Should retirement investors own small/value stocks at all?

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Browser
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Should retirement investors own small/value stocks at all?

Post by Browser »

I've taken the liberty of quoting Bill Bernstein's comments regarding small and value equities below:
The value premium, for example, is quite fickle. Since 1926, it has yielded negative returns for as long as 15 years. The small premium is even worse, yielding negative returns for as long as 30 years.

This occasional long-lasting underperformance of both the small and value factors, though, is of more concern to lump-sum investments than to a stream of periodic investments, because the ability to occasionally purchase small and value stocks at a low price mitigates any temporary underperformance of small and value stocks.
http://advisorperspectives.com/newslett ... h_Tilt.php

Dr. Bernstein's observations regarding small and value equities raises the question of whether "tilting" is an appropriate strategy for investors who are retired and are drawing down their portfolios. First, these investors can be considered to be "lump sum" investors since they're not making systematic contributions to their portfolios. Second, since they are drawing down their portfolios and only have an investment horizon of 25-30 years, it would be quite possible that small and value stocks could represent a serious source of return underperformance for most of that period. With these issues in mind, is it appropriate for retirement investors to allocate any portion of their equity investment to small or value stocks?
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Sbashore
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Re: Should retirement investors own small/value stocks at al

Post by Sbashore »

This is a lot of the reason that I did away with my S/D portfolio with tilts a while ago. When you tilt sometimes it takes a while, if ever for the advantage to show up. I'm not getting any younger. Now I am more simplified, but still tilt a bit towards REITs. Can't seem to let that go. :happy
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Chan_va
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Re: Should retirement investors own small/value stocks at al

Post by Chan_va »

Do you mean - Should retirees not hold small/value in excess of the market portfolio, or do you mean - Should retirees cut small/value out of their portfolio altogether?
Twins Fan
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Re: Should retirement investors own small/value stocks at al

Post by Twins Fan »

I believe they meant tilting, or more S/V than the market.

In retirement, I don't think it matters much. Those folks have likely reached their number and 5-10% tilt to something isn't going to sink the portfolio if it under performs for a while.

And, if they still tilt in retirement... what's the old saying, you can't teach an old dog new tricks? :D
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Re: Should retirement investors own small/value stocks at al

Post by dbr »

Sbashore wrote:This is a lot of the reason that I did away with my S/D portfolio with tilts a while ago. When you tilt sometimes it takes a while, if ever for the advantage to show up. I'm not getting any younger. Now I am more simplified, but still tilt a bit towards REITs. Can't seem to let that go. :happy
It can also take awhile, maybe not forever but a long time, for the equity risk premium over bonds to turn up. That would not suggest that retirees should not own stocks.

It does suggest that funding retirement from pools of wealth that have uncertain prospects for loss or gain may not be the best overall plan.
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Re: Should retirement investors own small/value stocks at al

Post by Calm Man »

I have simply not bought into the reason for ever tilting from the total market. And if I am wrong I doubt that I am throwing away a massive benefit.
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Re: Should retirement investors own small/value stocks at al

Post by steve_14 »

dbr wrote:It can also take awhile, maybe not forever but a long time, for the equity risk premium over bonds to turn up. That would not suggest that retirees should not own stocks.

It does suggest that funding retirement from pools of wealth that have uncertain prospects for loss or gain may not be the best overall plan.
Yup, that's what I tell folks about my can't-miss day trading strategy when it doesn't work out for them. Sometimes it just doesn't yield excess returns, just like the ERP. They get the implication - if you don't believe in Steve's trading signals, you must not believe in stocks at all!

I think retirees should own as much SV stocks as the market judges they're worth. Despite heavy industry marketing, they're no worse than any other bit of the market.
heyyou
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Re: Should retirement investors own small/value stocks at al

Post by heyyou »

Should retirement investors own small/value stocks at all?
That question is a sub-case of forecasting future returns, it is just narrowed down to two risk factors and one sub-asset class. The debate could be won by the most articulate posters, but the truth will only be known in the distant future.

