Who Should NOT Invest in Total Market Index Funds?

Meet with PWL Capital: calendly.com/d/3vm-t2j-h3p
I have told you in many of my videos that low-cost total market index funds are the most sensible investments for most people - just own the market. I stand by that statement, but as true as it is, there is a lot more nuance to making good asset allocation decisions. How do you know if you’re like most people? And if you’re not like most people, how should your portfolio be different from the market?
Check out the video posted on Rational Reminder: • Who Should NOT Invest ...
Episode 169 with John Cochrane: • RR # 169 - John Cochra...
Episode 200 with Eugene Fama: • RR #200 - Prof. Eugene...
Episode 234 with Robert Merton: • Prof. Robert C. Merton...
Episode 220 with Jonathan Berk: • RR#220 - Jonathan Berk...
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Sources:
Markowitz, H. (1952), PORTFOLIO SELECTION*. The Journal of Finance, 7: 77-91. doi.org/10.1111/j.1540-6261.1...
Sharpe, W.F. (1964), CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*. The Journal of Finance, 19: 425-442. doi.org/10.1111/j.1540-6261.1...
Merton, R. C. (1973). An Intertemporal Capital Asset Pricing Model. Econometrica, 41(5), 867-887. doi.org/10.2307/1913811
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56. do.org/10.1016/0304-405x(93)9...
Chen, N., & Zhang, F. (1998). Risk and Return of Value Stocks. The Journal of Business, 71(4), 501-535. doi.org/10.1086/209755
ZHANG, L. (2005), The Value Premium. The Journal of Finance, 60: 67-103. doi.org/10.1111/j.1540-6261.2...
YOGO, M. (2006), A Consumption-Based Explanation of Expected Stock Returns. The Journal of Finance, 61: 539-580. doi.org/10.1111/j.1540-6261.2...
Campbell, J. Y., & Vuolteenaho, T. (2004). Bad Beta, Good Beta. American Economic Review, 94(5), 1249-1275. doi.org/10.1257/0002828043052240
BETERMIER, S., CALVET, L.E. and SODINI, P. (2017), Who Are the Value and Growth Investors?. The Journal of Finance, 72: 5-46. doi.org/10.1111/jofi.12473
Betermier, Sebastien and Calvet, Laurent E. and Knüpfer, Samuli and Soerlie Kvaerner, Jens, What Do the Portfolios of Individual Investors Reveal About the Cross-Section of Equity Returns? (February 24, 2022). Available at SSRN: ssrn.com/abstract=3795690 or dx.doi.org/10.2139/ssrn.3795690
Jensen, Theis Ingerslev and Kelly, Bryan T. and Pedersen, Lasse Heje, Is There a Replication Crisis in Finance? (February 2021). NBER Working Paper No. w28432, Available at SSRN: ssrn.com/abstract=3781319

[@umbertopappalardi8667]

Ben Felix is the only person standing between me and bad investment decisions.

[@BenFelixCSI]

😂

[@oldgreg315]

​@@hasben0why do I get the feeling your investment outcomes are inexplicably worse than Ben's..

[@testacer5101]

@@hasben0 many factors perform well out of sample and the literature is very aware of skewed distributions

[@AHMADbg]

I can relate HARD

[@hasben0]

@testacer fair. How many factors are we talking about🤔🤔 and at point, do we say its random?

[@IncomeBoost42]

I’m glad you’re posting videos again! I was so looking forward to it 😊

[@ReisseT]

BASED FELIX THE FINANCIAL FATHER FIGURE WE NEVER HAD. Big thanks from a young Canadian guy. You have single handedly made me interested in financial literacy and educated in the subject matter. And the rational reminder podcast is a blessing to listen to. Thank you Ben.

[@LurchLures]

That's funny. I was just thinking how is someone so young giving such sensible advice. But then I'm about twice his age and used to listening to Charlie and Warren's videos for guidance.

[@David.Marquez]

It's always a good day when there's a new Ben Felix video!

[@jellovendigar]

Always so happy to see a new video from Ben. This one however was a little dense for me

[@AurelioPita]

The special ones. The problem is that everyone think they are special 😂

[@ajp642]

You have to be the best KZbinr that talks about passive indexing. There is so much new to learn and no recycled content

[@theotherview1716]

Rob Berger is great also.

[@jmc8076]

@@theotherview1716 Yes but not Canadian. Justin Bender of PWL has videos too.

[@markknecht9416]

As always, thanks for your insights and help

[@JonLuskin]

Amazing work, as always.

