Small Cap Index - What % of equities?
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Small Cap Index - What % of equities?
Hi all. I want to know what the general take is on Small Cap Index funds and how much to put in a portfolio. Some people like Bogle, say you don't need it. Others like Malkiel, Ferri, and Merriman say that it will produce higher returns. Merriman actually does 50% of his U.S. stocks as small cap!
What is a reasonable allocation?
I'm not interested in the small cap value strategy. Just a small cap blended index.
What is a reasonable allocation?
I'm not interested in the small cap value strategy. Just a small cap blended index.
Re: Small Cap Index - What % of equities?
I try to have a Morningstar 9-box style grid with only 45% to 50% in the top row of 3 boxes. The top row is large-cap. So I like small-caps to be about 50% of my equities. If you look at the style grid for the Vanguard small-cap funds, you will see they have a significant mid-cap exposure.
I suppose you know that you will not get a reliable "general take" from the responses simply because the responders will not be enough to represent "general".
I suppose you know that you will not get a reliable "general take" from the responses simply because the responders will not be enough to represent "general".
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Re: Small Cap Index - What % of equities?
Roughly 30% of my US Stocks are in Small-Cap.
Disclaimer: I'm mid-20s and have an aggressive AA (100% stock) until I have a larger portfolio.
Disclaimer: I'm mid-20s and have an aggressive AA (100% stock) until I have a larger portfolio.
Re: Small Cap Index - What % of equities?
I'm not much of a tilter, so the market weight satisfies me.
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Re: Small Cap Index - What % of equities?
I currently have 20% of my US stocks in small caps. But I'm worried that's too little.
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Re: Small Cap Index - What % of equities?
There might be something in it, or then again there might not. A lot of smart people think there's something in it. I switched from 500 Index to Total Stock about fifteen years ago, so I hold the market weight of small caps, but I don't tilt.
Be sure to read John C. Bogle's essay, The Telltale Chart. (NOTE: The online version is dated 2002, and John C. Bogle presented a version of it, with updated data, in his 2010 book Don't Count On it. It's my opinion that his case is still well supported, but that the data through 2010 do not present as tidy a picture as they did in 2002.)
This is really an issue where there's no substitute for looking at the data for yourself. You should not do it by trusting to second hand opinion.
What I find is that the effect becomes less and less definite as you ask harder and harder questions. Did small-caps outperform the total market since 1926? Yes. Did they if you remove the single period 1975-1983? No. If they did have higher return, did they have higher risk-adjusted return? Probably not, and some have claimed that's a straw man because nobody ever actually said they did. Are there problems with the data set? Maybe there were. Have the problems been fixed? Maybe they have been. How long do you need to wait to be pretty sure you will see the outperformance yourself? Based on the past, you might have to patiently wait out 17 or 18 years of painful underperformance first. Why don't people who advocate small caps like the Vanguard Small-Cap Index Fund? Because they say the small-caps in it aren't small enough. Are there issues with micro cap index funds? Yes.
There might be something in it, but it's not close to being a certainty. Since all of the justification for it is based on backtesting that assumes you will remain faithfully invested in small-caps for long periods of time, you need to have a strong enough conviction that you yourself will actually stay invested in them for long periods of time.
Be sure to read John C. Bogle's essay, The Telltale Chart. (NOTE: The online version is dated 2002, and John C. Bogle presented a version of it, with updated data, in his 2010 book Don't Count On it. It's my opinion that his case is still well supported, but that the data through 2010 do not present as tidy a picture as they did in 2002.)
This is really an issue where there's no substitute for looking at the data for yourself. You should not do it by trusting to second hand opinion.
What I find is that the effect becomes less and less definite as you ask harder and harder questions. Did small-caps outperform the total market since 1926? Yes. Did they if you remove the single period 1975-1983? No. If they did have higher return, did they have higher risk-adjusted return? Probably not, and some have claimed that's a straw man because nobody ever actually said they did. Are there problems with the data set? Maybe there were. Have the problems been fixed? Maybe they have been. How long do you need to wait to be pretty sure you will see the outperformance yourself? Based on the past, you might have to patiently wait out 17 or 18 years of painful underperformance first. Why don't people who advocate small caps like the Vanguard Small-Cap Index Fund? Because they say the small-caps in it aren't small enough. Are there issues with micro cap index funds? Yes.
There might be something in it, but it's not close to being a certainty. Since all of the justification for it is based on backtesting that assumes you will remain faithfully invested in small-caps for long periods of time, you need to have a strong enough conviction that you yourself will actually stay invested in them for long periods of time.
Last edited by nisiprius on Mon Jun 22, 2015 6:18 pm, edited 1 time in total.
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.
Re: Small Cap Index - What % of equities?
I say go big or go home if you're going to tilt make it worthwhile. Also consider tilting to value and/or small value
25% VTI
25% VXUS
25% VBR
25% VSS
- - - Value Blend Growth
Large - -13 - 13 -12
Medium 13 - 11 - 9
Small -- 14 - 10 - 5
http://portfolio.morningstar.com/Rtport ... Entry.aspx
25% VTI
25% VXUS
25% VBR
25% VSS
- - - Value Blend Growth
Large - -13 - 13 -12
Medium 13 - 11 - 9
Small -- 14 - 10 - 5
http://portfolio.morningstar.com/Rtport ... Entry.aspx
Last edited by mbk734 on Mon Jun 22, 2015 5:50 pm, edited 1 time in total.
You can't stop the waves, but you can learn to surf
Re: Small Cap Index - What % of equities?
I just read The Telltale Chart -- Jack Bogle is the man!nisiprius wrote:There might be something in it, or then again there might not. A lot of smart people think there's something in it. I switched from 500 Index to Total Stock about fifteen years ago, so I hold the market weight of small caps, but I don't tilt.
Be sure to read John C. Bogle's essay, The Telltale Chart.
This is really an issue where there's no substitute for looking at the data for yourself. You should not do it by trusting to second hand opinion.
What I find is that the effect becomes less and less definite as you ask harder and harder questions. Did small-caps outperform the total market since 1926? Yes. Did they if you remove the single period 1975-1983? No. If they did have higher return, did they have higher risk-adjusted return? Probably not, and some have claimed that's a straw man because nobody ever actually said they did. Are there problems with the data set? Maybe there were. Have the problems been fixed? Maybe they have been. How long do you need to wait to be pretty sure you will see the outperformance yourself? Based on the past, you might have to patiently wait out 17 or 18 years of painful underperformance first. Why don't people who advocate small caps like the Vanguard Small-Cap Index Fund? Because they say the small-caps in it aren't small enough. Are there issues with micro cap index funds? Yes.
There might be something in it, but it's not close to being a certainty. Since all of the justification for it is based on backtesting that assumes you will remain faithfully invested in small-caps for long periods of time, you need to have a strong enough conviction that you yourself will actually stay invested in them for long periods of time.
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Re: Small Cap Index - What % of equities?
The Portfolio Watch tool available to my Vanguard accounts gives the following market capitalization stats for the US stock market *:
Large Cap: 64%
Mid Cap: 28%
Small Cap: 8%
*Source: MSCI® US Broad Market Index as of 05/31/2015.
Assuming a 50% stocks /50% bonds portfolio , here's what I would consider aggressive and conservative...
--Aggressive: 25% large cap + 15% mid-cap + 10% small cap = 50% stocks. (recall that 10% of a 50% allocation to stocks is actually 20% of the total to small caps; 10 /50 = 0.20)
--Conservative: 30% large cap + 15% mid-cap + 5% small cap = 50% stocks (recall that 5% of a 50% allocation to stocks is actually 10% of the total to small caps; 5 / 50 = 0.10).
Good luck with your decision!
Disclosure: I am currently allocated to my definition of "aggressive" which is 20% of total stocks to the small cap category in my retirement account. The account is 50% - S / 50% - B.
Large Cap: 64%
Mid Cap: 28%
Small Cap: 8%
*Source: MSCI® US Broad Market Index as of 05/31/2015.
Assuming a 50% stocks /50% bonds portfolio , here's what I would consider aggressive and conservative...
