Author Topic: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)  (Read 1319 times)

MustacheAndaHalf

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Rather than derail some other threads, I thought I'd compare two "factor tilts" I've used, and why.  A factor explains historical stock market performance, and still matters after it's discovery.

Years ago I read Larry Swedroe's "The Only Guide to a Winning Investment Strategy You'll Ever Need", and agreed with historical data showing that small/value stocks tended to outperform over time.  Smaller companies tended to have more upside potential.  And during a crash, value stocks didn't fall as far - their problems were priced in, while growth was priced to grow quickly for a long time.  So the theory and data convinced me, and some of my portfolio went into small/value ETFs.

At some point I discovered Morningstar's style box, and plugged in "Vanguard Small Value ETF"... only to be shocked: that ETF was half mid cap stocks!  And had a weak value tilt, as well.  I switched to my nemesis, Invesco S&P SmallCap 600® Pure Value ETF (RZV), which had excellent stats: even now, it's 100% small cap with a +71% value tilt.  Yet over the past 15 years, it's returned 7%/yr vs the overall market's 11%/yr.  The theory and practice seemed to differ.

I read about "momentum" in another of Larry Swedroe's books, and it looked like the factor most likely to beat the market.  Momentum claims that stocks which went up tend to keep going up.  Studies showed a momentum affect at 3 months and 12 months.  But what sealed it for me was watching people buy stocks solely on their recent performance.  These people were helping momentum strategies, which got to those stocks first, and switched when something better came along.

That's my current tilt - momentum, which has delivered better returns for me than small/value.  Have others tried factor tilts, and have a different view?

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #1 on: November 01, 2021, 08:50:17 AM »
you didnt stick with your value tilt long enough to understand if it would work small value has had up to 20 years of underperfomance to large growth which is what it appears you were baselining to.  Then has 5-15 years of strong outperformance.  We're still currently in one of the longest outperformance/matched performance runs of value to growth.  IMO you're switching your AA too much to try to beat market returns and have to understand something more fully to stick with it.  What you experienced in your small/value tilt is completely to be expected yet you left it.  You're switching to the winning horses which IMO is a recipe for disaster- Small value won from 2000-2010 - large growth has won this last decade 2011-2021 and its outperformance to value started a bit before that if we don't use decade lines. 

So now you're in momentum which is winning currently due to the fact that growth stocks have been on a roll.  but again you switched at maybe another in opportune time.  Investment strategies have to be written down, understood by the person choosing the startegy and stuck to. Your reason for leaving an SCV tilt was actually a reason to stay but humans arent rational creatures so we have to put our emotional crap i lost 4% on avg to the sp500 aside and look at why we chose that strategy to begin with.  Over the last year SCV tilt has out performed the VTI - by 32% in 2021 alone the difference is at 17%.  so should you switch back to SCV tilt now?

AVUV/VTI used for those numbers.  Using IJS we get 5% YTD and 19% in the last year.
The momentum factor is not just "winning recently".  There's actually more data for momentum than there is for small cap stocks.  It's been found in stock market data going back 200 years, and found in numerous countries.  It's not just "winning recently".  Speaking of recently...  you picked AVUV, which has only existed a couple years?

As to your quip about market timing into SCV now - no, because I already did that.  I bought RZV from 3/30 to 4/02 last year, then waited about a year, and sold at a +67% profit.  If anything, my 2020 portfolio would be called deep value.  Growth and value companies are usually separated by price/book or price/earnings.  When Covid-19 hit the U.S., many value stocks dropped -67% or more, turning value stocks into deep value stocks with extremely low P/E and P/B values.  Those are the companies I bought, like Macy's and Dine Brands in my experiment, and many others.  I switched to deep value in 2020, when most people ran away from it.

When you say "Then has 5-15 years of strong outperformance" for SCZ, are you claiming the next 5-15 years will be SCV outperformance?  Historical data can be a guide, but it can't predict exact outcomes like that, can it?

You mentioned "Over the last year SCV tilt" as if to say 1 year is significant?  That doesn't fit with your message of patience for 20 years.  Looking at Morningstar data for DFA US Small Cap Value versus Vanguard Total Stock Market Index:
https://www.morningstar.com/funds/xnas/dfsvx/performance
https://www.morningstar.com/funds/xnas/vtsax/performance
What I see 22.75%/yr (VTSAX) and 13.87%/yr (DFSVX) over the past 3 years.  Even including that great year you like, the market has beaten Small Cap Value by 9%/year for the past 3 years.  Over 10 years, it's 15.80%/yr and 11.88%/yr, for a +4%/year beat over 10 years.

You mentioned that I didn't wait long enough, but we don't really know.  What I know is that either I was waiting too long, or I was wrong to invest in small/value.  You favor the former, I the latter.

