Factor Nuances, Dollar Cost Averaging, and Annuities in a Pandemic (EP.101)

Jun 4, 2020

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INSIGHT

Leveraged ETFs Suffer Volatility Decay

Leveraged ETFs replicate daily returns and reset exposure each day, creating a volatility-linked decay effect over time.
That decay and a convenience premium make leveraged ETFs often inferior to using margin for long-term leverage.

INSIGHT

Size Premium Is Weak And Debatable

The size premium (small-cap) lacks a strong, consistent theoretical or statistical basis relative to factors like value or profitability.
Much of the earlier size effect weakened after correcting delisting and database biases.

ADVICE

Combine Profitability With Value By Sorting

Don't combine a profitability ETF with a value ETF indiscriminately because their exposures offset and revert you toward market weights.
Instead, tilt value by sorting for profitability within value to achieve true multi-factor exposure.

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We kick off today's episode of the Rational Reminder by discussing when Ben will be publishing his new model portfolios and a quick look at some of our upcoming guests and resources you might want to take a look at. We have been on a roll with our guests lately, and we are certainly not slowing down anytime soon. From there, we look at some of the headlines, such as CDIC developments and the myths around inflation. Next, we move onto to listener rapid-fire questions. Some of the topics include the difference between leveraged ETFs and traditional ones as well as a small-cap investment strategy for an investor with a 30-year plus investment timeline. We then turn our attention to the core topic of the show, dollar-cost averaging versus lump-sum investing. Ben presents an overview of dollar-cost averaging along with some of the perceived benefits. We dive into his analysis of dollar-cost averaging versus lump sum investing in equity portfolios over select 10-year periods across various countries. We discuss the results based on a range of factors and variables. The crux of the argument is that dollar-cost averaging is not as compelling as it's often sold to be. While there are psychological benefits, the empirical evidence shows that there are not real ones. We wrap the show up with a look at how the pandemic is likely to shape the annuities industry and retirement planning. Tune in today!

Key Points From This Episode:

Find out when the new model portfolios will be up. [03:10]
Some books to look at ahead of upcoming guests. [05:04]
Ben and Cameron's takeaways from Tobi Lutke's appearance on Invest Like the Best. [05:43]
Current affairs, including CDIC changes, Michael Kitces recent publication, and inflation. [09:07]
Rapid fire questions: Leveraged ETFs versus traditional ETFs and size as a risk factor. [13:47]
How a small cap value investment strategy could work for an investor with a long horizon. [23:07]
Why Ben and Cameron don't talk about implementing the profitability factor with a dedicated ETF. [25:05]
A brief explanation of dollar-cost averaging and the rationale behind it. [29:54]
Find out more about Ben's dollar-cost averaging versus lump sum investing analysis. [31:49]
The results of Ben's analysis and some key takeaways. [36:44]
The worst 10% of lump sum outcomes versus dollar-cost averaging – the results. [41:26]
Two things people look at to try to predict positive outcomes and its influence on lump sum investing.[50:36]
How high stock prices influence lump sum versus dollar-cost averaging outcomes. [53:36]
Japan vs the US: How Ben determined if the Japanese market is expensive. [56:37]
Three key outcomes of the pandemic on retirement planning. [1:00:03]
How the annuity industry can encourage its products with decreasing life expectancy. [1:02:05]
Bad advice of the week. [1:06:16]