--Aggressive: 25% large cap + 15% mid-cap + 10% small cap = 50% stocks. (recall that 10% of a 50% allocation to stocks is actually 20% of the total to small caps; 10 /50 = 0.20)
--Conservative: 30% large cap + 15% mid-cap + 5% small cap = 50% stocks (recall that 5% of a 50% allocation to stocks is actually 10% of the total to small caps; 5 / 50 = 0.10).
Good luck with your decision!
Disclosure: I am currently allocated to my definition of "aggressive" which is 20% of total stocks to the small cap category in my retirement account. The account is 50% - S / 50% - B.
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes
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Re: Small Cap Index - What % of equities?
I have half of my equities in small, half in large/mid. Paul Merriman has done some excellent work discussing the historical data w/ small and value. I also have about 75% of my portfolio in value and 25% in growth.
Even if small doesnt beat large over the next 30 years and value doesnt beat growth, I have a hard time believing that large/growth will destroy small/value. In other words, I feel that either the future will resemble the past and small/value will out perform or there won't really be much of a difference and I'll get roughly the same return as someone in total stock market would get.
The thing is, small companies are most definitely riskier and companies who many consider to be "out of favor" often are "value" and thus they are riskier. Therefore, all things being equal, it'd make more sense to put all your money in the less risky stuff than in the risky stuff. Thus, you should expect a higher return for the risk. Otherwise we'd all just put 100% of our money into Apple and Exxon.
I also split my investments 50% domestic/50% foreign and slightly overweight emerging markets in the foreign. I add 10% REITs as a diversifier. This is basically paul merriman's portfolio. If you backtest it using portfoliovisualizer.com you'll see it has had ~9-10% post-inflation return w/ about the same volatility as the S/P 500. Impressive. Will it continue? Maybe not but you have to make the best educated guess with your money that you can and tilting strongly to small/value, adding REITs, and splitting btwn foreign/domestic is roughly the best guess one can make based on history.
Oh and my ER for all funds combined is around 0.15%, roughly what VT is. So I am able to tilt to more risky but hopefully higher earning ETFs w/o adding hardly any expense.
Even if small doesnt beat large over the next 30 years and value doesnt beat growth, I have a hard time believing that large/growth will destroy small/value. In other words, I feel that either the future will resemble the past and small/value will out perform or there won't really be much of a difference and I'll get roughly the same return as someone in total stock market would get.
The thing is, small companies are most definitely riskier and companies who many consider to be "out of favor" often are "value" and thus they are riskier. Therefore, all things being equal, it'd make more sense to put all your money in the less risky stuff than in the risky stuff. Thus, you should expect a higher return for the risk. Otherwise we'd all just put 100% of our money into Apple and Exxon.
I also split my investments 50% domestic/50% foreign and slightly overweight emerging markets in the foreign. I add 10% REITs as a diversifier. This is basically paul merriman's portfolio. If you backtest it using portfoliovisualizer.com you'll see it has had ~9-10% post-inflation return w/ about the same volatility as the S/P 500. Impressive. Will it continue? Maybe not but you have to make the best educated guess with your money that you can and tilting strongly to small/value, adding REITs, and splitting btwn foreign/domestic is roughly the best guess one can make based on history.
Oh and my ER for all funds combined is around 0.15%, roughly what VT is. So I am able to tilt to more risky but hopefully higher earning ETFs w/o adding hardly any expense.
Re: Small Cap Index - What % of equities?
I personally prefer mid caps vs other caps, but it's preference. I think anyone saying don't invest in small and mid caps is doing you a disservice and leaving a lot of your money on the table. I've found that fully replacing large caps with mid caps generates much better returns and when hedged with bonds, is less volatile than the S&P while beating over long horizons.
15% Large Cap, 30% Mid Cap, 15% REIT, 10% EM, 25% LT Bond, 5% TIPs
Re: Small Cap Index - What % of equities?
I have 31% of my U.S. domestic equities in mid-small cap. Specifically, 31% of my domestic equities are in the "extended market" index: VIEIX (or VEXMX -- or VXF as an ETF). It's mid- and small-cap, but with no value or growth tilt. But 31% is a larger percentage than implied by a VTSMX (Total Stock Market) distribution, which would have 20-25% in the extended market. I'm very satisfied with this allocation.
- Taylor Larimore
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"Rethinking Small Caps"
ajacobs6:Hi all. I want to know what the general take is on Small Cap Index funds and how much to put in a portfolio
Rethinking Small CapsOur research suggests that it is time to rethink the idea that small stocks outperform large stoncs on a risk-adjusted basis. On the contrary, it appears there may actually be a large company stock advantage.
Consider the simplicity and superior long-term performance of Total Market Index Funds.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: "Rethinking Small Caps"
interesting article, Taylor. Thanks for posting. If you backtest small vs large on portfoliovisualizer.com, from 1982-2014 (since the so-called small effect became public knowledge in 1981, according to that article) then large does nudge out small but only if you look at the united states. If you look at the global economy even during those date ranges small beat large. If you look at as much data as portfoliovisualizer will give you, from 1972-2014, small beat large in domestic and clobbered large internationallly. If you were 50/50 domestic/international small beat large during any of the above periods.Taylor Larimore wrote:ajacobs6:Hi all. I want to know what the general take is on Small Cap Index funds and how much to put in a portfolioRethinking Small CapsOur research suggests that it is time to rethink the idea that small stocks outperform large stoncs on a risk-adjusted basis. On the contrary, it appears there may actually be a large company stock advantage.
Consider the simplicity and superior long-term performance of Total Market Index Funds.
Best wishes.
Taylor
If you want to further data mine, just take out the incredible bull market that the large caps experienced '94-'95. Then, domestically, small beat large by 3-4%/year from '72-'14 (Taking out the years '94-'99)...
Point being, small beats large because of added risk. Even the article admits that on an absolute return basis small beats large. If you data mine only domestic stocks after 1981 and only look at the sharpe-ratio then yes large beat small during that period. but if you invest in small you understand that you are taking more risk. I would never put 100% into small that'd be hedging my bets way too much. But if you're say 50/50 between large and small and you rebalance annually you would have historically had higher returns w/ the same amount of risk as being 100% in the s/p 500.
Paul merriman outlines this wonderfully on his website paulmerriman.com, under "ultimate buy/hold strategy".
Small and value HAVE had better performance but they have been more volatile.
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Re: Small Cap Index - What % of equities?
I recommend the exact amount that's in the Total Stock Market fund.
Re: Small Cap Index - What % of equities?
I have a target of 40% of domestic equities in extended market plus another 10% MicroCap so 50% I guess is what I decided after much slogging through this forum and a few books. I don't think there is a right or wrong answer but I believe anywhere from 10-50% is what most people who want to add tilt do. Will it make any impact over just owning total US? Idk. Maybe. I'm hoping so.
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Re: Small Cap Index - What % of equities?
I doubt there is any kind of consensus, the 'general take' would obviously be to hold the market weightings because that is what the aggregate market is doing as a whole.
John Bogle has suggested that there's no compelling reason to tilt to small-caps (Telltale chart), but he does advocate for holding the Total Stock Market as it's weighted, which does include small-cap stocks. He doesn't see any issue with holding a S&P500 index (predominately large and mid-cap) instead - the returns over time haven't been much different between TSM and the S&P index (both have spent time slightly out performing each other).
Warren Buffett has said numerous times, that a low-cost S&P500 Index fund is a good choice for most people. He has setup a bequest for his wife suggesting using that fund for the money he leaves her. When asked explicitly what he thought a young persons allocations to various asset classes should be, he suggested putting it all in a S&P500 fund and to "get back to work". (When asked in an interview explicitly about Vanguard Total Stock Market index he said "That's good enough".)
In the book "The Intelligent Investor", Benjamin Graham wrote about stock selection criteria for a passive "defensive" investor, and suggested that small-cap or "secondary" companies be avoided, but had no issue with a diversified selection of large leading companies suggesting even replicating the 30 stock Down Jones Industrial Average.
