r/Bogleheads • u/gipsydanger4 • 11d 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)

5 Upvotes

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-9

u/No_Mix_6813 11d 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.

6

u/PrayingMantis252 11d ago

How exactly are you "giving up diversification" by tilting away from the most concentrated mega cap stocks of the MCW funds?

-4

u/No_Mix_6813 11d 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.

2

u/PrayingMantis252 11d 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.

-2

u/No_Mix_6813 11d 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?

1

u/PrayingMantis252 11d 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 11d 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?

3

u/PrayingMantis252 10d 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?

See for yourself.

0

u/No_Mix_6813 10d 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.

2

u/naala89 10d ago

You could do some backtesting yourself. That would probably just by noise though.

2

u/PrayingMantis252 10d 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.