Author Topic: PersonalCapital Tactical Weighting  (Read 12366 times)

Badass by 41

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PersonalCapital Tactical Weighting
« on: May 04, 2014, 10:52:26 AM »
From their site:

Quote
Tactical Weighting strives for more even exposures across size, style (growth or value), economic sector, industry, and individual securities. Since 1970, equally weighting any one of these factors would have produced better results than traditional indexes.

A Total Market Index Fund owns a piece of every stock in the market, but at a proportion approximately equal to their market capitalization. PersonalCapitals hypothesis is that weighting on market cap leads to a disproportionate diversification across market sectors, which leads to increased risk and reduced alpha.

Tactical Weighting can only be back tested from the early 90's (when market data started being tracked at the sector level).  This is unfortunate since more data would provide more diverse failure scenarios.  However, that time period does cover some significant bull and bear periods, so perhaps it's still meaningful.

Here's my question:
Would you replace your market cap based Total Market Index Fund/ETF with a Total Market Index Fund/ETF which strives to match total market performance by keeping an equal weighting of securities across sectors (were such a fund/ETF available)?

matchewed

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Re: PersonalCapital Tactical Weighting
« Reply #1 on: May 04, 2014, 11:07:51 AM »
I'd like to see a study. Do you have a link to Personal Capital's quote?

I think it's odd to call a market cap based index fund disproportionate. It is exactly proportionate to what it is supposed to be, a representation of the market based on market cap. If you use a different measuring stick sure it won't fit that one, square peg round hole.

And aren't we talking two different things in one post? Tactical Weighting sounds like active management and has nothing to do with an index based on equal weighting. Equal weighting sounds like you'd divide up the pie evenly across all companies that fit your criteria. Tactical Weighting does not sound like that as they mention that you can weight based on a specific factor.

In my case no I wouldn't replace my fund with a different fund that does an equal weighting. I understand what my index fund does and why it does it. I'd need some real hard evidence that equal weighting would be advantageous.

Badass by 41

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Re: PersonalCapital Tactical Weighting
« Reply #2 on: May 04, 2014, 12:07:03 PM »
I agree that I too would like to see a study.  8)

Market Cap is disproportionately weighted when looked at across sectors.  I think you misread my OP.  I was in no way suggesting that a market cap based index fund was something other than just that.  Rather, I was suggesting that there is the possibility of an alternate strategy to designing a Total Market Index Fund which is not based on market cap.

In terms of "active management" I complete agree that PersonalCapitals implementation of this strategy is by definition "active management".  However, prior to the creation of a market cap based Total Index Fund, the same strategy would have been called active management.  This is the reason I asked the question in the way that I did.

Perhaps another way of asking the question is whether people believe that market cap is the right design for Total Market exposure?

Here's the link I was referencing before: https://www.personalcapital.com/pages/webapp/investing/smart

You can get to it on their site by logging in and going to: Advisor > Advisor > "Read our 8 Principles of Investing" Click Here > Smart

I've attached a copy of their visual representation of the Tactical Weighting strategy.  As was mentioned in a previous thread on PersonalCapital, I don't agree with their comparison to the S&P 500 due to it's lack of Small Cap exposure (which they admit to in their literature), but you can still see the potential benefit.  Here's what I think makes this approach interesting.

If you believe that sectors of the market have low or no correlation, then not taking that into consideration in your allocation is adding risk and lowering potential alpha.  e.g. Tech stocks are overweighed but underperforming compared to utilities.

Reallocation across sectors is yet another opportunity to buy low and sell high.

Thoughts?

matchewed

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Re: PersonalCapital Tactical Weighting
« Reply #3 on: May 04, 2014, 12:15:21 PM »
My thoughts that if they are going to use the reason their Tactical Weighting strategy is superior because it won't suffer from being over-weighted in sectors during bubbles then just the opposite is true. They're under-weighted in sectors that have actual growth. They're also over-weighted in sectors that have little to no growth. It's an interesting tactic and I would love to see it backtested or sit on the sidelines and observe it for the next 30 years.

milesdividendmd

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Re: PersonalCapital Tactical Weighting
« Reply #4 on: May 04, 2014, 12:27:23 PM »
There are equal waiting S&P 500 funds.

RSP is one such ETF.

My take is that this is just a different way of tilting small. So you should expect more risk and more returns.

Here is Rick Ferri's excellent article on the very same:

http://www.forbes.com/sites/rickferri/2013/04/29/no-free-lunch-from-equal-weight-sp-500/

As to personal capitals "tactical waiting" I talked to them on the phone about this in my take is that it's just the same old spin. Active Stockpicking to justify their high fees.