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #2 on: November 01, 2021, 09:05:58 AM »
assuming you can stick with your momentum startegy and understand it better than you did your SCV strategy b/c its not a question of IF it will underperform but when.  B/c 200 years of data doesn't show it always wins.  But that is up to you

i DGAF about the last 10 years of SCV to VTI performance that's not the reason i switched.  If i did care it would mean i should be tilting towards it now anyways based on history.  from 2000 to 2010 VTI returned -0.1% annually SCV returned over 13% annually i can go cherry pick many more decades in which VTI underperformed SCV and 40 year time frames as well b/c VTI is terrible relative to other asset equity asset classes historically over 40 year periods its actually the worst asset class of the 10 Paul tracks most of the time. vs SCV is the best most of the time and not just a little bit its better over 95% of the time in 40 year windows. 
Why do you insist on using 2000-2002 in your data?  The dot-com crash obviously hit dot-com stocks the hardest, which were large cap growth.  Small cap value went up during the dot-com crash, so obviously they did better.  But that's cherry picking, and you've done it several times now.  Cherry picking isn't a good thing - it's taking biased data to prove a biased point.  Why do you insist on using biased data?  Is it the only way to prove a biased point?


Note in my earlier post, I did mention the 2010-2020, and you were right about 2013-2017 having about equal performance between total stock market and small cap value.  I didn't use 2010-2012, because those were recovery years of the 2008 crash.  Wouldn't it be more fair to measure 2005-2021, from before a crash all the way through it?

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #3 on: November 02, 2021, 09:21:18 AM »
i dont think there is much of an appetite for this here haha.
So is your attitude to me joking and friendly, like this... or is to attack my character because I disagreed with you in this thread?  It seems like you're showing two faces here, one friendly and one attacking.  The friendly approach is more in line with the forum rules, than context-free attacks on people's character.

grantmeaname

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #4 on: November 02, 2021, 09:31:47 AM »
I think he's joking because the rest of investor alley hasn't jumped in with their thoughts so he is like 80% of the posts. Don't think it was meant to be an attack on you for disagreeing, rather a comment that there aren't many folks on either side of this debate.

grantmeaname

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #5 on: November 02, 2021, 09:32:10 AM »
I've been enjoying lurking but have no opinion to add, fwiw...

Ichabod

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #6 on: November 02, 2021, 09:57:53 AM »
you are correct in your choice of morningstar to understand a funds make up instead of using the name of the fund.  VBR is a terrible small cap value fund yet that's the largest at vanguard.  They really need to reign that in.

I currently have a small value tilt with VBR. What are better alternatives? I see MustacheAndaHalf's RZVV recommendation.

Telecaster

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #7 on: November 02, 2021, 04:36:51 PM »
I think he's joking because the rest of investor alley hasn't jumped in with their thoughts so he is like 80% of the posts. Don't think it was meant to be an attack on you for disagreeing, rather a comment that there aren't many folks on either side of this debate.

correct b/c everyone here for the most part is VTSAX and forget it.  there aren't many people with thoughts to add in this space.

There is another part to this, namely portfolio construction can get extremely complicated extremely quickly.  And as you mentioned above, one of the keys is to select a superior strategy and stick with it.  But if you do something different than the market, in all likelihood at some point you will lag the market.    Many people are unable or unwilling to see their portfolios lag, possibly for periods of years.  Switching horses mid-stream is the worst of both worlds, so unless you have a strong conviction your portfolio is superior, it is probably best not to go there in the first place.   For example, a common recommendation is to keep a certain percent of your portfolio in international stocks.  Completely logical, however international has lagged domestic by a lot over the last 10 years. 

Next component is that we don't know for sure what portfolio will work best in the future.   We can have strong convictions about what will be best, but we don't really know.   It is a reasonable assumption that the market and economy today are much different than they were in the 1940s and 1950s.   I have strong convictions about my own portfolio, but I'm not evangelical about it.  I'm not interested in trying to convince anyone that my way is the best. 




MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #8 on: November 02, 2021, 07:17:38 PM »
I think he's joking because the rest of investor alley hasn't jumped in with their thoughts so he is like 80% of the posts. Don't think it was meant to be an attack on you for disagreeing, rather a comment that there aren't many folks on either side of this debate.
correct b/c everyone here for the most part is VTSAX and forget it.  there aren't many people with thoughts to add in this space.
Way to ignore context you obviously knew about Border42.  Here's what you posted about me in another thread, so others have the context:

You're arguing with someone who is citing the last 10-15 years as reasons for investing strategy in multiple threads on here. Also someone trading gme options I'm not sure it's worth the effort.
The other thread was related to crypto.  Do you see anything about crypto in that post?  Or just character attacks?  That's what I meant by attacking.

And I did not tell people to invest based on 10-15 years of investing strategy, so go ahead and quote me on that.  What I said is that value investing takes too long to break even, and is not for me.  If you instead said "how can most people not wait 20 years for small/value to do well?", you would get a different reaction.

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #9 on: November 03, 2021, 06:11:11 AM »
You're arguing with someone who is citing the last 10-15 years as reasons for investing strategy in multiple threads on here. Also someone trading gme options I'm not sure it's worth the effort.
The other thread was related to crypto.  Do you see anything about crypto in that post?  Or just character attacks?  That's what I meant by attacking.

