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.
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.