[@pepperleg]

You just know it's gonna be a banger Ben Felix vid when he starts out by referencing a paper from 1952.

[@impressivenow2000]

Perfect video, thanks a lot !

[@Diego-valdivia]

It's nice that you have given a name to giving time to constantly monitoring stocks, quarterly reports, and speculation in "Monitor cost". I've had this discussion with several highly intelligent friends that want to outperform everyone like good homo economicus but don't really understand the enormous opportunity cost implicit in giving 20-30 hours of attention per week at scanning numbers. Life is out there people, live it.

[@massafelipe8063]

First part of the video was a pure flex. I own IWQU and IWVL, (world sector neutral quality and world enhanced value) to achieve some exposure towards value and profitability but mostly feels like owning the market. And I bet that the difference won't be that much in the long run.

[@shun2240]

IWVL did outperform VWRA in 20 years, but I don't like that the sector weightings is identical to the market. It's a decent etf, but I am buying ussc instead for small cap value exposure

[@massafelipe8063]

@@shun2240 Yea, I have limited ETF availability through my bank so I have to compromise a bit. Besides, I really don't have the guts or conviction for small cap value since it seems that size doesn't matter if valuations are the same or so I have read.

[@shun2240]

@@massafelipe8063 yeah I was thinking of selling ussc and switching to IWVL, less hassle for me and it's way more liquid, but I would switch to global small cap value ucits etf if its available.

[@alexx2878]

Love this channel Ben, keep up the videos!

[@Sebastian-lb9qg]

Great video as always! :) I'm also considering to make educational videos. With which software do you cut and animate your videos? I love the style with you in the foreground and animations left and right of you.

[@WWC94]

Great summary of the podcast and a big fan of you, Cameron and your guests. The biggest question that comes to my mind is, how does the average investor and the iCAPM multi-factor-efficient portfolio look like (you have to know that to know in which direction of risk to shift your own portfolio, I guess)? If I my understanding is correct, you make the point that it's the market-cap-weighted one, if that is true, why? Since a big part of investors are institutional and got regulatory constraints, are these part of the average investor? It seems that government bonds are integrated through the risk-free-rate in the models? How does the additional risk through a.e. small cap (and) value stocks compare to a portfolio that is short on gov.bonds, while long on market-cap-weighted index-funds? Are both ways in the end the "same"?

[@BenFelixCSI]

The cap weighted portfolio is multifactor efficient for the average investor, but as you point out few, if any, individuals are the average investor. Short government bonds long market beta is different portfolio from long-only small cap and value. Either one could make sense for a given investor.

[@eltondang5286]

Excellent videos, I appreciate.

[@rduras]

Thank you for confirming that my path of value investing is a superior approach. Doing great so far, much much better than index funds.

[@alex2143]

You probably left this comment under the wrong video.

[@DIY_FInance_Guy]

Thanks Ben, great video. I’d love to hear your thoughts on sector tilting, specifically towards consumer staples and healthcare, both of which appear to have produced better returns and lower volatility for many many decades.

[@EgidioSalinaro]

It would be great to watch a video of you talking about the importance of rebalancing the portfolio VS rebalancing actually slowing the snowball effect of capitalization. Is there anything about that among academic literature?

[@D0NTsmokeCRACK]

Could a person with a guaranteed pension be considered not average? Would that guarantee enable them to take more risk assuming they could stomach the volatility. If so, do you believe adding 10-20% scv tilt, through an advantis fund, to something like a 60/20 US/EXUS would be enough to have any meaningful advantage? Asking for a friend. A very curious friend lol

[@carolinasoto6222]

You always have fantastic quality video's.

[@luckbeck3269]

I agree with you

[@funtechu]

This is basically my approach as I have a long investing time horizon. I predominantly have a total stock market portfolio, with a small overweighting in small cap value. There is sufficient historical evidence that such a portfolio will slightly outperform a total stock market approach. If you are interested in some of that analysis, Paul Merriman has great resources on the topic.

[@kvgolfa]

Which small cap value fund do you have? I just learned about this, and put 10% of my Roth into VBR. VIOV seemed better from my research but it was not available on Robinhood

[@PapaCharlie9]

First I've heard of ICAPM, pretty cool. Instead of an Efficient Frontier, it's like an Efficient Volume in multiple dimensions. Or I guess what's optimal is the intersection of the multifactor volume with the risk-free rate surface. Neat!

[@BenFelixCSI]

You nailed the explanation. I think it’s neat too! It also suggests that a portfolio is only optimal in the context of the investor who owns it.

