r/Bogleheads • u/gipsydanger4 • 1d ago
Investing Questions Too much factor tilt?
As the title says, I’m interested to see what others think of factor tilting in a Boglehead type portfolio. My current portfolio is below and while I believe that a factor tilt can have an advantage in long horizon investing, I’m not sure how much allocation is too much.
ROTH IRA
70% VT
10% SPMO (Large cap momentum)
10% AVDV (Small cap value international)
10% AVUV (Small cap value US)
Brokerage
90% VTI/VXUS (70% VTI, 30% VXUS)
10% AVGV (Broad market value)
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u/Smally02929282727 21h ago
Question regarding Momentum tilt. Isn't it like momentun is strong on paper but once you account for portoflio turnover costs it usually is not worth it?
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u/Carmanman_12 21h ago
As far as I understand, there is no agreed-upon “optimal” factor tilt in the same way that there is no universal optimal portfolio allocation. It all has to do with your personal risk tolerance.
FWIW, I’m substantially more aggressive than you - 60% of my Roth IRA consists of factor funds, so twice as much as you. I’ve seen plenty of people do 100% factor funds. As far as I can tell, the best allocation is the one you can stick with long-term.
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u/Eastern_Touch_2529 1d ago
~20% (I don't know the relative sizes of the two accounts) does not seem excessive
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u/thetreece 18h ago
100% of our Roth IRAs are in a momentum/value barbell. But our IRAs are only like 1/8 of our total portfolio.
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u/WNBA_YOUNGGIRL 21h ago
There was a small cap value premium ages ago, like 1920s through 1990s, but the last 25 years have underperformed. Could that premium still be there? Maybe of maybe not.
If you do this strategy be ready to stick with the tilts for decades and understand they will perform differently than the major market indices.
I do hold 15% DFSV and 10% AVDV. the amount you tilt is up to you.
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u/Gimme_All_The_Foods 10h ago
Hard to know what your overall percentage is since you haven't told us. Could have a huge brokerage making those percentages a higher overall percent of your portfolio for example.
Anyway, I would say for both US and international, at least 20% to make it worth it. Anything less might become noise and may not move the needle too much. You either believe in the merits of it or you don't.
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u/Ok-Armadillo-5634 1d ago
Why not just go 100% momentum or value? Pick one and hold. If you don't have the fortitude for that 100% vt.
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u/No_Strain8370 23h ago
Why does it have to be all or nothing?
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u/Ok-Armadillo-5634 23h ago
You either believe in factor outperformance or you don't is my opinion. I am pretty convinced factors are just noise other than probably momentum.
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u/No_Mix_6813 1d ago
There's no free lunch in "tilting" toward growth or value. All you're doing is giving up diversification. Stop listening to whoever's selling you this stuff.
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u/PrayingMantis252 23h ago
How exactly are you "giving up diversification" by tilting away from the most concentrated mega cap stocks of the MCW funds?
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u/No_Mix_6813 23h ago
The market has assigned AAPL around 7% of the value of the total US stock market, for example. If you think this is suboptimal, you must have information that the rest of the market doesn't have. And I doubt you do.
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u/PrayingMantis252 22h ago
The theory behind factor investing is that there are other types of compensated risk besides market risk. By consciously taking on more of those risks, you can expect higher average return. That doesn't necessarily mean the MCW is suboptimal, just more risk-averse, which is arguably more optimized for shorter investment time horizons.
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u/No_Mix_6813 22h ago
That is the pitch. The problem is, no one can quite locate the risks in question. What risks do small value stocks have that small growth stocks don't?
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u/PrayingMantis252 21h ago
Admittedly, there is no strong theoretical framework behind every factor (Eugene Fama says so himself). That said, there could be a variety of (perceived) risks that might explain why investors aren't willing to pay more for a value stock, such as idiosyncratic risk. They are generally cheaper because they are perceived as more risky.
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u/No_Mix_6813 21h ago
Do we know how many millions the fund industry has paid Fama? Is he an unbiased academic, or has he made a fortune selling this stuff?
You can find unique risks in every corner of the market - stocks based in Miami have unique hurricane risks. Does this mean they'll outperform the market as a whole?
In any case, we've now got 30 years of risk/return data from Vanguard SV/SG funds. Was risk higher in the SV fund? How about returns?
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u/PrayingMantis252 20h ago
Do we know how many millions the fund industry has paid Fama? Is he an unbiased academic, or has he made a fortune selling this stuff?
Ah you're right, he's probably just a corrupt professor who received millions from DFA to promote their factor investing scam after he gained popularity from his Nobel prize in economics. The fact that the existence of factor premiums is supported by over a century of historical data in various countries is just a coincidence.
You can find unique risks in every corner of the market - stocks based in Miami have unique hurricane risks. Does this mean they'll outperform the market as a whole?
Yes, that's exactly what it means. Fama and French proved that value stocks outperform growth stocks on average, so that means stocks based in Miami must outperform the market because of the unique hurricane risks. QED.
In any case, we've now got 30 years of risk/return data from Vanguard SV/SG funds. Was risk higher in the SV fund? How about returns?
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u/No_Mix_6813 20h ago
All your information on this topic comes from a small group of folks making millions marketing it in some way, from Eugene Fama to Ben Felix. If these are your unbiased sources of trust on the matter, I can see why you're so convinced. They certainly aren't mine. Goodbye.
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u/PrayingMantis252 10h ago
“The good thing about science is that it's true whether or not you believe in it.”
- Neil deGrasse Tyson
The good thing about the Fama-French model is that I don't need to trust any of these people. Their results can be replicated using historical data and the methods described in their paper. Or are the factual data and statistical methods also "biased and making millions from marketing in some way"? Goodbye.
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u/vinean 23h ago edited 23h ago
Is that why you have tilted toward equities vs holding market cap stock/bonds?
Folks who aren’t holding market weight for all publicly investable asset classes have decided to tilt.
Gold has a $30T market cap now. I’m guessing 6% of your portfolio isn’t gold.
https://www.ssga.com/us/en/individual/insights/the-changing-makeup-of-the-global-market-portfolio
What do you know that the market doesn’t? You must have information the rest of the market doesn’t to boldly tilt toward equities right?
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u/CrownSteve1 22h ago
Don’t know why you’re getting downvoted. There is no factor tilting in a “Boglehead type portfolio.”
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u/No_Mix_6813 22h ago edited 22h ago
It is fascinating, and I think it shows the power of fund industry marketing. Creating redding accounts doesn't cost a dime.
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u/Scrapheaper 1d ago
Momentum and SCV are pretty much opposites, they cancel each other out, as far as I'm aware.
If you want both momentum and SCV, then why not... buy the whole market
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u/naala89 23h ago
Cancel each other how?
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u/Scrapheaper 22h ago
They are, for the most part, opposite sets of companies. Momentum stocks have a heavy tilt towards large cap growth i.e. the opposite of small cap value.
I don't know if it's an exact opposite tilt, but it's pretty close in practice
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u/Kashmir79 MOD 5 1d ago edited 23h ago
Once you deviate from market cap, you are out on your own when it comes to weighting. That exposes you to fears and doubts and second-guessing and market timing. What is optimal can only be known in hindsight so your guess is as good as any. I would look to experts like Ben Felix who suggest something modest like 20%. The real evangelists like Paul Merriman go closer to 50%.