Is it worth tilting to International Small Cap?

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xrw1
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Is it worth tilting to International Small Cap?

Post by xrw1 » Fri Aug 22, 2014 7:56 am

Good morning everyone! I want to thank you in advance for all your feed back.

My AA is 80/20 stock/bond and with a 70/30 Domestic/international set up.

I have all my Domestic and bonds in my 401K and all my international in my roth IRA.

For my international portion, I use VTIAX which is the vanguard total international index fund. I am thinking about tilting to international small cap value using VFSVX which is vanguards international FTSE all world EX-US Small cap index.

Questions:

1. Do you guys think it would be worth tilting to international small cap value and where would it be best place for tax efficiency? I was thinking on selling some of my VTIAX in my roth to buy VFSVX.

2. Is 20 percent tilt to international small cap too much?

Thank you again!

retiredjg
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Re: Is it worth tilting to International Small Cap?

Post by retiredjg » Fri Aug 22, 2014 8:40 am

xrw1 wrote:1. Do you guys think it would be worth tilting to international small cap value and where would it be best place for tax efficiency? I was thinking on selling some of my VTIAX in my roth to buy VFSVX.

2. Is 20 percent tilt to international small cap too much?
Thank you again!
Nobody knows if it is "worth it". Maybe it will juice your returns and maybe it won't. You won't know till you can look back and compare. I'm betting that it will, so I have a little extra international small cap, but not enough to wreck my portfolio. :happy

20% of what? If you mean 20% of your 24% allocation to international, that would be about 5% of your portfolio. Seems fine to me. I would not do less than that because I think any slice less than 5% is a waste of effort.

The fund you mentioned is not small cap value, it is just small cap.

xrw1
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Re: Is it worth tilting to International Small Cap?

Post by xrw1 » Fri Aug 22, 2014 8:44 am

20 percent of my international holding. 5% of my portfolio is correct.

What would be a good small cap value index fund?


Thank you

livesoft
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Re: Is it worth tilting to International Small Cap?

Post by livesoft » Fri Aug 22, 2014 9:05 am

Yes it is definitely worth it. 20% into VFSVX is too little. I think 50% of one's international allocation should be in VFSVX / VSS. This fund will be good in Roth, tax-deferred, or taxable. It is not particular tax-efficient, but it is not particularly tax-inefficient either. One will pay about 0.1% more of your fund value in taxes than VTIAX if one has VFSVX in taxable.
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Aptenodytes
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Re: Is it worth tilting to International Small Cap?

Post by Aptenodytes » Fri Aug 22, 2014 10:51 am

I agree with Livesoft. Half my stocks are international; half my stocks are small-cap. I'm choosing to increase the tilt over time -- as I ramp down my equity percentage overall I maintain the same percentage in small-cap. By the time I retire all my equities will be small-cap. Thanks, Larry.

A starting point for you is whatever you are doing domestically. Do you tilt to small there? If so, why not match that percentage internationally? If not, why not? If your small tilt is piddling on the domestic front, why not increase it?

In general it is easy to tilt to small value domestically but not internationally, where most of us tilters tilt to small.

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bertie wooster
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Re: Is it worth tilting to International Small Cap?

Post by bertie wooster » Fri Aug 22, 2014 11:06 am

I think it is a great idea and I think the fund you've chosen is adequate.

I use the same fund and, like some posters above, also use it as 50% of my international (which is in turn 50% of my equity). I hold all of my small cap funds in tax advantaged accounts.

xrw1
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Re: Is it worth tilting to International Small Cap?

Post by xrw1 » Fri Aug 22, 2014 2:45 pm

Aptenodytes wrote:I agree with Livesoft. Half my stocks are international; half my stocks are small-cap. I'm choosing to increase the tilt over time -- as I ramp down my equity percentage overall I maintain the same percentage in small-cap. By the time I retire all my equities will be small-cap. Thanks, Larry.

A starting point for you is whatever you are doing domestically. Do you tilt to small there? If so, why not match that percentage internationally? If not, why not? If your small tilt is piddling on the domestic front, why not increase it?

In general it is easy to tilt to small value domestically but not internationally, where most of us tilters tilt to small.
I am somewhat new to this whole "Tilting". For my domestic I have allocated roughly 8 percent of my total portfolio to small cap value using VISVX. I do want to tilt more of my portfolio to small cap as I only 28 years old right now.

