Can value stocks mitigate sequence of returns risk?

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abc132
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Re: Can value stocks mitigate sequence of returns risk?

Post by abc132 »

alex_686 wrote: Fri Mar 24, 2023 4:23 pm
The ideal asset might have a correlation of 0. If it were-1 it would always move in the opposite direction. You can do this by investing a portion of your portfolio in the S&P 500 and then investing a equal amount in shorting the S&P 500. This would leave you with a expected return of zero.
Negative correlation with positive expected return is what you want. No they do not add up to zero for assets we buy and hold.

They each vary around a positive expected value.

In your example shorting something with a positive expected return gives a negative expected return.
Last edited by abc132 on Fri Mar 24, 2023 4:45 pm, edited 2 times in total.
Logan Roy
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Re: Can value stocks mitigate sequence of returns risk?

Post by Logan Roy »

alex_686 wrote: Fri Mar 24, 2023 4:30 pm
Logan Roy wrote: Fri Mar 24, 2023 2:11 pm
HeavyChevy wrote: Fri Mar 24, 2023 12:22 pm
alex_686 wrote: Fri Mar 24, 2023 11:10 am Short answer is no.

Sequence of Risk returns are tied to volatility. Value stocks have equal or higher volatility than the total market.
shouldn't the question be when in the market cycle the volatility occurs?
I think so.

I'm not a fan of the academia around factors.. However, from a macro point of view, I do think a value tilt (even as much as 50:50 MCW and Value) probably improves SoR risk.

Firstly, value acts as a way to tilt a portfolio away from speculative bubbles.. It worked in 2000, and I believe it worked well during Japan's market crash(?). Also, with a market focused on short-term earnings and manager performance (from 3 months to 3 years), value stocks can be a form of time-arbitrage, where you get to buy things cheaper than should probably be justified on a 10-20 year basis, because they're likely to do poorly on a 1-3 year basis. And if you're drawing down over 30 years, it makes sense to be buying things at better prices on a slightly longer horizon.. Then there's also a degree of inflation-hedging in value stocks, which is another major risk to drawing down. So I think there are properties to value stocks that hedge certain risks better, and overweighting probably makes sense.
It worked poorly during 2020 Covid crisis.

I think Value is more volatile but it is a grey area. Lots of nuances here.

Growth companies tend to fizzle when they fall behind, value companies tend to blow up, declare bankruptcy, and go to zero.

So while I think value is more volatile I don’t think it should be excluded either. As suggested in a above post I don’t care about a asset’s volatility - I care about its impact on my portfolio’s volatility. Stripping away 50% of the market is not going to add to my diversification.
Well this is interesting – Blue is 100% US Stocks, and Red is 50:50 US Stocks and LCV.. If we look at just down years, in about 50% of down years, the 50% Value tilt has a marginal or substantial impact on downside. I don't think it's quite a free lunch. I'd normally test ideas like this with gold and TIPS and maybe defensive sectors too. And I've often found in more balanced portfolios, the 50:50 MCW/Value tilt offers small but worthwhile improvements (at least in backtests, and if the aim is more absolute returns).

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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

Thanks to all for the discussion.

It's interesting how so many of these discussions evolve toward maximizing diversification, as if that is the only holy grail. Here I am seeking a discussion around the value (pun intended) of a value dominated stock portfolio in retirement, i.e. no incoming investments. Not adding 15%. Going all value like Wellington taditionally did (not so much recently). Better, drop the bond, TIPS, REIT, etc. discussion and go all value in equities. This is so ridiculous to some BH that it seems hard for them to fathom. Most think 100% total market equities in retirement is too risky, but the merits are discussed dispassionately. Here, an admittedly limited data set seems to support the idea that value holds up better than total market in a deaccumulating situation. I'd really appreciate some some counter arguments that directly show the fallacy of that apprach rather than global considerations around volatility and diversification that don't seem to address the question: is value better than total market in an equity portfolio with substantial periodic outward cashflows.

(Obviously, the value portfolio segments under considration contain many, many stocks and are quite diversified with respect to business, etc. already)

As always, I am interested in the correct answer rather than the rational answer.
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Re: Can value stocks mitigate sequence of returns risk?

Post by ScubaHogg »

alex_686 wrote: Fri Mar 24, 2023 4:17 pm Adding value does not increase your diversification. Or maybe it does if you go deep in the math and chuck many Boglehead assumptions.

We can start with the neutral portfolio, total market l, which is 50% growth and 50% Value. Then lets say we shift our portfolio to 50% total market and 50% value. Of course if we look under the hood we can see we are holding 33% growth and 67% value.

If you want I can lead you down the math but it should be obvious why you are not diversifying but the opposite.
I personally don't make the strong public claim that factors "diversify", but factor proponents do under the rubric of "sources of return."

But you know that, it's an old debate

side note: I don't recall exactly the FF definition of "value" in the 1992 paper, but it wasn't the bottom half of the market. More like the bottom 30% or something thereabouts.

Edit to add: a 50%/50% TSM/SCV destroyed the 100% TSM in terms of Sharpe ratio (1972-present...full length of portfoliovisualizer.com data)

https://www.portfoliovisualizer.com/bac ... tion2_2=50
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Re: Can value stocks mitigate sequence of returns risk?

Post by alex_686 »

ScubaHogg wrote: Fri Mar 24, 2023 7:47 pm
alex_686 wrote: Fri Mar 24, 2023 4:17 pm Adding value does not increase your diversification. Or maybe it does if you go deep in the math and chuck many Boglehead assumptions.

We can start with the neutral portfolio, total market l, which is 50% growth and 50% Value. Then lets say we shift our portfolio to 50% total market and 50% value. Of course if we look under the hood we can see we are holding 33% growth and 67% value.

If you want I can lead you down the math but it should be obvious why you are not diversifying but the opposite.
I personally don't make the strong public claim that factors "diversify", but factor proponents do under the rubric of "sources of return."

But you know that, it's an old debate

side note: I don't recall exactly the FF definition of "value" in the 1992 paper, but it wasn't the bottom half of the market. More like the bottom 30% or something thereabouts.

Edit to add: a 50%/50% TSM/SCV destroyed the 100% TSM in terms of Sharpe ratio (1972-present...full length of portfoliovisualizer.com data)
Value has low E/R ratios and high book value. Some dived the market in Value/Growth and others say Value/Blend/Growth.

Now Sharpe values assume a constant volatility and relationship between the assets. I wouldn’t trust one that was longer than 5 years, and even then….
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Re: Can value stocks mitigate sequence of returns risk?

Post by Forester »

Gold mining stocks did well through the GFC, and possibly also the Great Depression, using Homestake Mining as a proxy;

Dotcom;
https://www.portfoliovisualizer.com/bac ... sisResults

GFC;
https://www.portfoliovisualizer.com/bac ... sisResults

Image

All things being equal, gold miner profitability should increase during a contraction, following a frothy speculative financial market.
Last edited by Forester on Sat Mar 25, 2023 9:59 am, edited 1 time in total.
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Re: Can value stocks mitigate sequence of returns risk?

Post by CloseEnough »

HeavyChevy wrote: Fri Mar 24, 2023 7:26 pm Thanks to all for the discussion.

It's interesting how so many of these discussions evolve toward maximizing diversification, as if that is the only holy grail. Here I am seeking a discussion around the value (pun intended) of a value dominated stock portfolio in retirement, i.e. no incoming investments. Not adding 15%. Going all value like Wellington taditionally did (not so much recently). Better, drop the bond, TIPS, REIT, etc. discussion and go all value in equities. This is so ridiculous to some BH that it seems hard for them to fathom. Most think 100% total market equities in retirement is too risky, but the merits are discussed dispassionately. Here, an admittedly limited data set seems to support the idea that value holds up better than total market in a deaccumulating situation. I'd really appreciate some some counter arguments that directly show the fallacy of that apprach rather than global considerations around volatility and diversification that don't seem to address the question: is value better than total market in an equity portfolio with substantial periodic outward cashflows.

