While there are arguments for (clearly due to SCVs outperformance since inception) there is one argument against that has proven to be a killer for me. Once you choose a factor tilt - you are stuck forever. Why? I factor tilted value back during the great recession. That tilt has not paid off (yet) although over a long enough time frame it might. However, I cannot bail on the strategy due to extreme amounts of capital gains I'm sitting on. So the factor has lost over 16+ years and I'm stuck in it unless I want to incur extreme taxable events. When Swedroe first sold me on factor investing it was not clearly explained to me (or perhaps it was but I didn't grasp this concept) that if you choose to factor tilt you are stuck unless you want to exacerbate your pain (the pain of underperformance) alongside extreme capital gains taxes which will increase your underperformance even more. Unless the factor outperforms initially, you are left on this side of the table. And I can tell you first hand, it is a frustrating side to sit on (although perhaps being forced to stick with the factor tilt strategy will ultimately bear fruit). We shall see. Until thenWhat about making the case FOR factor investing?
Factors get enough arguments against them around these parts…
I listened to snippets and am not convinced of many arguments against factor investing. Factor investing certainly was a thing back before it was quantified. The concept of value isn’t new to the 90s.
Factor decay? Or just normal periods of factor underperformance. The post-GFC period isn’t unprecedented, it’s part of the reason a premium exists; risk. Perhaps premiums are now much larger due to Value spreads being high. I certainly don’t see money chasing into
Factor strategies these days, unlike growth strategies.
If it were as simple to get rid of risk premiums after they have been identified, why hasn’t the market premium gone away? Should we have declared it dead after 2000-2012 when returns were less than treasuries and index funds became widely available and money rushed in?
It’s fine to not be a big advocate of factors for various reasons (behavioral, etc), but arguments against factor investing from a strategic point of view seem eerily similar to those you could try and justify against cap weighted index investing. Factor investing is a logical extension to market investing. Low cost, broadly diversified. All it’s doing is filtering on higher risk metrics to capture an additional premium that manifests differently and thus can add extra sources of return diversification.
Statistics: Posted by sperry8 — Thu Dec 14, 2023 11:30 pm — Replies 68 — Views 6791