My retirement may last 40+ years if I outlive both of my parents. Is that a long enough horizon to consider having a slice and dice portfolio?

I say "Bah!" to those who worry about potential 15-20 year periods of poor returns in one small slice of the entire market. I'm trying that diversification thingy that is mentioned in all of the recommended books.

I wonder what happens after the low periods end? On my Callan Periodic Table, the poor equity performers seem to eventually rise again. Could there be some Return to Mean for patient investors? So far, delayed gratification has paid well.

Behavioral traits have been constant far longer than there have been stock markets. Fickle speculators will continue with their usual negative perceptions of SV stocks except for brief periods when those stocks are their favorites.

My forecast is the sequence of future returns will differ from the past, but people's behaviors will not change, and that is what sets the prices of SV stocks.
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Re: Should retirement investors own small/value stocks at al

Post by JRA »

In my opinion, a well-diversified portfolio should be represented in as many risk factors as possible, including market (beta), value, and size. I am still on the fence about investing in the other three risk factors (momentum, profitability, and investment). There appears to be good evidence for momentum and profitability, but successfully exploiting those risk factors appears to be somewhat unproven in the mutual fund/ETF marketplace. Having said that, I would probably now have a severe case of buyer's remorse had I invested solely in a domestic total market index for the last 15 years. By investing in all three risk factors, I seriously doubt that I will ever win the race--I will leave that to some lucky sector investor--but I suspect that I have a much better chance of finishing the race with a three-legged horse (multi-factor) than a one-legged one (total market). My plan is to construct a retirement portfolio in which my basic income needs are covered with riskless or low risk assets (TIPS, annuities, etc). If I chose or am able to also invest in equities for a legacy or some other reason, I expect to have a balanced portfolio of equities that is exposed to as many risk factors as possible (foreign and domestic). There is just too much evidence supporting a multi-factor investment environment to ignore in a preretirement or retirement portfolio.
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Re: Should retirement investors own small/value stocks at al

Post by rkhusky »

Increasing the number of factors is likely to increase the accuracy of explaining the return of a given portfolio (just as increasing the number of parameters in any model tends to do, especially if they are somewhat orthogonal). It is less clear that these factors can be used to predict the future performance of a portfolio.
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Re: Should retirement investors own small/value stocks at al

Post by larryswedroe »

fwiw retirees are the very people who should tilt AND lower beta exposure to cut tail risk when it matters most in withdrawal stage
larry
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Re: Should retirement investors own small/value stocks at al

Post by pascalwager »

This is from Fama, Cochrane, and Norstad:

The average investor works and usually should use total market. If an investor works for a large growth company, then should consider holding SV stocks.

A retiree is not average by definition (not part of the work force) and would not be increasing an existing risk (e.g., due to working for a small value company) by holding small value stocks and should consider small value investing.
VT 60% / VFSUX 20% / TIPS 20%
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Re: Should retirement investors own small/value stocks at al

Post by pascalwager »

larryswedroe wrote:fwiw retirees are the very people who should tilt AND lower beta exposure to cut tail risk when it matters most in withdrawal stage
larry
Yes, if you're a retiree with a large FI AA, then why not add more FI and go all the way to the LP?
VT 60% / VFSUX 20% / TIPS 20%
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Re: Should retirement investors own small/value stocks at al

Post by asset_chaos »

Retired investors certainly do make systematic changes to their portfolios. In retirement, though, these changes are withdrawls instead of deposits. But the effect is the same. During accumulation, deposits went into the recently poorly performing assets to rebalance to plan. Managing a portfolio on a total return basis, withdrawls come from recently well performing assets to rebalance to plan.
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Re: Should retirement investors own small/value stocks at al

Post by acegolfer »

pascalwager wrote:This is from Fama, Cochrane, and Norstad:

The average investor works and usually should use total market. If an investor works for a large growth company, then should consider holding SV stocks.

