Tilting to SmallCapValue & IntlSmall...Thoughts?

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SnowSkier
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Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by SnowSkier » Sat Feb 16, 2013 1:13 pm

I know this is a very complex topic, but I'll try to keep my question relatively simple & open ended.

For my Stock allocation, I'm currently at:
40% TSM (VTSAX, VTI)
20% ExtMkt (VEXAX, VXF)
10% REIT (VGSLX, VNQ)
30% TISM (VTIAX, VXUS)

I rebalance annually in April with new money, and this April, I'm strongly considering revising my Asset Allocation to (1) change US tilt from Small (ExtMkt) to SmallCapValue (VSIAX, VBR) and (2) introduce International tilt to International Small (SCZ or VSS, Not VFSVX due to fees).

New Stock allocation would be:
40% TSM (VTSAX, VTI)
20% SmallCapValue (VSIAX, VBR)
10% REIT (VGSLX, VNQ)
20% TISM (VTIAX, VXUS)
10% International Small (SCZ or VSS) (Not VFSVX due to fees)

I've done a significant amount of reading & thinking. Info includes books (Ferri, Swedroe, Bernstein, Bogleheads, Schultheis) and bogleheads posts (Robert T, Trev H, and many many more).

I'm in my mid-40's, in accumulation mode, didn't sell any stock in 2008/2009 (but didn't know about re-balancing at the time), and plan to rebalance annually (and 5%/25% bounds).

At this point, I intend to implement this in April.

Thoughts? Pros? Cons?

Many thanks.

Clivus1
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by Clivus1 » Sat Feb 16, 2013 1:36 pm

I'm following a similar plan using a simple ETF portfolio.
55% Domestic (mostly VTI)
45% International (VXUS)

The domestic is tilted using 15% VBR
The international is titled 15% VSS

Nobody knows how much tilt is needed strike the ideal balance between enhanced return increased risk/volatility. Certainly the past performance modeling using 20 year periods is compelling. Sometimes I think removing the tilt and just having a simple VTI/VXUS split may have 98% of the benefit at a lower cost with less complexity.

Vanguard does not offer an international small cap ETF with a value bias. VSS seemed to be the closest choice for me.

I was attracted to DFA funds after researching the topic, but I'm not willing to pay a advisor to access their products.

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hoppy08520
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by hoppy08520 » Sat Feb 16, 2013 1:46 pm

I'm considering something similar myself. One thought: I often read that when you make this move, you might want to change your stock/bond AA at the same time to shift a bit more to bonds. The idea is that by tilting more, you're increasing your potential expected returns, but adding attendant volatility/risk in the form of a higher standard deviation. Therefore, to keep your overall new-tilted portfolio at the same risk level as your current portfolio, you might want to shift your AA to more bonds. I don't know the right number, but maybe go from approx 70/30 (if that's where you are today) to 65/35.

You can read more about this in Larry Swedroe's column, in "Portfolio 6": http://www.cbsnews.com/8301-500395_162- ... vestments/.

stlutz
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by stlutz » Sat Feb 16, 2013 1:49 pm

In theory at least, there is more value to SV tilting than just S tilting. As such, I'd probably just to the domestic switch and leave international as it is. Maybe 5 years from now there will be better int'l SV options for those who are so inclined.

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zaboomafoozarg
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by zaboomafoozarg » Sat Feb 16, 2013 1:54 pm

Clivus1 wrote:I was attracted to DFA funds after researching the topic, but I'm not willing to pay a advisor to access their products.


I have a few DFA options in my 401k, so I use the small value one. Definitely wouldn't pay an advisor for it though, DFFVX is pretty darn close to VISVX.

EDN
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Vanguard SV

Post by EDN » Sat Feb 16, 2013 2:04 pm

zaboomafoozarg wrote:
Clivus1 wrote:I was attracted to DFA funds after researching the topic, but I'm not willing to pay a advisor to access their products.


I have a few DFA options in my 401k, so I use the small value one. Definitely wouldn't pay an advisor for it though, DFFVX is pretty darn close to VISVX.


