Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

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Mako52
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Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by Mako52 » Mon Aug 27, 2018 7:50 am

The recurring mantra among many (ETA: outside of BH) seems to be "nothing beats the S&P over the long haul". Well........

I did some analysis using portfoliovisualizer backtest from Jan 1977 to July 2018, the furthest back it could go on small and mid cap benchmarks.

Initial $10,000 Investment in Jan '77, with dividends reinvested.

US Stock Market $837,285 ($193,368 is inflation adjusted, so 4.33 is the inflation factor for all values below)
US Large Cap (S&P 500) $787,652
US Large Cap Value $981,013
Mid Cap $1,645,904
Mid Cap Value $1,814,877
Mid Cap Growth $1,140,403
Small Cap $1,603,002
Small Cap Value $3,226,076
Small Cap Growth $950,427

Looking at January 1994 to the present, there was much less variation on a $10,000 investment.....$95,338 for the S&P. Large Cap Value was the lowest at $87,589, and Small Cap Value was the highest at $135,091.

So why not have more overt small cap and mid cap exposure that the S&P doesn't give you?
Last edited by Mako52 on Mon Aug 27, 2018 9:32 am, edited 1 time in total.

PFInterest
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by PFInterest » Mon Aug 27, 2018 7:52 am

Mako52 wrote:
Mon Aug 27, 2018 7:50 am
The recurring mantra among many seems to be "nothing beats the S&P over the long haul". Well........

I did some analysis using portfoliovisualizer backtest from Jan 1977 to July 2018, the furthest back it could go on small and mid cap benchmarks.

Initial $10,000 Investment in Jan '77, with dividends reinvested.

US Stock Market $837,285 ($193,368 is inflation adjusted, so 4.33 is the inflation factor for all values below)
US Large Cap (S&P 500) $787,652
US Large Cap Value $981,013
Mid Cap $1,645,904
Mid Cap Value $1,814,877
Mid Cap Growth $1,140,403
Small Cap $1,603,002
Small Cap Value $3,226,076
Small Cap Growth $950,427

Looking at January 1994 to the present, there was much less variation on a $10,000 investment.....$95,338 for the S&P. Large Cap Value was the lowest at $87,589, and Small Cap Value was the highest at $135,091.

So why not have more overt small cap and mid cap exposure that the S&P doesn't give you?
hindsight is great.

SelfEmployed123
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by SelfEmployed123 » Mon Aug 27, 2018 8:06 am

If you are saving regularly, you could do far worse than investing all of your equities in the S&P 500. Past results do not guarantee future performance. Do you have any reason to believe these trends will continue? Also, I feel like a majority of people in this forum advocate buying a total stock market index fund (e.g., VTSAX) which includes large, mid, and small cap stocks.
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

Mako52
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by Mako52 » Mon Aug 27, 2018 8:14 am

I'm certainly not bashing the S&P......it's made a lot of people much better off! What I am saying is that Small and Mid caps probably don't get the attention they deserve from individual investors based on the historical performance.

Total Stock Market plays still are heavily weighted towards the S&P.....

VTSAX, for example
Top 10 Holdings (17.25% of Total Assets)
Name Symbol % Assets
Apple Inc AAPL 2.91%
Microsoft Corp MSFT 2.81%
Amazon.com Inc AMZN 2.53%
Facebook Inc A FB 1.43%
JPMorgan Chase & Co JPM 1.35%
Berkshire Hathaway Inc B BRK.B 1.29%
Alphabet Inc A GOOGL 1.26%
Alphabet Inc Class C GOOG 1.25%
Johnson & Johnson JNJ 1.23%
Exxon Mobil Corp XOM 1.19%

Compare that to VFIAX (Vanguard 500 Admiral)
Top 10 Holdings (21.16% of Total Assets)
Name Symbol % Assets
Apple Inc AAPL 3.90%
Microsoft Corp MSFT 3.40%
Amazon.com Inc AMZN 2.99%
Facebook Inc A FB 1.73%
JPMorgan Chase & Co JPM 1.63%
Alphabet Inc Class C GOOG 1.54%
Alphabet Inc A GOOGL 1.53%
Berkshire Hathaway Inc B BRK.B 1.52%
Johnson & Johnson JNJ 1.48%
Exxon Mobil Corp XOM 1.44%
Last edited by Mako52 on Mon Aug 27, 2018 10:13 am, edited 1 time in total.

HEDGEFUNDIE
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by HEDGEFUNDIE » Mon Aug 27, 2018 8:21 am

Lots of us tilt small. It’s true that you won’t outperform the S&P 500 every year, but you will in most years, and it’s good enough for me. I use IJR.