And I did not tell people to invest based on 10-15 years of investing strategy, so go ahead and quote me on that.  What I said is that value investing takes too long to break even, and is not for me.  If you instead said "how can most people not wait 20 years for small/value to do well?", you would get a different reaction.
What you said above was it lost to VTI by 4% over 15 years and sited that as your reason for moving.
That's false, and again I asked you to quote me, which you didn't.  Because you made that sentence up from separate things I said.  I said I gave up on small/value.  Then we discussed pros/cons of momentum versus small/value, and I brought up that small/value has underperformed for 15 years.  Two separate comments.

So are you going to find the quote, or admit you made something up about me?  You also posted that lie in another thread, so if you're wrong - maybe you should admit to it there, as well.

Even above in this thread your intentionally ignore sections of returns that contradict your view and site 10-15 year timelines.
Oh, you know my intentions, now?  Can you quote where I said I "intentionally ignore sections of returns that contradict my view"?  Because I don't see how you would know my intentions, so again, this is a lie.  Good luck proving my intentions by quoting me.


You've done it else where. You also discuss trading gme options and being relieved.
Why can't you stick to a topic?  In crypto, you talk about GME options, and here you do it again.  This is a character attack, not an attack on the merits.  I could say you foolishly invested in GME shares as well, leaving out the fact you bought it in an index fund.   Just as you've left out any context for my GME speculation - not that it was ever relevant in any of the threads where you brought it up.  If you don't care about attacking me, why do you bring this up over and over?


Your original post of this thread has you jumping from one investment strategy to another. All while getting out of gme options in another thread and being relieved.

I'm not here to win battles. I'm here to state why I think options other than VTSAX and forget it are better and provide consistent data that backs it up.
Then why attack me about "gme options" if you are "not here to win battles"?  You don't think that's an underhanded tactic?  How is talking about GME options relevant to a discussion about investment factors?  It's not, but you're desperate to win by any means you can, so you attack my character instead of arguing on the merits.
 

Branching out of VTSAX is already counter culture to the forums and you're all over the place with your investment strategies. Which directly contradicts the basic rule of investing. Which is pick something and stick to it.
How is your small/value tilt not "branching out of VTSAX"?  You're accusing me of something which you yourself have done, which makes you look like a hypocrite.


You've also cited returns of qqq recently as reason to think it would continue in a thread where someone is suggesting they may move from tsm to qqq.
Can you ever stick to a topic?  Did I also say to limit active investments to 10-20% of their portfolio?

And also, stop making claims like this and quote me!  If you read it, you can quote it from the forum - you don't have to rely on distorting what I said by how you remembered it.  Earlier in this thread, you did something similar - you conflated two things into one false statement.


So what I've seen so far is

1. Per your post here invested in scv it lost for a few years now I'm in momentum
Did I say "a few years", or are you lying again?  Quote me, and I won't have to catch you every time you distort something I said.

2. I traded gme options now I'm out may get back in but I'm relieved to be out. Maybe you should explore the relief feeling more. Consistent long term strategies where we aren't chasing shiny objects work better. See the why women are better investors than men article.
Actually what works better is timing the bottom of the 2020 March crash within 2%, which I did.  I posted about it on a thread here.  Moving over 1/4th of my investments into equities the Friday before the Monday bottom (2020-Mar-23).  When I do something active that works well, you won't comment on it.  But if you see anything odd that I did, that's all you can post about - regardless if it's relevant to the topic.


3. Defending the future of crypto another bright shiny object.
Another lie - quote me on this.  And again, not that it's relevant in a thread comparing momentum vs small/value - if you care about the topic, why don't you ever post about the topic?  Are you going to attack everyone who posts here?

What I have said is that Bitcoin is speculative.  In the future Bitcoin might do something novel and useful and be more valuable, or it might crash to zero.  If you want to find someone "defending the future of crypto", I'm a poor choice for it.  And again, you can quote me if you have a point to make here.

4. QQQ has been killing it for xx years so its pretty easy to see how that trend could continue.
Please quote where I said "QQQ has been killing it", because that's another distortion of something I said.  What I said is harder to recognize when you distort it like this.  So quote me, and we can discuss what I actually said.

None of these are attacks on you personally. I'm just stating things you've said across multiple threads here. Which is also why this thread is unlikely to gain much traction. It's like bright shiny objects everywhere.
I posted about momentum, and you attacked things I said elsewhere.  How is that not a personal attack?  Why did you tell people to ignore me in another thread?  I've brought this up repeatedly, and you have not replied.  How is that not a personal attack?


Honestly what will you do when momentum loses for a decade or more it's a serious question you should be asking and contemplating on. Can I do this forever?
As I posted earlier, momentum beats the market roughly 4 out of every 5 years.  Do you have evidence of momentum losing for a decade?

And again, why is this about what I do?  That makes it a personal matter.  What I'm bringing up is momentum the investment factor.  You seem to take every single thing and make it about me, personally.  Which is why I say you're making personal attacks... you keep attacking me, and not discussing momentum.
« Last Edit: November 03, 2021, 06:13:08 AM by MustacheAndaHalf »

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #10 on: November 03, 2021, 11:11:48 AM »
Here's the list of times border42 belittled me for "trading gme options":

Also someone trading gme options I'm not sure it's worth the effort.

You also discuss trading gme options and being relieved.