(Obviously, the value portfolio segments under considration contain many, many stocks and are quite diversified with respect to business, etc. already)

As always, I am interested in the correct answer rather than the rational answer.
I think you have gotten responses that show that value, sometimes, holds up better. The important thing is "sometimes". As a few posts above show, in certain market declines value has not held up better. And, that is why the discussion evolves toward diversification. If you are looking for the correct answer, and the rational answer, it is that diversification provides the best results over time while lowering risk. Go ahead and tilt toward value if you think that's the best, but if you go all in without diversifying I think there will be times where a more diversified portfolio would have a better risk adjusted return.
Last edited by CloseEnough on Sat Mar 25, 2023 9:23 am, edited 1 time in total.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Random Walker »

I think the key to minimizing SORR in this case is applying the value tilt together with decreasing the overall equity allocation a bit. This is a move in the direction of risk parity, more evenly spreading risks across market factor, value, term.

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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

CloseEnough wrote: Sat Mar 25, 2023 9:17 am
HeavyChevy wrote: Fri Mar 24, 2023 7:26 pm Thanks to all for the discussion.

It's interesting how so many of these discussions evolve toward maximizing diversification, as if that is the only holy grail. Here I am seeking a discussion around the value (pun intended) of a value dominated stock portfolio in retirement, i.e. no incoming investments. Not adding 15%. Going all value like Wellington taditionally did (not so much recently). Better, drop the bond, TIPS, REIT, etc. discussion and go all value in equities. This is so ridiculous to some BH that it seems hard for them to fathom. Most think 100% total market equities in retirement is too risky, but the merits are discussed dispassionately. Here, an admittedly limited data set seems to support the idea that value holds up better than total market in a deaccumulating situation. I'd really appreciate some some counter arguments that directly show the fallacy of that apprach rather than global considerations around volatility and diversification that don't seem to address the question: is value better than total market in an equity portfolio with substantial periodic outward cashflows.

(Obviously, the value portfolio segments under considration contain many, many stocks and are quite diversified with respect to business, etc. already)

As always, I am interested in the correct answer rather than the rational answer.
I think you have gotten responses that show that value, sometimes, holds up better. The important thing is "sometimes". As a few posts above show, in certain market declines value has not held up better. And, that is why the discussion evolves toward diversification. If you are looking for the correct answer, and the rational answer, it is that diversification provides the best results over time while lowering risk. Go ahead and tilt toward value if you think that's the best, but if you go all in without diversifying I think you there will be times where a more diversified portfolio would have a better risk adjusted return.
I've have heard this repeatedly, but haven't seen the evidence that supports it. The PV data MC analysis with all the included limitations showed 100% equities value faring better than 60 total stock market, 40 intermediate term treasuries. So if the "sometimes worse" is seldom and not very much worse, it still seems to be the correct choice. But I am eager to see data-based evidence for when value failed more spectacularly over an extended time period, ie 20+ years. Not trying to push a viewpoint at all, I was actually startled by the effect seemingly displayed in the OP.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Beensabu »

HeavyChevy wrote: Sat Mar 25, 2023 9:27 am I've have heard this repeatedly, but haven't seen the evidence that supports it. The PV data MC analysis with all the included limitations showed 100% equities value faring better than 60 total stock market, 40 intermediate term treasuries. So if the "sometimes worse" is seldom and not very much worse, it still seems to be the correct choice. But I am eager to see data-based evidence for when value failed more spectacularly over an extended time period, ie 20+ years. Not trying to push a viewpoint at all, I was actually startled by the effect seemingly displayed in the OP.
There are a couple posters here who have been vocal about opting for a diversified (across geographies, capitalizations, styles) all equity portfolio over one that includes fixed income. Neither of them has gone all-value, as far as I can tell. All anything is tricky. Just because something hasn't happened to a sub-set of stocks characterized in a particular way as long as we've been observing them so far doesn't mean that it won't/can't happen. And the thing about "seldom" is that it indicates the possibility being very real (having actually happened before). We don't get to choose frequency or magnitude - we just have to deal with it whenever it happens.

In combo with fixed income and other measures that can be taken, a significant tilt to value going into retirement does make sense to me. When I got all excited about the same thing, I was fixated on "dividend growth", and it was argued that the effect was probably mostly due to value. As far as I'm concerned, it turned out to be due to the sector weightings. And that one worked out in all three: 2000, 2007, and 2022. So it would have been a more correct choice than the one you've identified. But that doesn't mean I'm running out to go 100% dividend growth or industrials with my equity allocation (or my entire portfolio); it's just a thing noticed, worth paying attention to, that I might perhaps implement to some extent less than all-in at a particular time of my life.

Anytime anyone finds themselves seriously contemplating all-into anything, that's a moment to pause and collect yourself... That's risky. Even the Wellington fund has bonds, doesn't it?
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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

Beensabu wrote: Sat Mar 25, 2023 7:13 pm
HeavyChevy wrote: Sat Mar 25, 2023 9:27 am I've have heard this repeatedly, but haven't seen the evidence that supports it. The PV data MC analysis with all the included limitations showed 100% equities value faring better than 60 total stock market, 40 intermediate term treasuries. So if the "sometimes worse" is seldom and not very much worse, it still seems to be the correct choice. But I am eager to see data-based evidence for when value failed more spectacularly over an extended time period, ie 20+ years. Not trying to push a viewpoint at all, I was actually startled by the effect seemingly displayed in the OP.
There are a couple posters here who have been vocal about opting for a diversified (across geographies, capitalizations, styles) all equity portfolio over one that includes fixed income. Neither of them has gone all-value, as far as I can tell. All anything is tricky. Just because something hasn't happened to a sub-set of stocks characterized in a particular way as long as we've been observing them so far doesn't mean that it won't/can't happen. And the thing about "seldom" is that it indicates the possibility being very real (having actually happened before). We don't get to choose frequency or magnitude - we just have to deal with it whenever it happens.

In combo with fixed income and other measures that can be taken, a significant tilt to value going into retirement does make sense to me. When I got all excited about the same thing, I was fixated on "dividend growth", and it was argued that the effect was probably mostly due to value. As far as I'm concerned, it turned out to be due to the sector weightings. And that one worked out in all three: 2000, 2007, and 2022. So it would have been a more correct choice than the one you've identified. But that doesn't mean I'm running out to go 100% dividend growth or industrials with my equity allocation (or my entire portfolio); it's just a thing noticed, worth paying attention to, that I might perhaps implement to some extent less than all-in at a particular time of my life.

Anytime anyone finds themselves seriously contemplating all-into anything, that's a moment to pause and collect yourself... That's risky. Even the Wellington fund has bonds, doesn't it?
I am not planning a switch to 100% equities.

And as I've stated before, my actual non-BH portfolio is actually

32% LCV
32% MC broad
36% high yield bonds

which seems to trigger many here, but provides substantial monthly income (I KNOW, I KNOW!!) and has served me well, including 2022. The value tilts within may help explain its seeming utility in down markets. But I am not trying to beat the market in any way shape or form. I am trying to provide a solid retirement and at the time I retired I couldn't stomach the ridiculous multiples of growth stocks, nor the near-zero interest of investment-quality bonds. I expect to hold this portfolio in perpetuity with possible tweaks and expect it will be good enough.