DFA US Targeted Value has outperformed Vanguard Small Value Index by 2% per year for the last decade and since its inception 13 years ago. They are close in terms of being in the same asset class, but not really close in terms of returns.

Interestingly, on the subject of tilting to small and value benefits, since inception 13 years ago, here is the growth of $10K:

1YR Bonds = $14,685
US Total Stock Index = $14,857
Vanguard SV Index = $33,909
DFA Targeted Value = $42,310

Eric

EDN
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Location: Oklahoma City, OK

A Good Balance

Post by EDN » Sat Feb 16, 2013 2:05 pm

SnowSkier wrote:I know this is a very complex topic, but I'll try to keep my question relatively simple & open ended.

For my Stock allocation, I'm currently at:
40% TSM (VTSAX, VTI)
20% ExtMkt (VEXAX, VXF)
10% REIT (VGSLX, VNQ)
30% TISM (VTIAX, VXUS)

I rebalance annually in April with new money, and this April, I'm strongly considering revising my Asset Allocation to (1) change US tilt from Small (ExtMkt) to SmallCapValue (VSIAX, VBR) and (2) introduce International tilt to International Small (SCZ or VSS, Not VFSVX due to fees).

New Stock allocation would be:
40% TSM (VTSAX, VTI)
20% SmallCapValue (VSIAX, VBR)
10% REIT (VGSLX, VNQ)
20% TISM (VTIAX, VXUS)
10% International Small (SCZ or VSS) (Not VFSVX due to fees)

I've done a significant amount of reading & thinking. Info includes books (Ferri, Swedroe, Bernstein, Bogleheads, Schultheis) and bogleheads posts (Robert T, Trev H, and many many more).

I'm in my mid-40's, in accumulation mode, didn't sell any stock in 2008/2009 (but didn't know about re-balancing at the time), and plan to rebalance annually (and 5%/25% bounds).

At this point, I intend to implement this in April.

Thoughts? Pros? Cons?

Many thanks.


I think that makes a lot of sense. New allocation > Old allocation by a worthwhile amount.

Eric

livesoft
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by livesoft » Sat Feb 16, 2013 2:26 pm

SnowSkier wrote:I've done a significant amount of reading & thinking. Info includes books (Ferri, Swedroe, Bernstein, Bogleheads, Schultheis) and bogleheads posts (Robert T, Trev H, and many many more).

With all that reading, I have to wonder why you are not committed. I don't think anyone here can add to what you have read.

I have a small-cap & value tilted portfolio. For my US equities, 40% is in VBR and 11% in extended market, and 5% in REIT index. The rest is most in Large-cap index and S&P500 index. For my foreign equities, 40% is in VSS with another 8% in SCZ, DGS, and EWX.

But I don't see how my allocation should influence what YOU want to do because I am just some random mostly anonymous person on the internet.
This signature message sponsored by sscritic: Learn to fish.

SnowSkier
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by SnowSkier » Sat Feb 16, 2013 2:57 pm

Hi livesoft,

I'm committed to the SmallCapValue. Still thinking on the InternationalSmall (SCZ / VSS).

I'm interested in the collective and individual wisdom of the bogleheads community.

Also, it's an Asset Allocation change, and I want to let these percolate for awhile.

Thanks.

P.S. pure speculation on things that I might learn more about on this thread, but someone might point out
- I'm only at 30% International, and going to 40% International might be a point of view from some
- I'm looking at International Small, and don't know much about International Value or International Small Value...there might be some interesting points here
- I might be lucky or fortunate and get some thoughts/feedback from Larry Swedroe, Rick Ferri, Robert T, Nisi, or ?? Lots of people in this community with a lot more experience and analytics in this area than me :happy
- And many more...

Best regards.

SnowSkier
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Location: Austin

Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by SnowSkier » Sat Feb 16, 2013 2:59 pm

Thanks All for your comments so far.

Hoppy, thanks for the link to Larry's article...interesting and helpful.

EDN, thanks.