All while getting out of gme options in another thread and being relieved.

2. I traded gme options now I'm out may get back in but I'm relieved to be out.


But oh... the irony in the GME thread:

i think its white noise and its why i don't trade individual stocks or assets anymore.  BBBY is making me money now too hopefully it prices it self out of the small value sector and i can take my profits and run like i did with GME.
The same poster who wanted others to ignore me because I "traded gme options"...  talks about taking profits on that same 2021 meme stock!  And further, criticized me for switching investment approaches, and here admits to doing the same: "don't trade individual stocks or assets anymore".

I started this thread to try and have a discussion about factor investing, like the title said.  Unfortunately, border42 made false claims about me and personal attacks, instead.  When I asked to quote me on those false claims, border42 deleted all their posts in this thread.  That says a lot about their claims.


I think the forum rules are clear, so finish by quoting them:

"2. Attack an argument, not a person."
https://forum.mrmoneymustache.com/forum-information-faqs/forum-rules/
There are examples below that, and just above direct insults:
"attacks the characteristics or authority of the writer without addressing the substance of the argument."

BicycleB

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #11 on: November 09, 2021, 03:01:54 PM »
Just dropped in to this thread for the first time I can recall. Still curious about the topic.

Fwiw, Mustache And A Half is like Boarder42, in that both bring unusual thoughts and thought provoking examples/evidence/arguments to the table most of the time. However, it does appear that Boarder42 did do some personal attacking. Maybe he deleted some posts because the mods suggested it, or he wanted to avoid being banned. I hope that both posters stay on the board, and bring insightful analyses (and good questions) to this and other topics.

I wish I had special insight to share on factors; just came to learn. It seems like the problem in evaluating investment styles often comes down to timeframes chosen, I guess because performance varies in different periods and there's no definitive way to prove that one timeframe is more predictive than another. It looks like the examples upthread are examples of this. Maybe I'm missing something.


PDXTabs

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #12 on: November 09, 2021, 03:12:03 PM »
Fwiw, Mustache And A Half is like Boarder42, in that both bring unusual thoughts and thought provoking examples/evidence/arguments to the table most of the time. However, it does appear that Boarder42 did do some personal attacking. Maybe he deleted some posts because the mods suggested it, or he wanted to avoid being banned. I hope that both posters stay on the board, and bring insightful analyses (and good questions) to this and other topics.

Me too. Not only am I interested in the thread I value both of their contributions, but agree that we need to refrain from personal attacks. People on this board disagree with me all the time and sometimes they even change my mind. I find this one of the few places left on the internet where people can fervently disagree with each other but still (usually) keep it civil. I think that the world needs more of that.

NathanDrake

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #13 on: November 19, 2021, 10:04:40 PM »
Funds like AVUV incorporate momentum into their Value strategy to drive trading decisions. They let their winners run longer, and get rid of losers if they show accelerating momentum at the margins of their value band (to avoid junk stocks), along with a filter on quality/profitability.

So it's using Value in combination with other factors to drive investment decisions, and Value has the strongest historical returns.

I don't focus on momentum directly, other than with my passive market cap weighted holdings. But momentum works until it doesn't. Growth has had a nice run but ultimately reality sets in and many of these lofty valuations will not materialize. We've seen this speculative fervor before and a strong case can be made that Value strategies win because they keep your portfolio honest in relation to the fundamentals. SCV doesn't have the lure of an individual growth stock that could 2-3X in a year or whatever. But investors rush in with those expectations, and when they fail they fail spectacularly.

Being a student of investment history suggests there's nothing new about any of this. Before Big Tech and EVs it was the Dot Coms. Before Dot Coms it was the Nifty Fifty. Sectors and winners rotate. The spreads between Growth and Value are the highest they've ever been, and much of it is probably driven by social media influencers/shills which magnify the momentum trade, inflating valuations, and turning stock picking into a casino. That won't last forever. I see this is as the greatest Value investor opportunity of a lifetime to contra-trade against a new class of naive investors that haven't learned anything from history.
« Last Edit: November 19, 2021, 10:07:53 PM by NathanDrake »

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #14 on: November 20, 2021, 06:22:01 AM »
I don't focus on momentum directly, other than with my passive market cap weighted holdings. But momentum works until it doesn't. Growth has had a nice run but ultimately reality sets in and many of these lofty valuations will not materialize.
Growth is not momentum.  You would agree Bank of America is a value stock?  Well, right now it's also a momentum stock.  You seem to be conflating growth and momentum, so maybe this example of Bank of America helps you see they're different.


As to momentum ending soon, I would ask: which century?

"Momentum has proven to be one of the strongest and most robust sources of returns since modern markets were established, having been empirically verified for over 200 years across all major asset classes (Geczy & Samonov, 2015)"
https://www.nasdaq.com/docs/Momentum-Investing_Myth-vs-Reality.pdf

You can view the original study if you prefer, but that quote is a great summary.  With over 200 years of evidence for momentum, your claim that it might go away any time rings hollow.  Where is your evidence that after 200 years, momentum is suddenly going away?