One possible tweak would be to buy MCV whenever rebalancing demands addition to midcap. The observation noted in the OP tends to support that idea (to me), but in the thread I thought it more straightforward to explore the purer idea of value equities vs total market equities and I am still seeking to understand that initial strong signal of value, when it seems to be dismissed with regularity.

There is a commonsense idea held by many retirees that value stocks can provide some characteristics of improved portfolio safety. That idea is regularly rebuffed on the forum. I would like to better understand whether value equities should have a definite role for retirees as a matter of historical performance, rather than just as a matter of (mostly blind) choice.
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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

I appended to my last post to clarify my goals for learning from the discussion in this thread.
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Re: Can value stocks mitigate sequence of returns risk?

Post by CloseEnough »

HeavyChevy wrote: Sun Mar 26, 2023 6:11 am I appended to my last post to clarify my goals for learning from the discussion in this thread.
I found the thread interesting. Thanks.

Curious, one question (sorry if I missed it), what is the goal or purpose of the 36% high yield bonds in your portfolio? And, to be clear, how have you defined "high yield bonds"?.
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Re: Can value stocks mitigate sequence of returns risk?

Post by exodusing »

David Jay wrote: Fri Mar 24, 2023 1:23 pm
HeavyChevy wrote: Fri Mar 24, 2023 12:57 pme.g. data time period is too short, shouldn't limit to US, MC analysis is inappropriate, WR is too high (personal finance is personal)? Observed signal appears very strong to me.
Your signal is likely not statistically significant because, using a period of 30 years, there are not even two completely independent periods in 50 years of data.
Exactly. Approximately zero of the posts in this thread that look at historical data are statistically significant, yet people act as if they are (anchoring?, streetight effect?, some other cognitive bias?).

Periods with significant overlap don't have enough new signal to add much information. One or two independent data points is far from enough to draw meaningful conclusions in this context.
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Re: Can value stocks mitigate sequence of returns risk?

Post by ScubaHogg »

OP, if you aren't already familiar with the site portfoliocharts.com, you might enjoy some of the tools and posts the author (who is a BH by the name of Tyler9000) has made

https://portfoliocharts.com/2015/11/17/ ... ates-work/

https://portfoliocharts.com/portfolio/withdrawal-rates/

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

Post by HeavyChevy »

CloseEnough wrote: Sun Mar 26, 2023 6:27 am
HeavyChevy wrote: Sun Mar 26, 2023 6:11 am I appended to my last post to clarify my goals for learning from the discussion in this thread.
I found the thread interesting. Thanks.

Curious, one question (sorry if I missed it), what is the goal or purpose of the 36% high yield bonds in your portfolio? And, to be clear, how have you defined "high yield bonds"?.
The purpose is investment success since I am willing to hold through downturns without flinching. HY bonds tend to have low duration that helps in a rising interest rate environment (one risk I have been wary of) and have outperformed investment grade bonds for all but relatively short holding periods. (But not really pertinent to this thread)

Since you asked, my own holdings are nearly half and half VWEAX and FAGIX, both actively managed. JNK would be the more-BH approach I think.
Last edited by HeavyChevy on Sun Mar 26, 2023 9:49 am, edited 1 time in total.
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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

exodusing wrote: Sun Mar 26, 2023 6:50 am
David Jay wrote: Fri Mar 24, 2023 1:23 pm
HeavyChevy wrote: Fri Mar 24, 2023 12:57 pme.g. data time period is too short, shouldn't limit to US, MC analysis is inappropriate, WR is too high (personal finance is personal)? Observed signal appears very strong to me.
Your signal is likely not statistically significant because, using a period of 30 years, there are not even two completely independent periods in 50 years of data.
Exactly. Approximately zero of the posts in this thread that look at historical data are statistically significant, yet people act as if they are (anchoring?, streetight effect?, some other cognitive bias?).

Periods with significant overlap don't have enough new signal to add much information. One or two independent data points is far from enough to draw meaningful conclusions in this context.
No backtesting of financial markets is statistically significant. The idea that if we had data for 200 years we could get statistically significant "answers" while ignoring the dramatic changes in the economy/markets/technology over that time period is ludicrous. These questions cannot be solved by math. Yet, the MC resampling of a 50 year period just might reflect the relative zigs and zags for various market segments vs the business cycle and investor behavior. The value signal appeared to me to be strong and I am looking for insight for/against that observation. If you believe there is no signal there, I accept that as your opinion.
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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

I find accusations of cognitive bias in other posters as less than helpful in fostering honest and open discussion on the forum. We can all benefit from the knowledge that biases exist in everyone. Calling out biases in strangers seems going a bit far to me.
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Re: Can value stocks mitigate sequence of returns risk?

Post by nedsaid »

alex_686 wrote: Fri Mar 24, 2023 11:10 am Short answer is no.

Sequence of Risk returns are tied to volatility. Value stocks have equal or higher volatility than the total market.
My short answer is maybe but I wouldn't get my hopes up too high. Value stocks would have to be in the context of a diversification across factors strategy that Larry Swedroe has talked about.

Diversification across factors worked well during the 2000-2002 bear market, failed during the 2008-2009 bear market and financial crisis, and helped during 2022. No good diversification strategy works well all of the time.
A fool and his money are good for business.
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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

nedsaid wrote: Sun Mar 26, 2023 9:48 am
alex_686 wrote: Fri Mar 24, 2023 11:10 am Short answer is no.

Sequence of Risk returns are tied to volatility. Value stocks have equal or higher volatility than the total market.
My short answer is maybe but I wouldn't get my hopes up too high. Value stocks would have to be in the context of a diversification across factors strategy that Larry Swedroe has talked about.

Diversification across factors worked well during the 2000-2002 bear market, failed during the 2008-2009 bear market and financial crisis, and helped during 2022. No good diversification strategy works well all of the time.
But I'm optimistic by nature!

The key is only to work less poorly than an alternative most of the time.
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Re: Can value stocks mitigate sequence of returns risk?

Post by nedsaid »

HeavyChevy wrote: Sun Mar 26, 2023 9:51 am
nedsaid wrote: Sun Mar 26, 2023 9:48 am
alex_686 wrote: Fri Mar 24, 2023 11:10 am Short answer is no.

Sequence of Risk returns are tied to volatility. Value stocks have equal or higher volatility than the total market.
My short answer is maybe but I wouldn't get my hopes up too high. Value stocks would have to be in the context of a diversification across factors strategy that Larry Swedroe has talked about.

Diversification across factors worked well during the 2000-2002 bear market, failed during the 2008-2009 bear market and financial crisis, and helped during 2022. No good diversification strategy works well all of the time.
But I'm optimistic by nature!

The key is only to work less poorly than an alternative most of the time.
There is a lot of nuance to these discussions. What you find is that nothing is perfect, you just do the best you can with the choices you have.
A fool and his money are good for business.
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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

nedsaid wrote: Sun Mar 26, 2023 9:56 am
HeavyChevy wrote: Sun Mar 26, 2023 9:51 am
nedsaid wrote: Sun Mar 26, 2023 9:48 am
alex_686 wrote: Fri Mar 24, 2023 11:10 am Short answer is no.

Sequence of Risk returns are tied to volatility. Value stocks have equal or higher volatility than the total market.
My short answer is maybe but I wouldn't get my hopes up too high. Value stocks would have to be in the context of a diversification across factors strategy that Larry Swedroe has talked about.

Diversification across factors worked well during the 2000-2002 bear market, failed during the 2008-2009 bear market and financial crisis, and helped during 2022. No good diversification strategy works well all of the time.
But I'm optimistic by nature!

