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Small cap tilt

Posted: Thu Sep 13, 2018 7:13 pm
by BWildt
I realize this is probably the millionth small cap discussion on this forum, but I just wanted to see how many of you Bogleheads have a tilt towards small cap, whether it be a small cap index or small cap value. As for me, I'm not sure I completely buy the evidence that there is a small cap "premium", though I admit I could most certainly be wrong on that.

My Roth IRA contains two funds: Vanguard Total Stock Market Index and Vanguard Total International Stock Market Index. I'm debating whether I should add a third fund, which would either be Vanguard Small Cap Index or Vanguard Small Cap Value Index.

I would appreciate any insight, and if there are links for/against small caps arguments, I would appreciate it.

Re: Small cap tilt

Posted: Thu Sep 13, 2018 7:22 pm
by David Jay
The premium for small cap is not as clear the premium for value. I have a modest tilt to Small Cap Value, about 15% of my stock allocation.

Re: Small cap tilt

Posted: Thu Sep 13, 2018 7:25 pm
by livesoft
Still tilted to small cap and to value. I own VBR, IJS, VSS, DLS, DGS. Plus I own the opposite of that: MTUM.

Those go with the other equity funds in the portfolio like Total US Stock Market, Total International Stock Market Index and their close cousins.

No special insights except that over a couple of decades of doing this, I have found that one cannot just buy small-cap value and expect it to work its magic all by itself. One has to buy more of it when it drops a lot in a single day. And one has to sell some after it goes back up. Otherwise, I think you just never harvest the value of small-cap value and never plant at the right time either.

Re: Small cap tilt

Posted: Thu Sep 13, 2018 7:30 pm
by benway
I do not. However, I have thought about it and researched it.

Re: Small cap tilt

Posted: Thu Sep 13, 2018 7:34 pm
by Thesaints
David Jay wrote:
Thu Sep 13, 2018 7:22 pm
The premium for small cap is not as clear the premium for value.
Yet it is a lot easier to understand.

Re: Small cap tilt

Posted: Thu Sep 13, 2018 7:37 pm
by Taylor Larimore
BWildt wrote:
Thu Sep 13, 2018 7:13 pm
I realize this is probably the millionth small cap discussion on this forum, but I just wanted to see how many of you Bogleheads have a tilt towards small cap, whether it be a small cap index or small cap value. As for me, I'm not sure I completely buy the evidence that there is a small cap "premium", though I admit I could most certainly be wrong on that.

My Roth IRA contains two funds: Vanguard Total Stock Market Index and Vanguard Total International Stock Market Index. I'm debating whether I should add a third fund, which would either be Vanguard Small Cap Index or Vanguard Small Cap Value Index.

I would appreciate any insight, and if there are links for/against small caps arguments, I would appreciate it.
BWildt:

Vanguard Total Stock Market Index Fund ALREADY holds the market weight in small-cap and small-cap value stocks.

Strive for simplicity--not complexity.

Read my "Simplicity" link below.

Best wishes.
Taylor

Re: Small cap tilt

Posted: Thu Sep 13, 2018 7:39 pm
by HEDGEFUNDIE
Half of my US equities are small cap (IJR), and 2/3 of my international equities are small cap (ISCF).

I guess you could say I have conviction...

Re: Small cap tilt

Posted: Thu Sep 13, 2018 7:39 pm
by whodidntante
If you're looking to diversify from a concentration in the market factor, the Vanguard Multi-factor ETF VFMF is a new fund but all indications are that it is very well constructed. That's what I would do if it wouldn't trigger an avalanche of capital gains taxes for me. I wouldn't tilt to size only, at least not domestically. I just think there are better options available.

Re: Small cap tilt

Posted: Thu Sep 13, 2018 7:40 pm
by Elysium
Small caps are riskier than large caps, so there has to be a premium, otherwise why would anyone lend their capital. Also, small value has even more risk, since they are distressed companies with limited access to capital, so even more risk premium. That said, no guarantees of returns, at least not within your investment timeframe. The longer the investment timeframe, better chance to capture any premium.

Personally, I have invested in small caps and value, actually at this time more like small value and mid value / mid caps. I don't think of it like a tilt or anything, as I am not very strict about total market investing or anything like many people. I keep a fairly sizeable allocation to small / mid caps like 15% or so of total portfolio, and I have no problem going 20%. Large caps are like another 25% to 30%. I don't worry about tracking error, because I look at them each as individual components and if S&P 500 returned 20% in a year and Small Value returned only 12% I won't complain, and this is true even if it was negative, now if they continue to be negative after 10 years of investing in them then I may start questioning the strategy. That hasn't happened so far, and hopefully will not.

Re: Small cap tilt

Posted: Thu Sep 13, 2018 7:42 pm
by grabiner
I have overweighted small cap, value, and emerging markets for years. I prefer to increase the risk of my portfolio by holding riskier stocks (exposure to different risk factors in addition to the market), rather than holding more stock. Thus, in 2007-2009, while my portfolio was 90% stock, it declined by the same 60% as a typical 100%-stock portfolio. (And since I rebalanced near the market bottom, it recovered just as fast as well.)