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mhc
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by mhc » Mon Aug 27, 2018 9:27 am

The mantra I hear is TSM and not S&P 500.

There is a lot of talk around here about tilting small and/or small value.

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ReformedSpender
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by ReformedSpender » Mon Aug 27, 2018 9:43 am

HEDGEFUNDIE wrote:
Mon Aug 27, 2018 8:21 am
Lots of us tilt small. It’s true that you won’t outperform the S&P 500 every year, but you will in most years, and it’s good enough for me. I use IJR.
Looks like a great fund the more I read into it. Up 25% YTD isn't shabby either

:beer
Market history shows that when there's economic blue sky, future returns are low, and when the economy is on the skids, future returns are high. The best fishing is done in the most stormy waters.

GLState
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by GLState » Mon Aug 27, 2018 10:13 am

I like to do these asset class comparisons with actual funds or ETFs. I don't know what PortfolioVisualizer is using for asset classes, but ... we can't buy indexes. We buy funds that have expenses and taxes. Also there are many discussions here that say small cap fund X contains too many mid-caps to fully capture the size factor or value fund Y is not "value-y" enough... so, you also have to select the "right" small or value fund... there is a large range of outcomes.

Also, you only show return. What about risk? Or risk adjusted returns? We can get a higher expected return in a Total Stock/ Total Bond portfolio by increasing our allocation to Total Stock.

Many here have decided that Total Market Equity funds are "good enough" when everything is taken into account... returns, risks, costs, taxes, time spent on finding the "right" funds, etc. My view is that as long as we choose low-cost, broad-based funds or ETFs and don't chase hot funds or sectors, we can't go too far wrong. We get what the markets provide. Whatever way we decide to go, if we stick with our path through thick and thin, we'll come out OK.

randomguy
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by randomguy » Mon Aug 27, 2018 10:19 am

PFInterest wrote:
Mon Aug 27, 2018 7:52 am

hindsight is great.
Definitely. But it is also true that you can run this type of anyalsis over just about any 20 year period and small/midcaps pretty much always win and when they lose the gap tends to be pretty small. Of course there has been a ton of research on this in the last 30 years and over that period the premiums from size and value have been much smaller than historical levels.

Mako52
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by Mako52 » Mon Aug 27, 2018 10:21 am

Re risk, using the 1977-2018 analysis:

Small Cap Value: best year 42.96% worst year -32.05%
Small Cap Growth: best year 49.22% worst year -40.00%
S&P: best year 37.45% worst year -37.02%

Thanks for the heads up on IJR - definitely going to look at that.

https://www.portfoliovisualizer.com/bac ... rowth2=100

PFInterest
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by PFInterest » Mon Aug 27, 2018 10:41 am

randomguy wrote:
Mon Aug 27, 2018 10:19 am
PFInterest wrote:
Mon Aug 27, 2018 7:52 am

hindsight is great.
Definitely. But it is also true that you can run this type of anyalsis over just about any 20 year period and small/midcaps pretty much always win and when they lose the gap tends to be pretty small. Of course there has been a ton of research on this in the last 30 years and over that period the premiums from size and value have been much smaller than historical levels.
so you are 100% mid/small cap? i am not.

GLState
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by GLState » Mon Aug 27, 2018 10:53 am

Small Caps are getting a lot of attention this year because they are doing well. Remember all of the posts last year about adding International & Emerging Markets when they were doing well. Look back in discussions and you'll see times when Gold and REITs and GNMAs were hot topics. Chasing stocks, sectors, or funds after they have gone up 20% is not a good strategy. Has the outlook for small cap stocks improved that much in the last 9 months? Why would you be willing to pay 20% more today than you would have in January? Why didn't you buy in January?

ResearchMed
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by ResearchMed » Mon Aug 27, 2018 11:07 am

GLState wrote:
Mon Aug 27, 2018 10:53 am
Small Caps are getting a lot of attention this year because they are doing well. Remember all of the posts last year about adding International & Emerging Markets when they were doing well. Look back in discussions and you'll see times when Gold and REITs and GNMAs were hot topics. Chasing stocks, sectors, or funds after they have gone up 20% is not a good strategy. Has the outlook for small cap stocks improved that much in the last 9 months? Why would you be willing to pay 20% more today than you would have in January? Why didn't you buy in January?
Some (many?) of us have been in mid-caps and/or small caps for many years.
That can be tracked by previous comment here.

Some of us bought long before this past "January".
And for "whenever" each of us purchased or even added, recently or far in the past, someone could have said "Why didn't you already buy...?"
We all have to start somewhere, no matter when we purchase/add.

RM
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Mako52
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by Mako52 » Mon Aug 27, 2018 11:11 am

You can factor out the past 2 years of great returns for small caps and they still beat the S&P during the terrible 2000-2015 rolling average.

