Small cap tilt

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blessed
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Re: Small cap tilt

Post by blessed » Sun Sep 23, 2018 10:21 am

I'm not picking a side here, I think people should do their own research and do what they feel makes sense for their personal situation. I do have a concern with presenting data from 1975-1983 to suggest that small cap hasn't really outperformed large cap over the long term.

1. Small cap blend/value has higher volatility, so obviously higher highs and lower lows.
2. Someone finds the highest of high periods for small cap blend/value and removes that data when calculating long-term returns, therefore overweighting the lowest of lows.
3. The conclusion drawn/presented is that small cap blend/value does not outperform large cap over the long-term.

Feels strongly like starting with a conclusion and then finding data to support the conclusion vs letting the data lead to a conclusion. The former is not data analysis, it's just plain old cherry picking.

To each his own when determining AA, but please careful when using other people's data "analysis" to guide your path.

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JoMoney
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Re: Small cap tilt

Post by JoMoney » Sun Sep 23, 2018 10:24 am

nisiprius wrote:
Sun Sep 23, 2018 10:14 am
...
I think this is quite possibly the result of data mining by Siegel. ...
(From the appendix in "Stocks For the Long Run")
Image

The "size premium" itself is frequently criticized in academic literature as being the result of data mining.
Damodaran (2015) explains: “I have never used a small cap premium, [sic] when valuing a
company and I don’t plan to start now. Needless to say, I am often asked to justify my non-use
of a premium and here are my reasons. First, I am not convinced by either the historical data or
by current market behavior that a small cap premium exists. Second, I do believe that small cap
companies are more exposed to some risks that large cap companies but there are other more
effective devices to bring these risks into valuation.”

Ang (2014) explains:“[T]he original discovery of the size premium could have just been data mining. Fisher
Black (1993) made this comment immediately after Fama and French’s paper was
released. . . . One telling outcome of data mining is that an effect appears significant in
sample, where the models are originally estimated, but it fails out of sample, where the
models are tested after their discovery. Banz’s size effect, therefore, might never have
truly existed in the first place, and its finding by Banz and Reinganum was pure luck.”
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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vineviz
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Re: Small cap tilt

Post by vineviz » Sun Sep 23, 2018 10:53 am

JoMoney wrote:
Sun Sep 23, 2018 8:24 am
I understand you don't like the fact that the data based on real world mutual funds underperformed the academic reconstructions, but if you're going to say it's an "incorrect interpretation" it would make for better dialogue if you gave reasons for why you feel your interpretation (whatever interpretation that is) is less incorrect.
Then you understand incorrectly.

My objection is that that the Morningstar OE Small Blend composite has serious data integrity issues for the first 25 or so years of its history.

As I mentioned, its not clear what it even is a composite OF in its early years since there were virtually no small cap blend funds in existence before 1980. This is especially problematic in the first couple of years, when the OE composite had virtually no updates at all AND when the index showed basically no return at all when (in fact) small stocks were returning over 15% annually.

Image

Zooming out a bit, you can see that the correlation of returns between the OE Small Blend composite and the SBBI Ibbotson (also a Morningstar company, BTW) small stock monthly returns is consistently between 0.8 and 1.0 after 1980 or so.

As you'd expect.

Yet prior to 1978ish, the OE composite somehow shows virtually no relationship to real world returns.

Image

This is easy to understand if you take a second to think about what the mutual fund landscape looked like before 1980 or so and understand how a composite like the Morningstar composite actually gets assembled.

Basically, its impossible to say to what degree (or even if) the Morningstar index "performed much worse" than the other indexes.

Here's one thing we DO know. Siegel first published this nonsensical "fact" in 1994. If you'd been wise enough to ignore him then, and instead bought a representative sample of small cap mutual funds in 1994 and held on (as represented by the the same Morningstar composite) you'd have accumulated more than 10% more capital than someone who invested in Vanguard 500 Index Fund on the same date.

Image
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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JoMoney
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Re: Small cap tilt

Post by JoMoney » Sun Sep 23, 2018 11:02 am

vineviz wrote:
Sun Sep 23, 2018 10:53 am
... Yet prior to 1978ish, the OE composite somehow shows virtually no relationship to real world returns....
Part of the problem, is that the fund data IS based on real world returns, that had to deal with expenses and poor liquidity and ability to actually invest in those stocks ... unlike the academic data, which is almost impossible to tell how investable it would have been, or how stale the price data they're using was. Modern small-indices have had to repeatedly make adjustments to their methodology to make them actually investable.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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vineviz
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Re: Small cap tilt

Post by vineviz » Sun Sep 23, 2018 11:34 am

nisiprius wrote:
Sun Sep 23, 2018 10:14 am
(That still leaves other issues. One is mixing up the issue of raw return in small-caps, which has been higher than the market, with risk-adjusted return, which is in a maybe-so maybe-not area. The second is, if it doesn't have higher risk-adjusted return, does it have low enough correlation with large stocks to provide a robust diversification benefit?)
This is a a thornier question for sure.

As far as I can tell, the three oldest small cap index mutual funds are:
  • NAESX Vanguard Small Cap Index Inv
  • NMSCX Columbia Small Cap Index Inst
  • MASKX iShares Russell 2000 Small-Cap Idx Instl
Backtesting a portfolio that is 50% Vanguard S&P 500 index fund with 50% of each of those is a mixed bag form 1993 to 2018.

https://www.portfoliovisualizer.com/bac ... tion4_3=50

All three improved absolute returns and increased overall portfolio. Both NAESX and NMSCX improved risk-adjusted returns, but MASKX did not (it didn't help but it didn't hurt either).