SCV doesn't have the lure of an individual growth stock that could 2-3X in a year or whatever. But investors rush in with those expectations, and when they fail they fail spectacularly.
Rush in like say... last year?  Because last year I bought Invesco S&P SmallCap 600 Pure Value ETF (RZV), which has a stronger value tilt than AVUV.  I expected it to double (2X) in a recovery, and it did.  So your point seems to be wrong as recently as last year.

NathanDrake

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #15 on: November 20, 2021, 07:19:41 PM »
I am not conflating growth and momentum, but momentum has largely been a growth story the past decade. In a decade of value outperformance  over growth, value will also outperform momentum.

Momentum, like any factor, goes through periods of outperformance and underperformance which can last a very long time. Trading costs are also a significant issue with momentum based strategies, and many of the studies’ premiums can not effectively be collected if in after tax accounts.

I feel far more confident in the value factor and it’s where my portfolio is tilted heavily

effigy98

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #16 on: November 20, 2021, 08:06:19 PM »
Bitcoin is the one you need to keep an eye on. It is one of the few non correlated assets with the market and the factors listed in the thread. Commodities are another thing to keep an eye one, especially uranium. Something like NUSI is a great bond replacement.

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #17 on: November 20, 2021, 08:17:19 PM »
I am not conflating growth and momentum, but momentum has largely been a growth story the past decade. In a decade of value outperformance  over growth, value will also outperform momentum.
If you're not confusing growth and momentum, why can't you discuss momentum without discussing growth?

Momentum, like any factor, goes through periods of outperformance and underperformance which can last a very long time. Trading costs are also a significant issue with momentum based strategies, and many of the studies’ premiums can not effectively be collected if in after tax accounts.
What evidence do you have for claiming momentum goes through "underperformance which can last a very long time"?  Just because something is a drawback for value, doesn't mean it applies to momentum.

Trading costs are $0/trade at Schwab, Fidelity and Vanguard.  You're saying professionals pay more than I do?


... with momentum based strategies, and many of the studies’ premiums can not effectively be collected if in after tax accounts.
Which studies?  As a factor, there's "time series momentum", and "cross-sectional momentum".  I'm talking about cross-sectional momentum, investing in the stocks with the best trailing returns (ignoring the prior month).  If there's studies claiming that cross-sectional momentum can't beat the market after taxes, show me the study.

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #18 on: November 20, 2021, 08:18:56 PM »
Bitcoin is the one you need to keep an eye on. It is one of the few non correlated assets with the market and the factors listed in the thread. Commodities are another thing to keep an eye one, especially uranium. Something like NUSI is a great bond replacement.
The topic of the thread is factor investing, not commodities and Bitcoin.  I created a separate thread discussing active strategies.
https://forum.mrmoneymustache.com/investor-alley/90-passive-10-active-looking-for-ideas/

NathanDrake

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #19 on: November 20, 2021, 09:06:01 PM »
I am not conflating growth and momentum, but momentum has largely been a growth story the past decade. In a decade of value outperformance  over growth, value will also outperform momentum.
If you're not confusing growth and momentum, why can't you discuss momentum without discussing growth?

Momentum, like any factor, goes through periods of outperformance and underperformance which can last a very long time. Trading costs are also a significant issue with momentum based strategies, and many of the studies’ premiums can not effectively be collected if in after tax accounts.
What evidence do you have for claiming momentum goes through "underperformance which can last a very long time"?  Just because something is a drawback for value, doesn't mean it applies to momentum.

Trading costs are $0/trade at Schwab, Fidelity and Vanguard.  You're saying professionals pay more than I do?


... with momentum based strategies, and many of the studies’ premiums can not effectively be collected if in after tax accounts.
Which studies?  As a factor, there's "time series momentum", and "cross-sectional momentum".  I'm talking about cross-sectional momentum, investing in the stocks with the best trailing returns (ignoring the prior month).  If there's studies claiming that cross-sectional momentum can't beat the market after taxes, show me the study.

Seems you are not very well versed in factor investing.

Here’s a good read:
https://investors-corner.bnpparibas-am.com/investing/equity-factor-investing-putting-performance-into-perspective/amp/

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #20 on: November 20, 2021, 09:44:30 PM »
It's weird that people claim to wait decades for small/value to outperform, then more than one cites an ETF that's just 2 years old.  Only one small/value ETF that I examined beat the market YTD... AVUV.  So by coincidence, the only small/value ETF doing well is the one everyone puts forward - performance chasing, no?

To proponents of AVUV, what did you invest in before October 2019?

Since Jan 2012, I see just two small/value ETFs with a winning record against the market.  You know what they have in common?  "With Momentum" in their names!

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #21 on: November 20, 2021, 09:47:52 PM »
I am not conflating growth and momentum, but momentum has largely been a growth story the past decade. In a decade of value outperformance  over growth, value will also outperform momentum.
If you're not confusing growth and momentum, why can't you discuss momentum without discussing growth?

Momentum, like any factor, goes through periods of outperformance and underperformance which can last a very long time. Trading costs are also a significant issue with momentum based strategies, and many of the studies’ premiums can not effectively be collected if in after tax accounts.
What evidence do you have for claiming momentum goes through "underperformance which can last a very long time"?  Just because something is a drawback for value, doesn't mean it applies to momentum.