The oldest small-cap mutual fund still operating ,T.Rowe Price's Small-Cap Stock fund (OTCFX), has not been optimistic about small-caps in recent years. From their annual reports:
John Bogle has suggested that there's no compelling reason to tilt to small-caps (Telltale chart), but he does advocate for holding the Total Stock Market as it's weighted, which does include small-cap stocks. He doesn't see any issue with holding a S&P500 index (predominately large and mid-cap) instead - the returns over time haven't been much different between TSM and the S&P index (both have spent time slightly out performing each other).
Warren Buffett has said numerous times, that a low-cost S&P500 Index fund is a good choice for most people. He has setup a bequest for his wife suggesting using that fund for the money he leaves her. When asked explicitly what he thought a young persons allocations to various asset classes should be, he suggested putting it all in a S&P500 fund and to "get back to work". (When asked in an interview explicitly about Vanguard Total Stock Market index he said "That's good enough".)
In the book "The Intelligent Investor", Benjamin Graham wrote about stock selection criteria for a passive "defensive" investor, and suggested that small-cap or "secondary" companies be avoided, but had no issue with a diversified selection of large leading companies suggesting even replicating the 30 stock Down Jones Industrial Average.
The oldest small-cap mutual fund still operating ,T.Rowe Price's Small-Cap Stock fund (OTCFX), has not been optimistic about small-caps in recent years. From their annual reports:
I'm of the opinion that small-caps are generally more risky than larger cap stocks. They definitely have larger swings in price volatility. But they also go through fits of being over-valued and under-valued relative to stocks that have a larger market cap. If I was going to buy them, I would want to be satisfied that I could clearly see some additional value (comparatively good prospects, lower price valuations) in order to take on the risks. I would not be satisfied that the market is efficiently pricing a "risk premium" whether I can see it or not... and even then, I'm not sure I would want to buy them because in order to be rewarded for buying them "cheap" I would have to wait for some time that I considered them of at least "average" value relative to the broader market in order to get an advantage by it. The idea of playing that game brings about some other problems... there's a whole bunch of other reasons I don't like small-caps (particularly micro-caps) that I don't want to get into, but IMO the right allocation to small-caps is 0% especially at the current valuations.at the end of 2011 they said:
At midyear, we noted that we expected small-caps to underperform large-caps, and we cautioned investors not to expect the continued strong performance of our asset class. ...
http://www.sec.gov/Archives/edgar/data/ ... s_ncsr.htm
at the end of 2012:
We believe small-caps will face a significant challenge in outperforming larger-cap shares. ...
http://www.sec.gov/Archives/edgar/data/ ... s_ncsr.htm
at the end of 2013:
While we don’t expect small-cap stocks to experience sharp depreciation, we do expect them to underperform large-cap companies. We could easily foresee a period similar to the mid-1990s, in which even in a rising economy, the small-cap sector experienced years of P/E compression and trailing returns versus the S&P 500 Index. We would strongly advise you to review your allocations to small-cap funds and consider reducing holdings in the space, particularly if you find yourself overweight in the asset class after this period of strong performance. ...
http://www.sec.gov/Archives/edgar/data/ ... s_ncsr.htm
at the end of 2014:
We recommend that investors reduce their small-cap allocation to modest levels as we believe that the asset class will continue to suffer from eroding price/earnings valuations versus large-cap shares. In our view, large-cap stocks will likely outperform small-caps in 2015. ...
http://www.sec.gov/Archives/edgar/data/ ... s_ncsr.htm
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Re: Small Cap Index - What % of equities?
I had read about slices and wanted to try it. I added VB and VO, about 10% worth of each with extra cash that was coming in. I forgot to
look at them or balance. It seems VB (Small Cap) has grown a lot and VO (Mid Cap) has grown some. I also have other S&P 500 and Total Market.
Personal Capital says the weighting is 72.65% Large, 5.7% Mid, and 10.9% Small Caps. I am not sure I have any understanding of what they will
or are supposed to do in the future, though guys like Merriman seem to say there is scholarly evidence they will reduce risk and/or increase gains
without increasing risk but I am not sure I trust anyone though the stories seem fancy and gleeful! I guess I should build Mid Caps up a bit to match
the slices, we'll see.
I think if I were to do it all over again I would lean more towards 3 or 4 funds, I am not convinced the slicing, dicing and other fidgeting is
going to help and is very much not worth the pain of pondering.
look at them or balance. It seems VB (Small Cap) has grown a lot and VO (Mid Cap) has grown some. I also have other S&P 500 and Total Market.
Personal Capital says the weighting is 72.65% Large, 5.7% Mid, and 10.9% Small Caps. I am not sure I have any understanding of what they will
or are supposed to do in the future, though guys like Merriman seem to say there is scholarly evidence they will reduce risk and/or increase gains
without increasing risk but I am not sure I trust anyone though the stories seem fancy and gleeful! I guess I should build Mid Caps up a bit to match
the slices, we'll see.
I think if I were to do it all over again I would lean more towards 3 or 4 funds, I am not convinced the slicing, dicing and other fidgeting is
going to help and is very much not worth the pain of pondering.
Re: Small Cap Index - What % of equities?
I have about 7% in Small Cap which is a bit less than total market weight. I have a most of my funds in market indexes and the under weight seem to arise from a few legacy Large Caps that I had acquired over the years in my taxable account.
Re: Small Cap Index - What % of equities?
A lot of your criticisms of the small vs. large chart could be said exactly of a stocks vs. bonds chart so I won't even go into detail trying to refute them all. Would you recommend a 100% bond portfolio? I don't think so. We go heavy on stocks when we're young and still hold some stocks when we're old because we believe the extra returns, adjusting for risk, are worth it. Small cap : total stock market :: stocks : bonds.nisiprius wrote:Did they if you remove the single period 1975-1983? No. If they did have higher return, did they have higher risk-adjusted return? Probably not, and some have claimed that's a straw man because nobody ever actually said they did. Are there problems with the data set? Maybe there were. Have the problems been fixed? Maybe they have been. How long do you need to wait to be pretty sure you will see the outperformance yourself? Based on the past, you might have to patiently wait out 17 or 18 years of painful underperformance first. Why don't people who advocate small caps like the Vanguard Small-Cap Index Fund? Because they say the small-caps in it aren't small enough. Are there issues with micro cap index funds? Yes.
There might be something in it, but it's not close to being a certainty. Since all of the justification for it is based on backtesting that assumes you will remain faithfully invested in small-caps for long periods of time, you need to have a strong enough conviction that you yourself will actually stay invested in them for long periods of time.
Also remember that when we choose one asset class over another, we aren't looking for guaranteed overperformance, we are just looking for expected overperformance. No investment is guaranteed. Instead we maximize our expected utility which is the integral of our utility function multiplied by the probability distribution over different outcomes.
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
Re: Small Cap Index - What % of equities?
Wrong! 100% of what nisiprius has said cannot be refuted, which is, time will tell. The only way you can get out of that or refute itrca1824 wrote:A lot of your criticisms of the small vs. large chart could be said exactly of a stocks vs. bonds chart so I won't even go into detail trying to refute them all. Would you recommend a 100% bond portfolio? I don't think so. We go heavy on stocks when we're young and still hold some stocks when we're old because we believe the extra returns, adjusting for risk, are worth it. Small cap : total stock market :: stocks : bonds.nisiprius wrote:Did they if you remove the single period 1975-1983? No. If they did have higher return, did they have higher risk-adjusted return? Probably not, and some have claimed that's a straw man because nobody ever actually said they did. Are there problems with the data set? Maybe there were. Have the problems been fixed? Maybe they have been. How long do you need to wait to be pretty sure you will see the outperformance yourself? Based on the past, you might have to patiently wait out 17 or 18 years of painful underperformance first. Why don't people who advocate small caps like the Vanguard Small-Cap Index Fund? Because they say the small-caps in it aren't small enough. Are there issues with micro cap index funds? Yes.
There might be something in it, but it's not close to being a certainty. Since all of the justification for it is based on backtesting that assumes you will remain faithfully invested in small-caps for long periods of time, you need to have a strong enough conviction that you yourself will actually stay invested in them for long periods of time.
