Author Topic: Betterment  (Read 19144 times)

tj

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Re: Betterment
« Reply #50 on: October 22, 2015, 08:15:19 PM »
Quote
If it's impossible to know the mathematical difference, why do you prefer one over the other? Genuinely curious.

Well...I don't. I use mutual funds, including Vanguard Wellington,  in my tax advantaged acccounts and Betterment in taxable. The value I see from betterment is the tax loss harvesting and the robotic allocating of ongoing contributions and dividend reinvestment. In essence i am outsourcing the allocation of my taxable investments to betterment. The only way I could duplicate what they are doing with zero effort on my part (other than paying someone to code software....) is if I used a single fund which would generally not be as tax efficient (or as diversified) as what Betterment is doing. I know from my experience that if I am hands on, i will do a lot of fiddling around. I am trying to protect myself from myself. I think whatever added fees I give Betterment (which so far has been a whopping $2.00 or so for the short time between my original free trial and the free 6 months of management they gave me after I deposited $100k) is going to be far less than the $$$ i lose from screwing around with my investments.

I don't think Betterment necessarily has a secret sauce with their allocation, I just think it is a reasonable allocation that will not hurt vs something like a 3 fund portfolio or a slice and dice. Just like I think Vanguard Wellington is reasonable. And Balanced Index is reasonable. Reasonable would be moderately allocated with low fees. More than one road to Dublin IMO.
« Last Edit: October 22, 2015, 08:20:40 PM by tj »

tj

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Re: Betterment
« Reply #51 on: October 22, 2015, 08:22:12 PM »
The value factor is not a question of "some value funds have done well, and some growth funds have done well." 

It's not an anecdote.  It is one of a handful of factors associated with increased equity returns over long time horizons.

This is not a controversial claim. It's not hocus pocus. Its a claim that is well supported by  available academic evidence.

Now you can say, "it's too complicated", or I don't think I can handle periods of negative tracking error going forward. But the overwhelming evidence is that investing in cheap companies brings increased returns.

I don't think anyone is arguing the theory/evidence that paying a lower price results in higher returns, but look at reality and how such "value" funds are actually performing

VTV (value) vs VUG (growth) - 5.91% over ten years vs 8.09% over ten years, 12.35% over five years vs 14.26%

VOE (midcap value) vs VOT (midcap growth) - 7.63% since inception (2006) vs 7.86^

VBR (small value) vs VBK (small growth) - 7.03% over ten years vs 8.21%

We all agree with the theory, and if these value indexes were actually buying cheap stocks and holding them, they would have a good return, but sometimes you need to look at reality and ask - why are the indexes that supposedly follow this strategy not working out? I suspect it's the execution that's hurting the indexes because I truly believe the theory is sound, but can we agree that ten years is a long enough time horizon to make a decent comparison?

Because growth has outperformed during this 10 year period. Technology and health care etc. These things go through cycles, the difficult thing is knowing ahead of time.

milesdividendmd

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Re: Betterment
« Reply #52 on: October 22, 2015, 09:00:08 PM »
The value factor is not a question of "some value funds have done well, and some growth funds have done well." 

It's not an anecdote.  It is one of a handful of factors associated with increased equity returns over long time horizons.

This is not a controversial claim. It's not hocus pocus. Its a claim that is well supported by  available academic evidence.

Now you can say, "it's too complicated", or I don't think I can handle periods of negative tracking error going forward. But the overwhelming evidence is that investing in cheap companies brings increased returns.

I don't think anyone is arguing the theory/evidence that paying a lower price results in higher returns, but look at reality and how such "value" funds are actually performing

VTV (value) vs VUG (growth) - 5.91% over ten years vs 8.09% over ten years, 12.35% over five years vs 14.26%

VOE (midcap value) vs VOT (midcap growth) - 7.63% since inception (2006) vs 7.86^

VBR (small value) vs VBK (small growth) - 7.03% over ten years vs 8.21%

We all agree with the theory, and if these value indexes were actually buying cheap stocks and holding them, they would have a good return, but sometimes you need to look at reality and ask - why are the indexes that supposedly follow this strategy not working out? I suspect it's the execution that's hurting the indexes because I truly believe the theory is sound, but can we agree that ten years is a long enough time horizon to make a decent comparison?

The short answer is "No."  10 years is not enough.  Your argument would have looked far more convincing looking back 10 years in 1999, back when everyone was deriding Buffet for having lost his touch, right before the dot com bubble burst.

