ETF Investment portfolio example for EU (based on 5 risk factors)

[tekela]

@dreamingjoeinjail I will paste this until everyone has joined the community :

https://www.reddit.com/r/eupersonalfinance/comments/m5458d

 

[dreamingjoeinjail]

@tekela Thank you for the link. This is a great material on the topic. Joined the community.

 

[christianandy]

@dreamingjoeinjail Annoyingly the five factor model still ignores momentum and low volatility, but subsequent studies accounted for them as well, explaining almost all outsized returns. Momentum is particularly interesting to me, as not only is the risk adjusted outperformance usually large, relative to the others, and based on 200+ years of US and UK data, but it’s also the only factor that either outperforms, or is roughly in line with the market, across all four stages of the market cycle. The closest other than Momentum is Value, which coincidentally pairs very well with Momentum, as they share a decent negative correlation, Value does significantly underperform during sharp declines though.

MSCI Factor Performance relative to market, by stage of cycle

 

[dreamingjoeinjail]

@christianandy Really nice info and I have not seen this document before. Very useful insight

 

[resjudicata]

@dreamingjoeinjail keep in mind: Even Ben Felix said that he wouldn't go for a 5 factor portfolio without having access to dimensional funds.

You can end up spending all of the potential excess returns on rebalancing.

nice work though!

 

[dreamingjoeinjail]

@resjudicata Yes, I remember that Rebalancing does not concern me much, because I plan to rebalance by buying additional assets over time, not by selling the existing ones. Since I was going to buy something anyway, it does not make a difference if I buy 5 funds or 1, broker commissions will still be the same.

From the simplicity perspective - sure investing 100% in VWRP is much better and, probably, will give a very good result. But I really enjoy digging into portfolio construction, so why not give 5 factor a try

 

[resjudicata]

@dreamingjoeinjail I feel you.

I would probably do the same if my brokerage would give me access to the needed funds/ETFs

And good point on the re-balancing. During the buying fase it is a none issue.

 

[tekela]

@resjudicata I think his argument was more about time spent on it, and less about rebalancing consuming all the premiums. In fact you do not have to perfectly rebalance at all time. rebalancing twice or once a year is probably ok, and if you bring in new money, it is not too costly.