Bayesian Investor’s recommendations are actually pretty similar to the more advanced portfolio recommended in Ben Todd’s post Common investing mistakes in the effective altruism community. The article recommends “[adding] tilts to the portfolio for value, momentum and low volatility (either through security selection or asset selection or adding a long-short component) and away from assets owned for noneconomic reasons” as an advanced move that should only be done if “you know what you’re doing.”
These articles reach fairly similar conclusions because academic research indicates that these strategies have historically outperformed market capitalization–weighted indexes (commonly known as “the market”). Various theories exist about why these strategies outperformed historically and whether they can be expected to outperform in the future.
Your observation that investing is important for EA because it can significantly increase funding for the EA community is why I’m working on Antigravity Investments, a social enterprise with the goal of improving investment returns in the EA community. Right now, we’re picking the lowest hanging fruit by recommending that EA organizations move low-interest cash reserves into high-interest and low-risk savings options (see my EA forum article), which is essentially a guaranteed 2.5% improvement in returns every year at current interest rates. If we shift $15 million in cash, that’s another $1 million in direct funding for high impact charities over three years.
Interestingly enough our most recommended option is both safer and higher interest than storing large amounts of cash in a checking account.
While there may be obvious things that EAs should be doing, unfortunately it is very difficult to invoke behavior change. My current approach to behavior change with regards to investing is to have an organization with specific expertise in investing help other EAs and EA organizations implement sensible recommendations. This approach seems to be more effective than writing articles online since it removes the prerequisites of having adequate expertise and time to learn about and implement sensible investing practices.
I wrote the high-yielding cash equivalents article because the recommendation seems particularly easy and obvious to implement. So far, although my article was well received, I haven’t heard from any EA organization that has attempted to implement the recommendation based on reading the article, although organizations I’ve directly reached out to in the past have implemented the recommendation. I’m currently in the (very slow) process of doing more direct outreach to EA organizations to determine for them (and for us) whether our recommendation is worth implementing.
To answer your question about whether the advice is worth following, my personal opinion is that some of Bayesian Investor’s recommendations are worth diversifying (tilting) into at a level that reflects each investor’s confidence about how likely the anomaly will persist into the future. The low volatility factor in particular has achieved very high out-of-sample risk-adjusted and absolute returns, which is promising, but of course a prolonged period of underperformance could be on the horizon—hence the importance of diversifying.
I’m wondering why Todd suggests that “adding tilts to the portfolio for value, momentum and low volatility (either through security selection or asset selection or adding a long-short component) and away from assets owned for noneconomic reasons” should only been done if you know what you’re doing. Bayesian Investor’s recommendations seem to do this without requiring you to be very knowledgeable about investing.
It takes a certain degree of investment knowledge and time to form an opinion about the historical performance of different factors and expected future performance. It also requires knowledge and time to determine how to appropriately incorporate factors into a portfolio and how to adjust exposure over time. For example, what should be done if a factor underperforms the market for a noticeable period of time? An investor needs to decide whether to reduce or eliminate exposure to a factor or not. Holding an investment that will continue to underperform is bad, but selling an investment that is experiencing cyclical underperformance is a bad timing decision which will worsen performance each time such an error is made.
As a concrete example, the momentum factor has had notable crashes throughout history that could cause concern and uncertainty among investors that were not expecting that behavior. Decisions to add factors to portfolios need to take into account maintaining an appropriate level of diversification, tax concerns (selling a factor fund could incur capital gains taxes, and factor mutual funds will pass capital gains the fund incurs while following factors onto investors whereas factor ETFs almost definitely won’t), and the impact of fees, among other considerations.
It takes a certain degree of investment knowledge and time to form an opinion about the historical performance of different factors and expected future performance.
People who are knowledgeable about investing, e.g. Ben Todd and Bayesian Investor, have already formed opinions about the future expected performance of different factors. Is there something wrong with non-advanced investors just following their advice? Perhaps this wouldn’t be optimal, but I’m having a hard time seeing how it could be worse than not adding any tilts.
It also requires knowledge and time to determine how to appropriately incorporate factors into a portfolio and how to adjust exposure over time.
If a non-advanced investor using the recommended tilts merely maintains their current level of exposure and they shouldn’t have, it seems unlikely to me that such an investor would end up under-performing a strategy that uses no tilts by much; even if the tilts no longer provide excess returns, I don’t see why they would end up doing *worse* than the market. And perhaps eventually some knowledgeable investor would make a blog post saying you should stop adding tilts towards those factors.
The potential downside (and upside) of diversifying by adding some tilts and consistently sticking with them is limited, so I don’t see a major problem with “non-advanced investors” following the advice. Investors should be aware of things like rebalancing and capital gains tax; perhaps “intermediate investor” is a better term.
There are various frameworks like the transtheoretical model (TTM) that try to explain why individual behavior change is difficult. There are many prerequisites to change, like making people aware there may be an issue in the first place, convincing them that the possible problem is an actual problem, persuading them that the issue is urgent enough they should work on it in the near future, and helping them develop an effective plan of action. There are reasons why people do not proceed ahead at every step of change, like smokers believing that smoking is not harmful to them, or a perceived lack of urgency or time to implement changes in the near future. This problem may be magnified within organizations because multiple people within an organization often need to agree that change is necessary and should be implemented before anything gets done, and anyone that disagrees in the chain of command could prevent the intended change from happening.