Instead of taking the last 10 years let's take the maximum time we can go back with a portfolio split into thirds large/mid/small cap growth vs value.

https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&MidCapValue1=33&LargeCapValue1=33&SmallCapGrowth2=34&portfolio3=Custom&startYear=1972&portfolio2=Custom&portfolio1=Custom&endYear=2014&LargeCapGrowth2=33&mode=2&s=y&SmallCapValue1=34&inflationAdjusted=true&annualOperation=0&initialAmount=10000&rebalanceType=1&annualAdjustment=0&MidCapGrowth2=33&annualPercentage=0.0

As you can see from 1985 to present you have a 1% increase in CAGR using the value approach.

milesdividendmd

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Re: Betterment
« Reply #53 on: October 22, 2015, 10:10:04 PM »
I don't think anyone is arguing the theory/evidence that paying a lower price results in higher returns, but look at reality and how such "value" funds are actually performing

VTV (value) vs VUG (growth) - 5.91% over ten years vs 8.09% over ten years, 12.35% over five years vs 14.26%

VOE (midcap value) vs VOT (midcap growth) - 7.63% since inception (2006) vs 7.86^

VBR (small value) vs VBK (small growth) - 7.03% over ten years vs 8.21%

We all agree with the theory, and if these value indexes were actually buying cheap stocks and holding them, they would have a good return, but sometimes you need to look at reality and ask - why are the indexes that supposedly follow this strategy not working out? I suspect it's the execution that's hurting the indexes because I truly believe the theory is sound, but can we agree that ten years is a long enough time horizon to make a decent comparison?

"So investors should not ignore the obvious costs of implementing a strategy that rises, pristinely, out of academic studies that cannot be precisely replicated in the real world."

~Bogle (after watching value mutual funds underperform over the long term)

Bogle invented low cost cap weighted index funds.  Thank god for John Bogle.  But it does not follow that he is right about everything investment related.  He is anti international exposure.  He is anti ETF.  He is anti factor investing.  These are at best controversial stances, and it seems that Vanguard has chosen not to follow his advice based on their own fund offerings.

In this instance he is wrong too.  Value approaches, particularly small cap value, do bring improved returns in the real world over long time horizons and after fees.

Don't believe me?  Lets take the longest continuously operating passively indexed small value fund and compare its track record after expenses to vanguards small cap funds and s&p funds.

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation2_2=100&lastMonth=12&symbol1=DFSVX&endYear=2015&symbol3=NAESX&frequency=4&symbol2=VFINX&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=1985&rebalanceType=1&timePeriod=4&annualPercentage=0.0&allocation1_1=100&allocation3_3=100&annualOperation=0&firstMonth=1&reinvestDividends=true&initialAmount=10000

CAGR

Small Value: 11.32
Small:            9.36
S&P:              8.72

Caveats:  There will be long periods of underperformance if you tilt value or small.
               Past performance does not guarantee future results.

But the evidence is not equivocal.  There have historically been increased returns associated with exposure to the size and value factors, even using plain old passive index funds after fees.

For this reason, Betterment's expected returns for a similarly weighted stock/bond portfolio (which has a small/value tilt, in addition to increased EM exposure) are higher than for an identical portfolio constructed with VTI alone.  And this is before considering improved tax efficiency with municipal bonds in the bond basket, and most importantly before TLH which actually makes Betterment cheaper than VTI for people in higher income tax brackets.


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Re: Betterment
« Reply #54 on: October 23, 2015, 08:44:30 AM »
Quote
If it's impossible to know the mathematical difference, why do you prefer one over the other? Genuinely curious.

Well...I don't. I use mutual funds, including Vanguard Wellington,  in my tax advantaged acccounts and Betterment in taxable. The value I see from betterment is the tax loss harvesting and the robotic allocating of ongoing contributions and dividend reinvestment. In essence i am outsourcing the allocation of my taxable investments to betterment. The only way I could duplicate what they are doing with zero effort on my part (other than paying someone to code software....) is if I used a single fund which would generally not be as tax efficient (or as diversified) as what Betterment is doing. I know from my experience that if I am hands on, i will do a lot of fiddling around. I am trying to protect myself from myself. I think whatever added fees I give Betterment (which so far has been a whopping $2.00 or so for the short time between my original free trial and the free 6 months of management they gave me after I deposited $100k) is going to be far less than the $$$ i lose from screwing around with my investments.

I don't think Betterment necessarily has a secret sauce with their allocation, I just think it is a reasonable allocation that will not hurt vs something like a 3 fund portfolio or a slice and dice. Just like I think Vanguard Wellington is reasonable. And Balanced Index is reasonable. Reasonable would be moderately allocated with low fees. More than one road to Dublin IMO.

Sounds like a great plan! Many roads to Dublin indeed. While I don't see why someone would take the toll road (higher fees), when a shorter road is sitting right next to it with all the same attributes and no toll, both roads are close enough that it won't matter much :)

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Re: Betterment
« Reply #55 on: October 23, 2015, 09:47:35 AM »
I don't think anyone is arguing the theory/evidence that paying a lower price results in higher returns, but look at reality and how such "value" funds are actually performing

VTV (value) vs VUG (growth) - 5.91% over ten years vs 8.09% over ten years, 12.35% over five years vs 14.26%

VOE (midcap value) vs VOT (midcap growth) - 7.63% since inception (2006) vs 7.86^

VBR (small value) vs VBK (small growth) - 7.03% over ten years vs 8.21%

We all agree with the theory, and if these value indexes were actually buying cheap stocks and holding them, they would have a good return, but sometimes you need to look at reality and ask - why are the indexes that supposedly follow this strategy not working out? I suspect it's the execution that's hurting the indexes because I truly believe the theory is sound, but can we agree that ten years is a long enough time horizon to make a decent comparison?