[@PapaCharlie9]

@@BenFelixCSI And presumably where that investor is in the space varies over time. It's almost as if having a life-time relationship with a professional financial advisor to help you navigate your portfolio through the space is a necessity ... 😉

[@BenFelixCSI]

I don’t think it can be optimized that precisely, though your point is something that John Cochrane argued in one of his papers. He argued that if financial advisors want to be useful they should focus on this type of portfolio optimization rather than alpha seeking.

[@greg5892]

@@BenFelixCSIis that the Multifactor World paper?

[@kevinu.k.7042]

Great stuff. Thanks It would be good to here about Factor ETFs and Developed World:vs Whole World index funds.

[@MoementumFinance]

Very informative and well-researched, as always 😎😍👏

[@egal1780]

The best Investment Channel I know, thanks for keeping up the wondeful content.

[@RebeccaEvans]

You are appreciated

[@luckbeck3269]

You're appreciated.

[@samuel.andermatt]

So what is the tradeoff between taking risks by pivoting to value or taking on leverage?

[@josefbrolin7693]

What are your views on slightly levered market portfolio, for example having a 10-20% leverage? From what I have gathered this has been historically good for returns if one is willing to take on that extra volatility.

[@dietbajablast5790]

Even Ben had a chuckle that he FINALLY got to the question in the video title at 6:50 into the video.

[@BenFelixCSI]

🤣 had to do some background work before making the point.

[@dietbajablast5790]

@@BenFelixCSI Yes of course!

[@trafficspeaker9452]

So how can the portfolio be tilted towards value stocks? Besides VWCE, what should be added?

[@ericairwaterfire]

Quote that stuck out to me: "Owning the market is a hedge against being misinformed."

[@alankoslowski9473]

That's a decent argument, but to me the most compelling argument is simplicity. 'Your life is just a lot easier when you own the market.'

[@RobertAllen943]

@@alankoslowski9473 If you owned the market ( S & P 500 ) from 2000 to 2013 you made ZERO return ... Zero. That is indeed simple.

[@cowbellthunder]

Thanks for this, Ben. For sake of argument, even if I knew what my optimal factor allocation was, is there even a practical way for a DIY index investor to factor invest in a reasonably simple way?

[@evanwheeler7687]

ETFs from Dimensional Fund Advisors and Avantis provide some of the best options we have at the moment. You can find a number of Rational Reminder podcast episodes featuring guests from both fund managers.

[@alankoslowski9473]

If you're a US investor, an ETF like Avantis All Equity Markets (AVGE) is well-diversified across all factors including the market.

[@jweipjklawe4766]

Would be interesting to explore who is the "average investor", as it seems important for each person to judge if they're above or below average. If high income individuals and institutions own the majority of stocks, the average investor might be much richer (and able to absorb more risk) than people realize.

[@shawniscoolerthanyou]

Was thinking the same thing. I figure I can assume more risk because we are relatively young, frugal, highly paid DINKs. But I adjusted my risk/return by buying more stock (total market) and less bonds. But I don't know if I'm doing it right, since he didn't mention that at all.

[@zvxcvxcz]

"If high income individuals and institutions own the majority of stocks, the average investor might be much richer (and able to absorb more risk) than people realize." Sort of... but it isn't a useful observation because what we need to figure out is where we are relative to this average investor... I would NOT conclude from this that most investors could absorb more risk, this would not be correct. It would suggest that there are few investors that are actually average investors because the average is skewed high. This means that the typical (or median) investor has less wealth than the average investor and so they can generally handle less risk. Extreme cases like Bezos, Gates, and so forth, skew the average high and I don't think anyone is surprised that those people can handle a lot of risk. In December of 2022 NerdWallet wrote: "The average net worth for U.S. families is $748,800. The median - a more representative measure - is $121,700." Your typical (read median) investor can't take risk like he's swinging 750k, but more like 120k (presuming for simplicity that all families are investors, which they are not of course, but it is the same story among investors).

[@tthiago1982]

Hi Ben! Thanks for the informative content! I own a small software company in Brazil which is my main source of income. Of course I am exposed to a lot of risks. This means that I should tilt my personal investments towards bonds? Or the low-cost total market index funds + a bit of small cap and value stock ETFs still applies to my case? Thank you!

[@arjunsatheesh7609]

Based on the video, it is a question of how much risk are you willing to take with your investments and how much time can you spend monitoring your portfolio. If you want less risk or don't have enough time to monitor then go for low-cost index funds. If you have the risk appetite and a few hours to spend every 3 - 4 days (at least) to monitor the stocks then maybe tilt to small cap value picking. If we add the 'circle of competence' concept, you could pick stocks in the software field in other countries or pick stocks that would do well in case some risks to your business plays out. For example, I imagine that your competitors would do better if your business fails so you could buy your competitors stock. Then if and when you do well, you could buy them out 😂 Just sharing a thought - not recommending that you (or anyone else) do this. I think the whole point of this video is more "Know yourself as an investor".