What is the general % tilt to small cap for domestic and international (i know it has been recommended that 50% of the international holding should be in small cap. what about domestic)


Thank you!

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grap0013
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Re: Is it worth tilting to International Small Cap?

Post by grap0013 » Fri Aug 22, 2014 2:55 pm

Aptenodytes wrote:I agree with Livesoft. Half my stocks are international; half my stocks are small-cap. I'm choosing to increase the tilt over time -- as I ramp down my equity percentage overall I maintain the same percentage in small-cap. By the time I retire all my equities will be small-cap. Thanks, Larry.
Why not do all small cap now? Fallacy in your current logic there is.
There are no guarantees, only probabilities.

retiredjg
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Re: Is it worth tilting to International Small Cap?

Post by retiredjg » Fri Aug 22, 2014 2:56 pm

There is no "general".

There are people who hold Total Stock Market plus an extra 5% of small cap value and do the same with International. There are people who hold half 500 Index and half small cap value and do something similar for international. And there are people everywhere in-between and probably out-between as well. Yeah, I know that isn't a word, but you know what I mean. :happy

I think it would be unusual to hold more than half in small cap or small cap value. But I'm sure someone does it.

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Aptenodytes
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Re: Is it worth tilting to International Small Cap?

Post by Aptenodytes » Fri Aug 22, 2014 3:25 pm

grap0013 wrote:
Aptenodytes wrote:I agree with Livesoft. Half my stocks are international; half my stocks are small-cap. I'm choosing to increase the tilt over time -- as I ramp down my equity percentage overall I maintain the same percentage in small-cap. By the time I retire all my equities will be small-cap. Thanks, Larry.
Why not do all small cap now? Fallacy in your current logic there is.
Fair point.

But I think like a lot of people I react to new knowledge and insights and implement them in what seems prudent ways. In my case I am shifting from very aggressive to less aggressive portfolios over time, as retirement looms into view. And I'm also convinced by Larry's logic that for people in retirement the low-equity, high-tilt approach has the most compelling logic, because of its reduction in volatility. It doesn't seem contradictory to me to be something like 50-50 total market / small-cap ten years from retirement and 100% small-cap in retirement, when accompanied by a steep reduction in the equity percentages.

But if it is inconsistent, I will plead guilty.

I think in this business the only way to be completely consistent is to stick to a single approach and never change. There are wise, wealthy people who have done just that, and I don't fault them. But it just isn't for me.

nobsinvestor
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Re: Is it worth tilting to International Small Cap?

Post by nobsinvestor » Fri Aug 22, 2014 3:50 pm

Why are some of the posters in this thread so big on over-weighting international small cap? Would anyone also wish to overweight US small cap? I don't see what the difference is whether it's US or International; either way its tilting away from the total market approach.

kazper
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Re: Is it worth tilting to International Small Cap?

Post by kazper » Fri Aug 22, 2014 6:47 pm

nobsinvestor wrote:Why are some of the posters in this thread so big on over-weighting international small cap? Would anyone also wish to overweight US small cap? I don't see what the difference is whether it's US or International; either way its tilting away from the total market approach.
I tilt towards us small caps. According to several books I have read, they tend, but not always to outperform large caps over long periods of time. Trouble is, they also come with more risk. Someone on this forum posted a figure comparing someone investing in small caps vs an overall approach. Small caps were down for something like 17 years!! But in the end, they came out over 100k ahead.

livesoft
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Re: Is it worth tilting to International Small Cap?

Post by livesoft » Fri Aug 22, 2014 6:54 pm

nobsinvestor wrote:Why are some of the posters in this thread so big on over-weighting international small cap? Would anyone also wish to overweight US small cap? I don't see what the difference is whether it's US or International; either way its tilting away from the total market approach.
I think this is another way to ask the question "Do you favor total market weight or a small-cap and value-tilted portfolio?" The latter is sometimes called "a slice-and-dice" portfolio and stems from the observation by Fama and French that there is something called the small-cap premium and something call the value premium as part of a 3-factor model. http://en.wikipedia.org/wiki/Fama–Frenc ... ctor_model

I want my large-caps to be between 45% and 50% of my equity allocation, so I tilt to small-caps in both US and foreign equities. This is a very common asset allocation among folks on the forum. Sometimes the "total market weights" folks have more current posts and sometimes the "small-cap and value-tilting" proponents have more current posts. Books on the tilting are by Bernstein, Ferri, and Swedroe among others. Books on total market weights are by Bogle and others.