"So investors should not ignore the obvious costs of implementing a strategy that rises, pristinely, out of academic studies that cannot be precisely replicated in the real world."

~Bogle (after watching value mutual funds underperform over the long term)

Bogle invented low cost cap weighted index funds.  Thank god for John Bogle.  But it does not follow that he is right about everything investment related.  He is anti international exposure.  He is anti ETF.  He is anti factor investing.  These are at best controversial stances, and it seems that Vanguard has chosen not to follow his advice based on their own fund offerings.

In this instance he is wrong too.  Value approaches, particularly small cap value, do bring improved returns in the real world over long time horizons and after fees.

Don't believe me?  Lets take the longest continuously operating passively indexed small value fund and compare its track record after expenses to vanguards small cap funds and s&p funds.

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation2_2=100&lastMonth=12&symbol1=DFSVX&endYear=2015&symbol3=NAESX&frequency=4&symbol2=VFINX&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=1985&rebalanceType=1&timePeriod=4&annualPercentage=0.0&allocation1_1=100&allocation3_3=100&annualOperation=0&firstMonth=1&reinvestDividends=true&initialAmount=10000

CAGR

Small Value: 11.32
Small:            9.36
S&P:              8.72

Caveats:  There will be long periods of underperformance if you tilt value or small.
               Past performance does not guarantee future results.

But the evidence is not equivocal.  There have historically been increased returns associated with exposure to the size and value factors, even using plain old passive index funds after fees.

For this reason, Betterment's expected returns for a similarly weighted stock/bond portfolio (which has a small/value tilt, in addition to increased EM exposure) are higher than for an identical portfolio constructed with VTI alone.  And this is before considering improved tax efficiency with municipal bonds in the bond basket, and most importantly before TLH which actually makes Betterment cheaper than VTI for people in higher income tax brackets.

After reviewing the DFSVX "Principal Investment Strategies" section of the prospectus, it doesn't seem to be a passive index:

"U.S. small cap companies that Dimensional Fund Advisors LP (the “Advisor”) determines to be value stocks."

Source: http://prospectus-express.newriver.com/summary.asp?clientid=dimenll&fundid=233203819

Compared to the "Principal Investment Strategies" section of the prospectus for the Vanguard small value index fund you're comparing it against:

"The Fund employs an indexing investment approach designed to track the performance of the CRSP US Small Cap Value Index, a broadly diversified index of value stocks of small U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index."

Source: https://personal.vanguard.com/pub/Pdf/sp860.pdf?2210100228

This is easy to see the difference when plotting the DFSVX fund against the two small-cap value funds used in Betterment's portfolio:




While I'm sure you aren't doing it on purpose, it clearly shows the issue at hand. You can't just choose "Value funds", you have to choose the specific value funds which will outperform in the future. Unfortunately, this is unknowable. Looking at recent returns, it already looks like DFSVX is falling out of favor. I wonder which value fund we'll be talking about 30 years from now:

http://news.morningstar.com/fund-category-returns/small-value/$FOCA$SV.aspx

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Re: Betterment
« Reply #56 on: October 23, 2015, 10:43:30 AM »
That's the point - I think the value and size effects are 100% real, but buying a cap weighted index doesn't seem to work - there's something faulty about the methodology that is messing with the expected returns, you have to actively go and identify these opportunities, which is why I am wondering why Miles doesn't just pick stocks, if he wanted exposure to the value and size benefits

milesdividendmd

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Re: Betterment
« Reply #57 on: October 23, 2015, 10:44:58 AM »

I don't think anyone is arguing the theory/evidence that paying a lower price results in higher returns, but look at reality and how such "value" funds are actually performing

VTV (value) vs VUG (growth) - 5.91% over ten years vs 8.09% over ten years, 12.35% over five years vs 14.26%

VOE (midcap value) vs VOT (midcap growth) - 7.63% since inception (2006) vs 7.86^

VBR (small value) vs VBK (small growth) - 7.03% over ten years vs 8.21%

We all agree with the theory, and if these value indexes were actually buying cheap stocks and holding them, they would have a good return, but sometimes you need to look at reality and ask - why are the indexes that supposedly follow this strategy not working out? I suspect it's the execution that's hurting the indexes because I truly believe the theory is sound, but can we agree that ten years is a long enough time horizon to make a decent comparison?

"So investors should not ignore the obvious costs of implementing a strategy that rises, pristinely, out of academic studies that cannot be precisely replicated in the real world."

