Factor Investing

I'm big into factor investing. It really fits with FI because you're eliminating waste. Just have to be careful, some are better then others. I personally use SPMO and IUS. different lenses on each.

I came across a decent article that discusses the process of elimination in portfolios. It most discussed eliminating small caps but the logic applies to factor investing as well.

Data supports Factor-based investing. The current issue for investors is the fees on the Factor-centric funds are too high to account for the slightly better outcomes. As more Factor-based ETFs are created, with increased competition and increased management efficiency, fees will come down slightly. At that point, it will be obvious that the best practice way to invest in Early-Mid Accumulation Phase will be to just do that Factor-based investing via one or few ETFs designed for that.

A review of Warren Buffet's deals found that most of his gains can be explained away with Factor-based investing, even if that isn't the methodology he was thinking he was using.

I can see most of you talk about small cap here, but momentum is also considered factor investing I think. Global Equities Momentum (GEM) strategy is proven to generate somewhat better returns than simple passive investing. Also known as dual momentum, it asks to track the return of some indexes (e.g. Developed Markets / Emerging Markets / bonds, or US stocks / ex-US stocks / bonds) over a specific period (e.g. 1 year back) and always switch your entire portfolio to the one that performs best in this metric.

I was considering using GEM for part of my portfolio, but I eventually decided to stay with classic passive investing, because GEM has following disadvantages:

• It may be very difficult psychologically, if you need to switch your entire portfolio and you see a loss since the previous switch, because that signal turned out to be a bad prediction of the future.
• On the other hand, if you sell with a gain, you may need to pay lots of capital gain tax quite often (unless you do it on a tax advantage account).

I'm not much into Factor Investing, but I'd highly recommend the Rational Reminder podcast. It's run by a Canadian wealth management firm, but they're investment strategy is just owning Dimensional funds. It's a great podcast on investing regardless with interviews with many financial heavyweights, but it will defintily discuss the pros and cons of factor investing

This may be slightly unrelated, but I have always wondered if P.E. ratios should be looked at differently after we got off the gold standard. It just seems unfair to compare P.E. ratios for the 30s to the inflation fueled fever dream we live in now.

If you want to hold just one fund, then yes, factor tilts with a solid fund like AVUS or AVGE probably work, or at least won’t hurt you. Maybe 1-2% alpha, which can significant when compounded over a long period.

When you hold a more diversified portfolio, factors must be part of the strategy, but in a different way. For instance, pairing VUG with AVUV yields a better return than either alone.

I actually really flip flopped back and forth on this. I ultimately came to the conclusion that these factor tilts rarely add positive alpha to a portfolio. Not to say they can't but I think the value premium is pretty tight. Back in the day when you had to buy these funds from DFA through an advisor it was a toughs sell. If you want to add some factor tilt ETFs there is absolutely nothing wrong with that, but keep something like VTI and VXUS and your core holdings.

I actually used to buy DFSV and AVDV, but recently sold after reading this Big ERN blog post.

Small-Cap Value Stocks: Diversification or Di-WORSE-fication? - Early Retirement Now

Small-cap value (SCV) stocks got a lot of publicity in the FI/FIRE community. Don't buy the hype! SCV's recent performance has been atrocious!

Early Retirement Now

I have had conversations with others and it just seems like a lot of hassle when I want a very hands off accumulation portfolio.

Factors are the chocolate chips in an oatmeal cookie. They are the specific components of broad asset classes that are responsible for returns so factor investing boosts the benefits of modern portfolio theory.

Factor investing isn't mutually exclusive with passive index investing. Funds like VTWO use as their benchmark the Russell 2000 index which tracks small-minus-big (SMB). Funds like VBR use as their benchmark the CRSP US Small Cap Value index which combines SMB with high-minus-low (HML).

While there are passive funds for some factors, other factors like up-minus-down (UMD) a.k.a., momentum are available only as actively managed. Even for factors that are available as passive, you can get more juice for the squeeze if you pay for active management. AVUV for example (EXP 0.25%) is similar to VBR (EXP 0.05%) in that it invests in US small-cap value but it also filters for robust-minus-weak (RMW) a.k.a., profitability. So far, AVUV appears to be worth paying a bit extra in expense ratio for that tilt toward profitability.

Two excellent resources that will teach you about factor investing are the book Your Complete Guide to Factor-based Investing by Berkin and Swedroe and the Risk Parity Radio podcast which is hosted by @UncleFrank. The book is very educational and very dull. While I do recommend reading it, White Coat Investor has a great book review that will give you the CliffsNotes version. The RPR podcast is very educational and (I think) very entertaining. Check out episode 363 for a discussion on implementing factor investing in your portfolio.