[@tthiago1982]

@@arjunsatheesh7609 Thank you. Makes total sense!

[@simonp6339]

​@@arjunsatheesh7609 Most professionals underperform with stockpicking, so this isn't something I'd advise anyone to do. Just go for low-cost world market cap index funds. If you really want this risky bet, get a fund for it and mix it into the index funds, don't try to do it yourself.

[@simonp6339]

@@tthiago1982 I hope this didn't make you go for stockpicking instead of low cost index funds, as I wrote in another comment, haha. If anything, you can mix some of that into your mostly index fund portfolio. Most professional fund managers underperform indexes with stockpicking.

[@Tomas-tx6lq]

Great video. Let’s say I have a higher risk tolerance and want to invest in value investing. Is stock picking the only option? Or can I find an index which tracks value stocks like small cap index or similar? Keep up the great work 👍 Greetings from Sweden 🇸🇪

[@BenFelixCSI]

There are index funds and systematic active funds that do this in a diversified and low-cost way. DFA and Avantis are the leaders in the space.

[@Cael-nr9vo]

@@BenFelixCSI Hi, are there any good small cap value funds in Canada that you recommend? I believe that the currency conversion cost, the withholding taxes on dividends and the increased complexity of investing in AVUV and the like does not make sense for canadian investors

[@simonp6339]

There are also ETFs for this, MSCI World Value, USA Small Cap Value, Europe Small Cap Value, etc. (not value but other factors: World Momentum, multi-factor ETFs like JPMorgan Global Equity Multi-Factor) Of course you wouldn't put 100% in any single of these ETFs, but adding a certain allocation percentage to these would likely increase the fit to the higher risk tolerance and higher expected return you are apparently looking for. (but as the video says, it also increases risk and volatility, so if you would panic sell in a downturn, forget about it. You should be able to endure potential downturns)

[@rileydinsdale1252]

Hey mate, really enjoy your videos. Learn a lot. Can you explain the research behind rebalancing - ie; is it worth rebalancing, if so, what period of rebalancing is shown to work and why? How does this affect overall returns? Cheers, from Australia!

[@alankoslowski9473]

Even though I'm not Ben, I thought I'd let you know what I know. I don't know if this applies to Australia, but a few months ago Morningstar compared the volatility of different re-balancing frequencies. They didn't find a significant differences for more frequent than annually, so annual re-balancing is probably fine.

[@pallmall8452]

Was that a fancy way of saying "YOLO, hit that risk button and get paid fam!"

[@bizzzzzzle]

You need to post more man!

[@susymay7831]

Nice video.

[@herkfsu]

“With CAPM pricing the market is the mean variance optimal portfolio.” I don’t understand this. CAPM is a model to account for risk and return. How does it necessitate stock weights?

[@neakor]

How about increasing risk factor by using leverage but still only using the total market fund?

[@anotherriddle]

Overall very well articulated. One point: There are not necessarily "true" pricing factors. When two factors are highly correlated those will both work for the same weights. There can be as many factors as stocks on the market. Any more and the system of equation is obviously overdefined and there will be factors that are highly correlated. For a good approximate model there will be far less factors necessary but the idea that there are pure or better factors is not really true.

[@WhatIsThis-zq4hk]

I understand the higher expected returns for riskier assets, but how do you explain the higher returns from consumer staples stocks even though they historically have LESS risk than the overall market? How is this not a free lunch? Why should I not allocate a large fraction of my portfolio to consumer staples stocks?

[@PapaCharlie9]

It's not a free lunch. It just means the risk-factor exposures of the sector have a different mix than for the market as a whole. There's a lot of value factor in staples. Over some time frames, like 1999 to today, that results in slightly higher rolling average return (15y 7.76% vs 8.63%, SPY vs XLP). But that isn't true for all time frames. For 2009 until today, all of the rolling averages, from 1y to 15y, have SPY beating XLP. This should not be surprising, since SPY had a historic bull run from 2009 to 2019. This is also consistent with the value factor performing better in the past than now. Another possible explanation is that staples benefit when money is expensive and lag when money is cheap (2009-2021).

[@marcoz326]

You always have fantastic quality video's. Can you do a deep dive on selling covered calls for income?