Trading costs are $0/trade at Schwab, Fidelity and Vanguard.  You're saying professionals pay more than I do?


... with momentum based strategies, and many of the studies’ premiums can not effectively be collected if in after tax accounts.
Which studies?  As a factor, there's "time series momentum", and "cross-sectional momentum".  I'm talking about cross-sectional momentum, investing in the stocks with the best trailing returns (ignoring the prior month).  If there's studies claiming that cross-sectional momentum can't beat the market after taxes, show me the study.

Seems you are not very well versed in factor investing.

Here’s a good read:
https://investors-corner.bnpparibas-am.com/investing/equity-factor-investing-putting-performance-into-perspective/amp/
I said to quote a study that shows momentum can't beat the market after taxes.
"All factors generated positive returns in the long term,"
What does that sentence mean?

And also what is the point of: "The volatility of the portfolios was set to target 2.5% at each monthly rebalancing".  It means the whole study is an academic exercise, where you won't find real world investments.  Real ETFs don't target "volatility of ... 2.5%".  If the research doesn't apply to any investments, what's the point?

I can cite academic studies, which I consider superior to an article done by "BNP Paribas Asset Management".
« Last Edit: November 20, 2021, 09:50:06 PM by MustacheAndaHalf »

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #22 on: November 20, 2021, 09:51:07 PM »
Funds like AVUV incorporate momentum into their Value strategy to drive trading decisions.
What did you invest in before October 2019?

NathanDrake

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #23 on: November 20, 2021, 10:13:05 PM »
There are many value funds, including VBR which isn’t as highly loaded

DFA funds were generally recommended if you have access. Avantis is recommended because they have similar highly loaded constructions and lower fees

Hth

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #24 on: November 21, 2021, 12:59:48 AM »
There are many value funds, including VBR which isn’t as highly loaded

DFA funds were generally recommended if you have access. Avantis is recommended because they have similar highly loaded constructions and lower fees
I asked what YOU invested in before AVUV, before Oct 2019.

You only mentioned one small/value ETF by name... and it's VBR?  If you claim to know factor investing better than me, why can you only come up one that "isn’t as highly loaded"?  Why is your example 41% mid cap stocks?!

Maybe I should be giving you advice on small/value ETFs.  Before I gave up small/value tilts, I liked SPDR S&P 600 Small Cap Value ETF (SLYV).  Morningstar invented style boxes, where small/value is the lower left.  SLYV allocates 49% to small/value, while VBR has just 31%.  A higher small/value tilt.  You can also see that just 3% are mid caps, instead of the 41% mid caps for VBR.

https://www.morningstar.com/etfs/arcx/vti/performance
https://www.morningstar.com/etfs/arcx/slyv/performance
https://www.morningstar.com/etfs/arcx/vbr/performance

I included VTI (US Total Stock ETF) to compare performance with the overall stock market, which returned 10.77%/year over the past 15 years.  SLYV didn't do as well, at 9.40%/year over the same time period.  And coming in last is VBR, with a 8.74%/year return.

If you've started small/value investing in the past several years, then I'll have to forgive that.  But you shouldn't claim to be an expert, or know factor investing better than me if that's the case.  You shouldn't have to make excuses for VBR, when there's other choices.  I invested in SLYV years ago, before I gave up on small/value investing.  That's why I put it forward as a better small/value ETF than your pick of VBR.

NathanDrake

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #25 on: November 21, 2021, 01:38:17 PM »
More misrepresentations and straw man arguments. I listed VBR as a mainstream Vanguard fund. There are countless other examples. What is the relevance of listing them all? Avantis funds are popular simply because they are the best modern bang/buck.

Seems like the point of this is some petty “I Invested in SCV before you” childish argument

BicycleB

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #26 on: November 21, 2021, 02:51:25 PM »
Thanks for the discussions so far of value tilt, including the discussion of VBR, AVUV, etc as specific examples having a partial tilt and what the benefits/drawbacks are.

As a newbie to this type of thing but someone who owns VBR, very thought provoking. I hope over time to learn enough to make investing decisions more intelligently. Keep the discussions coming ya'll! :)

PS. I will look more at Morningstar's style box in the future.

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #27 on: November 22, 2021, 01:30:56 AM »
More misrepresentations and straw man arguments. I listed VBR as a mainstream Vanguard fund. There are countless other examples. What is the relevance of listing them all? Avantis funds are popular simply because they are the best modern bang/buck.

Seems like the point of this is some petty “I Invested in SCV before you” childish argument

If you lack experience with SCV, you shouldn't say things like this:
Seems you are not very well versed in factor investing.

I'm convinced you are just performance chasing.  You can't name an ETF more than 2 years old, because AVUV is all you know.  That's why when I asked you twice what you invested in before Oct 2019, you didn't answer.  You don't have an answer.

And if you have less than 2 years experience with factor investing, it's childish to insult other people as "not very well versed" in something you just discovered.

Earlier you mixed up growth and momentum, and I called you out on it.  You said you didn't confuse them, claimed they were related, and then mixed them up again.  So I don't think you're familiar with factor investing, and you shouldn't be insulting others about something where your understanding is flawed.

