Education Ben Felix: Five Factor Investing

Never implemented equal weight...over time changed my view on this as I couldn’t reconcile with my understanding of skewness which leads one to understanding the power of cap weighting.

I believe there should be some persistence in factors, particularly size and value but I am not certain this will bear out. I keep around 2/3rd exposure in cap weight, so portfolios are “factor light”. I use DFA funds for factor exposure. The factors are put simply; size, price, cash flow (the latter is profitability and low re-investment).

 

i haven't bought into MVW , yet , but the way MVW planned to implement equal-weighting did make sense and POSSIBLY give the ETF an edge in volatile markets but still give it some capability in a flat market by selecting roughly 80 div. paying stocks

would i replace an existing holding in a satisfactory ETF of LIC ... NO , but i would CONSIDER adding a new position of MVW in place of buying extra ETFs or LICs ( that i already hold ) , price would be very important on if and when i would buy the ETF .

i am still keeping an eye on MVW to get a better idea how it handles a tumultuous market

would i buy a different equal-weighted ETF , not before i had carefully researched THAT fund

i find equal-weighting an intriguing compromise between a 'high yield ' fund ( since it TRIES to only hold div. paying stocks ) and index ( as it TRIES to only pick large cap stocks , but not the entire index )

my strategy is to seek dividend income over the longer term NOT ( normally ) large capital gains , although SOME holdings are DRPed to help resist inflation in the coming years ( either fully or partially )

 

For those interested in further "Ideas and observations from Fama and French."

https://famafrench.dimensional.com/

 

Inverted Yield Curves and Expected Stock Returns Eugene F. Fama and Kenneth R. French1

https://famafrench.dimensional.com/...s-and-expected-stock-returns-july-28-2019.pdf

interesting

i was looking at the yield curve signal in relation to bond appetite and bond buyer risk appetite , and of course the eventual rising of official interest rates to attract bond purchases .

but i am NOT a financial expert of any type

DYOR

BTW i will browse the other Fama and French offerings later

cheers and thanks for posting the links

 

@Hockey Monkey I've been familiar with some of this for about the last 12 months but hadn't taken the time to go back to basics. I finally listened to episode 40. Wow. Just wow

 

how do you figure out the value and profitability tilt? cheers for sharing

 

The rational reminder model portfolio uses a 25% tilt against developed total market

eg (100% - domestic allocation - emerging markets allocation) * tilt

Or put another way
AVUV is 10% of 40% US exposure
AVDV is 6% (5.5 rounded up) of 22% ex US developed exposure

Apparently was closed to keep the standard deviation the same as total market only. Risk was kept constant, with a higher return (should the historical factors persist).

Paul Merriman suggests 1.5 x years to retirement which for me is 13 * 1.5 = 20%

or (100% - 20% Australian Equities - 11% Emerging Markets) * 20% = 14% AVUV/AVDV

 

Nice one.
So using the rational reminder model came up with the following:
Avoiding US as much as possible considering its way too overpriced
vif 20%
A200 24%
Veu 24%
Ijr 8%
Vae 12.80%
Vss 5%
Iem 6.40%

 

Not really a factor portfolio at all AFAICS

Significantly overweight emerging markets which are contained in VEU, VAE and IEM

Sure underweight US a little but we wary betting against it completely. That will lead to long term tracking error

 

replacing VEU with IOO now gives 15% emerging markets
with VEU its 22% emerging markets
I consider US way too risky probably it's riskier than the emerging markets

AVUV and AVDV are not on commsec. where can i get them?

 

AVUV and AVDV are US listed. With commsec you can register for trading US stocks. Other populate options include Interactive Brokers and SelfWealth.

Note IOO is global large caps only and is quite concentrated at 100 companies and double the MER compared to something like VGS. Any particular reason for the choice?

 

I would like to achieve the five factor portfolio without US exposure and also keep emerging markets less to than 8% at the same time

 

We don't really have great factor options in Australia.

There are a few funds like VVLU, VGMF, WDMF. The RR model portfolios aim to balance between local funds and a small number of factor funds not available locally in Canada (or Australia), namely AVUV/AVDV.

As far as the starting point for world market coverage I suggest looking at the three options listed here How to get worldwide index exposure on the ASX — Passive Investing Australia and then add in a domestic tilt (eg A200) and factor tilts

A few folks over at rational reminder community like A200/VTS/VEU/AVUV/AVDV

I guess you could drop VTS/AVUV if you want to avoid US, but I wouldn't recommend it.

 

You are right. I am struggling with getting a good mix

VIF VAS IEU IJR VEU VSO VGE(20%,30%,18%, 8%,12.80%,5%,6.20%)

Chucked in Europe. Bumped up Aus. Trying to avoid US.

 

Too complicated already.

VIF - 20%
VAS - 30%
VGS - 40%
VGE - 10%

I would cap Australia at 20% and put the rest in VGS.

 

Again, this is not a five factor portfolio and only getting exposure to the market (MKT) and size (SMB) factors

SMB on it's own is not found to be a statistically significant factor. Only when combined with value and profitability does it shine. For this reason, I wouldn't add IJR or VSO for factor exposure. All they do is give you total exposure to the MKT factor.

See this paper for more details.
https://www.pwlcapital.com/wp-conte...-Factor-Investing-with-ETFs_08-2019-Final.pdf

IEU, VEU and VGE has lots of overlap. VEU is All-World ex-US ETF. No need to add the other two.

giving you a simple portfolio of VIF VAS VEU

Again I strongly recommend against totally eliminating the US MKT exposure. Sure underweight it if you wish, but it accounts for 57% of the global market. Quoting Warren Buffet "Never bet against America"

 

@Hockey Monkey @mtat

Long term i do think US will do ok. I have a lump sum to invest and i'd just be uncomfortable investing big in the US to start with but on an ongoing monthly basis i guess it'll be ok.

I like the combination of VEU VAS VIF(40,40,20) for lump sum investing and then chuck VTS in the mix for monthly contributions.

what do you guys think?

 

So as stated above:

Monthly purchases based on following split:
VEU 20%
VAS 30%
VIF 20%
VTS 30%


Initial Lump sump purchase
VEU 40%
VAS 40%
VIF 20%

 

What percentage of your net worth is the lump sum?

70% of the time lump sum beats DCA. Another option is to lump sum half and DCA the rest over time but that really just defers the risk

If you are uncomfortable lump summing it all, this might tell you something about your risk tolerance and what you should hold in defensive assets permanently. Dropping the US doesn’t prevent a large drop if there is a downturn

if there is a downturn, rebalance your VIF to equities back to the desired allocation

Lump sum investing — Passive Investing Australia

 

50% of net worth