[@BenFelixCSI]

Yes! We covered this in a podcast episode and I will do a video on it. Here is the podcast: kzbin.info/www/bejne/h3naoICNgbinf6c

[@marcoz326]

@@BenFelixCSI Excellent, that's perfect! Thank you so much.

[@anaestereo810]

In times of turmoil, doubt and uncertainty, Felix at the rescue

[@dairysmoreta6108]

Yassssss!!! Welcome back! ❤

[@StrikingCrayon]

You make my job so much easier. Thank you!

[@Jason-gp4hg]

The three fund portfolio the best

[@joshr.5199]

Hey Ben! I have a compounding question for you… if something like Wealthsimple says a non dividend etf has a return of 50% over five years and you had invested 10000 dollars with no further contribution, would you then have $15000 or about $16486, if the market compounds daily? I guess what I’m asking is, does the market compound?

[@elmerjeanpierrelopezramire3002]

Is probably the first

[@Ouhterheaven]

Really the most instructive financial chanel on youtube. Thanks for your work! Here is my reasoning and I wonder if it makes sense, regarding value factor and Berskshire class B stock. Following what is said in this video, value is a factor that shows many advantages. As Berkshire Hathaway has a value investing strategy and an amazing track record, would it make sense to simply add some berkshire shares to a portfolio if I want to get exposure to value factor? And generaly speaking, considering track records of berkshire and their investing strategy, wouldnt it make sense to only invest in Berkshire stock? in my case, in addition to SP500 or total market ETF shares with a DCA strategy with a 30 year horizon (I am 34)

[@BenFelixCSI]

There are worse approaches, but I think Berkshire still has a lot of specific risk. A more systematic and diversified approach could give similar expected outcomes. See this paper papers.ssrn.com/sol3/papers.cfm?abstract_id=3197185

[@susymay7831]

Berkshire Hathaway figures to be an excellent passive investment for most people, meant to be held for decadea on end.

[@plurisdesign3210]

Hello, I have recently found your channel, is excellent, the only finances channel i would show my wife and family, i wonder if you could active the option of having audio in spanish. Great channel, I should retunr over and over on your videos for knowledge and advice. Thanks

[@rrcmha]

Hey Ben - Would VTWAX be a single fund, that meets all the criteria for global investment?

[@BenFelixCSI]

It’s an approximation of the equity market portfolio, so it makes sense for some investors but does not accomplish the multi factor tilts that I talk about in this video (which don’t make sense for all investors).

[@JakeSpradlin2]

Ben Felix is the man! I own the market.

[@MBusch]

What is ‘the average investor’?

[@anthonbyberg6]

When I sit and stare at logo of your sweatshirt fjällräven, and say to myself now we've reached Canada aswell! Joke aside great video as always!

[@Rm-cd8pl]

Ben, you have mentioned several times that home country bias can be good for some countries if the tax implications may support it. In the US, the implications are next to nothing. Does this mean you suggest a global market weighting for US investors who simply wants a diversified market portfolio?

[@BenFelixCSI]

There are some other reasons too. I need to do an updated home country bias video.

[@Rm-cd8pl]

@@BenFelixCSI that would be great. There are so many varying opinions that a simple "US citizens optimal home bias is x" from a respectable source like you would help a lot of people who are unsure and want an actual number we can shoot for.

[@chrisbilly1555]

This is nice

[@Jen-qb9cl]

Can you talk about vanguard target fund

[@nocontentfromoldman5595]

Hey Ben - did you buy that FR sweatshirt in Norway?

[@BenFelixCSI]

No, I got it here in Canada.

[@thecorrectoification]

Can't an investor do both? What about portfolios which are half Large Cap Growth and half Small Cap Value? Of course also using Index ETFs. A good example of this would be John Williamson's "Ginger Ale Portfolio", he also holds a 10% Treasury STRIPS tilt, but the focus seems to be primarily the balance between VOO and AVUV, aside from his international and emerging-VWO/AVES/AVDV.

[@asdfTheGreat]

What if you don't know as much as the average investor (but are learning determinedly fast) but also can take on more risk than the average investor? Does that make me doubly not the average investor, or does it kind of even out? What would someone with even less knowledge than average invest in, if not total stock market index fund? Like 80/20 with international.

[@jivko94]

Ben, how a non-canadian investor should diversify their portfolio if they don't have a home country TSX variant? I feel mine has gone too far into US-based companies currently and don't know if having a bigger percentage of Emerging markets for example is actually a good way to counter that US influence in the portfolio. Thanks and keep up the good work, you are one of the most level-headed and fact driven (not only financial but any type) of youtuber I've seen!