A retiree is not average by definition (not part of the work force) and would not be increasing an existing risk (e.g., due to working for a small value company) by holding small value stocks and should consider small value investing.
+1

This following thread discusses the above in detail. As usual, however, many BH disagree.
http://www.bogleheads.org/forum/viewtop ... 0&t=143600
abyan
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Re: Should retirement investors own small/value stocks at al

Post by abyan »

Larry, I'm relatively new to BH, but have read a lot of your articles and posts here, so I'm assuming you mean retirees should tilt to small and value? In a post last year someone quoted you from 2009:

"Roughly my portfolio looks like this--since most assets in taxable accounts. 70% AAA/AA munis and TIPS (currently 40% of tax advantaged fixed income assets) equities split 40 US/60 int'l with US as SV and int'l split between ISV and EMV with ratio about 3:1 and small allocation to CCF."

While it's tough for those of us at Vanguard to replicate the equity side of this, is this the kind of thing you'd suggest for a retiree?

I'm helping my 85 y.o. parents extirpate themselves from dad's broker who did a number on both their, and my, IRAs. So I've been doing quite a bit of reading trying to come up with a portfolio that can hopefully have some growth over the next 10 years, 15 if they're lucky. I think I understand the basics of your approach, that the 70% of very safe (relatively) fixed income let's you take more risk on the equity side. And on the equity side you try to use funds that aren't closely correlated to each other, and at the same time have the potential for greater gains. Yes?

If someone is at Vanguard, do you have any suggestions for replicating your tilt portfolio, and is it worth tilting even partially, or would a partial tilt (say, buying TSM and emerging markets, and/or small cap value and/or international small cap and/or intl value) risk not actually lowering beta exposure because we'd be injecting one volatile asset and not compensating with an equal and uncorrelated one?

I'm not saying I'm going to do this for my parents' portfolio, though I'd at least consider it for myself at some point. I'm just intrigued at your suggestion that tilting is exactly what a retiree should do, and if I understand your portfolio correctly, it is an interesting idea (though I worry about valuations being high right now, even though I know we shouldn't market time.)
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Re: Should retirement investors own small/value stocks at al

Post by rfowler »

larryswedroe wrote:fwiw retirees are the very people who should tilt AND lower beta exposure to cut tail risk when it matters most in withdrawal stage
larry
Can you elaborate on what you mean: "to cut tail risk"
I'm not familiar with that phrase.
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"Tail risk"

Post by Taylor Larimore »

Can you elaborate on what you mean: "to cut tail risk"
I'm not familiar with that phrase.
rfowler:

You are not alone. This is one definition:
Tail risk is the risk of an asset or portfolio of assets moving more than 3 standard deviations from its current price. In particular, most asset managers are only interested in the downside risk, i.e. moving more than 3 standard deviations below its current price. -- wikipedia
Best wishes.
Taylor
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Re: Should retirement investors own small/value stocks at al

Post by rfowler »

Taylor, Thanks for the explanation.

I'm surprised most asset managers care about "tail risk" as defined.
Seems to me all you hear about is upside potential.

That's one thing I've appreciated learning from my reading the past year on MPT and bogle-type investing etc:
looking at standard deviation up or down, perhaps the most valuable metric for me in deciding on our AA.
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Return and Volatility

Post by Taylor Larimore »

rfowler:
"One percentage point of excess return is priceless; one point of additional standard deviation is meaningless." -- Jack Bogle
Best wishes.
Taylor
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Re: Should retirement investors own small/value stocks at al

Post by larryswedroe »

abyan
no one should invest in strategy they don't understand the risks of, or likely to make make of confusing strategy and outcome and abandon plan
wnat to learn about high tilt read reducing risk of black swans


rfowler
a big mistake made by many investors is to think of returns "deterministically" ==I'm going to get x%, only right way to think about them is as the expected is the mean of wide dispersion of potential outcomes. the tails are the extreme good and bad outcomes in the distribution of what can happen

think 911, 2008, 73-74 for the left tail and late 90s for right tail
larry
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Re: Should retirement investors own small/value stocks at al

Post by Rodc »

dbr wrote:
Sbashore wrote:This is a lot of the reason that I did away with my S/D portfolio with tilts a while ago. When you tilt sometimes it takes a while, if ever for the advantage to show up. I'm not getting any younger. Now I am more simplified, but still tilt a bit towards REITs. Can't seem to let that go. :happy
It can also take awhile, maybe not forever but a long time, for the equity risk premium over bonds to turn up. That would not suggest that retirees should not own stocks.