That said, during the past few years (2015 to 2017 especially) there have been many new small cap ETFs introduced and these have (on average) much lower correlations with large cap stocks than the older ETFs. Only time will tell how valuable these new funds are in terms of diversification.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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vineviz
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Re: Small cap tilt

Post by vineviz » Sun Sep 23, 2018 11:37 am

JoMoney wrote:
Sun Sep 23, 2018 11:02 am
vineviz wrote:
Sun Sep 23, 2018 10:53 am
... Yet prior to 1978ish, the OE composite somehow shows virtually no relationship to real world returns....
Part of the problem, is that the fund data IS based on real world returns....
Sorry, but no. A composite index that has no constituent data is NOT "based on real world returns".
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Dulocracy
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Re: Small cap tilt

Post by Dulocracy » Sun Sep 23, 2018 2:28 pm

vineviz wrote:
Sat Sep 22, 2018 9:43 am
Dulocracy wrote:
Sat Sep 22, 2018 9:26 am

...to wait the 30 to 40 years it can take for the premium to show up.
This is among the most persistent misconceptions about factor investing I encounter on this forum.
If it is an incorrect assessment, please explain how it is incorrect instead of just stating your belief. You may be correct, but we cannot know it unless you share.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

international001
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Re: Small cap tilt

Post by international001 » Sun Sep 23, 2018 2:49 pm

I went through portfolio visulizer comparing returns for different 20 years periods (starting 1972) In a few instances, large cap beat small caps, but just by a bit
If you are not selective for the data, it seems clear to me pretty clear that small caps are a better bet for long term. For a retirement account with time to go, I don't even understand why you would have large cap.

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vineviz
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Re: Small cap tilt

Post by vineviz » Sun Sep 23, 2018 2:58 pm

Dulocracy wrote:
Sun Sep 23, 2018 2:28 pm
vineviz wrote:
Sat Sep 22, 2018 9:43 am
Dulocracy wrote:
Sat Sep 22, 2018 9:26 am

...to wait the 30 to 40 years it can take for the premium to show up.
This is among the most persistent misconceptions about factor investing I encounter on this forum.
If it is an incorrect assessment, please explain how it is incorrect instead of just stating your belief. You may be correct, but we cannot know it unless you share.
That's a bit of a lopsided standard, since the original claim was made without any supporting evidence or logic.

Nonetheless, let's look at it.

One way to see whether it can take "30 to 40 years it can take for the premium to show up" is to see whether that has ever happened. Since 1930, small cap stocks have never underperformed large cap stocks for more than four years in a row.

Image

Another way to look at it is to examine every 30-year period for which we have data. Starting in 1930, in how many 30-year periods did small caps outperform large caps? 58 out of 60.

Image

The two years in which small caps underperformed, it was by 0.10% and 0.62% respectively: hardly catastrophic to the investor.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

petulant
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Re: Small cap tilt

Post by petulant » Sun Sep 23, 2018 3:07 pm

JoMoney wrote:
Sun Sep 23, 2018 10:24 am
nisiprius wrote:
Sun Sep 23, 2018 10:14 am
...
I think this is quite possibly the result of data mining by Siegel. ...
(From the appendix in "Stocks For the Long Run")
Image

The "size premium" itself is frequently criticized in academic literature as being the result of data mining.
Damodaran (2015) explains: “I have never used a small cap premium, [sic] when valuing a
company and I don’t plan to start now. Needless to say, I am often asked to justify my non-use
of a premium and here are my reasons. First, I am not convinced by either the historical data or
by current market behavior that a small cap premium exists. Second, I do believe that small cap
companies are more exposed to some risks that large cap companies but there are other more
effective devices to bring these risks into valuation.”

Ang (2014) explains:“[T]he original discovery of the size premium could have just been data mining. Fisher
Black (1993) made this comment immediately after Fama and French’s paper was
released. . . . One telling outcome of data mining is that an effect appears significant in
sample, where the models are originally estimated, but it fails out of sample, where the
models are tested after their discovery. Banz’s size effect, therefore, might never have
truly existed in the first place, and its finding by Banz and Reinganum was pure luck.”
Well, one problem might be using Russell 2000 instead of alternatives. The index has many critics, and doing backtesting it has zero risk-adjusted benefit over a total stock index. It’s also odd that they would switch to using Russell 2000 data around 2000 when it’s been around since the 1980s.

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JoMoney
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Re: Small cap tilt

Post by JoMoney » Sun Sep 23, 2018 3:13 pm

Image

Every downward sloped period on the chart was a period where there was no size premium
Over the overall 35+ years since the size premium was "discovered" and the Banz paper published there has been no overall size premium, every up period was matched with a down period.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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JoMoney
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Re: Small cap tilt

Post by JoMoney » Sun Sep 23, 2018 3:19 pm

petulant wrote:
Sun Sep 23, 2018 3:07 pm
...

Well, one problem might be using Russell 2000 instead of alternatives. The index has many critics, and doing backtesting it has zero risk-adjusted benefit over a total stock index. It’s also odd that they would switch to using Russell 2000 data around 2000 when it’s been around since the 1980s.
I don't know his reasoning behind the data set he chose to use, my assumption would be that he wanted to use whatever was the best representation of something possibly investable... but that might lean towards just sticking with the DFA fund since it's existence, but that's not exactly an 'index' either, and they too have changed there methodologies over time... it's such a narrow segment of the market to begin with... lots of issues.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

HEDGEFUNDIE
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Re: Small cap tilt

Post by HEDGEFUNDIE » Sun Sep 23, 2018 3:33 pm

One more data point.