[@BenFelixCSI]

Thanks! It's tough to answer without knowing the specifics like costs and tax implications of different asset classes. I am a bit hesitant on overweighting EM.

[@zvxcvxcz]

They might have access to other markets through international brokerages like Interactive Brokers. That will be an option for investors in many (but not all) countries. Those that it isn't an option for, well, unfortunately those people likely live in countries with few financial options due to sanctions and there isn't much they can do. Edit: Yes, as Ben says, even if we assume access it is hard to answer about weighting and with what, especially since many countries are much smaller than Canada as well and my be even more concentrated when it comes to which industries are in their index, etc... They might consider a more regional fund as a replacement (like a Euro-wide fund rather than just an Italian one, etc...). And then there are of course the different tax considerations for them while investing from other countries. Personally I get some of my non-US exposure through VSGX, which "Seeks to track the performance of the FTSE Global All Cap ex US Choice Index," so it tracks global stocks excluding US ones, but this isn't a one size fits all thing. VSGX is also one that goes for ESG stocks, which also may not be for everyone.

[@kerri648]

ever thought about getting Coval et al since they wrote. paper about how retail investors can beat the market ?

[@user-zo2ge3oe8d]

The vanguard total market ETF is 63% US stocks. It seems the US has a more favorable business atmosphere and because of that I’m hesitant to take money out to invest in other areas.

[@alankoslowski9473]

That's not the only consideration. Ex-US markets are imperfectly correlated with the US, so provide beneficial diversification.

[@chronographer]

When you say 'average investor' is that more accurately 'average investing dollar'?

[@fredatlas4396]

Could just buying cheap total world index fund, and then have done satellite fund or funds in say ftse all world high yield index, or a health sector index The high yield index does appear to have a very high exposure to value stocks. Would this work

[@BenFelixCSI]

There are funds specifically designed to target priced risks. DFA and Avantis are the two companies making dedicated products in this space.

[@camus83489]

also value stocks are less volatile than growth stocks

[@timetraveller3063]

HSBC FTSE All World...Market cap weightings including Emerging markets. Also Legal and general global technology index and Scottish Mortgage Investment Trust for je ne sais quoi.

[@ss_websurfer]

Would it make sense to have an option like the XEQT (all-in-one ETF) and then add factor ETFS like AVUV and AVDV for additional price risk exposure? or would it have to be built separately? For example, having an ETF for the US market, Canada, emerging markets, and so on, and then the factor ETFS on top. Amazing video Ben!

[@BenFelixCSI]

You could definitely do it this way. Just need to be mindful of your overall exposures as you mix and match funds.

[@ss_websurfer]

@@BenFelixCSI Thanks for the response Ben!

[@ohjeohje3462]

sounds like clickbait, but its actually not :D

[@BenFelixCSI]

There are, in fact, lots of people who could be better off being different from the market.

[@TimmyMorinII]

Okay, but what are value stocks?

[@blumousey]

Stocks that seem to be underpriced when considering their fundamentals. There's lots of ways to define them, but that's the basic idea.

[@shawniscoolerthanyou]

If I can incur more or less risk, then why would I choose a different type of stock instead of changing my stock to bond ratio?

[@BenFelixCSI]

Not all risks are the same. They deliver different returns at different times, and risk premiums can deliver above market returns.

[@shawniscoolerthanyou]

@@BenFelixCSI That makes sense. Like the bond funds that were taking a beating. Thanks!

[@canadianmaple09]

4:05 for your mandatory mention of Fama and French.

[@skzion2]

Hi Ben. For a retiree it seems to me that one should build a portfolio that is highly likely to have had at least one type of security do well in the last year. The main categories would be value, growth, and REITs. I'd also add international value and growth. Even when categories are highly correlated, there tend to be some that go up much more, or go down much less than others in a given period. REITs add to that a generally low correlation (though its correlation varies a lot over time). I'm generally yelled at on Bogleheads for this, but it seems sensible to me. Finally, I don't see why tilting involves more management of one's portfolio than TSM. If you believe in the tilts you know that they improve returns in the long run. While one would periodically rebalance, one would not be "changing one's mind." If one can't commit to this, one should just go to TSM.

[@BenFelixCSI]

Value and growth is just the market. I agree with your premise though. The additional work from tilting is more about uncertainty around what exactly a value tilt is and whether your chosen provider is delivering it. Both are difficult questions to answer.

