Value Tilting - Stock
From Bogleheads
Caveat: The concept of portfolio value tilting is intended for advanced investors only. Not recommended for new investors, as it intentionally deviates from investing in the total market- a Bogleheads' approach to managing your portfolio.
Contents |
Background
Financial experts often recommend that investors should use index mutual funds to invest in entire markets, or, invest in funds that approximate the total market. Although mutual funds apply to both stocks and bonds (both domestic and international), this discussion covers stock portfolios only.
Vanguard's Total Stock Market Index Fund (VTSMX), approximates the total market by investing in over 3,000 stocks representative of the whole U.S. market.
In general, the stock market is composed of 3 levels of market capitalization and 3 styles, resulting in a 3 x 3 "style" box. As defined in the style box for VTSMX, the majority of the US Market (the Total Stock Market or "TSM") is held in large caps. Therefore, this fund (representing the US Market, or the "Market") is defined as a "cap weighted" market.
| Value | Blend | Growth | |
| Large Cap | 26 | 22 | 24 |
| Mid Cap | 6 | 6 | 7 |
| Small Cap | 3 | 3 | 3 |
The intent is that these distribution percentages, by definition, accurately represent the composition of the entire market. Gain and loss over time represents the movement of the market as a whole.
The main point is that if you invest $1.00 in a total market index fund, each stock receives the same amount of your dollar in proportion to it's cap weight. The largest stock gets 100 times the amount of a company 100th it's size. Therefore, no company gets more or less than that determined by it's market capitalization.
Tilting
Tilting is defined as any deviation (change) from the Total Stock Market distribution percentages as previously defined.
Historically, there have been periods of time where value stocks and small stocks have provided higher returns than large blend and growth stocks (example: the early 1990's bull market). Based on past performance, some investors choose to add additional value and small stocks to their portfolio. The most efficient way to do this is to overweight small value stocks. Overweight means increasing your holdings to more than is naturally in the market profile.
Small is 9% (3 + 3 + 3), so any small caps you hold over 9% would be overweight the market (tilted).
Tilting is a good term because it implies you adjust within reason and don't go overboard with extreme weighting to small. Tilting is also sometimes described as loading.
Considerations
Asset Allocation
In some cases, tilting can allow the investor to add more fixed-income securities (bonds) to the total portfolio.
Duration
Over the long term, investing in a tilted portfolio may not be productive as the market is expected to Revert to the Mean.
Investor Behavior
The investor's behavior during bear and bull markets can influence results.
Rate of Return
Although small and value stocks have higher expected returns than growth stocks, investors should recognize that the record of realized returns does not assure a similar pattern in the future. The timing and magnitude of the value premium will always be uncertain, i.e. past performance does not predict future performance.
Links
Remarks by Mr. Bogle regarding the stock market and Reversion to the Mean (RTM):
- Investing in Total Markets, Pros and cons of investing in the Total Market, Efficient Market Hypothesis / Theory
- Achieving Better Returns In Your Portfolio, Investopedia tutorial on the Fama / French 3-Factor model and a brief insight into tilting
How to Cite
You can link to this page from the Bogleheads Forum by copying and pasting the following text into your forum posting:
Please see [url=http://www.bogleheads.org/wiki/Value_Tilting_-_Stock]Value Tilting - Stock[/url] on the [url=http://www.bogleheads.org/wiki/Main_Page]Bogleheads Wiki[/url].
| Notice something that needs correcting? Notify a wiki editor or become a wiki editor and fix it yourself! |
|---|