The S&P 600 index became investable in 2000 via the IJR ETF. Inspired by nisiprius’s recent work on lifecycle contributions, I modeled how an investor who started with $10k and invested $1k monthly would have done in the following three funds:

SPY (S&P 500): $725k
VTSMX (Total US market): $747k
IJR (S&P 600): $953k

Sharpe ratios:

SPY (S&P 500): 0.37
VTSMX (Total US market): 0.40
IJR (S&P 600): 0.59

I totally get that 18 years is not a long time, but it does include two market crashes, and in both the S&P 600 outperformed the other funds.

Past performance is no guarantee of future results, but at least for me, this data is convincing enough evidence for a significant small cap tilt.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

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nisiprius
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Re: Small cap tilt

Post by nisiprius » Sun Sep 23, 2018 3:44 pm

petulant wrote:
Sun Sep 23, 2018 3:07 pm
JoMoney wrote:
Sun Sep 23, 2018 10:24 am
nisiprius wrote:
Sun Sep 23, 2018 10:14 am
...
I think this is quite possibly the result of data mining by Siegel. ...
(From the appendix in "Stocks For the Long Run")
Image
Well, one problem might be using Russell 2000 instead of alternatives. The index has many critics, and doing backtesting it has zero risk-adjusted benefit over a total stock index. It’s also odd that they would switch to using Russell 2000 data around 2000 when it’s been around since the 1980s.
Curioser and curioser. The 2015 Ibbotson Classic Yearbook, p. 57, "Description of the Basic Series" says their series is:
  • NYSE Fifth Quintile Returns (1926-1981) -- same as Siegel
  • DFA US 9-10 Small Company Portfolio (January 1982 - March 2001) -- probably the same as Siegel (did he transcribe the name correctly?)
  • DFA US Micro Cap Portfolio (April 2001 - December 2014) - different from Siegel
It states that "in April 2001 Dimensional Fund Advisors renamed ... the fund and changed some of the criteria."

I don't know what to say about either of them except that there doesn't seem to be a great deal of data purity or consistency in either. On the one hand, the DFA fund is a real-world fund and therefore represents results that can actually be achieved. On the other hand, we are always being told that DFA funds are not index funds and use transactional strategies like "patient trading" in hope of beating the index. It seems kind of like using Fidelity Contrafund as your data source for "large-company stocks."

In any case, if an effect is robust enough to put money into, it ought to be robust enough to show up even if you use the "wrong" index or the "wrong" company's fund.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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JoMoney
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Re: Small cap tilt

Post by JoMoney » Sun Sep 23, 2018 3:50 pm

One more point ... about how slight methodology differences in a narrow segment can make a big difference:
The "Total Market" indices, Wilshire 5000, Russell 3000, or even the reconstructed CRSP data going back to 1925, hasn't beat the S&P 500 (which is aprox. 80% of the market)...

Although it is predominately small caps, the portion that is not in the S&P is not precisely a small-cap index, but that's my point - that slight differences in methodology in narrow segments makes a big difference (even besides the question as to whether or not it was feasible to invest in these stocks in the earlier periods).

Chart of Wilshire 5000 vs S&P 500 since 1970
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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vineviz
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Re: Small cap tilt

Post by vineviz » Sun Sep 23, 2018 4:07 pm

JoMoney wrote:
Sun Sep 23, 2018 3:13 pm
Image

Every downward sloped period on the chart was a period where there was no size premium
Over the overall 35+ years since the size premium was "discovered" and the Banz paper published there has been no overall size premium, every up period was matched with a down period.
Sure. If you squint hard enough and pick just the right starting point, you can make the size premium look smaller. That's not the same as proving it isn't there.

Plus, the notion that the size premium was "discovered" in 1981 runs counter to reality. Academics were clearly aware of it earlier (its no conicicdence that Banz, Roll, etc. all were PhD students of Eugene Fama), but so were professional investors.

Heck, check out this quote form Banker's Magazine in 1964:
At the same time, there has been an explosion of investor interest in these same small-cap stocks and foreign shares. Coincidence or conspiracy? You decide.
The CCH pension guide in 1975 was aware that small cap stocks (more often referred to as "counter stocks" because they weren't listed on one of the national exchanges, of which NYSE was the largest) had superior returns to large stocks. https://books.google.com/books?id=wG9PA ... 0Q6AEIKTAA
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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vineviz
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Re: Small cap tilt

Post by vineviz » Sun Sep 23, 2018 4:17 pm

nisiprius wrote:
Sun Sep 23, 2018 3:44 pm
Curioser and curioser. The 2015 Ibbotson Classic Yearbook, p. 57, "Description of the Basic Series" says their series is:
  • NYSE Fifth Quintile Returns (1926-1981) -- same as Siegel
  • DFA US 9-10 Small Company Portfolio (January 1982 - March 2001) -- probably the same as Siegel (did he transcribe the name correctly?)
  • DFA US Micro Cap Portfolio (April 2001 - December 2014) - different from Siegel
On the topic of the pre-1981 returns, I'm curious about the use of the NYSE fifth quintile. I don't have an opinion one way or another about how representative that is of the investable universe in that era.

I am old enough to remember the American Stock Exchange, though, and I'm sure that many others here are as well. The Nasdaq index began in 1971, if I recall correctly, as a composite of over-the-counter (OTC) stock that were not listed on a national exchange. None of those stocks would be included in a dataset from the NYSE (not pre-1981 anyway).