~Bogle (after watching value mutual funds underperform over the long term)

Bogle invented low cost cap weighted index funds.  Thank god for John Bogle.  But it does not follow that he is right about everything investment related.  He is anti international exposure.  He is anti ETF.  He is anti factor investing.  These are at best controversial stances, and it seems that Vanguard has chosen not to follow his advice based on their own fund offerings.

In this instance he is wrong too.  Value approaches, particularly small cap value, do bring improved returns in the real world over long time horizons and after fees.

Don't believe me?  Lets take the longest continuously operating passively indexed small value fund and compare its track record after expenses to vanguards small cap funds and s&p funds.

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation2_2=100&lastMonth=12&symbol1=DFSVX&endYear=2015&symbol3=NAESX&frequency=4&symbol2=VFINX&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=1985&rebalanceType=1&timePeriod=4&annualPercentage=0.0&allocation1_1=100&allocation3_3=100&annualOperation=0&firstMonth=1&reinvestDividends=true&initialAmount=10000

CAGR

Small Value: 11.32
Small:            9.36
S&P:              8.72

Caveats:  There will be long periods of underperformance if you tilt value or small.
               Past performance does not guarantee future results.

But the evidence is not equivocal.  There have historically been increased returns associated with exposure to the size and value factors, even using plain old passive index funds after fees.

For this reason, Betterment's expected returns for a similarly weighted stock/bond portfolio (which has a small/value tilt, in addition to increased EM exposure) are higher than for an identical portfolio constructed with VTI alone.  And this is before considering improved tax efficiency with municipal bonds in the bond basket, and most importantly before TLH which actually makes Betterment cheaper than VTI for people in higher income tax brackets.

After reviewing the DFSVX "Principal Investment Strategies" section of the prospectus, it doesn't seem to be a passive index:

"U.S. small cap companies that Dimensional Fund Advisors LP (the “Advisor”) determines to be value stocks."

Source: http://prospectus-express.newriver.com/summary.asp?clientid=dimenll&fundid=233203819

Compared to the "Principal Investment Strategies" section of the prospectus for the Vanguard small value index fund you're comparing it against:

"The Fund employs an indexing investment approach designed to track the performance of the CRSP US Small Cap Value Index, a broadly diversified index of value stocks of small U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index."

Source: https://personal.vanguard.com/pub/Pdf/sp860.pdf?2210100228

This is easy to see the difference when plotting the DFSVX fund against the two small-cap value funds used in Betterment's portfolio:




While I'm sure you aren't doing it on purpose, it clearly shows the issue at hand. You can't just choose "Value funds", you have to choose the specific value funds which will outperform in the future. Unfortunately, this is unknowable. Looking at recent returns, it already looks like DFSVX is falling out of favor. I wonder which value fund we'll be talking about 30 years from now:

http://news.morningstar.com/fund-category-returns/small-value/$FOCA$SV.aspx

Despite your interpretation DFSVX is a passively managed value fund. It is not cap weighted, it is value weighted. It is not actively managed.

But don't trust me....

http://www.etf.com/sections/index-investor-corner/swedroe-3272015?nopaging=1

The reason it outperforms vanguard is because it has more exposure to the value factor and the size factor than vtv. Cap weighting is antithetical to value weighting, which is the problem with vanguard's style offerings. Vanguards small value is not very small and not very exposed to value. It is cheaper though. So your example is really further proof of the effectiveness of value investing.

Personally I like RZV, which has a similar methodology and size value weighting  to DFSVX and requires no advisor to access it.






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Re: Betterment
« Reply #58 on: October 23, 2015, 11:01:40 AM »
The reason it outperforms vanguard is because it has more exposure to the value factor and the size factor than vtv. Cap weighting is antithetical to value weighting, which is the problem with vanguard's style offerings. Vanguards small value is not very small and not very exposed to value. It is cheaper though. So your example is really further proof of the effectiveness of value investing.

Personally I like RZV, which has a similar methodology and size value weighting  to DFSVX and requires no advisor to access it.

Then why do you tout Betterment as offering a value tilt? Doesn't it strictly use Vanguard for its value exposure?

milesdividendmd

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Re: Betterment
« Reply #59 on: October 23, 2015, 11:10:15 AM »

The reason it outperforms vanguard is because it has more exposure to the value factor and the size factor than vtv. Cap weighting is antithetical to value weighting, which is the problem with vanguard's style offerings. Vanguards small value is not very small and not very exposed to value. It is cheaper though. So your example is really further proof of the effectiveness of value investing.

Personally I like RZV, which has a similar methodology and size value weighting  to DFSVX and requires no advisor to access it.

Then why do you tout Betterment as offering a value tilt? Doesn't it strictly use Vanguard for its value exposure?


No they use ishares too for their value exposure.

I would prefer that they used RZV, of course, but a weak value exposure is still preferable to no value exposure. It still increases expected returns, just not as much.

