Boglehead Presentation Tilting Manny What is tilting I

Boglehead Presentation – Tilting Manny

What is tilting? “I tilt. Do you tilt? It’s OK to tilt. Many people tilt. I’m not talking about posture or politics – I’m talking about portfolio design. ” -Rick Ferri Tilting overweighs a particular investment style with the expectation of achieving a higher return or higher risk-adjusted return than the market.

**Above explanations are based on the belief of those “tilters” and are not definitive facts.

Background of Tilting • University of Chicago Professors Fama and French – Three Factor Model • expanded on CAP-M • Found three factors explained 95% of return in diversified portfolio (for 1929 – 1997) • Beta (volatility) • Size (small cap, mid cap, large cap) • Style (value vs growth)

Fama and French’s Findings • Portfolios with small cap funds and value tilt outperformed total stock market in long term (>15 years) • Greater periods of volatility with this design

Example: Portfolio Visualizer – Invest $10000 Portfolio 3: 50% US Stock, 50% Small Cap Value Portfolio 2 : 75% US Stock Market, 25% Small Cap Value Portfolio 1 : 100% US Stock Market Logarithmic Scale

Asset Factors to Consider • Asset Allocation – more bonds will protect against “fat tail” risk • Duration of holding • Past performance does not predict future performance • Taxation • Value funds tend to have higher dividends

Human Factors • Fund names can vary and requires research • E. g. “small cap” • Investor Behavior – not sticking to IPS • NOT REALLY RECOMMENDED FOR NEW INVESTORS Vanguard SCV Fidelity SCV

Vanguard and Fidelity Small Cap Value Comparison

Debate Among Experts Pro-tilting -Larry Swedroe -Paul Merriman -Rick Ferri Anti/minimal/no effect-Tilting -John Bogle -Boglehead user nisiprius -Taylor Larimore

Boglehead Forum Results

Common Tilt– Real Estate Investment Trusts • enable small investors to invest in real estate • Often up to 10% of portfolio • Very tax-inefficient • Pay high non-qualified dividends • Allows inclusion of “private economy” • E. g. commercial real estate market = US stock market for what it is worth

Common Tilt – Emerging International Markets • Possibly undervalued • Includes larger countries like China, India, Russia and also Czech Republic, Malaysia, and Pakistan • Riskier – political, regulatory, currency risk at play • Theory that eventually EM will encompass large part of world market capitalization

Tilting Treasury Inflation Protected Securities (TIPS) • Notes and bonds issued by US Treasury • Principal and interest are indexed to inflation • Provide inflation protection • Can buy directly from government auctions or through a secondary market

Actively Managed Fund Tilts • Momentum Tilt – • Place emphasis on the prior performance of stocks • There are indexes that aggregrate “momentum” stocks • Buy stocks with high returns over past 3 -12 months and sell stocks with low returns over the same period • “Technical Analysis” • look at a conglomerate of metrics to try to predict market movements • Some evidence that this works over the short term (cherrypicking data? ) but no real proof this works long-term

Practical - Tilting Portfolios • Unclear exact percentage of stocks to put in “tilts” • Value: Varies between 10 -35% generally • Emerging Markets : 5 -10% • Ultimate Buy and Hold 25% large cap 25% large value 25% small cap 25% small value • Level of risk and investments depends on: • Years from retirement • Current assets • Location of assets (and potential locations) • Tax Bracket

Ferri Core-Four Coffeehouse Portfolio

Questions/Comments? • Other Resources • https: //www. northerntrust. com/documents/line-of-sight/assetmanagement/intl/understanding-factor-tilts. pdf