The key is only to work less poorly than an alternative most of the time.
There is a lot of nuance to these discussions. What you find is that nothing is perfect, you just do the best you can with the choices you have.
And I suscribe to the WCI concept of 200 portfolios that are better than "mine." Many roads to Dublin.
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Re: Can value stocks mitigate sequence of returns risk?

Post by JoMoney »

My answer is: stocks are risky and you should not feel any assurances that any flavor of them will move any particular way, and need to be willing to accept the consequences that they might lose value over any particular time period including "the long run."
If you want to reduce risk, the uncertainty about returns over some specific time period, you need bonds. Some people believe value stocks will have higher returns, and if that works out to be the case (although there are plenty of long time periods where that can be shown as false in the past) then one could theoretically make a portfolio holding more bonds (with more assurances on their returns) and get the same portfolio return as a less-value tilted stock portfolio that had lower returns... but it's also the case that value stocks could underperform their alternative and the reverse be the result, so it's not true, but even worse is "it's not even wrong" ... it's just noisy, and trying to fit past data to match the result you want has no bearing on the future.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Random Walker »

nedsaid wrote: Sun Mar 26, 2023 9:48 am
alex_686 wrote: Fri Mar 24, 2023 11:10 am Short answer is no.

Sequence of Risk returns are tied to volatility. Value stocks have equal or higher volatility than the total market.
My short answer is maybe but I wouldn't get my hopes up too high. Value stocks would have to be in the context of a diversification across factors strategy that Larry Swedroe has talked about.

Diversification across factors worked well during the 2000-2002 bear market, failed during the 2008-2009 bear market and financial crisis, and helped during 2022. No good diversification strategy works well all of the time.
Important to remember that size and value are considered risk factors with an associated expected premium. Thus for comparison to a TSM portfolio, one needs to guesstimate a tilted portfolio with similar expected return; that means decreasing the overall equity allocation and increasing the allocation to safe bonds. Since the correlation between stocks and bonds tends to turn negative just when you would want it to the most, the bad left tail tends to get cut more than the good right tail when looking at potential return distributions.

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Re: Can value stocks mitigate sequence of returns risk?

Post by rkhusky »

HeavyChevy wrote: Sun Mar 26, 2023 9:46 am I find accusations of cognitive bias in other posters as less than helpful in fostering honest and open discussion on the forum. We can all benefit from the knowledge that biases exist in everyone. Calling out biases in strangers seems going a bit far to me.
Cognitive bias is not a pejorative. It’s the result of how all of our brains are wired. Sometimes the bias is to our advantage and sometimes to our disadvantage. We can make better decisions if we can recognize when we are being misled by our brain’s architecture.
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Re: Can value stocks mitigate sequence of returns risk?

Post by nedsaid »

Random Walker wrote: Sun Mar 26, 2023 1:12 pm
nedsaid wrote: Sun Mar 26, 2023 9:48 am
alex_686 wrote: Fri Mar 24, 2023 11:10 am Short answer is no.

Sequence of Risk returns are tied to volatility. Value stocks have equal or higher volatility than the total market.
My short answer is maybe but I wouldn't get my hopes up too high. Value stocks would have to be in the context of a diversification across factors strategy that Larry Swedroe has talked about.

Diversification across factors worked well during the 2000-2002 bear market, failed during the 2008-2009 bear market and financial crisis, and helped during 2022. No good diversification strategy works well all of the time.
Important to remember that size and value are considered risk factors with an associated expected premium. Thus for comparison to a TSM portfolio, one needs to guesstimate a tilted portfolio with similar expected return; that means decreasing the overall equity allocation and increasing the allocation to safe bonds. Since the correlation between stocks and bonds tends to turn negative just when you would want it to the most, the bad left tail tends to get cut more than the good right tail when looking at potential return distributions.

Dave
Even the diversification strategy of mixing stocks and bonds within a portfolio didn't work so well in 2022. Stocks were down about 20% in 2022 and bonds down 13%. Bonds were down less than stocks but that was about it. In many bear markets, bonds will be up as stocks are down. So nothing works perfectly all of the time.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Northern Flicker »

Factors may not be highly correlated, but the major stock factor premia most certainly can all be negative when the market factor crashes. Diversifying across multiple risk factors nay ameliorate SORR but it also can make it worse.
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Re: Can value stocks mitigate sequence of returns risk?

Post by NoRegret »

HeavyChevy wrote: Thu Mar 23, 2023 1:40 pm As a near-retiree contemplating construction of my investment portfolio, I was most interested in the portfolio surviving SORR since I have no pension and was not contemplating taking SS for some time. I lurked on BH for some time and was always surprised when value stocks were generally seen as just an odd bet unlikely to pay off vs a total market approach.

Again, I would emphasize that my interests are generally in surviving bad markets for my retirement period rather than maximizing returns.

Just for fun, I ran portfolio visualizer MC analysis 10 times for the conditions noted in the following link (this example for total US stock market).

https://www.portfoliovisualizer.com/mon ... nt=3000000

The additional runs were then made for the sectors of the commonly used stock style-box classifying stocks as value-growth vs company size (PV definitions).

Data covers ~50 years.

Results for % of the time portfolio survived 30 years (each portfolio is 100% stock, eg LCV or MCBlend, 5.2% init WD rate):

LCV--84.8% * * * * LCB--72.6% * * * * LCG--67.6%

MCV--96.4% * * * * MCB--83.3% * * * * MCG--69.6%

SCV--95.3% * * * * SCB--84.6% * * * * SCG--71.2%

Total US Stock Market 75.9%

Despite the limitations of such an analysis, I found these results both interesting and enlightening.
The data you provided are proof for the value factor being positive, in the context of portfolios in distribution. If you accept the risk premium explanation — value stocks have higher returns because they are riskier or have higher volatility — that is not what you want to mitigate SORR.

Instead you want to demonstrate lower portfolio drawdowns, so low vol is probably the factor you’re looking for. To demonstrate better SORR, you’ll want to focus on the handful worst cases. Normally there should be a trade-off in the expected ending portfolio value, although I haven’t check the data and there is a well-known low vol anomaly.
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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

rkhusky wrote: Sun Mar 26, 2023 8:26 pm
HeavyChevy wrote: Sun Mar 26, 2023 9:46 am I find accusations of cognitive bias in other posters as less than helpful in fostering honest and open discussion on the forum. We can all benefit from the knowledge that biases exist in everyone. Calling out biases in strangers seems going a bit far to me.
Cognitive bias is not a pejorative. It’s the result of how all of our brains are wired. Sometimes the bias is to our advantage and sometimes to our disadvantage. We can make better decisions if we can recognize when we are being misled by our brain’s architecture.
Needn't be but can be. On a recent podcast, an author of a book on cognitive bias seemingly gave every example of such bias as emanating from people on the opposite end of the political spectrum from his own views

I guess I entered discussions of personal finance and investing knowing backtesting etc. cannot predict the future. It might provide snippets of information that inform future behavior. All the award-winning modelling applied to financial markets is just the roughest attempt to quantify elements of a living, breathing market that does not operate according to underlying rules other than the psychology of the populace. I think it is hard to discuss cognitive bias when evaluating a situation where there is no underlying "correct" answer.
Last edited by HeavyChevy on Mon Mar 27, 2023 7:17 am, edited 1 time in total.
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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

ScubaHogg wrote: Sun Mar 26, 2023 7:45 am OP, if you aren't already familiar with the site portfoliocharts.com, you might enjoy some of the tools and posts the author (who is a BH by the name of Tyler9000) has made

https://portfoliocharts.com/2015/11/17/ ... ates-work/

https://portfoliocharts.com/portfolio/withdrawal-rates/

Enjoy
Thank you. I have seen these, but quite some time back.
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Re: Can value stocks mitigate sequence of returns risk?