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Re: Betterment
« Reply #60 on: October 23, 2015, 11:24:04 AM »
That must be why this fund is falling out of favor recently. The other passive small value funds have more exposure to the value-factor. DFSVX is literally nowhere near the top of this list:

http://news.morningstar.com/fund-category-returns/small-value/$FOCA$SV.aspx[url]

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Re: Betterment
« Reply #61 on: October 23, 2015, 11:53:01 AM »

That must be why this fund is falling out of favor recently. The other passive small value funds have more exposure to the value-factor. DFSVX is literally nowhere near the top of this list:

http://news.morningstar.com/fund-category-returns/small-value/$FOCA$SV.aspx[url]

I would guess that's right. The ETF revolution is giving DIY investors access to quality factor rich funds without having to pay advisors 1% to access them (as is the case with dimensional funds.)

The one weak spot that remains is the lack of a strong easily accessible international small value fund.

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Re: Betterment
« Reply #62 on: October 23, 2015, 12:09:43 PM »

That must be why this fund is falling out of favor recently. The other passive small value funds have more exposure to the value-factor. DFSVX is literally nowhere near the top of this list:

http://news.morningstar.com/fund-category-returns/small-value/$FOCA$SV.aspx[url]

I would guess that's right. The ETF revolution is giving DIY investors access to quality factor rich funds without having to pay advisors 1% to access them (as is the case with dimensional funds.)

The one weak spot that remains is the lack of a strong easily accessible international small value fund.

Unfortunately, there are a few hundred small value funds beating DFSVX lately. How do we know which one will be on top 30 years from now? If the 1985 version of me looked at a similar list back in 1985, how would I have known to pick DFSVX as a future winner from the list of hundreds of passive value funds?

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Re: Betterment
« Reply #63 on: October 23, 2015, 12:22:36 PM »


That must be why this fund is falling out of favor recently. The other passive small value funds have more exposure to the value-factor. DFSVX is literally nowhere near the top of this list:

http://news.morningstar.com/fund-category-returns/small-value/$FOCA$SV.aspx[url]

I would guess that's right. The ETF revolution is giving DIY investors access to quality factor rich funds without having to pay advisors 1% to access them (as is the case with dimensional funds.)

The one weak spot that remains is the lack of a strong easily accessible international small value fund.

Unfortunately, there are a few hundred small value funds beating DFSVX lately. How do we know which one will be on top 30 years from now? If the 1985 version of me looked at a similar list back in 1985, how would I have known to pick DFSVX as a future winner from the list of hundreds of passive value funds?

I think you are making an argument here that equates to the argument about how difficult it is to pick active funds that are likely to succeed in the future.

In my view this is a very flawed comparison.

The reason that DFSVX has been underperforming recently is because it has more exposure to the value factor, and value has been underperforming recently. 

This is normal with any non-Cap weighted  approach to investing. There will be periods of negative tracking error.

But if your goal is to capture the value premium, obviously you should choose the fund with the most exposure to value.

DFSVX remains a good choice for that, as do other funds that do not require you to retain (and pay) retain a personal investment advisor.

This exposure is readily apparent a priori by looking at the value weighting of the fund, unlike the future success of actively managed funds.

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Re: Betterment
« Reply #64 on: October 23, 2015, 12:48:34 PM »


That must be why this fund is falling out of favor recently. The other passive small value funds have more exposure to the value-factor. DFSVX is literally nowhere near the top of this list:

http://news.morningstar.com/fund-category-returns/small-value/$FOCA$SV.aspx[url]

I would guess that's right. The ETF revolution is giving DIY investors access to quality factor rich funds without having to pay advisors 1% to access them (as is the case with dimensional funds.)

The one weak spot that remains is the lack of a strong easily accessible international small value fund.

Unfortunately, there are a few hundred small value funds beating DFSVX lately. How do we know which one will be on top 30 years from now? If the 1985 version of me looked at a similar list back in 1985, how would I have known to pick DFSVX as a future winner from the list of hundreds of passive value funds?

I think you are making an argument here that equates to the argument about how difficult it is to pick active funds that are likely to succeed in the future.

In my view this is a very flawed comparison.

The reason that DFSVX has been underperforming recently is because it has more exposure to the value factor, and value has been underperforming recently. 

This is normal with any non-Cap weighted  approach to investing. There will be periods of negative tracking error.

But if your goal is to capture the value premium, obviously you should choose the fund with the most exposure to value.

DFSVX remains a good choice for that, as do other funds that do not require you to retain (and pay) retain a personal investment advisor.

This exposure is readily apparent a priori by looking at the value weighting of the fund, unlike the future success of actively managed funds.

So looking at that list 30 years ago, if I sorted by funds with the highest value factor, I would've been able to chose the winner (DFSVX)?

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Betterment
« Reply #65 on: October 23, 2015, 01:12:06 PM »
The problem is that looking at a list 30 years ago there would've been exactly one small value fund. DFSVX.