Also remember that when we choose one asset class over another, we aren't looking for guaranteed overperformance, we are just looking for expected overperformance. No investment is guaranteed. Instead we maximize our expected utility which is the integral of our utility function multiplied by the probability distribution over different outcomes.
is to not live long enough. The rest is fluff. I suggest you go back and read the actual words that he wrote...they are usually spot on!
Re: Small Cap Index - What % of equities?
By the same logic you should never invest in stocks and stick to 100% bond portfolio -- it's the only safe bet!IPer wrote:Wrong! 100% of what nisiprius has said cannot be refuted, which is, time will tell. The only way you can get out of that or refute itrca1824 wrote:A lot of your criticisms of the small vs. large chart could be said exactly of a stocks vs. bonds chart so I won't even go into detail trying to refute them all. Would you recommend a 100% bond portfolio? I don't think so. We go heavy on stocks when we're young and still hold some stocks when we're old because we believe the extra returns, adjusting for risk, are worth it. Small cap : total stock market :: stocks : bonds.nisiprius wrote:Did they if you remove the single period 1975-1983? No. If they did have higher return, did they have higher risk-adjusted return? Probably not, and some have claimed that's a straw man because nobody ever actually said they did. Are there problems with the data set? Maybe there were. Have the problems been fixed? Maybe they have been. How long do you need to wait to be pretty sure you will see the outperformance yourself? Based on the past, you might have to patiently wait out 17 or 18 years of painful underperformance first. Why don't people who advocate small caps like the Vanguard Small-Cap Index Fund? Because they say the small-caps in it aren't small enough. Are there issues with micro cap index funds? Yes.
There might be something in it, but it's not close to being a certainty. Since all of the justification for it is based on backtesting that assumes you will remain faithfully invested in small-caps for long periods of time, you need to have a strong enough conviction that you yourself will actually stay invested in them for long periods of time.
Also remember that when we choose one asset class over another, we aren't looking for guaranteed overperformance, we are just looking for expected overperformance. No investment is guaranteed. Instead we maximize our expected utility which is the integral of our utility function multiplied by the probability distribution over different outcomes.
is to not live long enough. The rest is fluff. I suggest you go back and read the actual words that he wrote...they are usually spot on!
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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Re: Small Cap Index - What % of equities?
OK, refute one: Tell me the single 9-year period which, if removed from the record for 1926 through 2010, would result in bonds beating stocks.rca1824 wrote:A lot of your criticisms of the small vs. large chart could be said exactly of a stocks vs. bonds chart so I won't even go into detail trying to refute them all.nisiprius wrote:Did they if you remove the single period 1975-1983? No....
More generally, we need to use our own judgement, look at the data, and form a conviction about the strength and robustness of some claimed effect. We need to do it for ourselves. If we use authority, we need to weigh authority and look behind what they are saying.
The strength and robustness of the equity risk premium is quite convincing to me--and to most authorities. The strength and robustness of the size effect is in a completely different category. It is much less convincing. Some people find it convincing enough, some don't.
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Re: Small Cap Index - What % of equities?
I think if you do it, it has to be at least 20-40% to see substantial benefits. Anything less than that won't matter much in a long term period, and would not be worth it to invest your time and effort in it.
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Re: Small Cap Index - What % of equities?
As Warren Buffett once said, "If past history was all that is needed to play the game of money, the richest people would be librarians."
More "hands on" investors might want to consider the bullish argument for over-weighting small caps by lookng at current macroeconomic back drop. Have you noticed that small cap and the NASDAQ has really perked up this year? According to Morningstar Total Returns table, money has already started moving to small cap.
Category YTD ( as 6-22-15)
Small growth: +10.8
Mid-cap: +8.8%
Small Blend: +6.3%
Large Blend: +4.0%
http://news.morningstar.com/fund-category-returns/
What is the macro background that may be driving this ? The Fed's proposed tightening cycle will continue to strengthen the $USD vs other currencies, in addition to the obvious contribution from economic weakness in China, Japan, and Europe. These developed countries are struggling, and are lowering their interest rates to stimulate growth. This is the "trade-weighted effect" (vs foreign currencies). Then we have to consider higher US domestic oil production, which helps keep the trade deficit from growing. All of these, including our higher yields on US paper vs foreign currencies, are attracting capital to the US and strengthening the $USD.
Many of the companies in the Dow and S & P 500 get 40-50% of their earnings from overseas. The strong $USD will be a headwind to foreign earnings of these larger companies. It is wishful thinking to believe that we will continue to see double digit earnings growth from the S & P 500 companies going forward as a result of the $USD drag. Earnings growth for small caps are likely to be more favorable in the current environment because they tend to be more domestically-focused.
An anomaly that helped large caps in the last few years was that interest rates have been falling, even this late in the economic cycle. Lower interest rates are helpful to companies who carry larger amounts of debt, which tend to be the large caps. Now, higher interest rates on their debt is likely to cause yet another headwind, as they will have to pay out more earnings to service the debt.
While the rest of the world is struggling, the USA and US consumers will receive some benefits. One of the benefits to a stronger $USD is lower US inflation rates. Imports will be cheaper and imported oil is already cheaper. When inflation falls, it is like a tax cut to US consumers. This tends to benefit early-cycle small company stocks as US consumers have more money in their pockets. There is some lag effect here, and we will eventually see it. As Wayne Gretzky said we want to "skate to where the puck is going to be."
IMO: When considering the current macro backdrop, P/Es are likely to expand as small caps are poised to out-perform over the next few years. Some of us, including myself, believe there is some logic for over-weighting small caps.
Take-aways:
--As with all investments, there are periods of under-performance, and periods of out-performance. The past few years, the large caps have out-performed. The move to small cap is already evident. Refer to the Y-T-D Morningstar data above.
--The good news is that most posters in this thread have at least market weight allocation to small caps, and they will receive the benefit as these macro trends continue to unfold.
--For BHs who prefer a "hands off", "passive approach", there are complexities to equity investing from macro trends that argue for staying diversified across large cap, mid cap, and small cap. The ones mentioned above for having allocation to small cap are some examples. Just keep in mind there is always an argument by the money managers for category rotation. By staying diversified, we will always have some exposure to the changing trends.
Thanks to all for a good discussion. Good luck out there.
More "hands on" investors might want to consider the bullish argument for over-weighting small caps by lookng at current macroeconomic back drop. Have you noticed that small cap and the NASDAQ has really perked up this year? According to Morningstar Total Returns table, money has already started moving to small cap.
Category YTD ( as 6-22-15)
Small growth: +10.8
Mid-cap: +8.8%
Small Blend: +6.3%
Large Blend: +4.0%
http://news.morningstar.com/fund-category-returns/
What is the macro background that may be driving this ? The Fed's proposed tightening cycle will continue to strengthen the $USD vs other currencies, in addition to the obvious contribution from economic weakness in China, Japan, and Europe. These developed countries are struggling, and are lowering their interest rates to stimulate growth. This is the "trade-weighted effect" (vs foreign currencies). Then we have to consider higher US domestic oil production, which helps keep the trade deficit from growing. All of these, including our higher yields on US paper vs foreign currencies, are attracting capital to the US and strengthening the $USD.
Many of the companies in the Dow and S & P 500 get 40-50% of their earnings from overseas. The strong $USD will be a headwind to foreign earnings of these larger companies. It is wishful thinking to believe that we will continue to see double digit earnings growth from the S & P 500 companies going forward as a result of the $USD drag. Earnings growth for small caps are likely to be more favorable in the current environment because they tend to be more domestically-focused.
An anomaly that helped large caps in the last few years was that interest rates have been falling, even this late in the economic cycle. Lower interest rates are helpful to companies who carry larger amounts of debt, which tend to be the large caps. Now, higher interest rates on their debt is likely to cause yet another headwind, as they will have to pay out more earnings to service the debt.
While the rest of the world is struggling, the USA and US consumers will receive some benefits. One of the benefits to a stronger $USD is lower US inflation rates. Imports will be cheaper and imported oil is already cheaper. When inflation falls, it is like a tax cut to US consumers. This tends to benefit early-cycle small company stocks as US consumers have more money in their pockets. There is some lag effect here, and we will eventually see it. As Wayne Gretzky said we want to "skate to where the puck is going to be."
