Education Ben Felix: Five Factor Investing

Enjoyed this video. Hope we can get some discussion going...

Cheers,
Oracle.

 

not what i was expecting , but interesting just the same

now for small cap. stocks , i went for smaller LICs that focused on that area (WAX and WIC principally ) now sure the fees and performance fees are high , but they have produced the goods even when i thought they would struggle , even allowing for dividend smoothing

but give or take a preference for LICs in some areas mentioned here i am somewhere in that ballpark , apart from the fact i normally avoid US stocks ( and prefer Asian stocks for international growth

i tried IEM for emerging market exposure but they failed to do what i hoped so exited with a small profit

cheers and thanks

 

I recently adjusted my own equities portfolio based on his Canadian model portfolio but with a lower domestic allocation

20% A200
40% VGS
12% AVEM (Emerging markets with a value and profitability tilt)
17% AVUV (US small cap with a value and profitability tilt)
11% AVDV (Developed ex-US small caps with a value and profitability tilt)

Mrs Hockey Monkey remains on a market cap only portfolio with
20% VAS
62% VGS
9% VAE
9% VISM

This gives an overall portfolio of roughly
20% A200/VAS (Australian equities)
11% AVEM/VAE (Emerging markets)
55% VGS/VISM (Developed markets)
14% AVUV/AVDV (Small cap with value and profitability)

for an overall 20% Developed World Small Cap Value tilt (20% of 69%), slightly less than the canadian model portfolio with a 25% tilt.

Actual target allocations are calculated in a spreadsheet based on current market cap of each underlying index so will float over time.

We will see whether the factor persist and who wins over the next 30 years

 

What would the aggregate fees be for your allocation? And the combined allocations? Thank you

 

Curious: What have you estimated the difference to be p/a after fees over 30 years between the two portfolios?

 

results are more important to me than fees

if the fund is charging 1.5%+ but kicking regular significant goals .. yippee

IF NOT , it gets kicked out of the portfolio

low fees are nice , but not if underwhelming performance results

 

For Mrs Hockey Monkey, total MER is about 20 basis points and mine is about 21 basis points plus another 5 with mine for a total of 26 due to tax drag from lost foreign withholding tax and franking credits

 

Sounds a lot like this

 

That is quite low actually for the number of options.

Also thanks for sharing the asset allocations. Very useful in the Australian context as I was not sure what are the equivalent options in Australia.

 

6 basis points ($60 per $100,000) vs whatever a 40% value tilt outperformance is across AVUV/AVDV/AVEM averages over 30 years should be factors remain in the long term.

I see it as insurance to help me resist the urge to invest in BTC/GME/TSLA/ARKK or whatever the next meme stock is

 

A counter perspective being discussed over at the rational reminder community.

Why It Would Be Ludicrous To Invest In These Model Portfolios

Some quotes

But it’s clear that inexperienced investors are trying and failing to implement the more complicated portfolios in real life. In fact, it’s possible we’ll see thousands of Bender and Felix investing refugees flocking back to a one-ticket solution in the years to come.

That’s why the ridiculous, ludicrous, plaid, and five factor model portfolios should have been kept under wraps.

But I think these model portfolios should be locked behind a pay wall, only to be accessed by investors who can demonstrate the experience, competence, and discipline needed to execute the strategy. That includes:

• Having a large enough portfolio for this to even matter.
• Using an appropriate investing platform that allows you to hold USD, perform same-day currency conversions, and keep trading commissions low.
• Creating an investing spreadsheet that’s coded to tell you what to buy and when to rebalance.
• Being an engineer or mathematician who not only loves to optimize but who also understands exactly what he or she is doing (and why).
• Having the conviction to stick with this approach for the very long term, even through periods of underperformance.
• Being humble enough to admit that you’re probably not going to execute this strategy perfectly.

 

It's not too bad. The biggest pain is waking up early when I want to buy US ETFs on Interactive Brokers

I may live to regret the complexity in my retirement.