So by definition it would've been the winner and the loser.

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Re: Betterment
« Reply #66 on: October 23, 2015, 01:24:31 PM »
But to answer your question, had there been multiple small value index funds you could absolutely have compared their size and valuation on an apples to apples basis.

You can do this today. Average market cap and price to book are all available on Morningstar/yahoo finance/etc.

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Re: Betterment
« Reply #67 on: October 23, 2015, 02:00:31 PM »
The problem is that looking at a list 30 years ago there would've been exactly one small value fund. DFSVX.

So by definition it would've been the winner and the loser.

I found research on vanguard.com that says, "So, I'd now like to examine not abstract portfolios, but growth and value mutual funds that operate in the real world. The data are available from 1937". It went on to show that real world value funds underperformed the overall market from 1937 - 2002, when the page was written.

However, it doesn't specify "small value". Do you have a source showing there was only one small value fund in 1985? Is this really the first fund, or is it simply the longest running fund that hasn't been cancelled yet because it's still doing well? Looking a bit deeper, it seems DFSVX wasn't started until 1993:



Indeed, like the research I found on vanguard.com, I'm having trouble finding some good sources of real-world value funds that match the theory. It looks like your preferred fund RZV lost 80% of it's value in the 2008-2009 crash, and is still trailing behind the market index since inception:



Please provide any sources if you have them.

milesdividendmd

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Re: Betterment
« Reply #68 on: October 23, 2015, 02:16:39 PM »
I haven't had a chance to look at the vanguard study but I will.

One thing is certain, if it's looking at funds from 1937, then it's looking actively managed funds.there were no passively managed funds until the 1970s.

So the Vanguard study is by definition asking a very different question. It is mixing up active management with the value effect.

Unfortunately DFA was the first to create passively managed value funds, so this question is not really answerable past 1985.

But if you want to look at the Fama French database using simple returns and extrapolate by subtracting the current expense ratio on an annualized basis you could do that.

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Re: Betterment
« Reply #69 on: October 23, 2015, 02:30:00 PM »
I haven't had a chance to look at the vanguard study but I will.

One thing is certain, if it's looking at funds from 1937, then it's looking actively managed funds.there were no passively managed funds until the 1970s.

So the Vanguard study is by definition asking a very different question. It is mixing up active management with the value effect.

Unfortunately DFA was the first to create passively managed value funds, so this question is not really answerable past 1985.

But if you want to look at the Fama French database using simple returns and extrapolate by subtracting the current expense ratio on an annualized basis you could do that.

The interesting part of the study, is that it says we can't take the Fama French returns at face value. "The value mutual fund return of 11.0% fell far below that of French-Fama value return of 15.2%"

Even if I get the data from similar funds in 1993 to compare with DFSVX, how can I know if the funds are passively managed? The definition of passively managed that includes DFSVX doesn't seem clear. Along with, "U.S. small cap companies that Dimensional Fund Advisors LP (the “Advisor”) determines to be value stocks", the prospectus also says, "Securities are considered value stocks primarily because a company’s shares have a high book value in relation to their market value."

Is DFSVX really the first fund to use book value to select stocks?

Jeremy E.

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Re: Betterment
« Reply #70 on: October 23, 2015, 02:37:22 PM »
I haven't had a chance to look at the vanguard study but I will.

One thing is certain, if it's looking at funds from 1937, then it's looking actively managed funds.there were no passively managed funds until the 1970s.

So the Vanguard study is by definition asking a very different question. It is mixing up active management with the value effect.

Unfortunately DFA was the first to create passively managed value funds, so this question is not really answerable past 1985.

But if you want to look at the Fama French database using simple returns and extrapolate by subtracting the current expense ratio on an annualized basis you could do that.
What about Dow Jones industrial average?

milesdividendmd

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Re: Betterment
« Reply #71 on: October 23, 2015, 03:03:22 PM »

I haven't had a chance to look at the vanguard study but I will.

One thing is certain, if it's looking at funds from 1937, then it's looking actively managed funds.there were no passively managed funds until the 1970s.

So the Vanguard study is by definition asking a very different question. It is mixing up active management with the value effect.

Unfortunately DFA was the first to create passively managed value funds, so this question is not really answerable past 1985.

But if you want to look at the Fama French database using simple returns and extrapolate by subtracting the current expense ratio on an annualized basis you could do that.

The interesting part of the study, is that it says we can't take the Fama French returns at face value. "The value mutual fund return of 11.0% fell far below that of French-Fama value return of 15.2%"

Even if I get the data from similar funds in 1993 to compare with DFSVX, how can I know if the funds are passively managed? The definition of passively managed that includes DFSVX doesn't seem clear. Along with, "U.S. small cap companies that Dimensional Fund Advisors LP (the “Advisor”) determines to be value stocks", the prospectus also says, "Securities are considered value stocks primarily because a company’s shares have a high book value in relation to their market value."