IMO: When considering the current macro backdrop, P/Es are likely to expand as small caps are poised to out-perform over the next few years. Some of us, including myself, believe there is some logic for over-weighting small caps.
Take-aways:
--As with all investments, there are periods of under-performance, and periods of out-performance. The past few years, the large caps have out-performed. The move to small cap is already evident. Refer to the Y-T-D Morningstar data above.
--The good news is that most posters in this thread have at least market weight allocation to small caps, and they will receive the benefit as these macro trends continue to unfold.
--For BHs who prefer a "hands off", "passive approach", there are complexities to equity investing from macro trends that argue for staying diversified across large cap, mid cap, and small cap. The ones mentioned above for having allocation to small cap are some examples. Just keep in mind there is always an argument by the money managers for category rotation. By staying diversified, we will always have some exposure to the changing trends.
Thanks to all for a good discussion. Good luck out there.
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes
Re: Small Cap Index - What % of equities?
33% of equities in small-value.
Re: Small Cap Index - What % of equities?
Once my wife's 401(k) rollover is complete this week, our long-term allocation will look like this:
15% large value (VWNAX - Vanguard Windsor II Admiral in my 401(k) and VLUE - iShares MSCI USA Value Factor)
10% mid-cap value (VMVAX - Vanguard Mid Cap Value Index Admiral in my 401(k))
20% small value (VBR)
5% US REIT (VNQ)
15% developed int'l (VEA and DODFX - Dodge & Cox International in my HSA)
15% small/mid int'l (VSS)
15% emerging markets (VWO)
5% ex-US Real Estate (VNQI)
According to Morningstar's X-Ray style box, that shakes out as
=17=15=13= (Total 45%)
=16=12=07= (Total 35%)
=10=07=03= (Total 20%)
If Morningstar provided separate style boxes for U.S. and international, it would show a greater tilt domestically than internationally. At the moment, VEA and VWO are both large cap only. As they transition to all-cap indices, they will each end up about 10% small cap, which might give me another 3% small cap overall.
15% large value (VWNAX - Vanguard Windsor II Admiral in my 401(k) and VLUE - iShares MSCI USA Value Factor)
10% mid-cap value (VMVAX - Vanguard Mid Cap Value Index Admiral in my 401(k))
20% small value (VBR)
5% US REIT (VNQ)
15% developed int'l (VEA and DODFX - Dodge & Cox International in my HSA)
15% small/mid int'l (VSS)
15% emerging markets (VWO)
5% ex-US Real Estate (VNQI)
According to Morningstar's X-Ray style box, that shakes out as
=17=15=13= (Total 45%)
=16=12=07= (Total 35%)
=10=07=03= (Total 20%)
If Morningstar provided separate style boxes for U.S. and international, it would show a greater tilt domestically than internationally. At the moment, VEA and VWO are both large cap only. As they transition to all-cap indices, they will each end up about 10% small cap, which might give me another 3% small cap overall.
Re: Small Cap Index - What % of equities?
0% in the small-cap index fund. I accept the amount of small caps in the TSM index fund.
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Re: Small Cap Index - What % of equities?
I did the X-Ray on Morningstar. I have a 20% tilt to small caps. Here is what it looks like with the style box:
Large - -23 - 22 -20
Medium 8 - 7 - 6
Small -- 6 - 5 - 4
Obviously I'm tilting large, but doesn't this reflect the market much better? I can't believe some experts recommend to have 50% small caps. It seems like a huge bet to me, and very anti-Bogle.
Large - -23 - 22 -20
Medium 8 - 7 - 6
Small -- 6 - 5 - 4
Obviously I'm tilting large, but doesn't this reflect the market much better? I can't believe some experts recommend to have 50% small caps. It seems like a huge bet to me, and very anti-Bogle.
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Re: Small Cap Index - What % of equities?
How do we know what the expected return of small caps over large caps actually is and what sort of probability distribution we are operating in? If the market was perfectly efficient should the risk premium be 0.5%, 2%, 3%?rca1824 wrote:Also remember that when we choose one asset class over another, we aren't looking for guaranteed overperformance, we are just looking for expected overperformance. No investment is guaranteed. Instead we maximize our expected utility which is the integral of our utility function multiplied by the probability distribution over different outcomes.
In a perfectly efficient market taking more risk would result in higher returns. Of course, markets are not perfectly efficient so valuations do have a role in expected returns. It is entirely possible for asset classes to be bid up to the point where risk premiums become distorted over the near term i.e tech stocks in 2000, Japan 1990.
With that said, the larger the expected risk premium the less tracking an error an investor should have to tolerate before a premium shows up. For example, let's say we have 3 assets. Asset A has an expected return of 2% with a 5% SD. Asset B has an expected return of 6% with 15% SD and asset C has and expected return of 7.5% with a SD of 22%. On average fewer years will pass before asset B has a higher balance than asset A, than will pass before asset C will have a higher balance than asset B. It should also be pointed out that relative valuations between B and C will have a greater impact on the likelihood of ending balancing being larger than either A vs B or A vs C.
How much should we weight small caps in our portfolio? It depends on the expected risk premium, small cap relative valuation to our other investment options and how much tracking error one can tolerate. Unfortunately, none of these things are known before with any degree of certainty. All we can really say is that it is possible/probable that small caps should deliver higher returns than large caps over LONG time horizons. How long depends on the actual expected premium, which we of course dont't/can't know. It is very possible that 20-30 years will pass before small cap premiums will show up. There is certainly some probability that a small cap risk premium might be very small or not even exist at all! How many investors are really prepared to stick with their small cap strategy over the course of their entire investing lifetime even as risk tolerance drifts as they age?
Re: Small Cap Index - What % of equities?
How many investors are really prepared to stick with their equity strategy over the course of their entire investing lifetime even as risk tolerance drifts as they age?cottonseed1 wrote: How many investors are really prepared to stick with their small cap strategy over the course of their entire investing lifetime even as risk tolerance drifts as they age?
Everything you described about how the SCV premium is uncertain could just as easily be said about the equity premium.
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
Re: Small Cap Index - What % of equities?
I would doubt this period exists but that's also a very arbitrary criteria. You can however certainly cherry-pick periods where bonds outperform stocks just like you can cherry-pick periods where total market outperforms small-cap value.nisiprius wrote:OK, refute one: Tell me the single 9-year period which, if removed from the record for 1926 through 2010, would result in bonds beating stocks.
The fact that small caps got most of their growth during one decade doesn't really prove much. Asset prices are more volatile than earnings, and investors tend to bid them up and down in sudden spurts even if the underlying valuation is smooth. I would like to see a chart of small cap value EARNINGS relative to total stock market earnings. That would be much more "telling"
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
Re: Small Cap Index - What % of equities?
Sometimes we do things because "theory" tells us how things should work in the long run, e.g., with respect to the risk premium for smallcap.
Sometimes we do things because "experience" tells us how things have tended to work, e.g., with respect to the outperformance of smallcap.
And sometimes we stick with something because it worked, then we get burned, and we reflect on what to do.
Most years in which I have held mid-small cap have returned a premium over large cap. I overweighted mid and small as well. Not extremely, but still a clear overweight relative to the TSM standard. Then along comes a year like 2014, in which LC dominated MC-SC. There I was still with my MC-SC overweight. So what do do in 2015? I stuck with what had worked in the long run for me.
It's just dumb stick-to-it-iveness that keeps me with the strategy that has been successful in all but a few years.
Sometimes we do things because "experience" tells us how things have tended to work, e.g., with respect to the outperformance of smallcap.
And sometimes we stick with something because it worked, then we get burned, and we reflect on what to do.
Most years in which I have held mid-small cap have returned a premium over large cap. I overweighted mid and small as well. Not extremely, but still a clear overweight relative to the TSM standard. Then along comes a year like 2014, in which LC dominated MC-SC. There I was still with my MC-SC overweight. So what do do in 2015? I stuck with what had worked in the long run for me.