Post by CloseEnough »

HeavyChevy wrote: Sun Mar 26, 2023 9:22 am
CloseEnough wrote: Sun Mar 26, 2023 6:27 am
HeavyChevy wrote: Sun Mar 26, 2023 6:11 am I appended to my last post to clarify my goals for learning from the discussion in this thread.
I found the thread interesting. Thanks.

Curious, one question (sorry if I missed it), what is the goal or purpose of the 36% high yield bonds in your portfolio? And, to be clear, how have you defined "high yield bonds"?.
The purpose is investment success since I am willing to hold through downturns without flinching. HY bonds tend to have low duration that helps in a rising interest rate environment (one risk I have been wary of) and have outperformed investment grade bonds for all but relatively short holding periods. (But not really pertinent to this thread)

Since you asked, my own holdings are nearly half and half VWEAX and FAGIX, both actively managed. JNK would be the more-BH approach I think.
While I don't subscribe to a pure BH approach either, I don't understand your approach in holding the 36% high yield bond funds, given the rest of your investment philosophy. We all hope for "investment success" but I don't really see that as a purpose for a portion of a portfolio. I was more wondering if the high yield bonds were to reduce volatility or risk as compared to 100% equities. From other comments you made, it seems you don't really subscribe to diversification as a fundamental principle that advances the goal of investment success. I too am willing to hold through downturns without flinching, but while not a pure BH, have a significant allocation to fixed income that would correlate less to equities (sometimes) and be less volatile. With your high yield allocation, it seems to me that it is almost like holding 100% equities (still is in a high risk asset class that will move as much with equities as investment grade bonds) so I still wonder why you would have it. Why not just hold 100% equity with a heavy (pure?) value tilt. I guess you have just reached a conclusion that the high yield bond funds you hold will do well, i.e., investment success. When I look back and see this statement in your OP ("Again, I would emphasize that my interests are generally in surviving bad markets for my retirement period rather than maximizing returns.") it adds to my lack of understanding of what the high yield allocation is there for.
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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

CloseEnough wrote: Mon Mar 27, 2023 7:15 am
HeavyChevy wrote: Sun Mar 26, 2023 9:22 am
CloseEnough wrote: Sun Mar 26, 2023 6:27 am
HeavyChevy wrote: Sun Mar 26, 2023 6:11 am I appended to my last post to clarify my goals for learning from the discussion in this thread.
I found the thread interesting. Thanks.

Curious, one question (sorry if I missed it), what is the goal or purpose of the 36% high yield bonds in your portfolio? And, to be clear, how have you defined "high yield bonds"?.
The purpose is investment success since I am willing to hold through downturns without flinching. HY bonds tend to have low duration that helps in a rising interest rate environment (one risk I have been wary of) and have outperformed investment grade bonds for all but relatively short holding periods. (But not really pertinent to this thread)

Since you asked, my own holdings are nearly half and half VWEAX and FAGIX, both actively managed. JNK would be the more-BH approach I think.
While I don't subscribe to a pure BH approach either, I don't understand your approach in holding the 36% high yield bond funds, given the rest of your investment philosophy. We all hope for "investment success" but I don't really see that as a purpose for a portion of a portfolio. I was more wondering if the high yield bonds were to reduce volatility or risk as compared to 100% equities. From other comments you made, it seems you don't really subscribe to diversification as a fundamental principle that advances the goal of investment success. I too am willing to hold through downturns without flinching, but while not a pure BH, have a significant allocation to fixed income that would correlate less to equities (sometimes) and be less volatile. With your high yield allocation, it seems to me that it is almost like holding 100% equities (still is in a high risk asset class that will move as much with equities as investment grade bonds) so I still wonder why you would have it. Why not just hold 100% equity with a heavy (pure?) value tilt. I guess you have just reached a conclusion that the high yield bond funds you hold will do well, i.e., investment success.
High yield bonds provide significant stability and steady income. They are just bonds with slightly higher risk and better returns than the popular alternatives. I chose them because I expect they will fare better than investment grade if we get into a decade of increasing interest rates. Not much downside if we dont. (I didn't bring up that element of my portfolio initially specifically because HY bonds often elicit overt skepticism here, and they really aren't pertinent to the thread topic.)
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Re: Can value stocks mitigate sequence of returns risk?

Post by CloseEnough »

HeavyChevy wrote: Mon Mar 27, 2023 7:23 am
CloseEnough wrote: Mon Mar 27, 2023 7:15 am
HeavyChevy wrote: Sun Mar 26, 2023 9:22 am
CloseEnough wrote: Sun Mar 26, 2023 6:27 am
HeavyChevy wrote: Sun Mar 26, 2023 6:11 am I appended to my last post to clarify my goals for learning from the discussion in this thread.
I found the thread interesting. Thanks.

Curious, one question (sorry if I missed it), what is the goal or purpose of the 36% high yield bonds in your portfolio? And, to be clear, how have you defined "high yield bonds"?.
The purpose is investment success since I am willing to hold through downturns without flinching. HY bonds tend to have low duration that helps in a rising interest rate environment (one risk I have been wary of) and have outperformed investment grade bonds for all but relatively short holding periods. (But not really pertinent to this thread)

Since you asked, my own holdings are nearly half and half VWEAX and FAGIX, both actively managed. JNK would be the more-BH approach I think.
While I don't subscribe to a pure BH approach either, I don't understand your approach in holding the 36% high yield bond funds, given the rest of your investment philosophy. We all hope for "investment success" but I don't really see that as a purpose for a portion of a portfolio. I was more wondering if the high yield bonds were to reduce volatility or risk as compared to 100% equities. From other comments you made, it seems you don't really subscribe to diversification as a fundamental principle that advances the goal of investment success. I too am willing to hold through downturns without flinching, but while not a pure BH, have a significant allocation to fixed income that would correlate less to equities (sometimes) and be less volatile. With your high yield allocation, it seems to me that it is almost like holding 100% equities (still is in a high risk asset class that will move as much with equities as investment grade bonds) so I still wonder why you would have it. Why not just hold 100% equity with a heavy (pure?) value tilt. I guess you have just reached a conclusion that the high yield bond funds you hold will do well, i.e., investment success.
High yield bonds provide significant stability and steady income. They are just bonds with slightly higher risk and better returns than the popular alternatives. I chose them because I expect they will fare better than investment grade if we get into a decade of increasing interest rates. Not much downside if we dont. (I didn't bring up that element of my portfolio initially specifically because HY bonds often elicit overt skepticism here, and they really aren't pertinent to the thread topic.)
Great. That's food for thought for me. I have no HY bonds (at least, I don't think they are a part of intermediate bond index funds), and maybe something I should consider. I already have to make a decision on whether to add TIPs to my fixed income, and will educate myself a bit more on HY. Thanks.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Jungle »

IMO the difference between large value and large growth returns has shrunk significantly over the past 25 years, to the point where it isn't much now. Plus, TSM funds already have a significant allocation to large value. So for that reason I do not tilt to large value.

However, the outperformance on MCV and especially SCV is significantly higher and has also continued (more or less) to hold up in recent decades. So I do tilt towards that.

Not sure how much LCV would have helped in a 1929 or 1966 retirement. Would have to play around with the numbers in Simba's spreadsheet. I know SCV helped in 1966 quite a bit but only helped a tiny bit in 1929.
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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

Jungle wrote: Mon Mar 27, 2023 7:49 am IMO the difference between large value and large growth returns has shrunk significantly over the past 25 years, to the point where it isn't much now. Plus, TSM funds already have a significant allocation to large value. So for that reason I do not tilt to large value.