Bayesian Investor’s recommendations are actually pretty similar to the more advanced portfolio recommended in Ben Todd’s post Common investing mistakes in the effective altruism community. The article recommends “[adding] tilts to the portfolio for value, momentum and low volatility (either through security selection or asset selection or adding a long-short component) and away from assets owned for noneconomic reasons” as an advanced move that should only be done if “you know what you’re doing.”
Likewise, Bayesian Investor’s recommended portfolio heavily involves low-volatility and fundamentally weighted (value-tilted) ETFs.
These articles reach fairly similar conclusions because academic research indicates that these strategies have historically outperformed market capitalization–weighted indexes (commonly known as “the market”). Various theories exist about why these strategies outperformed historically and whether they can be expected to outperform in the future.
Your observation that investing is important for EA because it can significantly increase funding for the EA community is why I’m working on Antigravity Investments, a social enterprise with the goal of improving investment returns in the EA community. Right now, we’re picking the lowest hanging fruit by recommending that EA organizations move low-interest cash reserves into high-interest and low-risk savings options (see my EA forum article), which is essentially a guaranteed 2.5% improvement in returns every year at current interest rates. If we shift $15 million in cash, that’s another $1 million in direct funding for high impact charities over three years.
Interestingly enough our most recommended option is both safer and higher interest than storing large amounts of cash in a checking account.
While there may be obvious things that EAs should be doing, unfortunately it is very difficult to invoke behavior change. My current approach to behavior change with regards to investing is to have an organization with specific expertise in investing help other EAs and EA organizations implement sensible recommendations. This approach seems to be more effective than writing articles online since it removes the prerequisites of having adequate expertise and time to learn about and implement sensible investing practices.
I wrote the high-yielding cash equivalents article because the recommendation seems particularly easy and obvious to implement. So far, although my article was well received, I haven’t heard from any EA organization that has attempted to implement the recommendation based on reading the article, although organizations I’ve directly reached out to in the past have implemented the recommendation. I’m currently in the (very slow) process of doing more direct outreach to EA organizations to determine for them (and for us) whether our recommendation is worth implementing.
To answer your question about whether the advice is worth following, my personal opinion is that some of Bayesian Investor’s recommendations are worth diversifying (tilting) into at a level that reflects each investor’s confidence about how likely the anomaly will persist into the future. The low volatility factor in particular has achieved very high out-of-sample risk-adjusted and absolute returns, which is promising, but of course a prolonged period of underperformance could be on the horizon—hence the importance of diversifying.
I’m wondering why Todd suggests that “adding tilts to the portfolio for value, momentum and low volatility (either through security selection or asset selection or adding a long-short component) and away from assets owned for noneconomic reasons” should only been done if you know what you’re doing. Bayesian Investor’s recommendations seem to do this without requiring you to be very knowledgeable about investing.
It takes a certain degree of investment knowledge and time to form an opinion about the historical performance of different factors and expected future performance. It also requires knowledge and time to determine how to appropriately incorporate factors into a portfolio and how to adjust exposure over time. For example, what should be done if a factor underperforms the market for a noticeable period of time? An investor needs to decide whether to reduce or eliminate exposure to a factor or not. Holding an investment that will continue to underperform is bad, but selling an investment that is experiencing cyclical underperformance is a bad timing decision which will worsen performance each time such an error is made.
As a concrete example, the momentum factor has had notable crashes throughout history that could cause concern and uncertainty among investors that were not expecting that behavior. Decisions to add factors to portfolios need to take into account maintaining an appropriate level of diversification, tax concerns (selling a factor fund could incur capital gains taxes, and factor mutual funds will pass capital gains the fund incurs while following factors onto investors whereas factor ETFs almost definitely won’t), and the impact of fees, among other considerations.
People who are knowledgeable about investing, e.g. Ben Todd and Bayesian Investor, have already formed opinions about the future expected performance of different factors. Is there something wrong with non-advanced investors just following their advice? Perhaps this wouldn’t be optimal, but I’m having a hard time seeing how it could be worse than not adding any tilts.
If a non-advanced investor using the recommended tilts merely maintains their current level of exposure and they shouldn’t have, it seems unlikely to me that such an investor would end up under-performing a strategy that uses no tilts by much; even if the tilts no longer provide excess returns, I don’t see why they would end up doing *worse* than the market. And perhaps eventually some knowledgeable investor would make a blog post saying you should stop adding tilts towards those factors.
The potential downside (and upside) of diversifying by adding some tilts and consistently sticking with them is limited, so I don’t see a major problem with “non-advanced investors” following the advice. Investors should be aware of things like rebalancing and capital gains tax; perhaps “intermediate investor” is a better term.
Interesting. Do you have any thoughts on why it’s so hard to invoke behavior change?
There are various frameworks like the transtheoretical model (TTM) that try to explain why individual behavior change is difficult. There are many prerequisites to change, like making people aware there may be an issue in the first place, convincing them that the possible problem is an actual problem, persuading them that the issue is urgent enough they should work on it in the near future, and helping them develop an effective plan of action. There are reasons why people do not proceed ahead at every step of change, like smokers believing that smoking is not harmful to them, or a perceived lack of urgency or time to implement changes in the near future. This problem may be magnified within organizations because multiple people within an organization often need to agree that change is necessary and should be implemented before anything gets done, and anyone that disagrees in the chain of command could prevent the intended change from happening.