It's just dumb stick-to-it-iveness that keeps me with the strategy that has been successful in all but a few years.
Re: Small Cap Index - What % of equities?
If you use a small-cap index fund, you shouldn't have to to tolerate any tracking error.cottonseed1 wrote:...How much should we weight small caps in our portfolio? It depends on the expected risk premium, small cap relative valuation to our other investment options and how much tracking error one can tolerate...
If you buy a small-cap index fund and benchmark it against index other than what it's supposed to be tracking, that's improper benchmarking.
If you buy any mutual fund and are upset because some other fund or allocation performed better that's just inevitable, there will always be something better out there... but being upset because a fund didn't perform along the same lines as an index that holds a different set of assets is ridiculous.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Re: Small Cap Index - What % of equities?
Garco, what is your tilt percentage to mid-small caps?Garco wrote:Sometimes we do things because "theory" tells us how things should work in the long run, e.g., with respect to the risk premium for smallcap.
Sometimes we do things because "experience" tells us how things have tended to work, e.g., with respect to the outperformance of smallcap.
And sometimes we stick with something because it worked, then we get burned, and we reflect on what to do.
Most years in which I have held mid-small cap have returned a premium over large cap. I overweighted mid and small as well. Not extremely, but still a clear overweight relative to the TSM standard. Then along comes a year like 2014, in which LC dominated MC-SC. There I was still with my MC-SC overweight. So what do do in 2015? I stuck with what had worked in the long run for me.
It's just dumb stick-to-it-iveness that keeps me with the strategy that has been successful in all but a few years.
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Re: Small Cap Index - What % of equities?
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Last edited by Northern Flicker on Thu Mar 31, 2022 2:13 pm, edited 1 time in total.
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Re: Small Cap Index - What % of equities?
I use a couple of tilts... always debating if worth it and if I just want to sell them and go 3 fund portfolio + REIT.
I break down 60:40 US:World...
Then 3:1 TSM to Small Cap Value Fund
And 3:1 FTSE Large Cap Index to FTSE Small Cap World Index
My style breakdown per Vanguard is 37/36/27 for large/Med/Small currently on the US side of things.
Does it help? Who knows... I have a feeling I'll sell back to TSM/TIM/TBM in the next few years, with REIT in my Roths...
I break down 60:40 US:World...
Then 3:1 TSM to Small Cap Value Fund
And 3:1 FTSE Large Cap Index to FTSE Small Cap World Index
My style breakdown per Vanguard is 37/36/27 for large/Med/Small currently on the US side of things.
Does it help? Who knows... I have a feeling I'll sell back to TSM/TIM/TBM in the next few years, with REIT in my Roths...
Indexed Fully!
Re: Small Cap Index - What % of equities?
Usually 30-35%. Currently, 31% in my main tax deferred retirement account.jay22 wrote:Garco, what is your tilt percentage to mid-small caps?Garco wrote:Sometimes we do things because "theory" tells us how things should work in the long run, e.g., with respect to the risk premium for smallcap.
Sometimes we do things because "experience" tells us how things have tended to work, e.g., with respect to the outperformance of smallcap.
And sometimes we stick with something because it worked, then we get burned, and we reflect on what to do.
Most years in which I have held mid-small cap have returned a premium over large cap. I overweighted mid and small as well. Not extremely, but still a clear overweight relative to the TSM standard. Then along comes a year like 2014, in which LC dominated MC-SC. There I was still with my MC-SC overweight. So what to do in 2015? I stuck with what had worked in the long run for me.
It's just dumb stick-to-it-iveness that keeps me with the strategy that has been successful in all but a few years.
Re: Small Cap Index - What % of equities?
I have read this "fact" a thousand times ... and yet .. according to Jack Bogle ... the S&P 500 outperformed the Total Stock Market since 1926 by 0.3 percentage points. This would mean stock that do not count as large caps (500) underperformed. And given that the non-500 stocks make up only a small portion of the TSM, the non-500 caps must be underperforming by a sizable amount.nisiprius wrote:Did small-caps outperform the total market since 1926? Yes. Did they if you remove the single period 1975-1983? No. If they did have higher return, did they have higher risk-adjusted return? Probably not ...
How does one square these two "facts". Did mid caps underperform (by enough so that TSM returns less than S&P)? Is the "small cap index" cherry picked so as to do better than micro and mid? Is there some survivor bias? Is there something else entirely going on here? (should this be a different thread that an AA question).
I do not have any answers, but I have always found these two facts problematic.
Link:
https://books.google.com/books?id=FQMWn ... le&f=false
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
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Re: Small Cap Index - What % of equities?
Very interesting, I'd missed that nugget. Forgive me for mindlessly propagating a meme. The likely answer... just a wild guess... is probably that the data set actually isn't precise enough to tell which of them did better.steve r wrote:I have read this "fact" a thousand times ... and yet .. according to Jack Bogle ... the S&P 500 outperformed the Total Stock Market since 1926 by 0.3 percentage points.... How does one square these two "facts".... I do not have any answers, but I have always found these two facts problematic.nisiprius wrote:Did small-caps outperform the total market since 1926? Yes...
Link:
https://books.google.com/books?id=FQMWn ... le&f=false
There are definitely data issues which get papered over by statements like "the best available data." The best available data may not be good data.
There were definitely methodological problems in the data set Banz used in 1981. The CRSP data is apparently constantly being revised, adjusted, and corrected.
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.
Re: Small Cap Index - What % of equities?
Why would someone stick with the same plan their entire investing career? I'd hope no one is preparing to do that because that's not too smart. As you said, tolerances/needs change.rca1824 wrote:How many investors are really prepared to stick with their equity strategy over the course of their entire investing lifetime even as risk tolerance drifts as they age?cottonseed1 wrote: How many investors are really prepared to stick with their small cap strategy over the course of their entire investing lifetime even as risk tolerance drifts as they age?
Everything you described about how the SCV premium is uncertain could just as easily be said about the equity premium.
15% Large Cap, 30% Mid Cap, 15% REIT, 10% EM, 25% LT Bond, 5% TIPs
Re: Small Cap Index - What % of equities?
I don't see this as a tilt to large cap, which is 65 vs Morningstar's estimate of 72 for neutral.ajacobs6 wrote:I did the X-Ray on Morningstar. I have a 20% tilt to small caps. Here is what it looks like with the style box:
Large - -23 - 22 -20
Medium 8 - 7 - 6
Small -- 6 - 5 - 4
Obviously I'm tilting large,
It only looks tilted in the context of this thread. I think the trend would be different had it been titled, "Which should I do, 50/50 W&W or a 40% SC tilt?"
Re: Small Cap Index - What % of equities?
ajacobs6: I would suggest putting aside the question of which stocks did best when and just start with a thought experiment. Take a big conglomerate like GE. It could legitimately be broken up into 20 separate companies that would all be different from one another.
--Suppose you originally owned 100 shares of GE and you got a proportionate number of shares in each of the new 20 companies. Would you then go out and buy more shares of all 20 companies simply because they were now separate companies so as to overweight them in your portfolio?
--Would you expect that the 20 new companies in aggregate would do better, worse, or about the same as GE as a whole would have done?
--Do you think that holding the 20 companies in aggregate is more, less, or about as risky as holding the original GE would have been?
--Suppose you originally owned 100 shares of GE and you got a proportionate number of shares in each of the new 20 companies. Would you then go out and buy more shares of all 20 companies simply because they were now separate companies so as to overweight them in your portfolio?
--Would you expect that the 20 new companies in aggregate would do better, worse, or about the same as GE as a whole would have done?
--Do you think that holding the 20 companies in aggregate is more, less, or about as risky as holding the original GE would have been?
Re: Small Cap Index - What % of equities?
