any individual country, even the US. Also, small cap stocks tend to be more responsive to their local-national economies, so holding them is likely to provide beneficial diversification.

That said, the volatility difference between US-only and global markets is small enough that it seems likely a US-only investor will be fine, though investing in only one national market is riskier than investing in all of them.
In a story by John Waggoner (NY Times) published on April 29, 2017, Bogle stated

"The reality is that we do better than the rest of the world. You don't need currency risk, bit if you want, don't go over 20% in international," he said.

And he noted, international investing hasn't provided much diversification. "If you look at the last 10 years, the correlation between EAFE and the U.S. has been something like 92," Mr. Bogle said: "That doesn't seem to change your risk.

What about the argument that overseas stocks are much cheaper than the U.S. stocks? "One reason could be they are underpriced," Mr. Bogle said. "The other could be that they have higher risk. PE ratios don't come out of nowhere."

You can read the article here


I prefer to take my advice from Jack who knew far more about investing than anyone I know.

FYI, here's a PV of the US Stock Market from 1986 to 2022. To me the International Stock Market looks more volatile than the US stock Market and with the extra volatility International returns were much worse.
https://www.portfoliovisualizer.com/bac ... ion2_2=100

For the time period that I held US SCV in my portfolio, it provide no added (dollars) to my portfolio.
https://www.portfoliovisualizer.com/bac ... ion2_2=100

Best Wishes
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Re: Why don't you factor tilt?

Post by stan1 »

rkhusky wrote: Tue Sep 20, 2022 3:10 pm And things get even more confused when people use different definitions for the same word, like diversification or factor or risk.
Yep, that too. Unfortunately English is like that and a dictionary doesn't always help with clarity.

diversification - the action of diversifying something or the fact of becoming more diverse.
"growers should start planning diversification of crops"

factor - a circumstance, fact, or influence that contributes to a result or outcome.
"she worked fast, conscious of the time factor"

risk - a situation involving exposure to danger.
"flouting the law was too much of a risk"
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Re: Why don't you factor tilt?

Post by Marseille07 »

burritoLover wrote: Tue Sep 20, 2022 4:03 pm So, I guess when US TSM underperformed short-term treasuries for 17 years, you would have suggested it was the right time to dump US TSM altogether - after all, "you put in enough years".
I don't know which 17 years you're talking about, but if someone wants to get out at that point, I don't accuse them of lacking patience.
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Re: Why don't you factor tilt?

Post by Apathizer »

Marseille07 wrote: Tue Sep 20, 2022 2:47 pm
Apathizer wrote: Tue Sep 20, 2022 1:36 pm Correlation isn't the same as dispersion. The global market is usually less volatile than any individual country, even the US.
How did you arrive at the conclusion from this? https://www.portfoliovisualizer.com/bac ... ion2_2=100
Apparently I wasn't clear. I was comparing the total global market, including the US, to only the US. Vanguard compared them and found an allocation of about 30-40% ex-US has better risk adjusted returns than US only.

That said, the difference isn't so significant that US only are taking significantly more risk. Much as with factors, I think ex US markets provide some beneficial diversification, but it's probably not essential.
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Re: Why don't you factor tilt?

Post by Beensabu »

stan1 wrote: Tue Sep 20, 2022 3:03 pm Maybe its just human nature that we have to convince ourselves we've made the best choice and have to defend it to make sure we maintain our own confidence in our choices.
This is it. And if you don't feel the need to defend it, that's when you really truly have confidence in your choice.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Marseille07
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Re: Why don't you factor tilt?

Post by Marseille07 »

Apathizer wrote: Tue Sep 20, 2022 5:35 pm Apparently I wasn't clear. I was comparing the total global market, including the US, to only the US. Vanguard compared them and found an allocation of about 30-40% ex-US has better risk adjusted returns than US only.

That said, the difference isn't so significant that US only are taking significantly more risk. Much as with factors, I think ex US markets provide some beneficial diversification, but it's probably not essential.
You weren't, but mixing more volatile assets (ex-US) into US does not reduce volatility.

I get what Vanguard is saying though. They're basically doing an efficient-frontier type stuff, where you might find some mix of lower volatility.

This is, of course, data dependent and subject to change. I don't question their study based on the data they used, but I question if their conclusion continues to materialize.
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Cannibly
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Re: Why don't you factor tilt?

Post by Cannibly »

Thank you all for your responses. I think it's safe to say that 6 pages into my initial query, yes, my question was answered. I once thought I had read a lot about investing and that I had thought a lot about it, but I could see from the responses (by many who responded by explaining why they factor tilt), that my reading and thinking pales by comparison. I was interested in getting the feedback for myself to affirm my decision not to factor tilt (or go with managed funds for that matter), but I will also share this with my son who is in his late 20's and has been contributing to his retirement account since he was first eligible. While he is interested in investing, he is too busy with his life to take the deep dive into the topic that I have.
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Re: Why don't you factor tilt?

Post by Marseille07 »

Cannibly wrote: Tue Sep 20, 2022 5:51 pm Thank you all for your responses. I think it's safe to say that 6 pages into my initial query, yes, my question was answered. I once thought I had read a lot about investing and that I had thought a lot about it, but I could see from the responses (by many who responded by explaining why they factor tilt), that my reading and thinking pales by comparison. I was interested in getting the feedback for myself to affirm my decision not to factor tilt (or go with managed funds for that matter), but I will also share this with my son who is in his late 20's and has been contributing to his retirement account since he was first eligible. While he is interested in investing, he is too busy with his life to take the deep dive into the topic that I have.
Enad and I congratulate you for making the right decision. Keep it simple stupid (KISS) is the way to go.
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Re: Why don't you factor tilt?

Post by afan »

Marseille07 wrote: Tue Sep 20, 2022 2:47 pm
Apathizer wrote: Tue Sep 20, 2022 1:36 pm Correlation isn't the same as dispersion. The global market is usually less volatile than any individual country, even the US.
How did you arrive at the conclusion from this? https://www.portfoliovisualizer.com/bac ... ion2_2=100
Talking past each other. The comparison is global (which includes US) to US alone. You are comparing US to world ex US. The claim was that global, including US, is less volatile than US alone. It is close, but I think that is true.

Definitely true if you do the funds, VTI vs VT.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Re: Why don't you factor tilt?

Post by Marseille07 »

afan wrote: Tue Sep 20, 2022 6:05 pm Talking past each other. The comparison is global (which includes US) to US alone. You are comparing US to world ex US. The claim was that global, including US, is less volatile than US alone. It is close, but I think that is true.

Definitely true if you do the funds, VTI vs VT.
You're right. The person was comparing country A, B, C etc etc vs global.

I'm not so sure how useful this property is, but we weren't talking about volatility of US vs ex-US.
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Re: Why don't you factor tilt?

Post by rkhusky »

stan1 wrote: Tue Sep 20, 2022 4:47 pm
diversification - the action of diversifying something or the fact of becoming more diverse.
"growers should start planning diversification of crops"
I find definitions that use a form of the word to be defined not very helpful.
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