Is DFSVX really the first fund to use book value to select stocks?

Again the Vanguard study is looking at actively managed value funds by definition. I have no argument with the statement that actively managed mutual funds lose to passively managed mutual funds 80% of the time over 10 year time horizons.   So it is literally impossible to look at a study that looks at active value funds compared to the broad market and parse out how much of the underperformance was from active stockpicking and how much was from value weighting.

The DFA funds are passively managed and value weighted not capitalization weighted.  They were the first such passively managed value funds that I am aware of.

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Re: Betterment
« Reply #72 on: October 23, 2015, 03:31:13 PM »

I haven't had a chance to look at the vanguard study but I will.

One thing is certain, if it's looking at funds from 1937, then it's looking actively managed funds.there were no passively managed funds until the 1970s.

So the Vanguard study is by definition asking a very different question. It is mixing up active management with the value effect.

Unfortunately DFA was the first to create passively managed value funds, so this question is not really answerable past 1985.

But if you want to look at the Fama French database using simple returns and extrapolate by subtracting the current expense ratio on an annualized basis you could do that.

The interesting part of the study, is that it says we can't take the Fama French returns at face value. "The value mutual fund return of 11.0% fell far below that of French-Fama value return of 15.2%"

Even if I get the data from similar funds in 1993 to compare with DFSVX, how can I know if the funds are passively managed? The definition of passively managed that includes DFSVX doesn't seem clear. Along with, "U.S. small cap companies that Dimensional Fund Advisors LP (the “Advisor”) determines to be value stocks", the prospectus also says, "Securities are considered value stocks primarily because a company’s shares have a high book value in relation to their market value."

Is DFSVX really the first fund to use book value to select stocks?

Again the Vanguard study is looking at actively managed value funds by definition. I have no argument with the statement that actively managed mutual funds lose to passively managed mutual funds 80% of the time over 10 year time horizons.   So it is literally impossible to look at a study that looks at active value funds compared to the broad market and parse out how much of the underperformance was from active stockpicking and how much was from value weighting.

The DFA funds are passively managed and value weighted not capitalization weighted.  They were the first such passively managed value funds that I am aware of.

Unfortunately this doesn't address my concern. The source I quoted (vanguard.com) said they looked back at funds whose strategies paralleled that of French-Fama. Based on the prospectus of DFSVX, that seems to mean they consider securities primarily based on book value. I'm looking for a counter-source which shows it's impossible that the funds reviewed from 1937 - 2002 used primarily book value to choose securities.

Going one step further, I'm looking for a source which shows DFSVX was the only small-cap fund in 1993 which used primarily book value to choose securities.

I'll wait for a source if anyone has one.

milesdividendmd

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Betterment
« Reply #73 on: October 23, 2015, 03:47:26 PM »
I've got no source for you, sorry. If you find an earlier passively managed value fund please share it.

You shouldn't need a source to know that all funds from 1937 to the 1970s  were actively managed, (i.e. they were not tracking a value index. )

Since the first Passive fund of any kind (The Vanguard 500 fund) did not even exist until 1970s, it is literally impossible that a value fund from 1937-1970 could be passively managed.
« Last Edit: October 23, 2015, 03:50:52 PM by milesdividendmd »

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Re: Betterment
« Reply #74 on: October 23, 2015, 04:22:13 PM »
I've got no source for you, sorry. If you find an earlier passively managed value fund please share it.

You shouldn't need a source to know that all funds from 1937 to the 1970s  were actively managed, (i.e. they were not tracking a value index. )

Since the first Passive fund of any kind (The Vanguard 500 fund) did not even exist until 1970s, it is literally impossible that a value fund from 1937-1970 could be passively managed.

Looking at RZV, the prospectus is very clear:

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INVESTMENT OBJECTIVE
The investment objective of the Guggenheim S&P SmallCap 600® Pure Value ETF (the “Fund”) is to replicate as closely as possible, before fees and expenses, the performance of the S&P SmallCap 600® Pure Value Index Total Return (the “Underlying Index”).
----------------------------------

The prospectus for DFSVX doesn't have any wording like this at all. Here's the relevant piece, I understand how RZV can be defined as passively managed, but how does that fit here?

----------------------------------
Principal Investment Strategies
 
U.S. Small Cap Value Portfolio, using a market capitalization weighted approach, purchases a broad and diverse group of the readily marketable securities of U.S. small cap companies that Dimensional Fund Advisors LP (the “Advisor”) determines to be value stocks. A company’s market capitalization is the number of its shares outstanding times its price per share. In general, the higher the relative market capitalization of the U.S. small cap company, the greater its representation in the Portfolio. The Advisor may modify market capitalization weights and even exclude companies after considering such factors as free float, momentum, trading strategies, liquidity management, and profitability, as well as other factors that the Advisor determines to be appropriate, given market conditions. Securities are considered value stocks primarily because a company’s shares have a high book value in relation to their market value. In assessing profitability, the Advisor may consider different ratios, such as that of earnings or profits from operations relative to book value or assets.
 