I love the Personal Capital website, and find it invaluable. But I'm deeply skeptical of their investment services. I personally wouldn't touch them with a 10 foot pole.

Alexi

SnackDog

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Re: PersonalCapital Tactical Weighting
« Reply #5 on: May 04, 2014, 12:42:41 PM »
These days everyone and their brother would like to sell you an index fund which outperforms the index, for a fee.  Think about that.

hodedofome

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Re: PersonalCapital Tactical Weighting
« Reply #6 on: May 04, 2014, 01:08:46 PM »
Though I think there are better ways to skin a market cap cat, like others have said you are paying higher fees in order to do it. The strategy would have to outperform the additional fees to make any sense. I don't know what the fees are on sector funds, but you could look into equal weighting those instead of buying an equal weight index.

KingCoin

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Re: PersonalCapital Tactical Weighting
« Reply #7 on: May 04, 2014, 01:40:16 PM »
My take is that this is just a different way of tilting small. So you should expect more risk and more returns.

I think this is the long and short of it.

You're grappling with two separate questions. How to allocate across market cap and how to allocate across sector?

Market cap it rather simple. The smaller you go the higher the risk and return. Simple enough. Most asset allocation plans include some small cap stocks, especially for younger investors. Nothing revolutionary here.

Sector weighting is a bit trickier. Does it makes sense to weight small sectors like telecom and materials equally to sectors more than four times as large like energy, financials, and healthcare? How granular should this be? Should you weight solar energy equally to oil? These are tough questions, and while you may be able to cook up some reason to be equal wait across sector, if you want to track the economy as a whole, weighting sectors in proportion to their contribution to the economy seems to make more sense. That actually reminds me of another asset allocation plan that's often offered as an alternative to market cap weight, which is weighting by earnings.

It's interesting to look at back studies on this kind of thing, and as long as you're diversified and aware of how an alternative portfolio is transforming the risk characteristics of your investments, I think there's little harm and maybe some benefit of pursuing a non-standard slice-and-dice.

As usual, the most important thing is to come up with a sensible plan and stick to it rather than ending up with analysis paralysis trying to hash through every flavor-of-the-month, better moustrap strategy.




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Re: PersonalCapital Tactical Weighting
« Reply #8 on: May 04, 2014, 05:03:18 PM »
I'm with snackdog. I think this is BS. A friend of mine manages a crap load of money at Franklin Templeton. He regularly says to me, "Hey, average appears to be good enough for you." Yes. Yes it is.

This is just another derivative (pun intended) of a smart beta strategy. Not for me.....

I see a comparative chart here on the Personal Capital blog (http://blog.personalcapital.com/whitepapers/tactical-weighting/) that goes back to 1990. I want to see a HISTORICAL BACK TEST that goes back to 1900. If the trend prevails over 113-plus years, I'll shut up and go home.
« Last Edit: May 04, 2014, 05:10:47 PM by RapmasterD »

foobar

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Re: PersonalCapital Tactical Weighting
« Reply #9 on: May 05, 2014, 10:23:08 AM »
There is data since 1920 that suggests that overweighing to small caps will increase your returns.  Total Market for example returned .6% more than the S&P over the past 10 years.

Will any of these trends apply for the 30 or so years you care about? Who knows. If I wanted this strategy though, there is no need for personal capital. There are numerous ETFs that will do this for you without extracting a 1% fee.


I'm with snackdog. I think this is BS. A friend of mine manages a crap load of money at Franklin Templeton. He regularly says to me, "Hey, average appears to be good enough for you." Yes. Yes it is.

This is just another derivative (pun intended) of a smart beta strategy. Not for me.....

I see a comparative chart here on the Personal Capital blog (http://blog.personalcapital.com/whitepapers/tactical-weighting/) that goes back to 1990. I want to see a HISTORICAL BACK TEST that goes back to 1900. If the trend prevails over 113-plus years, I'll shut up and go home.

matchewed

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Re: PersonalCapital Tactical Weighting
« Reply #10 on: May 05, 2014, 10:27:23 AM »
I'm with snackdog. I think this is BS. A friend of mine manages a crap load of money at Franklin Templeton. He regularly says to me, "Hey, average appears to be good enough for you." Yes. Yes it is.

This is just another derivative (pun intended) of a smart beta strategy. Not for me.....