And the Wall Street Journal regularly published an OTC composite (35 stock as of January 1970) compiled by the National Quotation Bureau going back to the 1940s which contained companies including American Express, Anheuser-Busch, Berkshire Hathaway, Kaiser Steel, and Tampax, Inc. I don't know if those stocks (as they existed then) would be considered small caps by our current standards, but it does open up a question in my mind about whether the "NYSE Fifth Quintile" matches our current notion of the small cap universe.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

pascalwager
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Re: Small cap tilt

Post by pascalwager » Sun Sep 23, 2018 5:27 pm

pascalwager wrote:
Sat Sep 22, 2018 10:09 pm
CRTR wrote:
Sat Sep 22, 2018 8:53 am
pascalwager wrote:
Fri Sep 21, 2018 7:58 pm
CRTR wrote:
Fri Sep 14, 2018 1:04 pm
OK, I'm pretty sure I'm in the minority on this board (except for Larry Swedroe) but I've been VERY WELL served by having an extreme small cap tilt for the past 21 years. In fact, the equity portion of my portfolio has outperformed the classic Boglehead simple approach (TSM/TISM) on both an absolute and risk-adjusted basis with only a tiny bit higher volatility. Of course, I'm not going to say the next 20 years will repeat my experience but most rolling 20 year periods over the past 90 years have. By disclosure, it was not "my portfolio" . . . I simply followed recommendations of a friend in the industry (she worked for DFA and was one of the original architects of Schwab index funds). I invested in the following funds since 1998. I used contributions to rebalance:

25% VSMAX, Vanguard Small Cap,
25% BRSIX Bridgeway Micro Cap,
25% VINEX, Vanguard International Explorer,
25% VGSLX, Vanguard REIT

Here is my original post: viewtopic.php?f=1&t=229450&p=3566643#p3566643

Ironically, my advisor friend is NOT a fan of a tilting towards small caps -- even though she worked for DFA. In fact, she is in favor of general market wide diversification with one caveat: reduce exposure to so-called MEGA CAPS. She feels tilting away from that segment of the market will increase returns in the long run and reduce exposure in bubbles. As for small cap vs mid cap, she says the data is not there: they're equivalent.

I realize there are a number of things in my portfolio that will cause fits among many members of this board but the end result speaks for itself. To be clear, I am NOT arguing this is the best vehicle for everyone . . . just one example. If you can look past the 'religion' part of investing, it does satisfy the most important requirements: low costs, diversification, simplicity. Whatever you end up choosing, if it satisfies those requirements AND you stick with it, you'll be fine!
I experimented with your stock portfolio (8.4% CAGR) and modifications using the portfolio visualizer. What I found was that large international companies were the performance slayers, not large US companies. In fact, substituting US large cap (9.1% CAGR) for some of your funds boosted performance, but the best performance enhancer was the VG extended market fund (9.9% CAGR). So mid/small was a very good way to go from 1997 to date.
Thanks for doing all that work!! That's interesting! I must be doing something wrong because I just tried substituting VFINX for each component in the portfolio and it caused a decrement in performance. For which component did you substitute US large caps? As for international large caps, I've never had any significant international large cap exposure. VINEX has always had a relatively small average market cap although it does drift between a blend and growth fund, depending on the year.

As for large caps (or MEGA CAPS as Vanguard likes to call them), I did a search of the board and, of course, that topic has been discussed at length. Not surprisingly, the board's discussion confirms what my friend told me: the largest deciles in the CRSP (US Mega caps) have underperformed the greater market historically. Of course, that doesn't mean the same will happen over the next 80 years!!! Here are a couple of the links:
viewtopic.php?t=14489
viewtopic.php?t=38374
I didn't use VG 500 as the substitute fund. I used VG Large Cap Index Fund (VLCAX). When I substituted for the microcap fund, int'l explorer fund, REIT, and small cap fund, CAGR was 8.8%, 8.6%, 8.6%, and 8.3% respectively. So, in three out of four substitutions, US large cap actually raised CAGR compared to your (highly remunerative) portfolio's 8.4%. VLCAX does have slightly more mid-caps (2% more) than VFINX.
I had to redo this. I discovered that the PV was readjusting the starting date to match the fund inception date. This time I used MGC (VG Mega Cap ETF) to eliminate all mid-caps from the substitution fund, but the starting date was January 2008, not your portfolio inception date of 1997.

Your portfolio: 8.11%
MGC instead of VG small cap: 7.77%
MGC instead of Bridgeway Microcap : 8.18%
MGC instead of VG Int'l Explorer: 8.98%
MGC instead of VG REIT: 8.31%

So, for the last ten years, including mega caps would have generally helped your portfolio as long as you kept the VG small cap index fund.
Preferred AA: Total US and foreign stock markets and short-term Treasury fixed income

fennewaldaj
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Re: Small cap tilt

Post by fennewaldaj » Mon Sep 24, 2018 4:01 am

vineviz wrote:
Sun Sep 23, 2018 11:34 am

  • NAESX Vanguard Small Cap Index Inv
  • NMSCX Columbia Small Cap Index Inst
  • MASKX iShares Russell 2000 Small-Cap Idx Instl
This fund has data going back to 1972 on its fact sheet. I could not find any of its ticker symbols that go back that far though

https://am.jpmorgan.com/us/en/asset-man ... -4812c0225

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vineviz
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Re: Small cap tilt

Post by vineviz » Mon Sep 24, 2018 6:42 am

fennewaldaj wrote:
Mon Sep 24, 2018 4:01 am
vineviz wrote:
Mon Sep 24, 2018 4:01 am
[quote=vineviz post_id=4132788 time=<a href="tel:1537720494">1537720494</a> user_id=134698]

  • NAESX Vanguard Small Cap Index Inv
  • NMSCX Columbia Small Cap Index Inst
  • MASKX iShares Russell 2000 Small-Cap Idx Instl
This fund has data going back to 1972 on its fact sheet. I could not find any of its ticker symbols that go back that far though

https://am.jpmorgan.com/us/en/asset-man ... -4812c0225


That fund launched in 1995, so the fact sheet is likely showing some index data in that graph (possibly a Russell reconstruction).
Last edited by vineviz on Mon Sep 24, 2018 6:55 am, edited 1 time in total.
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JoMoney
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Re: Small cap tilt

Post by JoMoney » Mon Sep 24, 2018 6:48 am

^ It's not an "index fund" at all. T. Rowe Price has some old successful small-cap funds (actually, THE most successful fund still in existence)... but they're not index funds.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

samsdad
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Re: Small cap tilt

Post by samsdad » Mon Sep 24, 2018 8:04 am

Here's an excerpt from this viewtopic.php?t=34838 thread from boglehead Trev H utilizing CRSP data:
Trev H wrote:
Sat Mar 21, 2009 9:00 am
.
I still have some of those older crunches using CRSP data saved.

