The top conversations on APViewpoint last week were started by Larry Swedroe, Adam Butler and Bob Veres. They generated thoughtful discussion with wide ranging opinions on: factor-based approaches to investing; factor investing research methodologies; and a new tool to visualize retirement planning.
APViewpoint hosted another well-attended webinar on November 9, Thinking Differently About Diversification: A Factor-Based Approach, presented by Larry Swedroe and Andrew Berkin. In this presentation, Swedroe and Berkin helped advisors understand the daunting landscape of factor-based investing using tools discussed in their new book, Your Complete Guide to Factor-Based Investing. They introduced a framework for evaluating factors, and reviewed the criteria they use to determine factor allocations. Using examples of portfolio construction with varying factor weightings, they discussed the characteristics of notable factors such as momentum, and provided actionable insights about different investment strategies. Swedroe and Berkin are answering questions from their webinar in this follow up conversation, and a replay of the webinar can be viewed here.
Adam Butler’s The Definitive Book on Factor Investing received 19 comments from members discussing research techniques used to study the performance of factor-based investment strategies. Advisors commented on Butler’s review of Swedroe and Berkin’s new book, and they discussed the challenges inherent in selecting factor-based portfolio allocations given that over 600 factors have been identified in financial literature. Members discussed whether purveyors of factor-based strategies should be required to disclose the factors they tested (and discarded) before selecting a factor. Advisors agreed that greater disclosure would improve transparency and reduce data-snooping in this field of research, and they maintained that researchers should be more forthcoming about the process they use to identify factors. Members also considered whether purveyors of factor-based strategies should be required to monitor and report on the expected return of a factor, and some suggested this reporting may help investors gauge expectations because factor returns vary over time.
Bob Veres’ A New Tool to Visualize Retirement Planning generated discussion about his recent article on the Big Picture App, an illustrative program advisors can use to help clients plant for retirement. Veres introduced the app as a visual tool that analyzes historical data to help clients understand their chances of reaching their retirement goals if they make certain choices about distributions, portfolio design, expense ratios and legacy amounts. APViewpoint members acknowledged that applications with intuitive designs and great user experiences can be useful in their practice. However, they cautioned, “there are a number of flaws in this type of calculator that may lead it to produce both overly optimistic outcomes and to offer suboptimal guidance to investors.” Advisors argued that applications relying on historical data are misleading because they do not consider market scenarios that are worse than what we’ve seen in the past, and they do not account for unprecedented market conditions like the current interest rate environment. They also warned that many retirement apps make assumptions that can lead to suboptimal advice, such as assuming investors will be making proportional withdrawals from each asset class with annual rebalancing throughout retirement.
Don't miss our next APViewpoint webinar, 3 Secrets to Limitless Leadership, a Breakthrough Business and a Life You Love, presented by Stephanie Bogan on Wednesday, November 16 at 4:15 pm ET.
Marianne Brunet is a financial markets analyst with Advisor Perspectives.
