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Tilt: Playing Long Term Market Expectations

I have written several articles over the years regarding asset allocation.    More than a few posts have also touched on not timing the market.  Today we’re going to throw caution to the wind and talk about how I do play my own perceptions of the economy and stock market.  We’re going to explore the world of asset allocation tilt.

What is Tilt?

Now let’s first explain what I mean by tilt.  Tilting is the act of adjusting your asset allocation to overweight some technical factor based on your long-term perceptions of the directions of an asset class.  What do I mean by factors?  Well they could be as simple as small cap versus mid cap versus large cap, ie. the size of the relative companies. They could also be growth versus value stock.   How about domestic versus international? What about dividend bearing stocks?  It can even mean real estate versus stocks in general.

Basically, it’s targeting a specific sector or area of the economy.  You increase your asset allocation beyond normal levels in that area to capture your expectation of that asset class to outperform.

Market Timing Versus Tilt

When it is done in the short run, rapidly jumping between factors in the near term based on the latest thing that our president says, that’s called Market Timing not tilt.  Market Timing is a recipe for disaster, costly, and frankly your Investing Plan should keep you from doing such things. (Except perhaps some small play money amount as a psychological crutch).  Diversification is best for short term moves in the market.

Some Evidence that Tilting Works

But in the long run there is some evidence statistically that some factors can outperform the rest of the market. 

Small Versus Large Cap Tilt

 For example, small caps have statistically been proven to outperform their large cap compatriots through large periods of the last century.  Obviously past performance doesn’t guarantee future results.  However, even with that said most stock markets are weighted by market capitalization (or the size of the company).  That means a basic stock market portfolio would naturally see more impact due to larger companies than smaller without some tilt.   Tilting might just mean you hold closer to equal number of all sizes of companies.  In the current environment that might make you are less beholden to big Tech which makes up a huge percentage of the S&P 500.

Bonds as a Tilt

Another example might be holding more bonds.  A great example of Tilt here might be the common adjustment of asset allocation towards bonds as part of progression towards retirement.  People tend to hold more safe investments in retirement and later in their career as their risk tolerance adjusts.  Tilt can be used to adjust to your risk tolerance changes.

Tilt as it Relates to Market Expectations

A tilt could also be used if you view one asset class as a potential long-term leader in value.  You need to be careful here as it’s a hop skip and a jump to market timing the short term here.    IE if your views on the long-term asset class performance changes regularly then you are market timing, not tilting.  But what if you like the long-term prospects of real estate.  Or like my first example felt small caps will outperform over the long term, then a tilt might be justified.

Only Tilt if you Plan Too

In any case your Tilt should be captured in your Investment Plan.  That plan should clearly outline how you plan to tilt.  Should you choose to change your tilt you really need to make a change to your Plan.  Use that change as a monitor to see if you are changing your tilt frequently.  If you are doing so you are market timing, not tilting, and thus need to stop.

My International Tilt

So, my own tilting is towards small caps, real estate, and International stocks.  Why?  Well you can read about my take on these categories in the links above.

For international stocks you can add to my view that international stocks are a good undervalued asset class that I believe in the long run globalization will rise the tide in other countries.  IE, I view there being a lot of investing potential for higher returns in non-US countries.  So, for the last 12 years, through both under performance and now over, I’ve held 10% international in my portfolio.    I.e. I have not market timed my international play.

My Small Cap Tilt

Our small caps allocation is equally long in the tooth.  We’ve held our 5% small cap and 10% midcap for the same period.  I simply feel there is too much focus in society on the large cap market.   Also, by being small its likely more of these stocks present some growth opportunity.    Finally, as previously mentioned historical analysis promotes this as a decent idea.

My Real Estate Tilt

In terms of real estate, this asset class is less correlated with other stocks.  As noted with my real estate post this is currently REIT based, but at some point, I’m contemplating shifting to Crowd Funding Opportunities.  When I wrote my asset allocation post I listed the target then as 25%.  I have let that lag since then.  It now sits closer to 10% if you don’t count our home. 

REIT and Stock Correlation, Is it Really Diverse?

Honestly, I’ve become disillusioned over time that my REIT investments are truly uncorrelated with other stocks.  At some point I just stopped buying REIT stocks and my holding values declined compared to the rest of my portfolio.  I recently decreased my Investment Plan related to this allocation with a caveat to reconsider the class after the next crash with respect to crowd funding.

Mortgage Pre-payments as a Bond Proxy

My other allocations remain similar to our previous post, except that as noted I still consider mortgage prepayments a proxy for the bond portion of our portfolio.  So, these 2 combined are at my 25% bond goal, but I do not have 25% of my portfolio in bonds.  As noted in prior posts I control rebalancing of our portfolio using new money so shifts in our allocations are very slow and deliberate.  This is yet another control that keeps me from market timing.

A Summary of Our Current Allocation 

So, there we have it.  We remain largely at the same asset allocation from when we started this blog: 25% safe assets, 10% mid, 5% small, 10% world, and 10% real estate.  Our large cap domestic has grown from 25% large to 38% large domestic mostly out of our real estate allocation over the last few years.     2% of our investments remain play money on individual stocks as a psychological crutch to keep from actively managing our other investments.  These tilts combine allow us to invest based on our perception of long term trends while not market timing.  Do you Tilt?

5 Comments

  1. Erik @ The Mastermind Within
    Erik @ The Mastermind Within November 28, 2018

    Tilting is essential for getting the appropriate exposures to what is most beneficial to you.

    I call it risk management, and you make a great point: risk management, tilting, whatever you want to call it, is NOT timing the market.

    It’s a completely rational thought to “take profits” on winners and reassess your allocation.

    Thank you for this great post

    • FullTimeFinance
      FullTimeFinance November 30, 2018

      Thanks Erik. Question, where have you decided to allocate too?

      • I have a small allocation to large cap stocks, a sizable allocation to short term bonds, and then some allocation towards sector specific ETFs.

  2. Xrayvsn
    Xrayvsn November 28, 2018

    This is an interesting concept for sure FTF. There is definitely some gray zone/overlap between tilting and market timing so you really have to be diligent you are not falling trap to chasing assets just because they are doing well.

    I have apparently tilted in a similar way to your portfolio. I have been heavily investing recently in my non retirement portfolio components to real estate (namely private syndication multifamily apartments). I also have about 20% dedicated to international (although there are some bloggers I know that chastise the Bogle 3 fund portfolio because there is more volatility/risk compared to a few more basis in potential reward (one maintains a strict 2 fund equity/bond portfolio is the way to go).

    • FullTimeFinance
      FullTimeFinance November 30, 2018

      It’s all what we are comfortable with as individual investors. Nothing in life is risk free.

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