It does suggest that funding retirement from pools of wealth that have uncertain prospects for loss or gain may not be the best overall plan.
Right. If you can't be flexible in your spending you should consider adding annuities, TIPS ladder or something other than a highly volatile portfolio to generate a non-volatile income stream.

The OP's question also seems to ignore the fact that most retirees have a modest fraction of their wealth in stocks.

Tilting, whether for good or bad, is not much of a driver if for example you only have 40% in stocks and the rest in bonds.

The effect of tilting, whether for good or bad, is also somewhat reduced if you hold extra bonds or cash to account for the increased risk on the stock side of your portfolio. Now if it is a good idea it is still a good idea or if bad still bad, but the effect is reduced if say you move from 75/25 stocks bonds to 60/40 with tilt, both having roughly the same amount of "risk", broadly defined (hard to make this exact as the risk itself does not seem to be entirely well defined), say if in accumulation, and if in retirement where you might go from 40/60 to 30/70 if tilting even more so.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Should retirement investors own small/value stocks at al

Post by Browser »

So, if a retiree desired about 30% in stocks, 70% bonds then Larry is suggesting the whole 30% should be in SCV? This doesn't make sense to me. If I want only 30% in stocks to reduce portfolio risk why would I want to increase risk by putting the whole wad in volatile SCV stocks? What I think Larry is implying is that a retiree whose target allocation in stocks is higher (say 50%) might be better off with 30% in SCV instead of 50% in TSM. But if the target allocation was lower (say 30%), then maybe 20% in SCV would be preferred instead. It's important to have some kind of risk frame of reference here.
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Re: Should retirement investors own small/value stocks at al

Post by rnitz »

Browser wrote:So, if a retiree desired about 30% in stocks, 70% bonds then Larry is suggesting the whole 30% should be in SCV? This doesn't make sense to me. If I want only 30% in stocks to reduce portfolio risk why would I want to increase risk by putting the whole wad in volatile SCV stocks? What I think Larry is implying is that a retiree whose target allocation in stocks is higher (say 50%) might be better off with 30% in SCV instead of 50% in TSM. But if the target allocation was lower (say 30%), then maybe 20% in SCV would be preferred instead. It's important to have some kind of risk frame of reference here.
This gets to a question I've wondered about for a while: the quantification of the SCV tilt's effect on a mixed stock/bond portfolio's risk and return. I understand that the SCV tilt is thought to increase the expected return (compared to a TSM stock fund) and increase it's risk/volatility, and should be more efficient on a risk adjusted basis than just tweaking your standard stock/bond allocation. But perhaps some of the gurus can help me with an example:

Portfolio 1:
50% TBM / 50% TSM

Portfolio 2:
60% TBM / 30% TSM / 10% SCV (whatever DFA fund makes sense)

Which portfolio has had greater return, which has greater volatility/risk, and does it matter much with this size of a tilt? I.e. does a 10% change in stock/bond allocation have more or less effect on risk/return than a 10% SCV tilt in equities? (note: please assume that I've put in all of the usual necessary qualifiers that past performance doesn't guarantee future performance, nobody knows nuthin', different historical periods have very different results, there are disputes about the future persistence, etc.) I'm not looking for an exact guaranteed answer, but just some help getting a feeling for the size of the effects. Thanks in advance for anyone helping on this.

(note: edited to fix spelling.)
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Re: Should retirement investors own small/value stocks at al

Post by Taylor Larimore »

I'm not looking for an exact guaranteed answer, but just some help getting a feeling for the size of the effects.
rnitz:

The size effect may not be in the direction you want. There is a strong argument that a cap-weighted total market index fund is efficient -- in the sense that no other US stock portfolio can have lower risk and higher expected return.

