The basic idea is to use a broadly diversified low cost value ETF for the value (and market) factor premium.
Additionally, volatile gold and highly volatile cryptos are not very correlated to value stocks. I will rebalance whenever an asset deviates from the target by a factor 3/2 relative to the portfolio (e.g. about +7.8/-9.1 pp around 70%). I will rebalance angainst the asset class that performs deviates in the opposite direction the most. That should lower the portfolio risk and give me some returns through statistically buying low and selling high.
Possibly the cryptos will also have a high to very high average annual return. I am less optimistic for gold in that regard. The longterm return of gold is not very good.
Questions
For the given asset class distribution are there superior products to use instead?
Should I diversify products or brokers?
Do you have recommendations regarding changing asset classes and target distributions?
VVAL would have returned5.20% since inception (9 dec 2015). Overall, not annualised.
VT (or VWRL for that matter) on the other would have returned approximately 43% over the same period.
So as a rough estimate you could say VT would been roughly 700% better than VVAL. Of, if you had held a share in Bitcoin, it wouldn’t have mattered much, since your 10% share of Bitcoin would increased more than 20-fold in value since december 2015 (though only foregoing the rebalancing you intended).
While historical performance is no guarantee of future performance (or vice versa), given a difference of 5.2% return in VVAL against 42% in VT/VWRL, you might question your choice of ETF.
Put differently, you’ve got to be highly convicted of Vanguard’s (quotes) “actively-managed investment strategy” and “proprietary quantitative model” used in VVAL. Or rather, since it would have somewhat outperformed other value ETFs (IE00BP3QZB59) at least temporarily (until 2018 or 2018), the idea of a value ETF altogether. Personally, I’m not a big fan of strategies to buy “as long as it’s (relatively) cheap”.
I saw the relative underperformance vs VT as well. Value in general has had a bad time the last few years. But according to quite a bit of economic research there exists a value premium for the risk of value stocks. Even those who argue against its existence don’t claim that the opposite is true. I guess it will reverse sooner or later, likely later.
The fund being “active” did not lead to a higher ongoing charge. It is the same as VWRL (Vanguard’s UCITS alternative to VT) at the moment: 0.22%. They do differ in portfolio turnover. The annual report 2019 shows that the share of transaction costs in total costs were about 21% for VVAL, but only about 6% for VWRL. Also the net assets were more than one magnitude apart 2705 M (VWRL) vs 199 M (VVAL).
As I don’t expect any alpha from their rule based “active” ways, I am happy with their very nice P/E (7.23) and P/B (0.60) numbers. I didn’t find other low cost value etfs with better numbers yet.
What are your reasons for disliking strategies that buy (relatively) cheap assets?
Thank you for this very extensive review! I hope I can do it justice with my answer.
Yes, I have considered low-risk, low-return assets. It impacts the performance very significantly. The longer it goes the worse it gets. Especially as base performance starts evening out unlucky entry points. I have a very long time horizon. Longer than RE as I need few and am more interested in the FI part.
Rebalancing in general seems to boost return and lower risk the higher the decorrelated volatility of the assets is. That also implies that a volatile asset has advantages over a steady one. But if the base performance differs to much, that will become dominant over the boost in return. It is also why I’m unsure about the gold: While it does tend to be decorrelated from stocks even more than money, base performance is far away from stocks.
Crypto on the other hand will likely stay very volatile for quite some time, and if it doesn’t, then it either has crashed to zero or become established. Till it becomes established it still has a huge potential upside. In my opinion it has a very bright future as an asset class, because it brings something new, unique, and needed to the table: Delocalized trustless value, services, etc.
As far as I understood, the higher return is supposed to be generated by the higher risk. The factors differ from strategies doing arbitrage over market inefficiencies thus making them disappear. Instead the factors are a part of the present efficient market. They should only go away once the risk has also reduced.
I thank you for asking. As standard as the question is, it still got me thinking. I do think the asset classes themselves are quite solid. There are other asset classes which could probably stand in for them, but my knowledge of them is not good enough.
As I won’t need this money to survive, my risk tolerance is rather high. I think the most I would do is stop adding money and stop rebalancing.
I am less sure about the products, though. They bring uncertainty that could make me sell and replace:
VVAL doesn’t follow any open index and has a rather low cap. A replacement could be VVL. But it is just Vanguard still. The reinvestment risk could strike exactly when they perform the worst and everybody wants to get rid of it. I am supposed to buy then. But I can’t buy a fund that doesn’t exist anymore. I will be forced to buy a fund with very different P/E, P/B and consequently assets. Maybe the suggestion with the tilt could be adapted to additionally buy a fund with less value tilt. I could select this fund for size and diversity in funds that reproduce the same open index.
I agree that allocating 10% each in BTC and ETH is bad risk. I must diversify. The problem is how. If I just take market cap, I will only hold BTC. I could cap BTC. About halve of the rest would be ETH. Below them come a lot of interesting and a lot of dubious coins. Additionally crypto market data is still prone to manipulation. Whilst I wouldn’t be lost having to choose, it would be a very active approach then. Any good ideas?
Also individual cryptos probably have a good potential to go to 0, even BTC. The relatively low weight of 20% does shield quite well against loss. With rebalancing every time it looses 1/3 relative to the portfolio, I calculate a factor of 0.93… on the whole portfolio for every occurence. Assuming it goes straight down, after 11 occurences the absolute value of crypto will be about 1/100 of the original price. The whole portfolio will be only about halved by that time. But yes, it will go to 0 together with the 20% crypto eventually. There needs to be some stop trigger. Some combination of time and total loss?
The gold can be diversified rather easily. How much is also a question of fees and hassle. Do you think 2-3 different products would be sufficient?
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