Found one and posted it below. This was sort of a look at it from the range of possible outcomes perspective.

Notice where Mid Caps or a 1/3 each mix of Large/Mid/Small placed in each of the 4 - 20 year spans.

From the range of possible outcomes perspective a serious bet on Large or Small both shines and stinks. A neutral position of 50/50 Large/Small or 1/3 Each L/M/S lands you very near the center of (what was possible) during the timeframe.

And Mid Caps Only, did nicely toooooo... :-)

Trev H


Code: Select all

LC.......= Large Caps (CRSP Decile 1-2)
MC.......= Mid Caps.. (CRSP Decile 3-4-5)
SC.......= Small Caps (CRSP Decile 6-7-8)
75/25....= 75% Large / 25% Small
50/50....= 50% Large / 50% Small
1/3 Each.= 1/3 Each Large/Mid/Small


1927-1945

Portfolio....Stdev....10K Growth
================================
SC...........44.82.....54,795.48
MC...........37.98.....45,582.88
1/3 Each.....36.18.....44,405.54
50/50........35.42.....43,629.49
75/25........31.14.....36,633.19
LC...........27.30.....29,518.82

1946-1965

Portfolio....Stdev....10K Growth
================================
MC...........19.30....120,138.35
LC...........15.65....119,992.38
75/25........17.08....116,736.04
1/3 Each.....18.86....115,251.91
50/50........18.69....112,734.26
SC...........22.28....102,935.07


1966-1985

Portfolio....Stdev....10K Growth
================================
SC...........28.32....122,199.62
MC...........22.64.....92,400.76
1/3 Each.....22.03.....84,410.26
50/50........21.80.....80,476.99
75/25........19.16.....62,488.21
LC...........17.21.....47,018.19


1986-2005

Portfolio....Stdev....10K Growth
================================
MC...........16.97....110,065.52
1/3 Each.....17.05....103,098.00
SC...........19.75....100,705.51
50/50........17.25.....99,369.47
75/25........16.98.....96,037.54
LC...........17.43.....91,116.78

samsdad
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Re: Small cap tilt

Post by samsdad » Mon Sep 24, 2018 8:20 am

And another excerpt from that same thread that perhaps summarizes the issue better:
Trev H wrote:
Sat Mar 21, 2009 9:25 am
.
Below is another of the CRSP Data Crunches I did that is interesting.

It shows the Deciles and Decile Groups and includes F/F LV & SV.

The Eq Weight D1-10 gives each Decile 1-10 equal weight, rebalanced yearly.

It would have been nice to invest 10K in F/F SV back in 1927 ;-)

Trev H

===


1927-2005 (79 Years)
CRSP Deciles & Groups
Sorted by StDev

Code: Select all

Portfolio...........CAGR.....10K Growth.....StDev
=================================================
5 Year Treasury.....5.30.......592,861.74....5.70
=================================================
D1..................9.47....12,742,106.31...19.29
D1-2................9.72....15,174,588.37...19.55
Market D1-10.......10.06....19,467,171.02...20.35
D2.................10.98....37,658,681.62...22.08
D3.................11.38....49,778,938.52...23.76
D3-5...............11.54....55,694,238.02...24.88
D4.................11.61....58,614,440.58...26.11
FF Large Value.....11.42....51,150,942.95...26.47
D5.................11.80....67,302,415.61...26.99
D6.................11.73....63,873,224.22...27.95
Eq Weight D1-D10...12.10....82,809,132.06...28.18
D6-8...............11.85....69,411,459.35...29.63
D7.................11.82....67,911,331.87...30.20
D8.................12.07....81,079,257.69...33.50
FF Small Value.....14.42...418,798,265.89...34.73
D9.................12.32....96,840,199.26...36.77
D9-10..............12.95...150,155,976.94...39.34
D10................14.10...336,312,487.44...45.62
=================================================

bloom2708
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Re: Small cap tilt

Post by bloom2708 » Mon Sep 24, 2018 10:06 am

Stay the course with Total US and Total International.

It is unlikely that the amount in your Roth added to small cap would tilt the needle at all. The limits on Roth contributions typically limit the size of your Roth compared to 401k/403b/TSP.

Less is more.
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Re: Small cap tilt

Post by ignition » Mon Sep 24, 2018 10:17 am

vineviz wrote:
Sat Sep 15, 2018 12:50 pm
Small stocks had an especially robust period of performance from 1974 to 1983, it's true, and then an especially poor period of performance from 1984 to 1999. The logic behind the notion that we gain any useful insight from ignoring the good years but including the bad years escapes me.
So the question is: why did small caps perform so well in 1974-1983? And why were they nothing special since 1983?

Is it because valuations were extremely low in 1974? And extremely high in 1983?

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Re: Small cap tilt

Post by ruralavalon » Mon Sep 24, 2018 10:30 am

vineviz wrote:
Sun Sep 23, 2018 11:34 am
nisiprius wrote:
Sun Sep 23, 2018 10:14 am
(That still leaves other issues. One is mixing up the issue of raw return in small-caps, which has been higher than the market, with risk-adjusted return, which is in a maybe-so maybe-not area. The second is, if it doesn't have higher risk-adjusted return, does it have low enough correlation with large stocks to provide a robust diversification benefit?)
This is a a thornier question for sure.