However, the outperformance on MCV and especially SCV is significantly higher and has also continued (more or less) to hold up in recent decades. So I do tilt towards that.

Not sure how much LCV would have helped in a 1929 or 1966 retirement. Would have to play around with the numbers in Simba's spreadsheet. I know SCV helped in 1966 quite a bit but only helped a tiny bit in 1929.
If I was told there was such a value effect and asked to guess the capitalization category with the best behavior, I would have guessed LCV because of the name recognition of component companies and higher dividends. The outsized "performance" of MCV and SCV in the face of significant portfolio outflows caught me by surprise.
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Re: Can value stocks mitigate sequence of returns risk?

Post by muffins14 »

HeavyChevy wrote: Mon Mar 27, 2023 7:56 am
Jungle wrote: Mon Mar 27, 2023 7:49 am IMO the difference between large value and large growth returns has shrunk significantly over the past 25 years, to the point where it isn't much now. Plus, TSM funds already have a significant allocation to large value. So for that reason I do not tilt to large value.

However, the outperformance on MCV and especially SCV is significantly higher and has also continued (more or less) to hold up in recent decades. So I do tilt towards that.

Not sure how much LCV would have helped in a 1929 or 1966 retirement. Would have to play around with the numbers in Simba's spreadsheet. I know SCV helped in 1966 quite a bit but only helped a tiny bit in 1929.
If I was told there was such a value effect and asked to guess the capitalization category with the best behavior, I would have guessed LCV because of the name recognition of component companies and higher dividends. The outsized "performance" of MCV and SCV in the face of significant portfolio outflows caught me by surprise.
You’re not going to get a consensus here. Again, for me, I have enough confidence in these to tilt :

higher expected return
Decorrelation with market beta
Potentially higher SWR or lower start-date sensitivity

I think vineviz has had some helpful threads on this in the past
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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

CloseEnough wrote: Mon Mar 27, 2023 7:31 am
HeavyChevy wrote: Mon Mar 27, 2023 7:23 am
CloseEnough wrote: Mon Mar 27, 2023 7:15 am
HeavyChevy wrote: Sun Mar 26, 2023 9:22 am
CloseEnough wrote: Sun Mar 26, 2023 6:27 am

I found the thread interesting. Thanks.

Curious, one question (sorry if I missed it), what is the goal or purpose of the 36% high yield bonds in your portfolio? And, to be clear, how have you defined "high yield bonds"?.
The purpose is investment success since I am willing to hold through downturns without flinching. HY bonds tend to have low duration that helps in a rising interest rate environment (one risk I have been wary of) and have outperformed investment grade bonds for all but relatively short holding periods. (But not really pertinent to this thread)

Since you asked, my own holdings are nearly half and half VWEAX and FAGIX, both actively managed. JNK would be the more-BH approach I think.
While I don't subscribe to a pure BH approach either, I don't understand your approach in holding the 36% high yield bond funds, given the rest of your investment philosophy. We all hope for "investment success" but I don't really see that as a purpose for a portion of a portfolio. I was more wondering if the high yield bonds were to reduce volatility or risk as compared to 100% equities. From other comments you made, it seems you don't really subscribe to diversification as a fundamental principle that advances the goal of investment success. I too am willing to hold through downturns without flinching, but while not a pure BH, have a significant allocation to fixed income that would correlate less to equities (sometimes) and be less volatile. With your high yield allocation, it seems to me that it is almost like holding 100% equities (still is in a high risk asset class that will move as much with equities as investment grade bonds) so I still wonder why you would have it. Why not just hold 100% equity with a heavy (pure?) value tilt. I guess you have just reached a conclusion that the high yield bond funds you hold will do well, i.e., investment success.
High yield bonds provide significant stability and steady income. They are just bonds with slightly higher risk and better returns than the popular alternatives. I chose them because I expect they will fare better than investment grade if we get into a decade of increasing interest rates. Not much downside if we dont. (I didn't bring up that element of my portfolio initially specifically because HY bonds often elicit overt skepticism here, and they really aren't pertinent to the thread topic.)
Great. That's food for thought for me. I have no HY bonds (at least, I don't think they are a part of intermediate bond index funds), and maybe something I should consider. I already have to make a decision on whether to add TIPs to my fixed income, and will educate myself a bit more on HY. Thanks.
I don't advocate HY bonds for anyone but me. There are several sites (and the BH wiki) devoted to portfolio construction. Best of luck!
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Re: Can value stocks mitigate sequence of returns risk?

Post by rkhusky »

HeavyChevy wrote: Mon Mar 27, 2023 7:05 am I think it is hard to discuss cognitive bias when evaluating a situation where there is no underlying "correct" answer.
There often is a correct or incorrect answer. Waiting to sell an underwater investment, which you now know you shouldn’t have bought, until you are back to even, is the result of the Anchoring cognitive basis. The correct answer is to sell the investment as soon as you know it’s inappropriate, taking into account taxes and other costs.
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Re: Can value stocks mitigate sequence of returns risk?

Post by aristotelian »

Kenkat wrote: Fri Mar 24, 2023 11:25 am Thanks HeavyChevy for running these numbers.

I will give the typical horrible anecdotal example of 2022, my first year of retirement. My 50/50 portfolio returned around -10%, which while not great, was better than any of the three fund portfolio components in 2022. This was primarily due to contributions from my large value and small value funds, as well as a chunk of bond money I moved into a stable value fund and a small allocation to the always hated commodities.

While one year does not a retirement make, it sure helped at a minimum from a psychological basis.
How did they do in 2020? I am guessing not well.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Kenkat »

aristotelian wrote: Mon Mar 27, 2023 8:06 pm
Kenkat wrote: Fri Mar 24, 2023 11:25 am Thanks HeavyChevy for running these numbers.

I will give the typical horrible anecdotal example of 2022, my first year of retirement. My 50/50 portfolio returned around -10%, which while not great, was better than any of the three fund portfolio components in 2022. This was primarily due to contributions from my large value and small value funds, as well as a chunk of bond money I moved into a stable value fund and a small allocation to the always hated commodities.

While one year does not a retirement make, it sure helped at a minimum from a psychological basis.
How did they do in 2020? I am guessing not well.
I have returns by year going back to 1999 as well as the return of an equivalent benchmark with the same stock/bond/international allocation. 2020 was the worst year in terms of how far I trailed the benchmark since I began tracking returns. However, 2021 and 2022 reversed that.
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Re: Can value stocks mitigate sequence of returns risk?

Post by beanie »

Jungle wrote: Mon Mar 27, 2023 7:49 am ... TSM funds already have a significant allocation to large value. So for that reason I do not tilt to large value. ...
No, actually, according to Morningstar, TSM is currently tilted to large growth. The style box for VTSAX is:

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Re: Can value stocks mitigate sequence of returns risk?

Post by Northern Flicker »

Jungle wrote: Mon Mar 27, 2023 7:49 am IMO the difference between large value and large growth returns has shrunk significantly over the past 25 years, to the point where it isn't much now. Plus, TSM funds already have a significant allocation to large value. So for that reason I do not tilt to large value.

However, the outperformance on MCV and especially SCV is significantly higher and has also continued (more or less) to hold up in recent decades. So I do tilt towards that.
There is reasonable evidence that the value premium is stronger for smaller stocks. Part of that is that the most distressed companies tend to be smaller, so that a deeper value exposure is possible. But there also would be a fundamental flaw in the factor models in play to the extent that this is a non-linearity not captured by the factor (aka linear) model.
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Re: Can value stocks mitigate sequence of returns risk?