Scooter57
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by Scooter57 » Sat Feb 16, 2013 3:28 pm

I've been reading the same books you have been, and had thought of doing what sounds like Bernstein's recommended taxable allocation (from the Manifesto book) with small cap and value funds both U.S. and international.

However, I have been reading fund analyses on Morningstar and finding that some of these international funds appear correlate almost exactly to the broadest international indexes while mostly contributing volatility and, in some cases, taxable income that I don't want. (It turns out foreign dividends from some countries not involved in a treaty can be fully taxable at ordinary income rates.)

The original point of adding these other asset classes was to improve diversification, but the more I study the charts of how these various sliced & diced funds perform over the past decade, the less I am convinced that they really provide diversification anymore.

So I'm inclining back to just thinking that for international diversification I'm going to buy only the broad international stock market funds. VTIAX for IRA and the Tax Managed International VTMGX for my regular account.

I'm still thinking I want a small cap fund for the US since the Total Stock Market is so large cap heavy.

stan1
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by stan1 » Sat Feb 16, 2013 3:30 pm

SnowSkier wrote:New Stock allocation would be:
40% TSM (VTSAX, VTI)
20% SmallCapValue (VSIAX, VBR)
10% REIT (VGSLX, VNQ)
20% TISM (VTIAX, VXUS)
10% International Small (SCZ or VSS) (Not VFSVX due to fees)



This is very close to my equity allocation. I am mid-40s also.

Trev H
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by Trev H » Sat Feb 16, 2013 3:55 pm

SnowSkier...

I don't have the returns for US Extended Market back to 1970....

But 40% TSM, 20% Ext Mkt

I expect would be very similar to...

45% TSM, 15% Small Market

I did the comparison below considering that small tweak.

1970-2012 (annual rebalancing)

45% TSM, 15% SB, 10% REIT, 30% Total Intl

10K Growth
$737,594.83
CAGR
10.52
StDev
17.63
Sharpe
0.39

40% TSM, 20% SV, 10% REIT, 20% Total Intl, 10% Intl Small Market

10K Growth
$1,138,375.05
CAGR
11.64
StDev
17.50
Sharpe
0.45

Notice the Return went up and the Volatility down - now that is sweet.

And of course when you add bonds the volatility will go way on down.

PS - I like that mix - somewhat similar to Bernsteins Sheltered Sam.

Trev H

SnowSkier
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by SnowSkier » Sat Feb 16, 2013 6:34 pm

Trev H, Thank you! I have really enjoyed and benefited from your posts including the 4-slice Simplified Buy & Hold
viewtopic.php?t=38374
but haven't made it through all 472 or so posts yet on that one.

I appreciate your ideas and contributions.

snowman
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by snowman » Sat Feb 16, 2013 8:31 pm

I think you have a good plan. Assuming brokerage fees being equal, I would go with VSS over SCZ, as you get exposure to EM as well, with lower ER to boot.

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Kevin M
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by Kevin M » Sat Feb 16, 2013 8:34 pm

I summarized my thoughts on whether or not to tilt in a blog post: Lumpers vs. Splitters. There is no information there that you haven't already read--just my attempt to summarize the issue, and where I come down on it.

Kevin
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SnowSkier
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by SnowSkier » Sun Feb 17, 2013 1:26 am

Kevin M,

Thank you! Great blog post. I find myself very much in agreement with your thought process and your conclusion.

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Kevin M
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by Kevin M » Sun Feb 17, 2013 1:38 am

SnowSkier wrote:Kevin M,

Thank you! Great blog post. I find myself very much in agreement with your thought process and your conclusion.

Glad you appreciated the blog post. Thanks for taking the time to mention it.

Kevin
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sdrone
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Re: Tilting to SmallCapValue & IntlSmall...Thoughts?

Post by sdrone » Mon Feb 18, 2013 12:24 am

Snowskier - I like it. That's essentially what I do now, minus the REIT allocation. I'm comfortable with it, and I think long term it will give me a better return with acceptable risk compared to the straight 3 fund portfolio.

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