As for international and emerging market darlings of prior years, I avoided BRICs and haven't regretted it.

https://www.portfoliovisualizer.com/bac ... rowth2=100

GLState
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by GLState » Mon Aug 27, 2018 11:31 am

Portfolio Visualizer... from Jan 1972 to July 2018

................... CAGR ..... StdDev ..... SharpeRatio
Total Market.... 10.42 ...... 15.32 ........ 0.43
Small Cap....... 11.93 ...... 19.25 ........ 0.45
Small Value..... 14.33 ...... 17.70 ........ 0.59


Notice the Sharpe Ratios for Total Market and Small Cap are virtually identical. To get 15% greater return with small cap , we would be taking 25% more risk. Based only on past performance, Small Cap Value would be the place to be... more return than small cap with less risk (standard deviation) = higher Sharpe Ratio

Edit: I should point out, that after 46 years, Small Caps would be worth a lot more than Total Market ($10k would grow to $1.9 million for Small Cap vs $1.0 million for Total Market). Small value would be worth $5.1 million. In Nov. of 1974, the Small Cap portfolio would have been valued at $5200, down from the original $10,000. Would you have stuck with your portfolio, or sell and never invest again. We have to have portfolios in which we have confidence and can stick with them.
Last edited by GLState on Mon Aug 27, 2018 12:30 pm, edited 5 times in total.

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LiveSimple
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by LiveSimple » Mon Aug 27, 2018 11:33 am

GLState wrote:
Mon Aug 27, 2018 10:53 am
Small Caps are getting a lot of attention this year because they are doing well. Remember all of the posts last year about adding International & Emerging Markets when they were doing well. Look back in discussions and you'll see times when Gold and REITs and GNMAs were hot topics. Chasing stocks, sectors, or funds after they have gone up 20% is not a good strategy. Has the outlook for small cap stocks improved that much in the last 9 months? Why would you be willing to pay 20% more today than you would have in January? Why didn't you buy in January?

Some of the investors, who have the next 20+ years can benefit from adding Small Caps, if they indent to do so.
We cannot always ask, why you missed yesterday ? and why are you looking for today ?
IMO, yesterday was the lesson, today is the implementation. You can read any number of books, or blogs or forums, but experiencing is different.
Also agree do not change, if you cannot stay the course longer, say 10+ years.

GLState
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by GLState » Mon Aug 27, 2018 11:53 am

This thread does not strike me as a "I'm creating a portfolio" thread. It seems to be a "small caps have done well in the past, why buy anything else" thread. The OP is attracted to IJR because it is "up 25% this year". Perhaps, I've misunderstood the OP's intent.

Most here have a market allocation to small and midcap funds in Total Stock Market .... other choose to tilt. My point is ... those that add asset classes when they are hot, are chasing performance, not building a portfolio. Investors that buy when hot, usually sell when they cool off.

Yes, we all have to start from somewhere, but I hope we can help others to avoid making the mistakes that we had to learn the hard way.

Mako52
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by Mako52 » Mon Aug 27, 2018 1:14 pm

GLState wrote:
Mon Aug 27, 2018 11:53 am
This thread does not strike me as a "I'm creating a portfolio" thread. It seems to be a "small caps have done well in the past, why buy anything else" thread. The OP is attracted to IJR because it is "up 25% this year". Perhaps, I've misunderstood the OP's intent.
It appears you have. Where did I say I was attracted to IJR simply because it's up 25% this year? I pointed out in my original post that Small and Mid caps have performed VERY well over the long haul. If you go for a "Total Stock Market" approach, the % of the portfolio in small and mid caps is likely to be small enough that it will have little effect on overall performance. Conversely, one can also see how a handful of stocks have driven a huge amount of wealth generation in this paper by Bessembinder:https://www.google.com/url?sa=t&rct=j&q ... d-eV3JIrkt

jvini
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Re: Little love for Small and Mid Cap ETFs in a "minimalist" portfolio?

Post by jvini » Mon Aug 27, 2018 1:51 pm

I've used the visualizer, read historical charts, and came to the conclusion that splitting my U.S. holdings between small, mid and large cap provides superior returns. The expense ratios are quite low on the following

ijr
Ijh
Ivv

Ixus (international index) gets 20% of my equity allocation.

BND gets my age - 13. 38%, and will not go above 40% for a while.

It's similar to the three fund portfolio but divides up the u.s. market more evenly than a single total market ETF like VTI. Over the past few decades, rebalancing yearly for the most part and now using ETFs rather than funds, I've done quite well. Thank you Mr. Bogle!

It's been my model and I've stuck to it through thick and thin. That's more than half the battle.

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