Post by BogleFan510 »

alex_686 wrote: Fri Mar 24, 2023 11:10 am Short answer is no.

Sequence of Risk returns are tied to volatility. Value stocks have equal or higher volatility than the total market.
This.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Northern Flicker »

BogleFan510 wrote: Tue Mar 28, 2023 11:56 pm
alex_686 wrote: Fri Mar 24, 2023 11:10 am Short answer is no.

Sequence of Risk returns are tied to volatility. Value stocks have equal or higher volatility than the total market.
This.
Or the investor holds a smaller equity portfolio to balance out the volatility, but then the investor may depend on the value premium being positive to have adequate return.
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Re: Can value stocks mitigate sequence of returns risk?

Post by Logan Roy »

HeavyChevy wrote: Fri Mar 24, 2023 7:26 pm Thanks to all for the discussion.

It's interesting how so many of these discussions evolve toward maximizing diversification, as if that is the only holy grail. Here I am seeking a discussion around the value (pun intended) of a value dominated stock portfolio in retirement, i.e. no incoming investments. Not adding 15%. Going all value like Wellington taditionally did (not so much recently). Better, drop the bond, TIPS, REIT, etc. discussion and go all value in equities. This is so ridiculous to some BH that it seems hard for them to fathom. Most think 100% total market equities in retirement is too risky, but the merits are discussed dispassionately. Here, an admittedly limited data set seems to support the idea that value holds up better than total market in a deaccumulating situation. I'd really appreciate some some counter arguments that directly show the fallacy of that apprach rather than global considerations around volatility and diversification that don't seem to address the question: is value better than total market in an equity portfolio with substantial periodic outward cashflows.

(Obviously, the value portfolio segments under considration contain many, many stocks and are quite diversified with respect to business, etc. already)

As always, I am interested in the correct answer rather than the rational answer.
The correct answer will only be known with hindsight – I think a rational answer is the best we can hope for.

I don't think there's a good reason to go all-in on Value. If the aim is reducing a form of risk: limiting yourself to a smaller part of a single asset class probably won't achieve that.. It goes against the most fundamental principle of risk reduction, which is that you really want as many unrelated sources of return as possible. Value is then a good principle to apply to all of them.

One risk with value stocks is you're generally in more cyclical businesses (banks, natural resources, etc.), and if we found ourselves back in a deflationary regime (as we have been in recent history, and Japan has been since 1990 – and it may be a sign of the kind of economy we're moving towards), the sources of a lot of those earnings might stay rather depressed, which is why Value's tended to underperform in the recent era, and even been a pretty poor investment.
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Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

Logan Roy wrote: Wed Mar 29, 2023 8:23 am
HeavyChevy wrote: Fri Mar 24, 2023 7:26 pm Thanks to all for the discussion.

It's interesting how so many of these discussions evolve toward maximizing diversification, as if that is the only holy grail. Here I am seeking a discussion around the value (pun intended) of a value dominated stock portfolio in retirement, i.e. no incoming investments. Not adding 15%. Going all value like Wellington taditionally did (not so much recently). Better, drop the bond, TIPS, REIT, etc. discussion and go all value in equities. This is so ridiculous to some BH that it seems hard for them to fathom. Most think 100% total market equities in retirement is too risky, but the merits are discussed dispassionately. Here, an admittedly limited data set seems to support the idea that value holds up better than total market in a deaccumulating situation. I'd really appreciate some some counter arguments that directly show the fallacy of that apprach rather than global considerations around volatility and diversification that don't seem to address the question: is value better than total market in an equity portfolio with substantial periodic outward cashflows.

(Obviously, the value portfolio segments under considration contain many, many stocks and are quite diversified with respect to business, etc. already)

As always, I am interested in the correct answer rather than the rational answer.
The correct answer will only be known with hindsight – I think a rational answer is the best we can hope for.

I don't think there's a good reason to go all-in on Value. If the aim is reducing a form of risk: limiting yourself to a smaller part of a single asset class probably won't achieve that.. It goes against the most fundamental principle of risk reduction, which is that you really want as many unrelated sources of return as possible. Value is then a good principle to apply to all of them.

One risk with value stocks is you're generally in more cyclical businesses (banks, natural resources, etc.), and if we found ourselves back in a deflationary regime (as we have been in recent history, and Japan has been since 1990 – and it may be a sign of the kind of economy we're moving towards), the sources of a lot of those earnings might stay rather depressed, which is why Value's tended to underperform in the recent era, and even been a pretty poor investment.
https://www.portfoliovisualizer.com/bac ... tion5_2=35


My eyes are tired

I ran the original conditions through PV for all available 11 year periods: 1972-82 thru 2012-22 (41 runs)

Portfolios were: 34LCV/33MCV33SCV, 65TSM/35IntTreas, 100TSM

The ending portvolio values (initial $3M) were:

34LCV 65TSM/35IntTreas 100TSM
33MCV
33SCV

6.26 * * 2.52 * * 2.24 * * 1972-82
7.11 * * 2.21 * * 1.65 * * 1973-83
12.06 * * 3.82 * * 3.96 * * 1974-84
25.47 * * 8.15 * * 11.17 * * 1975-85
18.36 * * 6.72 * * 8.28
10.65 * * 4.91 * * 5.68
14.13 * * 6.72 * * 8.42
16.4 * * 8.42 * * 10.53
10.67 * * 7.28 * * 7.93
11.69 * * 7.51 * * 7.49
13.85 * * 8.93 * * 9.67
12.29 * * 7.71 * * 8.77
8.52 * * 6.37 * * 6.84
11.17 * * 8.09 * * 9.18
9.40 * * 6.74 * * 8.34
10.37 * * 7.00 * * 9.33
11.88 * * 8.66 * * 11.89
9.81 * * 8.82 * * 12.56
8.83 * * 6.70 * * 8.28
12.04 * * 7.04 * * 8.81
6.98 * * 4.74 * * 4.88
7.62 * * 5.35 * * 5.94
7.61 * * 5.26 * * 6.07
9.05 * * 5.98 * * 6.83
7.47 * * 4.64 * * 5.28
5.73 * * 4.24 * * 4.36
2.39 * * 2.46 * * 1.74
2.88 * * 2.10 * * 1.40
3.24 * * 1.85 * * 0.87
2.57 * * 2.16 * * 1.35
3.14 * * 2.79 * * 2.22
6.15 * * 4.26 * * 5.00
4.39 * * 3.48 * * 3.64
3.18 * * 3.17 * * 3.12
3.40 * * 3.40 * * 3.40
2.93 * * 3.39 * * 3.29
3.15 * * 3.12 * * 3.07
8.54 * * 5.82 * * 9.34
6.48 * * 5.56 * * 8.36
6.63 * * 5.56 * * 8.85 * * 2011-21
6.71 * * 4.63 * * 7.48 * * 2012-22

Value portfolio "won" 33/40 or 83%
Diversified stock/bond "won" 1.5/40 or 4%
Total market "won" 5.5/40 or 14% - but 5 of the last 6 years
Tie in 2006-2016

Do these results mean anything at all? Let me know what you think.
"It's not the best move, but it is a move." - GMHikaru
muffins14
Posts: 5528
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Location: New York

Re: Can value stocks mitigate sequence of returns risk?

Post by muffins14 »

HeavyChevy wrote: Wed Mar 29, 2023 12:58 pm
Do these results mean anything at all? Let me know what you think.
I don't think it's a reasonable comparison to compare 100% TSM or 34 LCV / 33 MCV / 33 SCV to a 65/35 stock/bond portfolio.

