Small Cap Value Tilt

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blessed
Posts: 19
Joined: Mon Feb 27, 2017 9:55 pm

Small Cap Value Tilt

Postby blessed » Thu May 18, 2017 10:43 pm

Hello everyone, I've been reading a lot of the discussions concerning small cap value tilting. I've been taking a very simple approach to my investments, which right now consists of 75% Total Market (FSTVX) and 25% US Bond Index (FSITX), but now I'm intrigued by the thought of adding the small value tilt and my primary options for that are DFFVX and IJS. I'd like to hear any thoughts/opinions/criticisms on my thought process. I was thinking maybe something like:
45% total market
30% scv (IJS or DFFVX)
25% total bond

Current situation:
-early 40's (both of us), no kids
-combined annual income of 360k (this level of income is rather new)
-total investments currently at 650k and growing rapidly (yes I know I should have a higher net worth but various factors have led us to where we are)
-no debt other than mortgage debt, which is $2450 for 13 more years
-starting 1/1/2017, we will be contributing 48k per year in combined 401k+match, 11k in back door roth, and 6k per month into taxable...totaling ~130k/year in additional investments

Thanks,

red5
Posts: 745
Joined: Sun Apr 01, 2012 4:42 pm

Re: Small Cap Value Tilt

Postby red5 » Fri May 19, 2017 3:42 am

I tilt using Vanguards VSIAX. It is a pretty modest tilt too. I keep it at a 1:5 ratio with the Total US Stock fund.

I think you should ask yourself why you want to tilt. Is it because SCV has been doing quite well in the past (recency bias)? Is it because you genuinely believe SCV will outperform the broad market in the years to come? Is SCV at a relatiave high (compared to the total market)? Do you believe you have a need to tilt to meet your retirement savings goal? Would a more modest tilt be okay?

Some of those questions can only be answered in hindsight.

I'm not at all saying your plan is unwise. Just ask yourself some hard questions before you take that action.

Good luck.

NiceUnparticularMan
Posts: 1402
Joined: Sat Mar 11, 2017 7:51 am

Re: Small Cap Value Tilt

Postby NiceUnparticularMan » Fri May 19, 2017 6:56 am

I personally use both IJS in a taxable account and DFFVX in a 401K. I wouldn't pay an extra fee just for access to DFFVX, but since I was already paying an extra fee for the 401K, I was happy to go ahead and use the available DFA funds. I also use Vanguard's SCV fund (VBR as an ETF) in accounts without DFA access which are tax-advantaged.

I think of DFFVX as underrated--it is not as small as some competitors, including IJS, but it is pretty valuey. And the reason it is not as small is that it is screening more aggressively for quality, which basically means filtering out a lot of "junk" microcaps. This results in it having a lot of "alpha" in three-factor regressions, which disappears in five-factor regressions (that's how you know it is a quality screen). IJS also appears to be screening for quality, just not as aggressively, so it generates less "alpha". I don't know where you plan to hold this, but IJS is also quite a nice fund for taxable accounts, and all that is why I hold some IJS too. VBR is actually sort of like DFFVX in that it is a bit larger, but I just hold more of it in combination with SP500 rather than TSM, and that gets you yet again a de facto quality screen. It has a nice low ER. Just for reference, if I would be 40/60 IJS/TSM, I'd be more like 60/40 VBR/SP500.

Personally, I'd use DFFVX first if it wasn't costing you extra for access (above the ER), then either VBR (but maybe a little more of it) in tax-advantaged or IJS in taxable.

The usual cautions should apply--you should be aware there may be risks that don't show up in typical backtests, and you may experience some tracking error. But my two cents is you sound like you are in good shape to handle such risks, and with such a large remaining investment in total market, I would think you could focus on that whenever your SCV is tracking behind.

blessed
Posts: 19
Joined: Mon Feb 27, 2017 9:55 pm

Re: Small Cap Value Tilt

Postby blessed » Fri May 19, 2017 2:18 pm

red5 wrote:I tilt using Vanguards VSIAX. It is a pretty modest tilt too. I keep it at a 1:5 ratio with the Total US Stock fund.

I think you should ask yourself why you want to tilt. Is it because SCV has been doing quite well in the past (recency bias)? Is it because you genuinely believe SCV will outperform the broad market in the years to come? Is SCV at a relatiave high (compared to the total market)? Do you believe you have a need to tilt to meet your retirement savings goal? Would a more modest tilt be okay?

Some of those questions can only be answered in hindsight.

I'm not at all saying your plan is unwise. Just ask yourself some hard questions before you take that action.

Good luck.

Great questions. I'm thinking that over a longer period, say 20-25 years, that SCV has the potential to outperform the broader market. Given my rate of savings, income, and job stability I'm very comfortable that even if my 30% SCV goes to zero I will still have more than enough for a comfortable retirement with the other 70% of my investments. So it's more of a calculated tolerable risk that may lead to a greater return, but if it doesn't, I won't lose any sleep.

blessed
Posts: 19
Joined: Mon Feb 27, 2017 9:55 pm

Re: Small Cap Value Tilt

Postby blessed » Fri May 19, 2017 2:25 pm

NiceUnparticularMan wrote:I personally use both IJS in a taxable account and DFFVX in a 401K. I wouldn't pay an extra fee just for access to DFFVX, but since I was already paying an extra fee for the 401K, I was happy to go ahead and use the available DFA funds. I also use Vanguard's SCV fund (VBR as an ETF) in accounts without DFA access which are tax-advantaged.

I think of DFFVX as underrated--it is not as small as some competitors, including IJS, but it is pretty valuey. And the reason it is not as small is that it is screening more aggressively for quality, which basically means filtering out a lot of "junk" microcaps. This results in it having a lot of "alpha" in three-factor regressions, which disappears in five-factor regressions (that's how you know it is a quality screen). IJS also appears to be screening for quality, just not as aggressively, so it generates less "alpha". I don't know where you plan to hold this, but IJS is also quite a nice fund for taxable accounts, and all that is why I hold some IJS too. VBR is actually sort of like DFFVX in that it is a bit larger, but I just hold more of it in combination with SP500 rather than TSM, and that gets you yet again a de facto quality screen. It has a nice low ER. Just for reference, if I would be 40/60 IJS/TSM, I'd be more like 60/40 VBR/SP500.

Personally, I'd use DFFVX first if it wasn't costing you extra for access (above the ER), then either VBR (but maybe a little more of it) in tax-advantaged or IJS in taxable.

The usual cautions should apply--you should be aware there may be risks that don't show up in typical backtests, and you may experience some tracking error. But my two cents is you sound like you are in good shape to handle such risks, and with such a large remaining investment in total market, I would think you could focus on that whenever your SCV is tracking behind.


Thanks for the information, very helpful. I have access to DFFVX and IJS without fees. I'm leaning towards the 40/60 IJS/TSM for my equity holdings but I haven't made a decision yet.

NiceUnparticularMan
Posts: 1402
Joined: Sat Mar 11, 2017 7:51 am

Re: Small Cap Value Tilt

Postby NiceUnparticularMan » Fri May 19, 2017 4:59 pm

blessed wrote:Thanks for the information, very helpful. I have access to DFFVX and IJS without fees. I'm leaning towards the 40/60 IJS/TSM for my equity holdings but I haven't made a decision yet.


Is this taxable or tax-deferred? I'd use DFFVX if tax-deferred, but that's a judgment call.


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