I see a comparative chart here on the Personal Capital blog (http://blog.personalcapital.com/whitepapers/tactical-weighting/) that goes back to 1990. I want to see a HISTORICAL BACK TEST that goes back to 1900. If the trend prevails over 113-plus years, I'll shut up and go home.
There is data since 1920 that suggests that overweighing to small caps will increase your returns.  Total Market for example returned .6% more than the S&P over the past 10 years.

Will any of these trends apply for the 30 or so years you care about? Who knows. If I wanted this strategy though, there is no need for personal capital. There are numerous ETFs that will do this for you without extracting a 1% fee.

This may be nitpicky but the Total Market isn't overweight on small caps. It has small caps in exact proportion to the market. I would be interested in seeing if there is an active fund that captured all small caps but intentionally inflated their position on them much like Personal Capital is suggesting with their flatter approach. But that just really overlaps on what I've already said.

milesdividendmd

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Re: PersonalCapital Tactical Weighting
« Reply #11 on: May 05, 2014, 12:24:09 PM »
I'm with snackdog. I think this is BS. A friend of mine manages a crap load of money at Franklin Templeton. He regularly says to me, "Hey, average appears to be good enough for you." Yes. Yes it is.

This is just another derivative (pun intended) of a smart beta strategy. Not for me.....

I see a comparative chart here on the Personal Capital blog (http://blog.personalcapital.com/whitepapers/tactical-weighting/) that goes back to 1990. I want to see a HISTORICAL BACK TEST that goes back to 1900. If the trend prevails over 113-plus years, I'll shut up and go home.
There is data since 1920 that suggests that overweighing to small caps will increase your returns.  Total Market for example returned .6% more than the S&P over the past 10 years.

Will any of these trends apply for the 30 or so years you care about? Who knows. If I wanted this strategy though, there is no need for personal capital. There are numerous ETFs that will do this for you without extracting a 1% fee.

This may be nitpicky but the Total Market isn't overweight on small caps. It has small caps in exact proportion to the market. I would be interested in seeing if there is an active fund that captured all small caps but intentionally inflated their position on them much like Personal Capital is suggesting with their flatter approach. But that just really overlaps on what I've already said.

I agree that the total market is definitely not "overweighted" to small caps. Relative to the S&P 500 however, it's weight is smaller (about in the middle of the large cap blend space as opposed to tilting towards the largest aspect of the large clap blend space.) in addition the total market includes some small-cap companies, whereas the S&P 500 includes only the largest of mid-cap companies at the lowest capitalization rnd of it spectrum.

I think this is a key reason why VTI usually outperforms VOO, it is tilted slightly smaller.

Alexi

foobar

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Re: PersonalCapital Tactical Weighting
« Reply #12 on: May 05, 2014, 01:26:39 PM »
Total market overweighs the small caps a lot compared to the S&P 500. Roughly 10% to 0%:)  Some funds like DFA US Core Equity overweight small/mid caps more than total market while stile holding a ton of stocks. Those have gotten better returns the past cycle which has favored small caps. Unfortunately none of them have the 30+ year history that you really want to see if there is long term outperformance or are we just looking at a market cycle.

I looked into equal weighting a while back and the fund that with the longest data was Invesco Equally-Wtd S&P 500 (never buy the fund. Nothing is worth a 5% load). If you use the class b share, you can get numbers back to 1987(equal weighting isn't a new idea).  10k in the S&p 500 grew to 147k. 10k in that fund grew to 149.7k. Now that fund did have a pretty high expense ratio (something like 1.2) so buying something like RSP (.4% er) should do slightly better.

I don't hate the equal weight strategy but for most people you would be better off just buying a midcap fund to bring the ratio of mid to large cap into balance does pretty much the same thing but a lot cheaper. I also thinking that not trying to chase this last 1-2% of return is also a very valid option for people that don't get excited about reading about  3 factor investing.


I'm with snackdog. I think this is BS. A friend of mine manages a crap load of money at Franklin Templeton. He regularly says to me, "Hey, average appears to be good enough for you." Yes. Yes it is.

This is just another derivative (pun intended) of a smart beta strategy. Not for me.....

I see a comparative chart here on the Personal Capital blog (http://blog.personalcapital.com/whitepapers/tactical-weighting/) that goes back to 1990. I want to see a HISTORICAL BACK TEST that goes back to 1900. If the trend prevails over 113-plus years, I'll shut up and go home.
There is data since 1920 that suggests that overweighing to small caps will increase your returns.  Total Market for example returned .6% more than the S&P over the past 10 years.