If interested, you can get the annual total returns of the S&P index and the "CRSP 1-10" since 1926 in DFA's annual "Matrix Book", which can be downloaded from here: https://www.ifa.com/pdf/matrix_book_2015.pdfsteve r wrote:I have read this "fact" a thousand times ... and yet .. according to Jack Bogle ... the S&P 500 outperformed the Total Stock Market since 1926 by 0.3 percentage points. This would mean stock that do not count as large caps (500) underperformed. And given that the non-500 stocks make up only a small portion of the TSM, the non-500 caps must be underperforming by a sizable amount.nisiprius wrote:Did small-caps outperform the total market since 1926? Yes. Did they if you remove the single period 1975-1983? No. If they did have higher return, did they have higher risk-adjusted return? Probably not ...
How does one square these two "facts". Did mid caps underperform (by enough so that TSM returns less than S&P)? Is the "small cap index" cherry picked so as to do better than micro and mid? Is there some survivor bias? Is there something else entirely going on here? (should this be a different thread that an AA question).
I do not have any answers, but I have always found these two facts problematic.
Link:
https://books.google.com/books?id=FQMWn ... le&f=false
It corroborates the data Mr.Bogle has presented regarding those two indices.
There are peculiarities in that although the S&P data is actually real historical data since the inception of their daily calculated index in 1926, the index has gone through various changes over time. It was only 90 stocks originally, and the stocks even today are selected by committee and have eligibility criteria that is more restrictive than just cap-size.
Some issues with the CRSP data is that it's mostly re-created from piecing together historical sources, and it is not an investable index - it tracks stocks that an investor or mutual fund might not actually be able to buy (liquidity issues, etc..).
]In 2010, CRSP introduced it's first investable index (that Vanguard funds now track) but this is a subset of the "total market" and doesn't necessarily match the research database, because some stocks are screened out to meet the eligibility requirements of the investable index.
Because of the various criteria S&P uses, which include things like a company being a "leading company" in it's area, and a record of positive earnings, more than just small-cap companies can be excluded. Looking at the top 13 holdings in Vanguards "Extended Market Index", Morningstar currently considers them to be in the large-cap style.
There's also a matter that the researched "small-cap" performance is generally looked at the smallest two deciles of stocks, which make up a very small portion of the market. It's certainly possible for some larger section (but maybe not the largest) to have really bad relative performance.
I find it interesting that the Russell 1000 and Russell 2000 can be combined to equal the total markets return, with the Russell 2000 representing deciles 6-10. If we look at the results over the past 30 years the Russell 1000 index (Large Caps) has outperformed both the S&P500 and the Russell 2000, and yet the DFA Micro-Cap fund (DFSCX) that attempts to track Deciles 9-10 has also outperformed the Russell 2000 6-10 and the Russell 1000 1-5
MStar Chart
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Small Cap Index - What % of equities?
And yet... just saying. I think it's clear that I'm very skeptical about the small-cap premise. Even if small-caps do have higher return, that's completely uninteresting to me unless you can show me something about "risk." With regard to return itself, I think the most interesting thing is that it is even possible to argue about it--intelligent inquirers are not clear on what the numbers are, or whether they mean what they seem to mean.
For what it's worth...
...executive summary, the CAGR for the total return of the ten CRSP deciles, from 1926-2009, shows a pattern of higher returns for smaller-cap stocks. The pattern in the numbers is real and statistically significant. So, the anomaly spotted by others--"smaller stocks have higher returns" yes "the S&P 500 has higher return than the total market"--is pretty interesting it shows that...
...even ignoring risk and looking only at return, the strength of the small-company effect is not strong enough to overpower the slipperiness of the data.
Anyway. When I look at page 90 of the Ibbotson SBBI 2010 Classic Yearbook, what I see is a chart of "Size-Decile Portfolis of the NYSE/AMEX/NASDAQ year-end index values" starting at 1.000 for year-end 1925, "Source: Morningstar and CRSP. Calculated (or Derived). Based on data from CRSP US Stock Databases and CRSP US Indices Database (c)2010 Center for Research on Security Prices (CRSP(r)), The University of Chicago Booth School of Business. Used with permission." I took the values and then calculated the annualized CAGR, and the values of the index and CAGR are:
Decile 2009 index CAGR
1 1455.799 9.06%
2 3981.479 10.37%
3 5232.471 10.73%
4 5172.596 10.72%
5 7779.671 11.26%
6 7579.329 11.22%
7 7309.405 11.17%
8 8660.930 11.40%
9 9338.614 11.50%
10 31242.844 13.11%
I now use a statistical test available on a web page, Spearman's rank-order test, and relying on the accuracy of its calculation. I stress that this is only a test of whether there is a pattern of increase in the numbers for the higher deciles are really higher than those for the lower deciles; it doesn't say whether the numbers represent anything in the real investible world or whether they are bogus artifacts of data methodology problems.
Unlike the (bizarre) customary practices in the investment world, this is a non-parametric test (makes no assumptions about its being a normal distribution). It's actually a rank-order test, meaning that we get identical results whether we use the index value or the CAGR values... or the sequence "1, 2, 4, 3, 7, 6, 5, 8, 9, 10." In terms of drawing conclusions, it is much more conservative and less powerful than a parametric test would be--that is, it is less likely to report something as "significant." In this case, the effect is certainly significant, p = 0.0055%, just as our eyeballs tell us the higher deciles do have higher numbers associated with them.
For what it's worth...
...executive summary, the CAGR for the total return of the ten CRSP deciles, from 1926-2009, shows a pattern of higher returns for smaller-cap stocks. The pattern in the numbers is real and statistically significant. So, the anomaly spotted by others--"smaller stocks have higher returns" yes "the S&P 500 has higher return than the total market"--is pretty interesting it shows that...
...even ignoring risk and looking only at return, the strength of the small-company effect is not strong enough to overpower the slipperiness of the data.
Anyway. When I look at page 90 of the Ibbotson SBBI 2010 Classic Yearbook, what I see is a chart of "Size-Decile Portfolis of the NYSE/AMEX/NASDAQ year-end index values" starting at 1.000 for year-end 1925, "Source: Morningstar and CRSP. Calculated (or Derived). Based on data from CRSP US Stock Databases and CRSP US Indices Database (c)2010 Center for Research on Security Prices (CRSP(r)), The University of Chicago Booth School of Business. Used with permission." I took the values and then calculated the annualized CAGR, and the values of the index and CAGR are:
Decile 2009 index CAGR
1 1455.799 9.06%
2 3981.479 10.37%
3 5232.471 10.73%
4 5172.596 10.72%
5 7779.671 11.26%
6 7579.329 11.22%
7 7309.405 11.17%
8 8660.930 11.40%
9 9338.614 11.50%
10 31242.844 13.11%
I now use a statistical test available on a web page, Spearman's rank-order test, and relying on the accuracy of its calculation. I stress that this is only a test of whether there is a pattern of increase in the numbers for the higher deciles are really higher than those for the lower deciles; it doesn't say whether the numbers represent anything in the real investible world or whether they are bogus artifacts of data methodology problems.
Unlike the (bizarre) customary practices in the investment world, this is a non-parametric test (makes no assumptions about its being a normal distribution). It's actually a rank-order test, meaning that we get identical results whether we use the index value or the CAGR values... or the sequence "1, 2, 4, 3, 7, 6, 5, 8, 9, 10." In terms of drawing conclusions, it is much more conservative and less powerful than a parametric test would be--that is, it is less likely to report something as "significant." In this case, the effect is certainly significant, p = 0.0055%, just as our eyeballs tell us the higher deciles do have higher numbers associated with them.
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.
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Re: Small Cap Index - What % of equities?
P.S. 1) CRSP "deciles" are bizarre and don't mean anything any naïve person would think of as a "decile." They are mysterious and seemingly arbitrary, although I am sure CRSP can state good reasons for not doing the obvious thing. Either of the two obvious things. See this thread. When you've finished reading it, see if you can close the book and recite what gt4715b says is the definition. (You will be responsible for this on the Monday quiz).
By the way, don't you think it's cool that CRSP seemingly knows the data for the NASDAQ going back to 1926 (joke)? What's much more serious is that the "AMEX" used to be the "curb exchange" and was literally outdoors until 1921... and was considered so disreputable that the financial newspaper that reported it included a warning.