Originally I was only going to go with AVUV/AVDV but added emerging markets at the last minute given I was already in on the complexity US stocks.

I like AVEM over VAE or VGE as
- It follows the MSCI index making is a good match for VGS (eg no South Korea issue)
- It is a true emerging markets index unlike VAE which is Asia only.
- MER is actually lower than VGE @ 0.33% vs 0.48%. We get scammed here as the underlying VWO is only 0.10% which I could have gone with via a US broker but hey factor investing is fun.

 

another thought provoking video , thanks

remember when i first started my investing adventure i knew i had to be aggressive ( without being crazy and reckless )

and yes i have had success from small cap. ( when i invested it them ) stocks but cautious enough to rescue that investment CASH ( and let the profits run a bit further ) at say , 140% profit .

another factor in Australia is the ACCC which sometimes puts a limit on a company's growth potential , so say a big 4 bank has only limited options to grow ,but plenty more opportunities to shrink .

i instinctively like to buy into a strategy that is struggling , because the strategy is facing headwinds ( not the fund manager being 'unlucky ' ) say a high div. yield strategy when divs dry up ( AND the unit prices plummet , not point buying them at a premium if few divs )

now obviously a younger person still earning a very nice income would be wise to keep earning that income and invest excess cash as wisely as he/she can

 

i normally resist meme stocks , although i did dabble in ART ( less than $1k ) and KGN ( about $4k invested ) in January 2020 ( that was a surprise winner easily double what i had hoped so rescued the cash and let the profit run ) i prefer cheap boring stocks with a solid history but fiddle and take some cash risk off the table ABSOLUTELY , that is just me .

i TRY not to lose my investment cash as a first hurdle , earn some divs second , and play it by ear after that ( i would probably get killed in a rational predictable market )

LOL

 

Right, but what is the estimated (range maybe) of outperformance? I guess there are lots of variables.

 

This paper (page 25) shows historical out performance of 0.80% p.a. over 20 years

https://www.pwlcapital.com/wp-content/uploads/2020/12/Five-Factor-Investing-with-ETFs.pdf

another aspect is diversification from market beta alone. There are periods where market returns are low or negative but factors return a positive result (see page 18 where from 111 rolling 10 year periods where market returns were negative, factors return a positive result)

A couple of interesting podcasts to listen to

Episode 129: Five Factor Investing with ETFs — Rational Reminder
Episode 40: Five Factor Thinking: Using Factors to Spot Trends and Guide Decision Making — Rational Reminder

 

Here's Ben's paper on this 5 Factor investing with ETF's

Felix says the five factors are market, size, value, profitability, and investment

I need to dumb it down to consider it.... KISS

Where's @dunno when you need him?

Size is a factor, value is a factor, momentum is a factor, I've no idea if it's the magic pudding though

Value stocks have received a thrashing over recent years, maybe time for a comeback if in your portfolio



From memory @The Falcon was looking at equal-weighted index funds (smart-beta) some time ago so may have additional insight

Buying an out of favour index appeals if investing for the long term

Swedroe wrote

Your Complete Guide to Factor-Based Investing: The Way Smart Money Invests Today

There's also the below from Research Affiliates

How Can Smart Beta Go Horribly Wrong

 

Boomer & Echo querying if too complex for the average punter

Why It Would Be Ludicrous To Invest In These Model Portfolios

 

if i believed in generic models i would have stayed in the Super and searched for strategy options

but i had seen how they gouged fees , so took the opportunity to liquidate and take responsibility for myself

 

yes i researched MVW very closely ( READ the extra white papers that come with it ) and found it appealing

IMO the interesting factor is the two monthly rebalancing of the portfolio ( frequent harvesting of share price rises )

i do NOT hold MVW yet because i cannot get my entry price , i am hoping to go so in the next BIG dip

beware that extra reading is NOT lightweight material

and once again i use ETFs as INSURANCE against poor share selection NOT a major investment