Better to compare the same stock/bond split across some options, maybe

1) 70% TSM + 30% bonds
2) 25% LCV, 25% MCV, 20% SCV + 30% bonds
3) 42% US / 28% International / 30% Bonds

etc etc
Crom laughs at your Four Winds
Topic Author
HeavyChevy
Posts: 523
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Location: Below the Mac bridge (Troll)

Re: Can value stocks mitigate sequence of returns risk?

Post by HeavyChevy »

muffins14 wrote: Wed Mar 29, 2023 1:18 pm
HeavyChevy wrote: Wed Mar 29, 2023 12:58 pm
Do these results mean anything at all? Let me know what you think.
I don't think it's a reasonable comparison to compare 100% TSM or 34 LCV / 33 MCV / 33 SCV to a 65/35 stock/bond portfolio.

Better to compare the same stock/bond split across some options, maybe

1) 70% TSM + 30% bonds
2) 25% LCV, 25% MCV, 20% SCV + 30% bonds
3) 42% US / 28% International / 30% Bonds

etc etc
Part of my initial question was "how are bonds helping me when all-equity portfolios are fairing better over 11 year periods?"

Diversification into a poor-return vehicle seems on the face of it to be counterproductive. If we add the counterproductive asset to all portfolios they will look more alike, but all will perform more poorly. (but obviously this dataset doesn't include 1966- or 1929- etc.)
"It's not the best move, but it is a move." - GMHikaru
3funder
Posts: 1814
Joined: Sun Oct 15, 2017 9:35 pm

Re: Can value stocks mitigate sequence of returns risk?

Post by 3funder »

watchnerd wrote: Fri Mar 24, 2023 11:25 am Value stocks don't mitigate SORR risk as well as things that aren't stocks.

This sounds like an attempt to have cake and eat it, too.
Totally agree.
Global stocks, US bonds, and time.
Logan Roy
Posts: 1838
Joined: Sun May 29, 2022 10:15 am

Re: Can value stocks mitigate sequence of returns risk?

Post by Logan Roy »

HeavyChevy wrote: Wed Mar 29, 2023 12:58 pm
Logan Roy wrote: Wed Mar 29, 2023 8:23 am
HeavyChevy wrote: Fri Mar 24, 2023 7:26 pm Thanks to all for the discussion.

It's interesting how so many of these discussions evolve toward maximizing diversification, as if that is the only holy grail. Here I am seeking a discussion around the value (pun intended) of a value dominated stock portfolio in retirement, i.e. no incoming investments. Not adding 15%. Going all value like Wellington taditionally did (not so much recently). Better, drop the bond, TIPS, REIT, etc. discussion and go all value in equities. This is so ridiculous to some BH that it seems hard for them to fathom. Most think 100% total market equities in retirement is too risky, but the merits are discussed dispassionately. Here, an admittedly limited data set seems to support the idea that value holds up better than total market in a deaccumulating situation. I'd really appreciate some some counter arguments that directly show the fallacy of that apprach rather than global considerations around volatility and diversification that don't seem to address the question: is value better than total market in an equity portfolio with substantial periodic outward cashflows.

(Obviously, the value portfolio segments under considration contain many, many stocks and are quite diversified with respect to business, etc. already)

As always, I am interested in the correct answer rather than the rational answer.
The correct answer will only be known with hindsight – I think a rational answer is the best we can hope for.

I don't think there's a good reason to go all-in on Value. If the aim is reducing a form of risk: limiting yourself to a smaller part of a single asset class probably won't achieve that.. It goes against the most fundamental principle of risk reduction, which is that you really want as many unrelated sources of return as possible. Value is then a good principle to apply to all of them.

One risk with value stocks is you're generally in more cyclical businesses (banks, natural resources, etc.), and if we found ourselves back in a deflationary regime (as we have been in recent history, and Japan has been since 1990 – and it may be a sign of the kind of economy we're moving towards), the sources of a lot of those earnings might stay rather depressed, which is why Value's tended to underperform in the recent era, and even been a pretty poor investment.
https://www.portfoliovisualizer.com/bac ... tion5_2=35


My eyes are tired

I ran the original conditions through PV for all available 11 year periods: 1972-82 thru 2012-22 (41 runs)

Portfolios were: 34LCV/33MCV33SCV, 65TSM/35IntTreas, 100TSM

The ending portvolio values (initial $3M) were:

34LCV 65TSM/35IntTreas 100TSM
33MCV
33SCV

6.26 * * 2.52 * * 2.24 * * 1972-82
7.11 * * 2.21 * * 1.65 * * 1973-83
12.06 * * 3.82 * * 3.96 * * 1974-84
25.47 * * 8.15 * * 11.17 * * 1975-85
18.36 * * 6.72 * * 8.28
10.65 * * 4.91 * * 5.68
14.13 * * 6.72 * * 8.42
16.4 * * 8.42 * * 10.53
10.67 * * 7.28 * * 7.93
11.69 * * 7.51 * * 7.49
13.85 * * 8.93 * * 9.67
12.29 * * 7.71 * * 8.77
8.52 * * 6.37 * * 6.84
11.17 * * 8.09 * * 9.18
9.40 * * 6.74 * * 8.34
10.37 * * 7.00 * * 9.33
11.88 * * 8.66 * * 11.89
9.81 * * 8.82 * * 12.56
8.83 * * 6.70 * * 8.28
12.04 * * 7.04 * * 8.81
6.98 * * 4.74 * * 4.88
7.62 * * 5.35 * * 5.94
7.61 * * 5.26 * * 6.07
9.05 * * 5.98 * * 6.83
7.47 * * 4.64 * * 5.28
5.73 * * 4.24 * * 4.36
2.39 * * 2.46 * * 1.74
2.88 * * 2.10 * * 1.40
3.24 * * 1.85 * * 0.87
2.57 * * 2.16 * * 1.35
3.14 * * 2.79 * * 2.22
6.15 * * 4.26 * * 5.00
4.39 * * 3.48 * * 3.64
3.18 * * 3.17 * * 3.12
3.40 * * 3.40 * * 3.40
2.93 * * 3.39 * * 3.29
3.15 * * 3.12 * * 3.07
8.54 * * 5.82 * * 9.34
6.48 * * 5.56 * * 8.36
6.63 * * 5.56 * * 8.85 * * 2011-21
6.71 * * 4.63 * * 7.48 * * 2012-22

Value portfolio "won" 33/40 or 83%
Diversified stock/bond "won" 1.5/40 or 4%
Total market "won" 5.5/40 or 14% - but 5 of the last 6 years
Tie in 2006-2016

Do these results mean anything at all? Let me know what you think.
Probably not. I do think that's a much better way to backtest (e.g. rolling 11 year periods), but you're only looking at a specific period in history, which was stagflation, then rates falling for 40 years. And I don't think markets are necessarily ready to repeat that – we may well be into a period a bit more like the 1960s, and it may well play out differently..

The key with backtesting (if there is one) is to identify principles from simply expecting history to repeat. A principle may be an approach to diversification, or offsetting assets with low correlations in most situations, etc. But a *bet* on something like Value or Quality, because it's done well in the past, can just as easily be exactly the wrong thing to do, as it may just lead you to old anomalies that have been arbitraged away, or things that were never really anomalies, and are only on our radar because they've done better through sheer chance.. That's the dilemma active investors have always had. It's never been easy to solve that one. I think it's generally a mistake for passive investors to go down that rabbit hole. Better to focus on principles, like diversification, correlations, the relationship between asset classes and macroeconomics..
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