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #28 on: November 22, 2021, 01:51:08 AM »
As a newbie to this type of thing but someone who owns VBR, very thought provoking. I hope over time to learn enough to make investing decisions more intelligently. Keep the discussions coming ya'll! :)
Do you have significant taxable gains in VBR?

Vanguard charges $0/trade for all ETFs.  Besides my favorite (SLYV) and the ones others mentioned (AVUV), there's a list at etfdb.com that's useful:
https://etfdb.com/etfdb-category/small-cap-value-equities/

Morningstar's style box is what I relied on.  But as a long-term investment, RZV is terrible despite it's amazing style box percentages.  I got my revenge last year, buying it after a deep drop, and selling after it recovered.  But I will not own RZV long term again.

You can also use Portfolio Visualizer's "factor regressions", which try to attribute various factors to the ETFs (or funds) you specify.  "HML" is value (high minus low, referring to p/e or p/b) and "SMB" is small cap (small minus big).  Of course, "MOM" is how your mom invested momentum.
https://www.portfoliovisualizer.com/factor-analysis

Small/value tilts can take decades to beat the market, so it may also help to do some reading and look at historical data.  That can help you keep your resolve when things go badly for a long time.  Personally my favorite author was Larry Swedroe, whose "winning investment guide" has a great section where he replaces each part of a 60/40 portfolio with a tilted version, and compares volatility and performance.  The full book title is "The Only Guide to a Winning Investment Strategy You'll Ever Need: The Way Smart Money Preserves Wealth Today".
https://www.amazon.com/gp/product/B003K15OJI

Imanuels

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #29 on: November 22, 2021, 04:10:35 PM »
Any thoughts on GDP weighting as a 'factor'? I've been recently trying to find some more research on GDP weighting in asset allocation, for example this MSCI research bulletin from 2010 states (see Exhibit 3) that 'Over the history, all three GDP weighted indices have outperformed their market capitalization weighted counterparts'. Even after accounting for risk.
https://www.msci.com/documents/10199/bd587385-8f67-423d-bd82-8e5ce52fa13b

Similar conclusions also from DWS
https://etf.dws.com/en-gb/EmeaAssetDownload/Index/e777e370-8ee6-411e-b1cc-ac7b68c7c155/Passive-Insights-4-GDP-Weighted-Portfolio-ETFs.pdf

NathanDrake

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #30 on: November 22, 2021, 06:03:58 PM »
More misrepresentations and straw man arguments. I listed VBR as a mainstream Vanguard fund. There are countless other examples. What is the relevance of listing them all? Avantis funds are popular simply because they are the best modern bang/buck.

Seems like the point of this is some petty “I Invested in SCV before you” childish argument

If you lack experience with SCV, you shouldn't say things like this:
Seems you are not very well versed in factor investing.

I'm convinced you are just performance chasing.  You can't name an ETF more than 2 years old, because AVUV is all you know.  That's why when I asked you twice what you invested in before Oct 2019, you didn't answer.  You don't have an answer.

And if you have less than 2 years experience with factor investing, it's childish to insult other people as "not very well versed" in something you just discovered.

Earlier you mixed up growth and momentum, and I called you out on it.  You said you didn't confuse them, claimed they were related, and then mixed them up again.  So I don't think you're familiar with factor investing, and you shouldn't be insulting others about something where your understanding is flawed.

How’s your straw, man?

Have a good day, troll

Not going to waste time engaging anyone arguing in bad faith. Please do better next time.
« Last Edit: November 22, 2021, 06:06:47 PM by NathanDrake »

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #31 on: November 22, 2021, 08:23:29 PM »
Earlier I asked for another small/value fund, to which you replied:

There are many value funds, including VBR which isn’t as highly loaded

And when I pointed out VBR is a very poor choice for small/value tilt, you replied:

More misrepresentations and straw man arguments. I listed VBR as a mainstream Vanguard fund.

You lied.  You said "many value funds, including VBR" and then lied, claiming you said "I listed VBR as a mainstream Vanguard fund", which is not true.  You can't even state the truth about your own posts.

I also highlighted this because you used "straw man arguments" there, just as you're trying to do it now.  Maybe you don't know what that phrase means, because you lied when you used it previously.

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #32 on: November 22, 2021, 09:18:52 PM »
Any thoughts on GDP weighting as a 'factor'? I've been recently trying to find some more research on GDP weighting in asset allocation, for example this MSCI research bulletin from 2010 states (see Exhibit 3) that 'Over the history, all three GDP weighted indices have outperformed their market capitalization weighted counterparts'. Even after accounting for risk.
https://www.msci.com/documents/10199/bd587385-8f67-423d-bd82-8e5ce52fa13b

Similar conclusions also from DWS
https://etf.dws.com/en-gb/EmeaAssetDownload/Index/e777e370-8ee6-411e-b1cc-ac7b68c7c155/Passive-Insights-4-GDP-Weighted-Portfolio-ETFs.pdf
I'm not aware of GDP as a factor that describes market performance.  The factors with the most research and attention are: market (CAPM), small cap and value (3-factor), momentum (4-factor), investability and quality (rejecting momentum, then adding 2 factors to replace it).  But many researchers have tried to add to that list, so maybe GDP has a few papers researching it as a factor.

