Was: 70% VT* 20% AVUV 10% AVDV
Now: 100% VT*
*Except split between VTI/VXUS in Taxable at market weights
Bond portion is made up of TIPS ladder/I-Bonds/T-Bills
I have had a tilt since 2018.
My rational:
1) 50 y/o with enough assets to retire in 10-15 years. Any extra return above market beta which "might" show up is not needed, plain and simple.
2) There appears no clear consensus whether factor investing will benefit a portfolio beyond a theoretical framework. What is certain is that my former tilt cost an additional 15 bps annually.
3) The decaying premiums from this strategy makes it more likely to match market returns moving forward at best, at worst, result in underperformance due to individual investor behavior. I have no interest in deciding which factors merit investment nor how much tilt to give them any more, much less determine when these choices should be updated nor do I have the skill to determine this. Optimum factor exposure at any point in time is unknowable.
4) Factor investing feels as though it is more of a product that is sold rather than an asset to buy. Methodologies differ across fund families and even William Bernstein states that "over time, the long-term returns of different small value funds should converge" (emphasis mine). If such convergence doesn't materialize the penalty for selecting the wrong methodology might be significant.
5) Factor investing does not hold up to a non-stationary framework of time. For example, does factor regression take into account the effect of growing private equity allocations withheld from the public market?
6) Factor funds are long only portfolios while factor theory is long and short. This appears to still be an obstacle to implementation.
7) Finally, I disagree with the logic that because the value premium has underperformed for so long it therefore must outperform in the future. It is akin to somebody saying that because something cannot be disproven it has a chance of being correct and therefore must be treated equally with all other outcomes. This is hardly actionable in one's relatively short accumulation phase. Exactly for how many additional years must factors underperform before the concept is discarded? Some would say that just as investors reach full capitulation, then factors will return and justify those who truly believed in them all along, like Mr Brown finally seeing The Great Pumpkin. This MAY happen, but so might a LOT of other things. With all due respect, this is not an investing policy I can hold onto.
Those are the concerns that have been rumbling around in my head for several months now. I apologize for yet another thread on factors. I give any reader full permission to scold me if I ever speak of personally introducing a factor tilt again.![:sharebeer]( "celebrate")
Now: 100% VT*
*Except split between VTI/VXUS in Taxable at market weights
Bond portion is made up of TIPS ladder/I-Bonds/T-Bills
I have had a tilt since 2018.
My rational:
1) 50 y/o with enough assets to retire in 10-15 years. Any extra return above market beta which "might" show up is not needed, plain and simple.
2) There appears no clear consensus whether factor investing will benefit a portfolio beyond a theoretical framework. What is certain is that my former tilt cost an additional 15 bps annually.
3) The decaying premiums from this strategy makes it more likely to match market returns moving forward at best, at worst, result in underperformance due to individual investor behavior. I have no interest in deciding which factors merit investment nor how much tilt to give them any more, much less determine when these choices should be updated nor do I have the skill to determine this. Optimum factor exposure at any point in time is unknowable.
4) Factor investing feels as though it is more of a product that is sold rather than an asset to buy. Methodologies differ across fund families and even William Bernstein states that "over time, the long-term returns of different small value funds should converge" (emphasis mine). If such convergence doesn't materialize the penalty for selecting the wrong methodology might be significant.
5) Factor investing does not hold up to a non-stationary framework of time. For example, does factor regression take into account the effect of growing private equity allocations withheld from the public market?
6) Factor funds are long only portfolios while factor theory is long and short. This appears to still be an obstacle to implementation.
7) Finally, I disagree with the logic that because the value premium has underperformed for so long it therefore must outperform in the future. It is akin to somebody saying that because something cannot be disproven it has a chance of being correct and therefore must be treated equally with all other outcomes. This is hardly actionable in one's relatively short accumulation phase. Exactly for how many additional years must factors underperform before the concept is discarded? Some would say that just as investors reach full capitulation, then factors will return and justify those who truly believed in them all along, like Mr Brown finally seeing The Great Pumpkin. This MAY happen, but so might a LOT of other things. With all due respect, this is not an investing policy I can hold onto.
Those are the concerns that have been rumbling around in my head for several months now. I apologize for yet another thread on factors. I give any reader full permission to scold me if I ever speak of personally introducing a factor tilt again.
Statistics: Posted by guppyguy — Tue Apr 23, 2024 2:56 pm — Replies 9 — Views 664