Three Proofs That TSM IS Efficient

Best wishes.
Taylor
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Re: Should retirement investors own small/value stocks at al

Post by Rodc »

Browser wrote:So, if a retiree desired about 30% in stocks, 70% bonds then Larry is suggesting the whole 30% should be in SCV? This doesn't make sense to me. If I want only 30% in stocks to reduce portfolio risk why would I want to increase risk by putting the whole wad in volatile SCV stocks? What I think Larry is implying is that a retiree whose target allocation in stocks is higher (say 50%) might be better off with 30% in SCV instead of 50% in TSM. But if the target allocation was lower (say 30%), then maybe 20% in SCV would be preferred instead. It's important to have some kind of risk frame of reference here.
The value of 30% is not the issue. The level of risk is the issue.

If you want some level of risk you can get there with X% TSM, Y% SCV, or something between X% and Y% if you mix TSM and SCV.

Larry's claim as I understand it is person A might hold 50% in TSM, rest in bonds, while person B might hold 30% in SCV, rest in bonds (numbers are not exact, for illustration only), and both hold similar risk over all, but person B has less left tail risk and they both have the same expected return.

One can argue whether that is correct or not, but I don't think you have characterized the issue correctly.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Should retirement investors own small/value stocks at al

Post by stlutz »

A few notes:

--For a retiree who holds, say, 30% in stocks, whether 5 or 8% of the portfolio is in SV stocks won't matter that much.

--As you focus on smaller and smaller parts of the market, tail risks go up, not down. The odds of having a real bad outcome are simply larger when you are focusing on 5% of the market than 100%. Most of the additional risk from a big SV bet comes not because the stocks are smallish or valuey, but simply because you are excluding 95% of the market.

--If a retiree is looking to reduce the risk of their equity portfolio, they should look for less risky stocks--i.e. use a low volatility fund or something like that. However, my next point will go against that.

--As we age, it's generally better to move in the direction of portfolio simplification--e.g. using Life Strategy/TR funds vs. more complex portfolios. Such balanced funds are of course, not tilted, but I think DFA does have some balanced funds if one really does want to tilt while using a balance fund.
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Re: Should retirement investors own small/value stocks at al

Post by BigJohn »

Browser wrote:Dr. Bernstein's observations regarding small and value equities raises the question of whether "tilting" is an appropriate strategy for investors who are retired and are drawing down their portfolios. First, these investors can be considered to be "lump sum" investors since they're not making systematic contributions to their portfolios. Second, since they are drawing down their portfolios and only have an investment horizon of 25-30 years, it would be quite possible that small and value stocks could represent a serious source of return underperformance for most of that period. With these issues in mind, is it appropriate for retirement investors to allocate any portion of their equity investment to small or value stocks?
Browser, I'm 58 and 6 - 12 months from retirement. I would not invest in a large tilt to small or value for just the reasons you stated above, especially early in retirement when sequence of return risks are highest. Agree with comments made by others that a small tilt to take less risk just won't make enough difference even if you catch the upside of performance swings.

In the interest of full disclosure, I am not convinced that historical performance of small and value tilts can be counted on to continue. I honestly don't think this influences my above opinion as even true believers in these tilts agree that significant under performance can persist for very long periods.
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
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Re: Should retirement investors own small/value stocks at al

Post by rfowler »

larryswedroe wrote:
a big mistake made by many investors is to think of returns "deterministically" ==I'm going to get x%, only right way to think about them is as the expected is the mean of wide dispersion of potential outcomes. the tails are the extreme good and bad outcomes in the distribution of what can happen

think 911, 2008, 73-74 for the left tail and late 90s for right tail
larry
Larry,
I think I know what you mean, although I am far from experienced in this arena. My reference to standard deviation in the context of asset allocation reflects the "inputs" that helped me determine my "comfort zone" AA for the paper assets portion of our overall portfolio--- at this time in life.
I had been at around 80/20 but never less than 70% equity (using active funds) for many, many years.
As I transitioned to index funds / passive approach the last half year I also gave more thought to asset allocation.
The three FA advisors I consulted had various cheatsheets for us to look at (including the risk questionnaire one sees on sites such as VG and Fid) to help us determine best fit AA. These particular quickie references were not convincing enough for me (in terms of their ability to match my current situation and future needs) to feel comfortable about an AA.