Re: Small cap tilt

Posted: Thu Sep 13, 2018 7:46 pm
by jalbert
Nobody can predict the future. The size or value premium may overperform with a vengeance after I’m dead, but underperform until then, and still satisfy that they still exist. If you believe in mean reversion, value may be a better bet than size right now.

Re: Small cap tilt

Posted: Thu Sep 13, 2018 7:47 pm
by Alexa9
Yes Market Weight is a large cap tilt IMO (75% large caps). See my photo >>>>>

Re: Small cap tilt

Posted: Fri Sep 14, 2018 11:02 am
by nisiprius
I don't use a small-cap tilt.

The original paper (Banz 1981) that called attention to a small firm effect, now called the size factor, was based on a flawed data. When the data is corrected, the magnitude of the effect decreases. The effect is acknowledged by factor advocates to be one of the less strong factors. Factor advocates will not say that the size factor is discredited, but are now increasingly using phrases like "rescuing" or "resurrecting" or "not dead." They are now moving on to new factors, and emphasizing it only as having synergy with other factors when combined in specific ways, and "screened" in various ways.

There has been a tendency to overemphasize the higher return from small-caps, while underemphasizing the higher risk. When you look at risk-adjusted return, any difference is greatly reduced. Meanwhile, small-caps have not had such a low correlation large-caps as to have constituted a powerful diversifier.

Even the idea of a higher return can be challenged. One issue is that the higher return is completely attributable to one single time period of nine years: 1975-1983. A small-cap investor obtained no benefit from any holding period that didn't include those years. So (as is often the) this presents a conundrum: do we invest in small-caps in the hope that a second such period will recur during the period we are holding them? Or do we shrug it off as fluke that can't be counted on recurring?

If you assume that small-caps don't have higher risk-adjusted reward and don't have low correlation, then their most interesting use would be as a long-only substitute for leveraged stocks. This is not very interesting if you were not planning to leverage stocks in the first place.

Larry Swedroe has put forward some interesting ideas about using a smaller allocation of small-cap value stocks in lieu of a larger allocation to the total market. It's based oughly, on the idea that if you only have an X% allocation, even if they go to zero you can't lose more than X% of your portfolio, so, other things being equal, a smaller allocation to small-cap value has less "tail risk" than a larger allocation to the total market.

Another question that needs to be examined is that mid-caps have been pretty similar in behavior to small-caps. The division isn't so much between large-caps and small-caps, it's more between large-caps and not-large-caps. So someone who is interested in having a small-cap tilt ought to consider a mid-cap tilt, too.

Re: Small cap tilt

Posted: Fri Sep 14, 2018 11:40 am
by ruralavalon
We use a small-cap value tilt, about 25% of domestic stocks in Vanguard Small-cap Value Index Fund Admiral Shares (VSIAX) and the rest in Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX).

Re: Small cap tilt

Posted: Fri Sep 14, 2018 12:10 pm
by GammaPoint
I have some tilt to small cap, both domestically and internationally (VB and VSS, as well as VBR).
grabiner wrote:
Thu Sep 13, 2018 7:42 pm
I have overweighted small cap, value, and emerging markets for years.
Grabiner, how much do you overweight EM and with what justification? I overweight EM too actually but was curious about your % and technical/qualitative reasoning behind it (since EM is not a factor like size or value).

Re: Small cap tilt

Posted: Fri Sep 14, 2018 1:04 pm
by CRTR
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!

Re: Small cap tilt

Posted: Fri Sep 14, 2018 1:18 pm
by vineviz
nisiprius wrote:
Fri Sep 14, 2018 11:02 am
Even the idea of a higher return can be challenged. One issue is that the higher return is completely attributable to one single time period of nine years: 1975-1983. A small-cap investor obtained no benefit from any holding period that didn't include those years.
If I only had a dollar for every time this falsehood got trotted out . . . .

Re: Small cap tilt

Posted: Fri Sep 14, 2018 1:23 pm
by Jack FFR1846
I watched a recent Bogle interview where he explained how SCV is only one of the latest trends where it looks like it's outperforming, everyone buys, the price of entry exceeds the outperformance, and we're back to no advantage.

I'll sit on my haystack and watch the trendy stuff blow by. No tilt here.

Re: Small cap tilt

Posted: Fri Sep 14, 2018 7:06 pm
by grabiner
GammaPoint wrote:
Fri Sep 14, 2018 12:10 pm
I have some tilt to small cap, both domestically and internationally (VB and VSS, as well as VBR).
grabiner wrote:
Thu Sep 13, 2018 7:42 pm
I have overweighted small cap, value, and emerging markets for years.
Grabiner, how much do you overweight EM and with what justification? I overweight EM too actually but was curious about your % and technical/qualitative reasoning behind it (since EM is not a factor like size or value).
I overweight emerging markets because they are less correlated with the rest of my portfolio. They happen to be riskier as well, which increases my portfolio risk for a given stock allocation, but I can set my stock allocation freely to get a desired risk level.

