Några anteckningar från caset MOT faktortilt med SCV från Bogleheads-konferensen 2023 med Rick Ferri. De lovade släppa hela inspelningen vid tillfälle.
Market Beta, Additional Betas (factors), and Risk Premiums
Market beta explains most of the return of any diversified portfolio.
Additional factors (size, value, quality, price momentum) explain most of the rest (up to 18% of the return variability from beta).
The more weight to additional factors, the greater the tracking error to the market, which investors hope is positive (risk premiums).
Factor “titled” portfolios come with extra costs: higher management fees, additional trading. This creates a “hurdle rate” that must be overcome before any alpha is earned.
If the factor premiums are 0% (or less) during your time horizon, a factor tilted portfolio will underperform the market.
The only way to benefit is to remain disciplined for a long time and hope the factor premiums ultimately exceed the hurdle rate.
och
Large Cap vs Small-Cap
och
Growth vs Value Stocks
samt
The Silent Issue: Bad Investor Behavior
Factor tilts create more “behavioral risk” than holding the market because factor investing is about outperforming the market.
During 2000 to 2007, thousands cried, “Gotta have DFA funds!” and advisers pounced on the marketing opportunity.
Regression to the mean followed, and weak hands threw in the towel. This locked in their underperformance.
The performance-chasing mindset of most factor investors is left out of academic literature, but fund flow data shows it exists.
It’s easier to stay the course in a simple market portfolio. ~John Bogle
samt
Bottom line
You may be rewarded for including additional factors to your portfolio in the long-term, but premiums are not guaranteed.
The only guarantees are more risk, more cost, more complexity, and tracking error to the market that can result in permanent underperformance due to bad timing by investors.
If you are in, stay in. If you thinking of adding factors, limit your exposure to ~25% of your equity and stay the course, probably for LIFE, and that might not be long enough.
Remember, the most important decision we make as investors is our beta allocation - how much to invest in stocks, fixed-income, real estate, and cash, then let the markets take care of the rest.
och avslutningsvis
It’s hard to talk the talk and walk the walk