[@skzion2]

@@BenFelixCSI Thanks for your response and clarification. Last year US large value (Vanguard Value Fund) did least badly. I weight that fund and the S&P 500 equally. While the performance of US Treasury bond funds was horrific (no flight to safety when interest rates are being hiked!), it was reassuring that SOMETHING didn't tank. Certainly in the de-accumulation phase this seems to be an important issue. For me it is more important than any risk premia. If I were young, I might go 60% US small value and 40% ex-US small value. But I would have many decades to ride that wave. I had decided on a non-market cap years ago. Vanguard seemed to implement the various chunks of the market well--and I needed to stay in mutual funds in the retirement plan. The optimal choice of weighting scheme for someone who wants to deviate from market cap is tough to decide, though. Fortunately, at this level of detail the precise value of the weights don't make that much difference. Thanks again for the interesting content.

[@BenFelixCSI]

We recorded a podcast episode recently with a guest who argued for holding portfolio components separately rather than in a single fund for the purpose of minimizing regret year to year since you will be able to see that something is (usually) up. It’s an interesting idea to think about.

[@skzion2]

@@BenFelixCSI Very interesting. Reducing regret makes staying the course easier, I would think.

[@lukesammann1959]

im 19 yrs old and been investing in index funds for the last year. I am a college student and have comfort for high risk since I have a long time horizon. Ive felt like I could handle more risk if it means getting higher returns than S&P 500. Not sure how I can get higher returns. Definitely not going to start day trading or randomly picking stocks tho.

[@RubbingPotatoes]

I think small caps is higher risk higher return. Am I right Ben Felix ?

[@leojboby]

Sounds like I should trust you. I want to trust you. I don't know if I should trust you with establishing the asset allocation that will determine if I will have or not enough money for when I retire 15+ years out. *sigh* I just care about maximizing expected returns 15, 20, 25 years out. i am very insensitive to risk as I know it is just a long game.

[@BenFelixCSI]

If you arm yourself with enough information, you will either be confident enough to do it yourself, or confident enough to know who you can trust.

[@NickOloteo]

Nice of you to leave your duty as the family basketball coach to make us a new KZbin video 😎

[@TheCurtypert]

My biggest problem with VEQT is that its boring to hold one stock. Would holding like 10% in VVL add a factor tilt that you speak of if i'm looking for a Canadian etf? Or are there more options?

[@BillyCarsley]

I am currently trying to buy a house. My portfolio is sitting in MM because I want lower risk and to avoid losing money to inflation.

[@Domdodom]

Proud to be an average investor! (...and make more money than my non average investor friends 😅)

[@flammmenspeeryt9184]

Yeah it's hard being average haha

[@JT-tz1ef]

So…stonks good?

[@25Soupy]

After 24 years of investing I've found no one can beat the market, just buy the index. Some investors have beaten the market for some time periods but only for a short time. Even Warren Buffett under performed the market for 20 years. Only now, with 50% of Berkshire Hathaway's holding in Apple and Apple at an all time high does Buffett outperform the market. Save yourself the time and headaches and just buy the index.

[@alankoslowski9473]

Good points though I would argue factor tilts are still 'the market'. In some sense they're more balanced since they spread allocation more equitably across different market segments than MCW.

[@CGB.SPENDER]

Play the market with leverage to beat the market 😊

[@alankoslowski9473]

@@CGB.SPENDER Using leverage is extremely risky though.

[@jakel8627]

I bought VT Total stock market years ago and it was the worst time to buy. Been negative ever since lmao

[@MFGBG123]

If I want to increase my risk and expected returns but don't think that personally I am better than the average investor, or want to spend the time monitoring stocks and companies, it could make sense to invest some part of my portfolio into an actively managed fund (if I can find one with a low fee)? Since that fund maneger might be better than average investor in picking riskier stocks that can yield higher expected returns? Or an index fund that follow a value stocks index?

[@PapaCharlie9]

I'm not Ben, but channeling Ben, I'd guess that rather than use actively managed funds, shift the weighting of your portfolio to include more narrowly focused passive indexes, like a value index. Ben recommends a weighting in small-cap value index funds in his model portfolio. Making the initial weighting decision and rebalancing risk exposures in the portfolio at some interval or for some criteria would be where your time/effort in monitoring would be spent.

[@BenFelixCSI]

There are systematic funds that are active in the sense that they deviate from the cap weighted index, but are very different from traditional active management. They also have lower fees because they are systematic rather than relying on teams of analysts and portfolio managers. DFA and Avantis are specialized in this space but other companies make products that aim to be similar.

[@george6977]

👍I buy ETFs expecting to outperform 85% of the smarter fund managers over a 20 year period.