As far as I can tell, the three oldest small cap index mutual funds are:
  • NAESX Vanguard Small Cap Index Inv
  • NMSCX Columbia Small Cap Index Inst
  • MASKX iShares Russell 2000 Small-Cap Idx Instl
Backtesting a portfolio that is 50% Vanguard S&P 500 index fund with 50% of each of those is a mixed bag form 1993 to 2018.

https://www.portfoliovisualizer.com/bac ... tion4_3=50

All three improved absolute returns and increased overall portfolio. Both NAESX and NMSCX improved risk-adjusted returns, but MASKX did not (it didn't help but it didn't hurt either).

That said, during the past few years (2015 to 2017 especially) there have been many new small cap ETFs introduced and these have (on average) much lower correlations with large cap stocks than the older ETFs. Only time will tell how valuable these new funds are in terms of diversification.
Out of curiosity where does one quickly and easily find the start date for an index fund? I have always just assumed that the "maximum" range on a Morningstar "growth of $10k" graph gave the fund start date.

I believe the start date is 1960 for Vanguard Small-cap Index Fund Investor Shares (NAESX), was not initially an index fund, appears to have been converted to an index fund 1/31/1994 (used Russell 2000 index, then used MSCI Small-cap 1750 Index, currently uses CRSP Small-cap Index). (Source: on this forum Google "why does NAESX begin with an 'N'? ".)

Morningstar on a performance chart seems to indictate a start date of 10/15/1996 for Columbia Small-cap Index Fund (NMSCX) (uses S&P Small-cap 600 Index).

Morningstar on a performance chart seems to indictate a start date of 4/9/1997 for iShares Russell 2000 Index Fund Institutional (MASKX).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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vineviz
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Re: Small cap tilt

Post by vineviz » Mon Sep 24, 2018 11:03 am

ruralavalon wrote:
Mon Sep 24, 2018 10:30 am
vineviz wrote:
Sun Sep 23, 2018 11:34 am
nisiprius wrote:
Sun Sep 23, 2018 10:14 am
(That still leaves other issues. One is mixing up the issue of raw return in small-caps, which has been higher than the market, with risk-adjusted return, which is in a maybe-so maybe-not area. The second is, if it doesn't have higher risk-adjusted return, does it have low enough correlation with large stocks to provide a robust diversification benefit?)
Backtesting a portfolio that is 50% Vanguard S&P 500 index fund with 50% of each of those is a mixed bag form 1993 to 2018.
Out of curiosity where does one quickly and easily find the start date for an index fund? I have always just assumed that the "maximum" range on a Morningstar "growth of $10k" graph gave the fund start date.I think I had a typo in my post: I should have typed 1998 instead of 1993.
First, I think I had a typo in my post: I should have typed 1998 instead of 1993.

Second, I tend to trust the "Inception Date" field from Morningstar. That usually corresponds to the date in the graph, but with older funds especially you see an anomaly every once in a while.

Portfolio Visualizer pulls its data from Morningstar, so it should be accurate as well.

E.G. https://www.portfoliovisualizer.com/fun ... F23%2F2018
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Small cap tilt

Post by nisiprius » Mon Sep 24, 2018 11:35 am

vineviz wrote:
Sun Sep 23, 2018 4:17 pm
...On the topic of the pre-1981 returns, I'm curious about the use of the NYSE fifth quintile...
I'm not sure how it bears on the question, but the CRSP "deciles" are weird. They are not at all what I might have and they have an involved definitions that has always sounded arbitrary to me.

Oddly enough, the obvious Google searches are not turning up the actual definition! But I find in various places things like
NYSE only
NYSE and NYSE MKT. NYSE MKT data are added beginning July 1962
NYSE, NYSE MKT and the NASDAQ National Market. The NASDAQ National Market data are added beginning April 1982...
CRSP has two types of cap based deciles.
1) CRSP Stock File Capitalization Decile Indices: Largest companies in decile 10.
2) CRSP Cap-Based Portfolios: Largest companies in decile 1 (not 10).

The two methodologies were invented twenty years apart. They contain slightly different universes of stocks. CRSP / WRDS do not make a recommendation on which methodology to use.
My search did, however, turn up a stunning article: This is the small cap secret no one ever told you which highlights points from a paper, Edward F. McQuarrie, "The Myth of 1926: How Much Do We Know About Long-Term Returns on U.S. Stocks?" November 2009, The Journal of Investing 18(4):96-106.

To put it bluntly: it sounds to me like historical data is crap and can't be trusted--at least, can't be trusted to mean what people think it means.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Small cap tilt

Post by lukestuckenhymer » Mon Sep 24, 2018 12:46 pm

I see many convincing graphs telling that SCV is drastically outperforming the S&P/TSM since the dawn of man, but I'm having trouble seeing past SCV underperforming TSM in 1-year, 3-year, 5-year returns. SVC is beating TSM in 10-year performance by ~18 bps.

Not convincing in my mind. I'll be over here with my haystack.

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vineviz
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Re: Small cap tilt

Post by vineviz » Mon Sep 24, 2018 2:35 pm

lukestuckenhymer wrote:
Mon Sep 24, 2018 12:46 pm
I see many convincing graphs telling that SCV is drastically outperforming the S&P/TSM since the dawn of man, but I'm having trouble seeing past SCV underperforming TSM in 1-year, 3-year, 5-year returns. SVC is beating TSM in 10-year performance by ~18 bps.