Will any of these trends apply for the 30 or so years you care about? Who knows. If I wanted this strategy though, there is no need for personal capital. There are numerous ETFs that will do this for you without extracting a 1% fee.

This may be nitpicky but the Total Market isn't overweight on small caps. It has small caps in exact proportion to the market. I would be interested in seeing if there is an active fund that captured all small caps but intentionally inflated their position on them much like Personal Capital is suggesting with their flatter approach. But that just really overlaps on what I've already said.

matchewed

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Re: PersonalCapital Tactical Weighting
« Reply #13 on: May 05, 2014, 03:40:45 PM »
I'm with snackdog. I think this is BS. A friend of mine manages a crap load of money at Franklin Templeton. He regularly says to me, "Hey, average appears to be good enough for you." Yes. Yes it is.

This is just another derivative (pun intended) of a smart beta strategy. Not for me.....

I see a comparative chart here on the Personal Capital blog (http://blog.personalcapital.com/whitepapers/tactical-weighting/) that goes back to 1990. I want to see a HISTORICAL BACK TEST that goes back to 1900. If the trend prevails over 113-plus years, I'll shut up and go home.
There is data since 1920 that suggests that overweighing to small caps will increase your returns.  Total Market for example returned .6% more than the S&P over the past 10 years.

Will any of these trends apply for the 30 or so years you care about? Who knows. If I wanted this strategy though, there is no need for personal capital. There are numerous ETFs that will do this for you without extracting a 1% fee.

This may be nitpicky but the Total Market isn't overweight on small caps. It has small caps in exact proportion to the market. I would be interested in seeing if there is an active fund that captured all small caps but intentionally inflated their position on them much like Personal Capital is suggesting with their flatter approach. But that just really overlaps on what I've already said.
Total market overweighs the small caps a lot compared to the S&P 500. Roughly 10% to 0%:)  Some funds like DFA US Core Equity overweight small/mid caps more than total market while stile holding a ton of stocks. Those have gotten better returns the past cycle which has favored small caps. Unfortunately none of them have the 30+ year history that you really want to see if there is long term outperformance or are we just looking at a market cycle.

I looked into equal weighting a while back and the fund that with the longest data was Invesco Equally-Wtd S&P 500 (never buy the fund. Nothing is worth a 5% load). If you use the class b share, you can get numbers back to 1987(equal weighting isn't a new idea).  10k in the S&p 500 grew to 147k. 10k in that fund grew to 149.7k. Now that fund did have a pretty high expense ratio (something like 1.2) so buying something like RSP (.4% er) should do slightly better.

I don't hate the equal weight strategy but for most people you would be better off just buying a midcap fund to bring the ratio of mid to large cap into balance does pretty much the same thing but a lot cheaper. I also thinking that not trying to chase this last 1-2% of return is also a very valid option for people that don't get excited about reading about  3 factor investing.

I don't think you understand my nitpick. Calling total market overweight in small caps a lot compared to S&P 500 is sort of a meaningless statement. It's like saying that the bag of M&M's is overweight in yellow M&M's compared to my specifically sorted bag of red M&M's. Apples and oranges.

foobar

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Re: PersonalCapital Tactical Weighting
« Reply #14 on: May 05, 2014, 04:34:37 PM »
If I tell you that my baseline is a bag of red mm(S&p 500) and say that equal (red+blue) and total (red+blue and some green) are overweight in the other colors, that is an accurate statement.  Maybe you default to compare the equal weight S&P 500 to total market but I am guessing most people compare it to the S&P 500 index.


I'm with snackdog. I think this is BS. A friend of mine manages a crap load of money at Franklin Templeton. He regularly says to me, "Hey, average appears to be good enough for you." Yes. Yes it is.

This is just another derivative (pun intended) of a smart beta strategy. Not for me.....

I see a comparative chart here on the Personal Capital blog (http://blog.personalcapital.com/whitepapers/tactical-weighting/) that goes back to 1990. I want to see a HISTORICAL BACK TEST that goes back to 1900. If the trend prevails over 113-plus years, I'll shut up and go home.
There is data since 1920 that suggests that overweighing to small caps will increase your returns.  Total Market for example returned .6% more than the S&P over the past 10 years.

Will any of these trends apply for the 30 or so years you care about? Who knows. If I wanted this strategy though, there is no need for personal capital. There are numerous ETFs that will do this for you without extracting a 1% fee.