As a non-fundamental policy, under normal circumstances, the U.S. Small Cap Value Portfolio will invest at least 80% of its net assets in securities of small cap U.S. companies. As of the date of this Prospectus, for purposes of the U.S. Small Cap Value Portfolio, the Advisor considers small cap companies to be companies whose market capitalizations are generally in the lowest 10% of total market capitalization or companies whose market capitalizations are smaller than the 1,000th largest U.S. company, whichever results in the higher market capitalization break. Total market capitalization is based on the market capitalization of U.S. operating companies listed on the New York Stock Exchange (“NYSE”), NYSE MKT LLC, Nasdaq Global Market® or such other securities exchanges deemed appropriate by the Advisor. Under the Advisor’s market capitalization guidelines described above, as of December 31, 2014, the market capitalization of a small cap company was $3,938 million or below. This dollar amount will change due to market conditions.
 
The U.S. Small Cap Value Portfolio may use derivatives, such as futures contracts and options on futures contracts for U.S. equity securities and indices, to adjust market exposure based on actual or expected cash inflows to or outflows from the Portfolio. The Portfolio does not intend to use derivatives for purposes of speculation or leveraging investment returns.
 
The U.S. Small Cap Value Portfolio may lend its portfolio securities to generate additional income.
----------------------------------

Jeremy E.

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Re: Betterment
« Reply #75 on: October 23, 2015, 05:09:10 PM »
I've got no source for you, sorry. If you find an earlier passively managed value fund please share it.

You shouldn't need a source to know that all funds from 1937 to the 1970s  were actively managed, (i.e. they were not tracking a value index. )

Since the first Passive fund of any kind (The Vanguard 500 fund) did not even exist until 1970s, it is literally impossible that a value fund from 1937-1970 could be passively managed.
There have been Dow Jones indexes being tracked since the 1800s, they didn't have a mutual fund for them, but many people would buy stocks to match the DJIA.

milesdividendmd

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Re: Betterment
« Reply #76 on: October 23, 2015, 05:20:51 PM »

I've got no source for you, sorry. If you find an earlier passively managed value fund please share it.

You shouldn't need a source to know that all funds from 1937 to the 1970s  were actively managed, (i.e. they were not tracking a value index. )

Since the first Passive fund of any kind (The Vanguard 500 fund) did not even exist until 1970s, it is literally impossible that a value fund from 1937-1970 could be passively managed.
There have been Dow Jones indexes being tracked since the 1800s, they didn't have a mutual fund for them, but many people would buy stocks to match the DJIA.

I am not sure what your point is.

bryan

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Re: Betterment
« Reply #77 on: January 13, 2016, 12:42:18 PM »
I am interested in Betterment but didn't go with them since they don't consider extrenal accounts like e.g. futureadvisor. Also they lack tax gain harvesting or any portfolio other than what they give you.

I already do 10-20 ETFs. Balance only by buying new shares or when I TLH. I haven't had to do an annual rebalance after taking those other rebalances into account. I would be fine with taking over the assets from Betterment with unrealized gains. TurboTax should handle everything just fine.

Betterment (with fees) is a no go for anything over $500k as we agree. Unless they incorporate better post-FI features like glidepath or what I already mentioned.


- more bonds golden butterfly, ~6.05% real CAGR https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&yearlyWithdrawal=80000&allocation1_1=15&fullHistory=true&allocation4_1=20&allocation5_1=20&allocation2_1=20&allocation3_1=25&circularBootstrap=true&yearlyPercentage=4.0&simulationModel=2&volatility=12.0&distribution=1&endYear=2014&years=7&currentAge=70&bootstrapMaxYears=20&asset1=TotalStockMarket&asset2=IntlStockMarket&asset3=TotalBond&inflationAdjusted=true&asset4=Commodities&annualOperation=1&asset5=REIT&inflationVolatility=3.13&lifeExpectancyModel=0&bootstrapMinYears=1&inflationMean=4.26&meanReturn=7.0&startYear=1972&bootstrapModel=1&inflationModel=1&initialAmount=1

it is a difference of about $9k, which in this hypothetical would be about 2-3 paychecks.

Great points all around! If you don't mind managing a 10-20 fund ETF portfolio, it's a good plan. WiseBanyan would be a great place to implement such a strategy.

I finally received my WiseBanyan account and it seems to be basically Betterment without fees, on first glance. It lacks any portfolio allocation customization (or consideration of external accounts) like you lead me to believe.

I cancelled my account with them. Hopefully it closes before they get the $10 minimum transfer to open the account..

So disappointing that a fintech startup (or existing company like Vanguard/Fidelity) doesn't exist to do this "simple" stuff at a competitive price.
« Last Edit: January 13, 2016, 12:53:38 PM by bryan »