If you go to Portfolio Visualizer, under Backtest is "Backtest Asset Class".  Click on that and compare "US Stock Market" against "Global ex-US Stock Market".  From 1986 - 2021, U.S. stocks returned 11.12%/year versus 7.23%/year for international.  To be more precise, you would need to look at each country's returns multiplied by their world GDP percentage:
https://worldpopulationreview.com/countries/countries-by-gdp

#1 US 22.3%
#2 China 14.6%
#3 Japan 5.4%
#4 Germany 4.3%
#5 UK 3.1%
#6 France 3.0%
#7 India 3.0%
#8 Italy 2.8%
#9 Brazil 2.0%
#10 Canada 1.9%
(Divide each country's GDP by the world total of 91.98T)

Are you comfortable allocating only 22% to US stocks?  And that's down from 24%, based on 2017 data used by Wikipedia.  Since 2017, US stocks have returned 18.1%/year.

Radagast

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #33 on: November 23, 2021, 07:26:47 PM »
I've been a little reluctant to join this thread. But I do use funds targeting small stocks and value stocks. There are a number of reasons, probably not all of which I will recall as I type this. One is of course that they backtest with higher returns. Also, they have been riskier, so if riskier assets should return more, then that is a good sign. Further, as a person dollar cost averaging my savings into them over a decade of more, the risk actually works to my advantage. Also, they often have lower correlation with things like government bonds and international stocks than more mainstream stock funds do. The biggest downside IMO is higher costs.

I don't use momentum funds. First, while there is academic evidence that momentum has worked amazingly well for centuries, it is not clear how well that will hold up after costs and algorithms making the opposite trades. Second, if momentum stops working, it will be hard to tell why or if it will begin to work again later. For small and value stocks, you can read that right now they have not been doing as well as the market for years. However, you can also read that spreads in value vs growth stocks (the difference between price/book, price/earnings, etc.) are around their all time highs, meaning that large/growth stocks are probably going through an unusual period of relative strength as a result of growth in stock price more so than any fundamentals of the companies. If momentum went through a decade of weakness, there would be no way to tell anything about it, or know if it was time to bail out.

US small and value oriented funds I use:
RZV is currently at around 250% of my target, I will probably split the IRA/401k half into SLYV, MDYV, or VBR in a few months and obviously leave the taxable half alone.
VO (mutual fund version). Vanguard midcap. Small-ish.

International small and value oriented funds I use:
FNDE may switch to AVES at some point
FNDC I will probably keep this, so I have one Schwab fund and one Avantis fund.
EWX I am not sure if this addition does anything useful, and its ER is high, but so far I haven't changed.

BicycleB

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #34 on: November 24, 2021, 12:26:53 AM »
Thanks, @Radagast! Sobered by the thought of how to evaluate momentum if it has a slow streak, appreciative of the examples of funds you use.

Centuries of outperformance in the big Mo. Maybe something's different now, but spreads in other categories still exist. Does that mean we should assume momentum continues? Never having previously supposed momentum had evidentiary backing, I ponder. So much to learn.

MustacheAndaHalf

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Re: Factor Investing (Small, Value, Momentum, Quality, Investibilty, ...)
« Reply #35 on: November 24, 2021, 12:52:20 AM »
Just to clarify, I hate RZV.  It does not perform like it should.  I only bought it last year because it had lost the most, and I expected small/value to recover. It has strong small/value tilts, yet it performs no better than other small/value ETFs, and often worse.

Small cap stocks are less correlated, about the same as international.
https://www.portfoliovisualizer.com/asset-correlations?s=y&symbols=VTI+VTV+VUG+SLYV+SLYG&timePeriod=1&tradingDays=20&months=36

While momentum has been seen for centuries, most of those centuries didn't have ETFs to invest in.  Some momentum ETFs (like Vanguard's) hide their formula, but iShares MSCI USA Momentum does not, and they really impressed me.  They incorporate volatility into momentum returns, which I hadn't even thought to do.
https://finance.yahoo.com/quote/MTUM/performance?p=MTUM
https://finance.yahoo.com/quote/VTI/performance?p=VTI

In 2021 so far (YTD), the market (VTI) beats momentum by 3%.
2020: MTUM +9%
2019: MTUM -3%
2018: MTUM +4%
2017: MTUM +16%
2016: MTUM -8%
2015: MTUM +9%
2014: MTUM +2%

By my calculations, MTUM is ahead 27% from 2014 to now, which is very close to 3%/year for 8 years.  Unlike academic momentum, MTUM doesn't short the worst performing stocks.  So the effect is smaller in an ETF with only long positions.

That's something to keep in mind when reading literature on the value factor, as well.  The academics study long/short portfolios that do not appear in the ETFs we discuss here.  SLYV only holds small/value stocks, it does not have short positions.  So there will be a significant gap between historical factors, and the ETFs that implement them.  That's why I ask for specific ETFs - because we can't invest in academic papers, only in real investments.