Not convincing in my mind. I'll be over here with my haystack.
After outperforming by 800 bps/year in the prior 10 years, I’d it reasonable to be disappointed by a decade in which it has outperformed by ONLY 58bps/year?

https://www.portfoliovisualizer.com/fun ... F23%2F2018
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Re: Small cap tilt

Post by nisiprius » Mon Sep 24, 2018 3:32 pm

vineviz wrote:
Mon Sep 24, 2018 2:35 pm
lukestuckenhymer wrote:
Mon Sep 24, 2018 12:46 pm
I see many convincing graphs telling that SCV is drastically outperforming the S&P/TSM since the dawn of man, but I'm having trouble seeing past SCV underperforming TSM in 1-year, 3-year, 5-year returns. SVC is beating TSM in 10-year performance by ~18 bps.

Not convincing in my mind. I'll be over here with my haystack.
After outperforming by 800 bps/year in the prior 10 years, I’d it reasonable to be disappointed by a decade in which it has outperformed by ONLY 58bps/year?

https://www.portfoliovisualizer.com/fun ... F23%2F2018
Just for the record, I note that your illustration is showing noticeably higher standard deviation (one measure of risk), and (very slightly) lower risk-adjusted return for small-cap value. Over that time period, it did have higher return, but, measured by risk-adjusted return, was an inferior investment. And with 0.91 correlation to the US market I doubt that you can find any normal portfolio in which it would have had a enough of diversification benefit to improve the Sharpe ratio of the portfolio.

Image
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Re: Small cap tilt

Post by vineviz » Mon Sep 24, 2018 4:02 pm

nisiprius wrote:
Mon Sep 24, 2018 3:32 pm
Over that time period, it did have higher return, but, measured by risk-adjusted return, was an inferior investment.
That would only be relevant if I were advocating that someone invest their entire portfolio in SCV.

Clearly, that's not the recommendation I was making.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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arcticpineapplecorp.
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Re: Small cap tilt

Post by arcticpineapplecorp. » Mon Sep 24, 2018 8:35 pm

Siegel says it again:
Asked how the currently hot FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) would fare in the long run, Siegel compared the situation to the 1990s, when small stocks were believed to outperform in the long term. After further investigation, he found that the small stock premiums from 1929 to the 1990s were mainly due to a 9-year period — starting in 1975 — of “unbelievable outperformance.” The rest of the time, they did not.
source: http://knowledge.wharton.upenn.edu/arti ... ck-market/
just noticed this when reading this other post ("Siegel: 'stocks are overvalued on a long-term basis, but bonds are enormously overvalued on a long-term basis'"):

viewtopic.php?p=4134990#p4133736
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vineviz
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Re: Small cap tilt

Post by vineviz » Mon Sep 24, 2018 8:40 pm

arcticpineapplecorp. wrote:
Mon Sep 24, 2018 8:35 pm
Siegel says it again:
Asked how the currently hot FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) would fare in the long run, Siegel compared the situation to the 1990s, when small stocks were believed to outperform in the long term. After further investigation, he found that the small stock premiums from 1929 to the 1990s were mainly due to a 9-year period — starting in 1975 — of “unbelievable outperformance.” The rest of the time, they did not.
source: http://knowledge.wharton.upenn.edu/arti ... ck-market/
just noticed this when reading this other post ("Siegel: 'stocks are overvalued on a long-term basis, but bonds are enormously overvalued on a long-term basis'"):

viewtopic.php?p=4134990#p4133736
It’s amazing he hasn’t figured out his error yet.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

samsdad
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Re: Small cap tilt

Post by samsdad » Mon Sep 24, 2018 8:47 pm

I’m so confused. On one hand, the story is that anything in the 1920s to, apparently, sometime relatively recently might as well be thrown away as unreliable, and on the other, we’re citing Siegel again (who apparently is the only one who can read the numbers from so far back) saying his findings are such and such and are reliable. Which is it?

Which data set is not poo?

samsdad
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Re: Small cap tilt

Post by samsdad » Mon Sep 24, 2018 8:58 pm

And I seem to recall thinking about buying an Ibbotson yearbook. If I recall they’re rather pricy. Are they accurate or not-so-much?

And, though I haven’t memorized this entire thread yet, has anyone trotted out the “why look at returns from the 20s, 30s, etc. the world was so different and was only a vaguely shaped blob” argument yet?

I don’t put much credence in quotes from “The Curb” of yesteryear or today for that matter, but can we all fairly agree as to a reliable set of data? How about from the turn of the century or so onwards? Surely that data is reliable?

Can we agree that on a risk-adjusted-basis, since the 2000s S&P small cap 600 funds have worked over their big brothers midcap and large cap pretty well, and regularly?

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Re: Small cap tilt

Post by CRTR » Mon Sep 24, 2018 9:26 pm

pascalwager wrote:
Sun Sep 23, 2018 5:27 pm
pascalwager wrote:
Sat Sep 22, 2018 10:09 pm
CRTR wrote:
Sat Sep 22, 2018 8:53 am
pascalwager wrote:
Fri Sep 21, 2018 7:58 pm
CRTR wrote:
Fri Sep 14, 2018 1:04 pm
OK, I'm pretty sure I'm in the minority on this board (except for Larry Swedroe) but I've been VERY WELL served by having an extreme small cap tilt for the past 21 years. In fact, the equity portion of my portfolio has outperformed the classic Boglehead simple approach (TSM/TISM) on both an absolute and risk-adjusted basis with only a tiny bit higher volatility. Of course, I'm not going to say the next 20 years will repeat my experience but most rolling 20 year periods over the past 90 years have. By disclosure, it was not "my portfolio" . . . I simply followed recommendations of a friend in the industry (she worked for DFA and was one of the original architects of Schwab index funds). I invested in the following funds since 1998. I used contributions to rebalance:

25% VSMAX, Vanguard Small Cap,
25% BRSIX Bridgeway Micro Cap,
25% VINEX, Vanguard International Explorer,
25% VGSLX, Vanguard REIT

Here is my original post: viewtopic.php?f=1&t=229450&p=3566643#p3566643

Ironically, my advisor friend is NOT a fan of a tilting towards small caps -- even though she worked for DFA. In fact, she is in favor of general market wide diversification with one caveat: reduce exposure to so-called MEGA CAPS. She feels tilting away from that segment of the market will increase returns in the long run and reduce exposure in bubbles. As for small cap vs mid cap, she says the data is not there: they're equivalent.