For better or worse, the ONE resource I found most helpful in settling on an AA was Paul Merriman's article "Ultimate Buy and Hold" and his accompanying chart of returns for 40 years. The detailed chart lists annualized returns and SD for various AA (from 80/20 to 20/80). Using a 60/40 model portfolio, he also demonstrates the impact on return and risk by adding one slice at a time of a 10-slice equity portfolio. This analysis made sense---and of course is consistent with many "lazy" portfolios. But the logic was at least supported by his running the numbers (hypothetical) and walking through it step by step.

It's certainly possible I am misinterpreting how to view standard deviation figures in my overall AA strategy, given that you invoked Bogle's quote.
Your wisdom is always instructive, and I appreciate your generosity on this forum.
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Re: Should retirement investors own small/value stocks at al

Post by abyan »

As a relatively new member of this forum, but not a new member to online forums in other areas, which I've actually managed, it's a bit scary jumping in and asking questions when so many others seem to be experts on these various issues. And when you ask a question, and are told that you clearly don't understand what's going on, and that you should "buy my book," it's not a terribly helpful response, and feels like a bit of a brush off, like you've just said something stupid.

I know that I don't fully understand what Larry is proposing, that's why I asked a question in the first place, to better understand all of this. (And, not wanting to ask a dumb question, I even googled a number of Larry's articles, and things written about Larry's proposal, in order to better understand where he was coming from, before asking my question.) I think that I have a basic understanding of the theory behind Larry's proposal. And I get that one shouldn't adopt a strategy that one doesn't fully understand. That was drilled into my head by a number of comments on this site the first day I read through it. I just feel that sometimes, in this forum, it's a bit scary for a new person to weigh in, we worry that we're going to ask something stupid, and I felt that the response I got above was a bit of a brush off. If my question was stupid, I'm sorry. But I asked it sincerely, and the response I got didn't particularly motivate me to ask more questions as time goes on.

I've run big online forums before, and I've been the guy who everyone is looking to for advice. It's not always easy, I get that. I just ask that folks keep in mind that some of us are new here, and even newer people are coming here (hopefully) every day. And some of our questions are going to lack a full understanding of the underlying principles, and some of them might even come across as dumb (and they might even be dumb). But asking questions, and joining in the discussion, is the only way we're going to learn.

Perhaps I misread the tone of Larry's response to me above. But I just wanted to point out that many of us are new here, and it's not easy for us to feel comfortable asking questions or weighing in, when so many of you are so far ahead of us in terms of your understanding of all of this. Just keep that in mind when suggesting that we go read a book before asking any more questions.
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Re: Should retirement investors own small/value stocks at al

Post by acegolfer »

abyan wrote: Perhaps I misread the tone of Larry's response to me above. But I just wanted to point out that many of us are new here, and it's not easy for us to feel comfortable asking questions or weighing in, when so many of you are so far ahead of us in terms of your understanding of all of this. Just keep that in mind when suggesting that we go read a book before asking any more questions.
Well said. If a post includes a link or cites an article without a short summary, I doubt many readers will look into it.

Personally, if a person does not provide a summary that an average BH can understand, I reckon him not knowing the materials well enough. If one fully understands the paper, he should be able to summarize it supporting his argument.
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Re: Should retirement investors own small/value stocks at al

Post by rca1824 »

If you're willing to expose yourself to market risk by holding stocks at all, why wouldn't you also want to expose yourself to small and value factor risk as well?

For every simple TSM/TBM portfolio, there exists a TSM/SV/TBM with the same risk but higher expected returns, or the same expected returns but lower risk.

