What caught my eye this week.
According to the reliably provocative Cullen Roche at Pragmatic Capital, factor picking is the new sector picking for flighty trader types.
And the problem with that, Roche writes, is:
“Predicting factors isn’t just identifying known sectors of the market. Factors are moving targets that require an even greater degree of asset forecasting than sectoral picking.”
Roche includes a new chart from Northern Trust [PDF], showing how factor returns have been all over the place from year to year:
Clearly active investors are going to have to be channeling Mystic Meg to successfully switch from factor to factor in advance, given that chart. The vast majority will surely fail.
What about passive investors?
My co-blogger has made the case for adding a factor tilt to your portfolio (he prefers the term return premiums) whereas Monevator contributor Lars Kroijer is skeptical, and suggests you stick to simple market-cap weighted indices.
Your choice. But if you do decide to add a factor tilt to your index portfolio, then I’d suggest it’s best to commit to your strategy for the long-term and rebalance as required.
Clearly some years are going to be bad years, even if overall the allocation pays off.
From Monevator
The Slow and Steady passive portfolio update: Q2 2017 – Monevator
Why I don’t use the FIRE acronym for financial freedom [Good comments, too] – Monevator
From the archive-ator: You don’t have to go nuclear on working for a living – Monevator
News
Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1
UK faces tightest squeeze on household finances in five years – Guardian
£1,000 cash in a savings account in 2007 now worth £878 in real terms – Guardian
Some Shard apartments are still empty, five years on – Guardian
10 ways HMRC can tell if you’re a tax cheat [Search result] – FT
Mel B has “wiped out” her estimated £50m Spice Girls fortune, LA court told – Telegraph
If you hold AIM shares and noticed weird quotes this week, here’s why [Forum] – Stockopedia
NIMBYs told Tory building plans could boost the value of their homes – Telegraph
What happened to the BTL tax backlash? It’s getting cheaper to rent! – Telegraph
Family of four needs “at least £40,800” a year, says think tank – Guardian
Graduates in England face decades repaying £60,000 of student debt – Bloomberg
Products, taxes, and services
Tesco revamps Clubcard scheme, adds Uber to list of reward partners – ThisIsMoney
Are you taxed on a divorce settlement? No, but beware wrinkles – Telegraph
Would you gamble on HSBC’s new 0.99% tracker mortgage? – ThisIsMoney
Virgin’s Manchester United bond triples 1% return if it does double – Professional Advisor
Funeral plans could be “the latest mis-selling con” – ThisIsMoney
HSBC and Investec have joined the ranks of the robo-advisors – ThisIsMoney
Charity opt-out service launched to crack down on donation requests – Guardian
Amazon is promising its usual raft of offers for its made-up festival, Prime Day – Amazon
Comment and opinion
What I learned from my ‘faux-tirement’ – Morningstar
The awesomeness of not being important – Think Save Retire
Why consumer goods giants will pay Clooney-Tunes prices for rivals – Value Perspective
How to save for retirement with a lumpy income – Liberate Life
Preview of the upcoming How to Retire at 40 broadcast on 10 July – ThisIsMoney
The case for selling out of Morrisons shares – UK Value Investor
The broadest markets offer the best likelihood of expected returns – Fortune Financial
Good decisions can have bad outcomes (and vice versa) – Oblivious Investor
Excess indexing? The stock market has entered Bizarro World – Bloomberg
In real estate – rent luxury, buy utility [US data but interesting] – Financial Samurai
“Drunk with internet riches, hall-of-fame investor Stanley Druckenmiller plowed an additional $6 billion into tech stocks in March 2000. The bubble burst just days later and he lost $3 billion. When asked what he learned from that experience, Druckenmiller replied, “I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself.” – Bloomberg
Off our beat
Seems young men are skipping work for superior video games – New York Times
More from Tim Hartford: Fantasy gaming can be better than a job [Search result] – FT
Alain de Botton Tweets ironically about banks leaving UK. Brexiteer misses joke – Twitter
Economist Milton Friedman predicted the failure of the bloody War on Drugs – AE Ideas
And finally…
“A part of all I earn is mine to keep.’ Say it in the morning when you first arise. Say it at noon. Say it at night. Say it each hour of every day. Say it to yourself until the words stand out like letters of fire across the sky.”
– George S. Clason’s classic The Richest Man In Babylon is just 99p on Kindle
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- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]
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Another good bunch of links – thanks!
I didn’t get Bloomberg’s article about excess indexing causing the stock market to act strangely. Are they saying that too much capital is flowing into equities as an asset class through index funds (and so presumably dubious businesses can get easy access to equity capital simply by going public and being included in a whole market index)? Or are they saying that a disproportionate amount of capital is flowing into the shares that are included in a popular equity index (e.g S&P 500) compared to the rest of the market, and the business fundamentals of the actual companies do not support the difference in the valuations between those companies whose stock is included in a popular index and those that that are part of a less popular index? If it’s the latter, wouldn’t something like a whole market ETF solve the problem?
> Good decisions can have bad outcomes (and vice versa) – Oblivious Investor
short story on this:
http://xa.yimg.com/kq/groups/23571577/1945910851/name/The+Facts+of+Life1.pdf
I agree with Cullen Roche and Cliff Asness and disagree with Rob Arnott. Factor timing/picking is very hard/dangerous. http://www.institutionalinvestor.com/article/3670089/asset-management-macro/cliff-asness-blasts-rob-arnott-on-factor-timing.html#/.WWDGIlFLeid
If You believe any factor stick to it through thick and thin. You can be sure there will be very long and painful periods of underperformance and outperformance is not guaranteed. No pain no gain.
Thanks for the links this week, TI. I must say the thing that’s stayed with me most this week is from mid-week: the Scott Adams quintumvirate of diet exercise sleep schedule flexibility and imagination. I’m not sure it’s 100% right but it’s not a bad flag to sail under in until something better comes along.
It’s great to have a reprise of the factor returns chart — I’ve long filed away factor investing as either too expensive to achieve in reality or simply a form of market timing. That said, I like trying to time the market — unsuccessfully so far although one day S&P500 and gilts will stop defying what I imagine to be gravity.
“Virgin’s Manchester United bond triples 1% return if it does double”. That raised a grin.
Quantitative analysis of the Northern Trust “scatterplot” of factor-based return rankings backs Lars K’s contention. If we’re right in thinking that the factor which tops the ranking in any given year is just random, then as there are 6 factors, each has a 16.7% chance of topping the rankings in any given year. The apparently impressive appearance of “Value” topping the rankings in five out of the 11 years then carries a so-called p-value of around 0.03, which is statistically significant – and by conventional scientific standards is worth taking seriously. But before anyone piles into value equities (as if…), it’s worth noting that they also come at the bottom of the heap in five out of 11 years, which is also statistically significant. (Statisticians will tell you “significance” isn’t that, well, significant in any case). In short, the scatter diagram of rankings looks random because the rankings are more or less random, and trying to pick winners is inadvisable to say the least.
This backs Lars K’s contention that one should just ignore all this second-order stuff about factors. But further backing comes from a comparison of the returns of the various factors over the 11 years covered. This shows that the sheer volatility of the returns of the various factors, combined with their absolute values is such that there’s no real difference between any of them.
In short – it’s hard to spot the right factor to back…and pointless in the long run in any case.
The Richest man in babylon was one of the first books I read on Kindle as it was a “free classic” back then. Now it’s 99p – ironic?
I got the general message but it was a bit hard to digest as I recall. Maybe worth another try though now with a fresh pair of eyes!