Last week, Tadas Viskanta of Abnormal Returns rounded up some of the best finance writers around to answer a series of questions. Much like the series that ran this summer, it is so cool to collaborate with such a talented group of people.
Below are my responses to the different questions asked along with links to response from the entire group.
Let’s say Warren Buffett re-ups his famous decade-long bet. He takes the S&P 500. What would you take (and why)?
I’m a fan of simplicity, so give me DFA Global Equity Portfolio (DGEIX). I’m relying on two things Buffett doesn’t seem to believe in: global diversification and factor investing. Even though an index fund tracking the S&P 500 will be cheaper and more tax-efficient – I’m not sure if taxes count in the bet, but they should – ten years gives me a pretty good runway for global exposure to value, size, and profitability to pay off.
I’d feel more confident if the bet used a 30-year time horizon, but sign me up for the bet either way.
Assume you have discovered an equity return factor that is both previously unknown and uncorrelated with other factors. What would you do to monetize that insight?
Publish the research, land a consulting job based on my discovery, and book speaking gigs.
What is one thing you do with your money (spending and/or investing) that you would never recommend to a client, family or friend?
My portfolio is invested in 100% equities because I want the higher expected returns, my risk tolerance is very high, and I’m comfortable with market losses. Although I don’t have a bond allocation to use for rebalancing, my human capital serves a similar purpose by funding automatic contributions to my various investment accounts every two weeks.
For someone else, however, the additional return of having an all-stock portfolio versus allocating 10% or 20% towards bonds isn’t enough to compensate for the risk that someone suddenly decides they can’t handle the volatility of an all-stock portfolio. Most younger investors have the ability to tolerate the risk of a 100% stock portfolio, but their willingness to tolerate risk (whether they acknowledge it or not) makes them more likely to stick with an 80% stock portfolio. Additionally, the ability to rebalance from bonds to stocks has the behavioral benefit by giving people something productive to do in response to market losses.
As of the end of August 2017, the ICI reports that long-term (x-money market funds) mutual funds hold $15.106 trillion in AUM and ETFs hold $3.067 trillion in AUM. When, if ever, will they crossover?*
I think the crossover is unlikely, but not impossible. Two things that could speed up this process would be faster settlement for ETF trades (it currently takes two days versus one day for mutual fund trades) and broader use of ETFs in retirement plans.
What is one thing you have changed your mind about recently in the investment world and why?
Until a few months ago, I classified Bitcoin as “Not Worth Thinking About.” A presentation on blockchain technology at this year’s CFA Institute Annual Conference shifted my thinking. I’m more concerned with implementing a bad idea than missing out on a good one, which makes it tough for me to get behind cryptocurrencies as a long-term asset class. That said, I now recognize that blockchain technology is a very big deal.