The question then isn't whether to own small/value stocks, but how much to land on the efficient frontier in a conservative AA?
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
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Browser
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Re: Should retirement investors own small/value stocks at al

Post by Browser »

abyan wrote:As a relatively new member of this forum, but not a new member to online forums in other areas, which I've actually managed, it's a bit scary jumping in and asking questions when so many others seem to be experts on these various issues. And when you ask a question, and are told that you clearly don't understand what's going on, and that you should "buy my book," it's not a terribly helpful response, and feels like a bit of a brush off, like you've just said something stupid.

I know that I don't fully understand what Larry is proposing, that's why I asked a question in the first place, to better understand all of this. (And, not wanting to ask a dumb question, I even googled a number of Larry's articles, and things written about Larry's proposal, in order to better understand where he was coming from, before asking my question.) I think that I have a basic understanding of the theory behind Larry's proposal. And I get that one shouldn't adopt a strategy that one doesn't fully understand. That was drilled into my head by a number of comments on this site the first day I read through it. I just feel that sometimes, in this forum, it's a bit scary for a new person to weigh in, we worry that we're going to ask something stupid, and I felt that the response I got above was a bit of a brush off. If my question was stupid, I'm sorry. But I asked it sincerely, and the response I got didn't particularly motivate me to ask more questions as time goes on.

I've run big online forums before, and I've been the guy who everyone is looking to for advice. It's not always easy, I get that. I just ask that folks keep in mind that some of us are new here, and even newer people are coming here (hopefully) every day. And some of our questions are going to lack a full understanding of the underlying principles, and some of them might even come across as dumb (and they might even be dumb). But asking questions, and joining in the discussion, is the only way we're going to learn.

Perhaps I misread the tone of Larry's response to me above. But I just wanted to point out that many of us are new here, and it's not easy for us to feel comfortable asking questions or weighing in, when so many of you are so far ahead of us in terms of your understanding of all of this. Just keep that in mind when suggesting that we go read a book before asking any more questions.
My sense of it is that (1) Larry is a very busy guy who nonetheless keeps up and posts here regularly, but he doesn't always have the time to craft an elaborate response - often uses "Larry shorthand", and (2) he is peppered with same questions and arguments over and over again; nonetheless seems to take time to respond even though it must seem like "Groundhog Day" to him. His efforts are much appreciated. He's always taken time to get back to me with PM when I've wanted more info about something.
We don't know where we are, or where we're going -- but we're making good time.
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Should retirement investors own small/value stocks at al

Post by acegolfer »

rca1824 wrote:If you're willing to expose yourself to market risk by holding stocks at all, why wouldn't you also want to expose yourself to small and value factor risk as well?

For every simple TSM/TBM portfolio, there exists a TSM/SV/TBM with the same risk but higher expected returns, or the same expected returns but lower risk.

The question then isn't whether to own small/value stocks, but how much to land on the efficient frontier in a conservative AA?
It's because ppl have different definition of risks. You can't generalize it using your definition of risk that doesn't apply to others.

If what you are saying is true for all investors, then market portfolio will always tilt and will never be in equilibrium.
Angst
Posts: 2968
Joined: Sat Jun 09, 2007 11:31 am

Re: Should retirement investors own small/value stocks at al

Post by Angst »

abyan wrote:As a relatively new member of this forum, but not a new member to online forums in other areas, which I've actually managed, it's a bit scary jumping in and asking questions when so many others seem to be experts on these various issues. And when you ask a question, and are told that you clearly don't understand what's going on, and that you should "buy my book," it's not a terribly helpful response, and feels like a bit of a brush off, like you've just said something stupid.

I know that I don't fully understand what Larry is proposing, that's why I asked a question in the first place, to better understand all of this. (And, not wanting to ask a dumb question, I even googled a number of Larry's articles, and things written about Larry's proposal, in order to better understand where he was coming from, before asking my question.) I think that I have a basic understanding of the theory behind Larry's proposal. And I get that one shouldn't adopt a strategy that one doesn't fully understand. That was drilled into my head by a number of comments on this site the first day I read through it. I just feel that sometimes, in this forum, it's a bit scary for a new person to weigh in, we worry that we're going to ask something stupid, and I felt that the response I got above was a bit of a brush off. If my question was stupid, I'm sorry. But I asked it sincerely, and the response I got didn't particularly motivate me to ask more questions as time goes on.

