Value / Small Tilters, please weigh in....

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ctom99
Posts: 6
Joined: Sun Apr 03, 2016 12:13 pm

Value / Small Tilters, please weigh in....

Post by ctom99 » Thu Dec 08, 2016 5:37 pm

Hello all. It would very helpful if I could hear opinions from members that are both familiar with DFA's Core and Vector Equity funds and who personally invest in an equity structure that tilts to both value and small. I'd like to know whether the portfolio I've come up with has a reasonable chance, in your opinion, of meeting its long-term goal.

I am wanting this particular portfolio to have a reasonable chance, over a 27 year period, of earning 0.5% more than a typical 11 to 12 DFA fund 'slice & dice' equity model. Examples of two very similar slice & dice models would be Paul Merriman's Ultimate Buy & Hold equity portfolio (with 12 funds) and Steven Evanson's 10x10% (with 11).

Here's what I've come up with:

35% DFVEX DFA US Vector Equity
9% DFSVX DFA US Small Value
10% DFGEX DFA Global Real Estate
29% DFVQX DFA Int'l Vector Equity
7% DISVX DFA Int'l Small Value
10% DFEVX DFA Emer Mkts Value

The portfolio is 50% domestic, 40% developed international, and 10% emerging markets. When you throw my 6 fund design into Fidelity's portfolio x-ray tool, the resulting M* style box looks like this...

15 10 7
14 11 8
17 13 6

Whereas Evanson's 11 fund 10x10% model results in the following M* style box...

18 14 10
11 9 6
14 12 6

In your opinion, have I overweighted my portfolio too far toward small? The value tilt with 46% in its column looks about right to me. The reason that I'm concerned is that other, much more knowledgeable members here have advocated tilting only 20% to small. What would the M* style box look like for a 20% tilt to small, maintaining the roughly 45% tilt to value?

Finally, do you all think my 6 fund design has a reasonable chance of beating the annualized return of the 11 to 12 fund slice & dice portfolios by 0.5%, over a long 27 year period? Thanks in advance for the assistance!

livesoft
Posts: 62776
Joined: Thu Mar 01, 2007 8:00 pm

Re: Value / Small Tilters, please weigh in....

Post by livesoft » Thu Dec 08, 2016 5:56 pm

I'll just say that small- and value- does not always pan out, so I have decided that my small- and value-tilted portfolio should be judged only by the 9-box style grid for US-separately, foreign-separately, and both together. I want all of them to have 45% to 50% in the large-cap row and about 40% in the value column. I don't care otherwise what's in the other 4 boxes. I make all rebalancing decisions within equities based on those 2 criteria.

For instance, after rebalancing yesterday, I have today:
17 16 15
12 10 08
11 08 03

I will also say that to get the 1% to 2% better performance over a total markets weighted portfolio of the same stock:bond asset allocation, I think one has to hav rock-bottom expense ratios (my portfolio is about 0.12% for the whole thing) and pay no management fees, no commissions, and pretty much no taxes, too. In addition to that, you had better be opportunistically rebalancing. Otherwise, you've got too big a headwind.

You might also use DGSIX as a 60/40 benchmark. What's it 9-box style grid like? Compare it to VSMGX.
Last edited by livesoft on Thu Dec 08, 2016 9:45 pm, edited 1 time in total.
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livesoft
Posts: 62776
Joined: Thu Mar 01, 2007 8:00 pm

Re: Value / Small Tilters, please weigh in....

Post by livesoft » Thu Dec 08, 2016 6:13 pm

ctom99 wrote:In your opinion, have I overweighted my portfolio too far toward small?
Yes, in my opinion.
The value tilt with 46% in its column looks about right to me.
46% is OK with me, but I don't go that high myself.
The reason that I'm concerned is that other, much more knowledgeable members here have advocated tilting only 20% to small.
I try to have about 40% to 50% of my equities in VBR (small-cap value) and VSS (small-cap foreign). 20% of equities to small is too small.
What would the M* style box look like for a 20% tilt to small, maintaining the roughly 45% tilt to value?
It is trivial for you do create a portfolio to look at that yourself. You should report back in this thread when you have the style box. :sharebeer

Finally, do you all think my 6 fund design has a reasonable chance of beating the annualized return of the 11 to 12 fund slice & dice portfolios by 0.5%, over a long 27 year period? Thanks in advance for the assistance!
No, I don't think so. Let me ask a question in return: How much does a 60/40 benchmark beat an 80/20 benchmark over time? You can compare VSMGX and VASGX. Does even a 20% change of portfolio from bonds to equities give you 0.5% per year? A 0.5% annual difference is pretty much in the noise where just changing rebalancing by a few days could overwhelm 0.5%.
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heyyou
Posts: 3175
Joined: Tue Feb 20, 2007 4:58 pm

Re: Value / Small Tilters, please weigh in....

Post by heyyou » Thu Dec 08, 2016 11:10 pm

Saving more from each paycheck is a surer way to a bigger nest egg than trying to boost the highly variable returns of your equity funds.

I do tilt to small and value to reduce my exposure to Large Growth stocks.

LibertyLover
Posts: 75
Joined: Thu May 05, 2016 5:56 am

Re: Value / Small Tilters, please weigh in....

Post by LibertyLover » Fri Dec 09, 2016 7:20 am

ctom99 wrote: In your opinion, have I overweighted my portfolio too far toward small? The value tilt with 46% in its column looks about right to me. The reason that I'm concerned is that other, much more knowledgeable members here have advocated tilting only 20% to small. What would the M* style box look like for a 20% tilt to small, maintaining the roughly 45% tilt to value?

Finally, do you all think my 6 fund design has a reasonable chance of beating the annualized return of the 11 to 12 fund slice & dice portfolios by 0.5%, over a long 27 year period? Thanks in advance for the assistance!
I can't possibly predict if it will outperform but I think it is sound. My portfolio tilts even more towards small and value.

There are a few things to consider:

1. In order to earn the size and value premium you must stick to the allocation through potentially long periods of underperformance. How much do you trust the plan? You must be able to trust it enough to stick to it through the ups and downs. If you only 50% believe in the plan you will sell during rough times.

2. Your long time frame suggests you have the time to withstand underperformance.

Paul Merriman suggest that this is a reasonable approach depending on an investors time horizon:
Paul Merriman wrote::
Q: I am under 30 and considering putting my 401(k) entirely into a small-cap value index fund. What do you think?

A: Even though I don’t want to give you specific advice without knowing more about your circumstances, I can tell you I’ve come to believe that overweighting to small-cap value stocks can be a great option in the early years of saving for retirement.

For somebody who can tolerate the risks, I think it makes sense to be all-equity until age 35 to 45. And for the first 10 to 15 years of your investments, I think an all-value portfolio (including large-cap and small-cap) is worth considering.

Here’s an alternate suggestion: If you have 40 or more years to go before retirement, consider making a major lifetime commitment to small-cap value. (This can include international small-cap value funds in both developing and emerging markets).

Specifically, think about investing $5,000 a year into small-cap value funds for 40 years. In the early years that may be all you have to invest. When you can invest more than that, put the excess into other asset classes. This will gradually diversify your portfolio into one with a lower risk profile.
http://paulmerriman.com/pays-go-small-cap-value/

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