This may be nitpicky but the Total Market isn't overweight on small caps. It has small caps in exact proportion to the market. I would be interested in seeing if there is an active fund that captured all small caps but intentionally inflated their position on them much like Personal Capital is suggesting with their flatter approach. But that just really overlaps on what I've already said.
Total market overweighs the small caps a lot compared to the S&P 500. Roughly 10% to 0%:)  Some funds like DFA US Core Equity overweight small/mid caps more than total market while stile holding a ton of stocks. Those have gotten better returns the past cycle which has favored small caps. Unfortunately none of them have the 30+ year history that you really want to see if there is long term outperformance or are we just looking at a market cycle.

I looked into equal weighting a while back and the fund that with the longest data was Invesco Equally-Wtd S&P 500 (never buy the fund. Nothing is worth a 5% load). If you use the class b share, you can get numbers back to 1987(equal weighting isn't a new idea).  10k in the S&p 500 grew to 147k. 10k in that fund grew to 149.7k. Now that fund did have a pretty high expense ratio (something like 1.2) so buying something like RSP (.4% er) should do slightly better.

I don't hate the equal weight strategy but for most people you would be better off just buying a midcap fund to bring the ratio of mid to large cap into balance does pretty much the same thing but a lot cheaper. I also thinking that not trying to chase this last 1-2% of return is also a very valid option for people that don't get excited about reading about  3 factor investing.

I don't think you understand my nitpick. Calling total market overweight in small caps a lot compared to S&P 500 is sort of a meaningless statement. It's like saying that the bag of M&M's is overweight in yellow M&M's compared to my specifically sorted bag of red M&M's. Apples and oranges.

hodedofome

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Re: PersonalCapital Tactical Weighting
« Reply #15 on: May 05, 2014, 09:15:55 PM »
Recommend checking out Research Affiliates and Rob Arnott's research if you want to look into this kind of stuff. https://www.youtube.com/watch?v=9iQjyrnDrxM&list=UUW9B1PJwennxYi5Fk_94Lew

I like the idea of fundamental indexing and believe it makes intuitive sense. However, you gotta get the fees as low as possible as historically I've only seen backtests with 1-5% outperformance over a long period. There are plenty of fundamental index/smart beta funds out there now so you'd also want to make sure the implementation is right. There are copycats that are probably over optimized/curve fit to past data. I wish Joel Greenblatt's funds weren't so dang expensive, I'd be very tempted to buy those if he charged less than 1%.

Consistent with my comments on the "what if everyone indexes" thread, a consideration to keep in mind is that a lot of the smart beta funds publicly give out the methodology for what they will buy and sell, AND tell you when they are going to do it. This give traders all they need to 'legally' front run their trades on the rebalance date. http://www.russell.com/documents/indexes/construction-methodology-fundamental-indexes.pdf This could obviously eat into the returns going forward. A backtest wouldn't take those kind of 'costs' into consideration.

As with any strategy, the best time to buy into it is after it's had a rough period of underperforming the market cap index. Buying in after it's had a good run relative to the market is just asking for pain/mean reversion. All styles go in and out of favor. Buy when it's out of favor (assuming it's a good strategy to begin with...!)
« Last Edit: May 06, 2014, 08:46:11 AM by hodedofome »

Franklin

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Re: PersonalCapital Tactical Weighting
« Reply #16 on: May 30, 2014, 08:54:32 AM »
Quote
Recommend checking out Research Affiliates and Rob Arnott's research if you want to look into this kind of stuff. https://www.youtube.com/watch?v=9iQjyrnDrxM&list=UUW9B1PJwennxYi5Fk_94Lew

Hodedofome,

Totally agree.  Arnott has the ability to articulate the difference between fundamental indexing, EWI, and value indexes, which a lot of people mistakenly believe are the same things.

Mr Mark

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Re: PersonalCapital Tactical Weighting
« Reply #17 on: May 30, 2014, 10:59:16 AM »
Ive seen research showing super large companies - ie the top 50 US market cap -  have systematically lower growth going forward than smaller caps. This makes sense, or microsoft would now comprise the entire universe's GDP.

so an AA strategy is to not just have sp500 or even Russell 2000 but to spice the AA by overweighting to market wrt smaller stocks. This is one reason I have a slightly more complex AA within my stock portfolio versus a simple 3 box portfolio. I deliberately overweight my portfolio to mid and small cap vs total market, not by a lot, but some. A tilt.

as stated, this then has greater volatility. You could think of big blue chips as being sort of between bonds and most company stock. Microsoft ain't going broke tomorrow. 10 years, meh?

At least the index has a built in survivor bias. As bad companies do their version of icarus,  they are replaced by new blood.