I realize there are a number of things in my portfolio that will cause fits among many members of this board but the end result speaks for itself. To be clear, I am NOT arguing this is the best vehicle for everyone . . . just one example. If you can look past the 'religion' part of investing, it does satisfy the most important requirements: low costs, diversification, simplicity. Whatever you end up choosing, if it satisfies those requirements AND you stick with it, you'll be fine!
I experimented with your stock portfolio (8.4% CAGR) and modifications using the portfolio visualizer. What I found was that large international companies were the performance slayers, not large US companies. In fact, substituting US large cap (9.1% CAGR) for some of your funds boosted performance, but the best performance enhancer was the VG extended market fund (9.9% CAGR). So mid/small was a very good way to go from 1997 to date.
Thanks for doing all that work!! That's interesting! I must be doing something wrong because I just tried substituting VFINX for each component in the portfolio and it caused a decrement in performance. For which component did you substitute US large caps? As for international large caps, I've never had any significant international large cap exposure. VINEX has always had a relatively small average market cap although it does drift between a blend and growth fund, depending on the year.

As for large caps (or MEGA CAPS as Vanguard likes to call them), I did a search of the board and, of course, that topic has been discussed at length. Not surprisingly, the board's discussion confirms what my friend told me: the largest deciles in the CRSP (US Mega caps) have underperformed the greater market historically. Of course, that doesn't mean the same will happen over the next 80 years!!! Here are a couple of the links:
viewtopic.php?t=14489
viewtopic.php?t=38374
I didn't use VG 500 as the substitute fund. I used VG Large Cap Index Fund (VLCAX). When I substituted for the microcap fund, int'l explorer fund, REIT, and small cap fund, CAGR was 8.8%, 8.6%, 8.6%, and 8.3% respectively. So, in three out of four substitutions, US large cap actually raised CAGR compared to your (highly remunerative) portfolio's 8.4%. VLCAX does have slightly more mid-caps (2% more) than VFINX.
I had to redo this. I discovered that the PV was readjusting the starting date to match the fund inception date. This time I used MGC (VG Mega Cap ETF) to eliminate all mid-caps from the substitution fund, but the starting date was January 2008, not your portfolio inception date of 1997.

Your portfolio: 8.11%
MGC instead of VG small cap: 7.77%
MGC instead of Bridgeway Microcap : 8.18%
MGC instead of VG Int'l Explorer: 8.98%
MGC instead of VG REIT: 8.31%

So, for the last ten years, including mega caps would have generally helped your portfolio as long as you kept the VG small cap index fund.
Thanks again. That's great except my timeline is over twenty years, and counting. I think substituting VFINX for VLCAX is fair because they've had a 1.00 correlation and identical risk controlled returns over the past 14 years. Recall this discussion was about a supposed small cap premium versus large cap (not versus a REIT or International allocation). Substituting a large cap fund for my small cap fund (VSMAX) caused a decrement in performance: over your 10 and 14 year time frames and over my 21 year, real life example, time frame. Didn't matter if we use VG 500 or VG large cap index, we get the same result: a decrease in performance. The performance over a shorter, ten year interval doesn't really interest me. I bet if we could look at the 10 years before that, the opposite would probably show. Anything can happen over shorter time frames.

I do have a confession to make . . . After all my big talk about my historic small cap bias, as I enter retirement, I've toned things in my IRA (with the blessing of my original "advisor"). I now have VIOO, VSS, VMNVX, VFIUX (equal parts) and a 5 year CD ladder . . . . almost for sure will cause a decrease in returns over the long run but the reduced volatility will save my stomach lining!

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Re: Small cap tilt

Post by Dulocracy » Sat Oct 06, 2018 9:07 am

vineviz wrote:
Sun Sep 23, 2018 2:58 pm
Dulocracy wrote:
Sun Sep 23, 2018 2:28 pm
vineviz wrote:
Sat Sep 22, 2018 9:43 am
Dulocracy wrote:
Sat Sep 22, 2018 9:26 am

...to wait the 30 to 40 years it can take for the premium to show up.
This is among the most persistent misconceptions about factor investing I encounter on this forum.

If it is an incorrect assessment, please explain how it is incorrect instead of just stating your belief. You may be correct, but we cannot know it unless you share.
That's a bit of a lopsided standard, since the original claim was made without any supporting evidence or logic.

Nonetheless, let's look at it.

One way to see whether it can take "30 to 40 years it can take for the premium to show up" is to see whether that has ever happened. Since 1930, small cap stocks have never underperformed large cap stocks for more than four years in a row.

Image

Another way to look at it is to examine every 30-year period for which we have data. Starting in 1930, in how many 30-year periods did small caps outperform large caps? 58 out of 60.

Image

The two years in which small caps underperformed, it was by 0.10% and 0.62% respectively: hardly catastrophic to the investor.
The reason that I asked you to explain why the presumption is wrong is because it is such a commonly held belief on this form, as you have stated. I was not challenging you because I was trying to debate the matter, but because I wish to learn if a presumption that I have held has been incorrect. It appears that, at least as it pertains to small-cap Investments, I was wrong.

My comment was more towards a small / value tilt. Do you find that a small / value tilt also has similar outperformance, or is adding the value tilt what causes the perception on this site that it can take decades to come out ahead?
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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