[@collin8962]

I'm lazy and average so I'll stick with VEQT

[@BenFelixCSI]

There is nothing wrong with this choice.

[@me0101001000]

I have quite a few stocks as well as ETFs, and very slowly growing the percent of index funds I own, but I'm in my mid 20s, so I have plenty of time. I think as I grow older, I'll increase the portfolio composition I have in index funds. No rush.

[@Mutmutism]

It would be more logical to do the opposite: index investing when you're young and spend your time on improving your income rather than analyzing companies. When you get older and have significant capital, trying to beat the market with stock picking makes more sense, as a small performance increase will have a big impact.

[@chrisw8011]

Why not just pick the ones that will go up the most and dont pick the ones that wont?

[@caddie1a]

Sounds like a person who isn’t average should follow Ben Graham’s investing strategy in the ‘Intelligent Investor’. Graham’s strategy is one that I follow.

[@romiguma]

I’d be interested to hear if my thinking is flawed. If market cap weighting is optimal, and I want to add risk in favour of a higher expected return, wouldn’t it make sense to just leverage the index rather than get into trying to tilt towards a particular factor?

[@ohjeohje3462]

yes I would say that works as well, but at the cost of a possible margin call in a down turn

[@willdiaz943]

Ben has a couple videos on this but some economists would say yes, it could make sense leveraging even at the risk of losing everything if you are young enough.

[@_Athanase_]

The plain bagel has a great video on leveraged index funds, the leverage is actualized daily so the return is not the same as a un-levered index fund. With enough volatility, even on an up year you can end up loosing.

[@739jep]

Yes that’s one way , but there’s an added diversification benefit by tilting towards risk factors.

[@BenFelixCSI]

Market cap is optimal if you are the average investor (or want to behave as if you are). Tilting toward factors and leverage are not mutually exclusive. Being exposed to multiple risk premiums may be more reliable than leveraging exposure to one (market beta).

[@user-hp9eg3gf6s]

I don't understand when you say the value factor brings diversification !!! It's the opposite from my prospective. We have growth stocks and we have value stocks, if you have both you are diversified, if you focus one one you are consentrating on one therefore it's the opposite of diversification right?

[@alankoslowski9473]

A market cap weight portfolio currently has significantly more allocated to large growth than value. Vanguard Total World Stock ETF (VT) is currently about 30% large growth, 27% large blend, 18% large value. Factor tilts are more well balanced across the entire market.

[@desaawa]

What's not clear here is what he means by "average investor" - is it an investor that has other risks outside of their portfolio or one that's not savvy??

[@alankoslowski9473]

That's a good question/point, but I think he discusses it. There is no actual 'average' investor. The average portfolio (market cap weight) is the average of everyone investing in the market. An investor that can and is willing to take on more risk might consider tilting towards riskier assets. An investor incapable or who prefer taking less risk might consider tilting towards safer assets. For investors who want to keep things simple the market (market cap weight) is good enough.

[@djayjp]

Since Dotcom value has underperformed because the risk premium shifted to tech.

[@BenFelixCSI]

That's not how risk premiums work. The risk premium in tech got extremely low, pushing up valuations, meaning lower expected returns. That aside, the data point is incorrect. 3/1/2000 - 4/30/2023 MSCI USA Small Value Index (gross div.) returned 9.06% annualized vs. 6.90% for MSCI USA IMI Index (gross div.) .

[@djayjp]

@@BenFelixCSI Lol you can't compare at the height of the Dotcom Ben! My point was post-crash. Look from beginning of 2007 to today: 700% XLK vs 200% VBR or SLYV (total return). QQQ was even better. I agree though that returns for tech likely will be lower than before going forward.

[@BenFelixCSI]

🤣 fair. I wouldn't call 2007 Dotcom though. 2007-2021 was the crazy historic drop in rates that benefitted longer duration assets like growth stocks (not just tech). 2022-today growth has gotten crushed by value. In the long-run, the higher risk premiums of value should still show up.

[@djayjp]

@@BenFelixCSI YTD value has gotten crushed haha. Time will tell! :)

[@French14]

I'm not average

[@BenFelixCSI]

That's the spirit!

[@JosephDickson]

Who shouldn't? A person without an emergency fund. 😉

[@DuffyElmer]

What is the optimal portfolio structure if I'm a gambling addict who wants to hit it big on Tesla Call Options and brag about it on WallStreetBets??? 😁😁

[@BenFelixCSI]

No joke, there’s something called behavioural portfolio theory which suggests that optimal portfolios for some people include lottery-like assets.