It's a never-ending debate. Enjoy the discussions and decide for yourself.
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grabiner
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Re: Is it worth tilting to International Small Cap?

Post by grabiner » Fri Aug 22, 2014 7:49 pm

I am a serious slice-and-dicer. I have half my US stock in small caps, and would have half my international in small caps as well, but I reduce the weight because of costs, both taxes and expenses. I have 3/8 of my international stock in developed markets large, 1/4 in emerging large, 1/4 in emerging small, 1/8 in developed small, rather than the 1/4 each I would use if expenses were equal.
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Re: Is it worth tilting to International Small Cap?

Post by placeholder » Fri Aug 22, 2014 7:56 pm

There was a long thread by Trev about the ultimate by and hold four fund version which basically had stocks as 25% each large cap/small value/international large value/international small cap.

xrw1
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Re: Is it worth tilting to International Small Cap?

Post by xrw1 » Sat Aug 23, 2014 7:00 am

For my small cap tilting of domestic and international, I am planning on tilting 10% for each of them in my whole portfolio (this comes down to about 18% of my domestic and 35% of my international holdings)

I am planning to hold both of the value index in my roth ira. By doing this I will not have enough space for my VTIAX (total international index) so I have pick up a higher ER international fund in my 401k. The one available right now is REREX American Funds EuroPacific Fund R4 (ER of 0.82). I am normally opposed to picking funds with high ER such as REREX but do you guys think it is ok?

I know the other option will be open a taxable account, but I am trying to save for my downpayment for the house so I rather just focus upon 401k and roth ira options right now

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grabiner
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Re: Is it worth tilting to International Small Cap?

Post by grabiner » Sat Aug 23, 2014 1:59 pm

xrw1 wrote:I am planning to hold both of the value index in my roth ira. By doing this I will not have enough space for my VTIAX (total international index) so I have pick up a higher ER international fund in my 401k. The one available right now is REREX American Funds EuroPacific Fund R4 (ER of 0.82). I am normally opposed to picking funds with high ER such as REREX but do you guys think it is ok?
Whether this is worth doing depends on your other 401(k) options. If the choice is between this fund and something at 0.1% expenses such as a Vanguard or Fidelity index fund, it isn't worth paying the extra costs; work out the best portfolio you can with the low-cost options in the 401(k). If the choice is between this fund and another fund with similar expenses such as American Funds Growth Fund of America class R4, you might as well use whichever 401(k) fund best fits your needs.
I know the other option will be open a taxable account, but I am trying to save for my downpayment for the house so I rather just focus upon 401k and roth ira options right now
Even at 0.82% expenses, it's better to invest in a 401(k) than in a taxable account for your retirement savings.
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xrw1
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Re: Is it worth tilting to International Small Cap?

Post by xrw1 » Sat Aug 23, 2014 6:18 pm

My only other option for international exposure in my 401K is Masters Select International (MSILX) which has an ER. of 1.07. The American Europacific growth R4 (REREX) has an ER of 0.82. I guess if I have to add international to my 401k it would be REREX since it has slightly lower ER

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grabiner
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Re: Is it worth tilting to International Small Cap?

Post by grabiner » Sun Aug 24, 2014 5:02 pm

xrw1 wrote:My only other option for international exposure in my 401K is Masters Select International (MSILX) which has an ER. of 1.07. The American Europacific growth R4 (REREX) has an ER of 0.82. I guess if I have to add international to my 401k it would be REREX since it has slightly lower ER
The real issue is not the other international options, but the other options in general. If you have to use an international fund with a 0.82% expense ratio rather than a US stock fund with a 0.20% expense ratio in order to hold international stock in your 401(k), you probably shouldn't hold international in the 401(k) because of the 0.62% extra cost. If the US stock funds and bond funds all have expenses of 0.60% or higher, then choosing to hold international in the 401(k) doesn't add much extra cost.

Both situations are common. Many 401(k) plans hold only high-cost load funds; other plans have a low-cost S&P 500 index and everything else high-cost.
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