I've run big online forums before, and I've been the guy who everyone is looking to for advice. It's not always easy, I get that. I just ask that folks keep in mind that some of us are new here, and even newer people are coming here (hopefully) every day. And some of our questions are going to lack a full understanding of the underlying principles, and some of them might even come across as dumb (and they might even be dumb). But asking questions, and joining in the discussion, is the only way we're going to learn.

Perhaps I misread the tone of Larry's response to me above. But I just wanted to point out that many of us are new here, and it's not easy for us to feel comfortable asking questions or weighing in, when so many of you are so far ahead of us in terms of your understanding of all of this. Just keep that in mind when suggesting that we go read a book before asking any more questions.
Hi abyan,
welcome to the forum! :wink: Your background provides a great perspective to add to our community, please hang in there. I too would encourage you to give Larry some slack. Both of your posts in this thread have been relatively long reads, and it's something to expect the average reader, let alone Larry, to carefully read and digest this much in this context. From the second to last paragraph of your first post:
abyan wrote:If someone is at Vanguard, do you have any suggestions for replicating your tilt portfolio, and is it worth tilting even partially, or would a partial tilt (say, buying TSM and emerging markets, and/or small cap value and/or international small cap and/or intl value) risk not actually lowering beta exposure because we'd be injecting one volatile asset and not compensating with an equal and uncorrelated one?
this is a broad question deserving an in-depth response, and it is something that has been asked many times before in the forum and Larry has addressed, and surely will continue to do so. Try not to take offense at the apparent shortness of some responses. You're experiencing first hand the perspective from the other side of the fence now, where I too started (and largely still remain), but you'll find your way to the information you need if you hang in there! I suggest you spend more time searching for past threads where Larry has addressed this before in greater depth. Maybe get the book at the library too. Either way, good luck and please stay with us.
Last edited by Angst on Thu Jul 31, 2014 11:43 am, edited 1 time in total.
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 7:28 am
Location: St Louis MO

Re: Should retirement investors own small/value stocks at al

Post by larryswedroe »

abyan
no clue how you decided I was brushing you off in any way. I gave you what I thought was good answer and then suggested that if you were really interested in the specifics you read the book I wrote on the subject/ Cannot see how you can think that's a brush off.

BTW_ I just had surgery on my elbow, sitting here with cast and hunting and pecking to try and answer your question--cast off Tuesday

Stlutz
As you focus on smaller and smaller parts of the market, tail risks go up, not down. True in ISOLATION, but remember that I suggested tilting AND lowering beta exposure which historically clearly cuts tail risk if you use high quality bonds. So say 30% equity with only SV is much less risky iMO than say 70/30 TSM or even higher (as has been the case to get same returns)

Larry
rca1824
Posts: 719
Joined: Tue Jun 03, 2014 9:33 am

Re: Should retirement investors own small/value stocks at al

Post by rca1824 »

acegolfer wrote:
rca1824 wrote:If you're willing to expose yourself to market risk by holding stocks at all, why wouldn't you also want to expose yourself to small and value factor risk as well?

For every simple TSM/TBM portfolio, there exists a TSM/SV/TBM with the same risk but higher expected returns, or the same expected returns but lower risk.

The question then isn't whether to own small/value stocks, but how much to land on the efficient frontier in a conservative AA?
It's because ppl have different definition of risks. You can't generalize it using your definition of risk that doesn't apply to others.

If what you are saying is true for all investors, then market portfolio will always tilt and will never be in equilibrium.
What is controversial about my definition of risk? Who would disagree with wanting a portfolio that has the same expected returns but less variance? If portfolio B stochastically dominates portfolio A, then B is better than A for everyone, no matter your risk tolerance.

Here is some good background reading: http://en.wikipedia.org/wiki/Stochastic_dominance
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
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