In The Quest for Alpha
, Larry Swedroe gives an example of building up a slice-and-dice portfolio, layer by layer. All discussions of slice-and-dice are very dependent, way too dependent in my opinion, on the specific choices of funds or indexes used to implement the portfolio, and the endpoints taken for measuring returns. But this is at least one
illustration, and I feel it is fair because it is a representative illustration made by a knowledgeable practitioner of the technique.
In that book, when he goes from "portfolio 2" to "portfolio 3" (in chapter 10), he does it by shifting 15% of the portfolio from the S&P 500 to the "Fama-French Small-Cap Index ex utilities." For portfolio 4, he shifts half of that 15% to "Fama/French U. S. Small-Cap Index." So portfolio 4 is:
The results of first adding small-cap (to get portfolio 3), then shifting half of it to small-cap value (to get portfolio 4), are as follows. Notice that (over the specific time period, using those specific indexes rather than actual mutual funds), he is showing 0.9% more annualized return but also is increasing volatility/standard deviation/"risk":
Point being, and trying to brush all controversy aside, if we take this is a rough guide to the size
of the improvements slice-and-dice practitioners say you'd have gotten in the past, those are the sorts of numbers they show us. At the end, when he's finished building up to portfolio 6 (adding international small-cap and commodities), he's increased return by 1% while pushing risk back down to where it started. But that's with four extra slices, and you are just adding one.
The slice-and-dicers will have to tell you whether it's important to have both small-cap and small-cap value, or whether small-cap value by itself is good enough.
It all boils down to how much extra you actually think you're going to get (in your lifetime, not in some past period). I suspect that the knowledgeable slice-and-dicers will say that in theory you can
overcome an 0.3% headwind... on the average, in the long run, etc. But the 0.3% will cancel out a meaningful chunk
of the expected improvement. And the extra cost is a sure thing, while the extra return is not.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.