There are real issues with changes in the basic nature of "the U.S. stock market" over time. Not just dividends versus buybacks, but in simple things like the identities and definitions of stock exchanges and everything else. "The U.S. stock market" is actually a changing set of stock markets, plural, and at any given time some are included and some are not. In the 1920s there were many important regional stock markets (Boston, Philadelphia, etc.) When talking about CRSP data, does NYSE literally mean NYSE?
The Cowles Commission in 1939 combined data from about two dozen stock markets. They said that the NYSE was only 2/3 of "the stock market." And they didn't include all the NYSE stocks, but "93 per cent in market value of the railroad stocks, traded on the New York Stock Exchange" and "90 per cent of all common shares listed on the New York Stock Exchange." 93% and 90% aren't bad, but the omission of 10% of the market could certainly bend the averages since it is surely not a random 10%.
Actually, "the NASDAQ going back to 1926" is not entirely a joke. The NASDAQ was the successor to "the over-the-counter market." Does it really make sense to include the NASDAQ of 1973, and but not include the stocks in the over-the-counter market of 1970?
I think asking "do small-caps have higher return than large-caps" is much the same question as "was Barry Bonds a better hitter than Babe Ruth?" Well, just look at the numbers, they speak for themselves. Wait, should we care about home runs or batting average? Longer seasons. Aluminum bats. Wait, what's that asterisk? Well, Ruth would have used steroids if he could have, to let's use the best available research on the percent performance improvement from steroids and increase Ruth's numbers by that percentage...
2) It certainly looks... taking the data at face value, which I'm not sure I'm prepared to do... as if the so-called small-company effect is entirely the result of decile 1 underperformance and decile 10 outperformance.
3) Decile 10 is the mouthwatering one, and it is also the one that seems to suffer the most in real life from being not-entirely-investible.
4) As a practical matter, in terms of what's robust and do-able, it certainly seems as if it would be more fruitful to explore excluding the largest-cap stocks rather than overweighting the smallest-cap. How many stocks need to be excluded to get rid of Decile 1? Is there any mutual fund that explicitly tries to include "deciles 2 through 10?" Is this the "Mel's unloved mid-caps" effect? Should we all ditch our Total Stock and invest in 100% Extended Index? Why is all the "buzz" (from a few years ago before DFA went out of style and AQR came into style) about overweighting small-caps rather than underweighting the largest caps?
Having said all that I'm not going to look at any of this myself, my mind is closed. I may not be a "solid blue-chip companies will never let you down" type but I still want a decent chunk of my "stock" investments in the Dow Jones Industrial Average companies.
By the way, don't you think it's cool that CRSP seemingly knows the data for the NASDAQ going back to 1926 (joke)? What's much more serious is that the "AMEX" used to be the "curb exchange" and was literally outdoors until 1921... and was considered so disreputable that the financial newspaper that reported it included a warning.
There are real issues with changes in the basic nature of "the U.S. stock market" over time. Not just dividends versus buybacks, but in simple things like the identities and definitions of stock exchanges and everything else. "The U.S. stock market" is actually a changing set of stock markets, plural, and at any given time some are included and some are not. In the 1920s there were many important regional stock markets (Boston, Philadelphia, etc.) When talking about CRSP data, does NYSE literally mean NYSE?
The Cowles Commission in 1939 combined data from about two dozen stock markets. They said that the NYSE was only 2/3 of "the stock market." And they didn't include all the NYSE stocks, but "93 per cent in market value of the railroad stocks, traded on the New York Stock Exchange" and "90 per cent of all common shares listed on the New York Stock Exchange." 93% and 90% aren't bad, but the omission of 10% of the market could certainly bend the averages since it is surely not a random 10%.
Actually, "the NASDAQ going back to 1926" is not entirely a joke. The NASDAQ was the successor to "the over-the-counter market." Does it really make sense to include the NASDAQ of 1973, and but not include the stocks in the over-the-counter market of 1970?
I think asking "do small-caps have higher return than large-caps" is much the same question as "was Barry Bonds a better hitter than Babe Ruth?" Well, just look at the numbers, they speak for themselves. Wait, should we care about home runs or batting average? Longer seasons. Aluminum bats. Wait, what's that asterisk? Well, Ruth would have used steroids if he could have, to let's use the best available research on the percent performance improvement from steroids and increase Ruth's numbers by that percentage...
2) It certainly looks... taking the data at face value, which I'm not sure I'm prepared to do... as if the so-called small-company effect is entirely the result of decile 1 underperformance and decile 10 outperformance.
3) Decile 10 is the mouthwatering one, and it is also the one that seems to suffer the most in real life from being not-entirely-investible.
4) As a practical matter, in terms of what's robust and do-able, it certainly seems as if it would be more fruitful to explore excluding the largest-cap stocks rather than overweighting the smallest-cap. How many stocks need to be excluded to get rid of Decile 1? Is there any mutual fund that explicitly tries to include "deciles 2 through 10?" Is this the "Mel's unloved mid-caps" effect? Should we all ditch our Total Stock and invest in 100% Extended Index? Why is all the "buzz" (from a few years ago before DFA went out of style and AQR came into style) about overweighting small-caps rather than underweighting the largest caps?
Having said all that I'm not going to look at any of this myself, my mind is closed. I may not be a "solid blue-chip companies will never let you down" type but I still want a decent chunk of my "stock" investments in the Dow Jones Industrial Average companies.
Last edited by nisiprius on Wed Jun 24, 2015 7:44 am, edited 5 times in total.
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.
Re: Small Cap Index - What % of equities?
I wonder if the results are at all period dependent from that time period, and if the results are the same from other start/stop points.nisiprius wrote:... the CAGR for the total return of the ten CRSP deciles, from 1926-2009, shows a pattern of higher returns for smaller-cap stocks. The pattern in the numbers is real and statistically significant. So, the anomaly spotted by others--"smaller stocks have higher returns" yes "the S&P 500 has higher return than the total market"--is pretty interesting it shows that...
There certainly have been some points in time that show very odd looking, and wide disparity between small/large/mid/-and everything but S&P500 stocks.
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Re: Small Cap Index - What % of equities?
Actually really helpful, thank you! Quick question, I am thinking about using the Tax-Managed Small-Cap Fund in my taxable account instead. Does anyone have thoughts on that fund, vs VB which is the full blended index?ANC wrote:I don't see this as a tilt to large cap, which is 65 vs Morningstar's estimate of 72 for neutral.ajacobs6 wrote:I did the X-Ray on Morningstar. I have a 20% tilt to small caps. Here is what it looks like with the style box:
Large - -23 - 22 -20
Medium 8 - 7 - 6
Small -- 6 - 5 - 4
Obviously I'm tilting large,
It only looks tilted in the context of this thread. I think the trend would be different had it been titled, "Which should I do, 50/50 W&W or a 40% SC tilt?"
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Re: Small Cap Index - What % of equities?
I'd bet money that the answers are "yes" and "no." And don't forget, 1926 has become enshrined as if it were a natural starting point, but it began as an arbitrary choice by a professor, James H. Lorie. IMHO both a reasonable and a good-faith choice but a choice.JoMoney wrote:...I wonder if the results are at all period dependent from that time period, and if the results are the same from other start/stop points...
Now, Lorie did it in order to help out Merrill Lynch, who wanted to run a sort of full-page print infomercial presenting stocks as a prudent long-term investment for retail investors, so there might have been some "funding bias" because of that, but it was in 1959 and the "small-company effect" was not... discovered? publicized? until 1980, so he would not have been influenced by that consideration.
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.
Re: Small Cap Index - What % of equities?
mbk734 wrote:I say go big or go home if you're going to tilt make it worthwhile. Also consider tilting to value and/or small value
25% VTI
25% VXUS
25% VBR
25% VSS
- - - Value Blend Growth
Large - -13 - 13 -12
Medium 13 - 11 - 9
Small -- 14 - 10 - 5
http://portfolio.morningstar.com/Rtport ... Entry.aspx
Similar approach used here... I slice equities evenly 6 ways between (using ETF symbols) VTI, VXUS, VSS, VBR, VNQ and VHT. Switching out VBR for the blend and either add or delete REITs and Health.