I would split my foreign stock 50/50 between developed and emerging markets if the costs were equal. However, the costs are not equal; it is not just the 0.07% expense difference, but the higher percentage of non-qualified dividends. Therefore, my target allocation is 3/8 developed large, 1/4 emerging large, 1/4 developed small, 1/8 emerging small. (I don't hold emerging small separately at all because the ETFs are too expensive, but I hold the small-caps in Emerging Markets Index and the emerging markets in FTSE All-World Ex-US Small-Cap.)

Re: Small cap tilt

Posted: Fri Sep 14, 2018 7:43 pm
by GammaPoint
grabiner wrote:
Fri Sep 14, 2018 7:06 pm
I overweight emerging markets because they are less correlated with the rest of my portfolio. They happen to be riskier as well, which increases my portfolio risk for a given stock allocation, but I can set my stock allocation freely to get a desired risk level.

I would split my foreign stock 50/50 between developed and emerging markets if the costs were equal. However, the costs are not equal; it is not just the 0.07% expense difference, but the higher percentage of non-qualified dividends. Therefore, my target allocation is 3/8 developed large, 1/4 emerging large, 1/4 developed small, 1/8 emerging small. (I don't hold emerging small separately at all because the ETFs are too expensive, but I hold the small-caps in Emerging Markets Index and the emerging markets in FTSE All-World Ex-US Small-Cap.)
Makes sense. Thanks, grabiner. My emerging small is also in VSS, with additional holdings in VWO and FDNE (well, and VXUS).

Re: Small cap tilt

Posted: Fri Sep 14, 2018 7:53 pm
by MotoTrojan
Jack FFR1846 wrote:
Fri Sep 14, 2018 1:23 pm
I watched a recent Bogle interview where he explained how SCV is only one of the latest trends where it looks like it's outperforming, everyone buys, the price of entry exceeds the outperformance, and we're back to no advantage.

I'll sit on my haystack and watch the trendy stuff blow by. No tilt here.
Been proven wrong on here before. Dig around.

Re: Small cap tilt

Posted: Fri Sep 14, 2018 8:35 pm
by nisiprius
vineviz wrote:
Fri Sep 14, 2018 1:18 pm
nisiprius wrote:
Fri Sep 14, 2018 11:02 am
Even the idea of a higher return can be challenged. One issue is that the higher return is completely attributable to one single time period of nine years: 1975-1983. A small-cap investor obtained no benefit from any holding period that didn't include those years.
If I only had a dollar for every time this falsehood got trotted out . . . .
I should not have said "any holding period that didn't include those years" because obviously there were some during which small-caps did do better--as well as some when large-caps did better. The rest of it is straight out of Jeremy Siegel, Stocks for the Long Run 5/E, 2014, p. 178, figure 12-1.

Image

And a quick glance at table C-1 and C-2 from the Ibbotson 2010 Classic Yearbook verifies it:

1926-1974, large-caps, 8.4%; small-caps 9.1%;
1984-2009, large-caps 10.4%; small-caps 9.8%;

Calculating,
1926-2009 with 1975-1983 excluded, large-caps 9.09%, small-caps 9.34%.

1975-1983, large-caps 15.8%; small-caps 35.3%.

Why do you say "falsehood?"

Re: Small cap tilt

Posted: Sat Sep 15, 2018 8:17 am
by vineviz
nisiprius wrote:
Fri Sep 14, 2018 8:35 pm

Why do you say "falsehood?"
Because what you said is not true.

It is sent true when Siegel wrote it and it hasn’t been true since then.

We’ve debunked it more times than I can count: do we need to do it again?

Re: Small cap tilt

Posted: Sat Sep 15, 2018 11:45 am
by DG99999
nisiprius wrote:
Fri Sep 14, 2018 8:35 pm
vineviz wrote:
Fri Sep 14, 2018 1:18 pm
nisiprius wrote:
Fri Sep 14, 2018 11:02 am
Even the idea of a higher return can be challenged. One issue is that the higher return is completely attributable to one single time period of nine years: 1975-1983. A small-cap investor obtained no benefit from any holding period that didn't include those years.
If I only had a dollar for every time this falsehood got trotted out . . . .
I should not have said "any holding period that didn't include those years" because obviously there were some during which small-caps did do better--as well as some when large-caps did better. The rest of it is straight out of Jeremy Siegel, Stocks for the Long Run 5/E, 2014, p. 178, figure 12-1.

Image

And a quick glance at table C-1 and C-2 from the Ibbotson 2010 Classic Yearbook verifies it:

1926-1974, large-caps, 8.4%; small-caps 9.1%;
1984-2009, large-caps 10.4%; small-caps 9.8%;

Calculating,
1926-2009 with 1975-1983 excluded, large-caps 9.09%, small-caps 9.34%.

1975-1983, large-caps 15.8%; small-caps 35.3%.

Why do you say "falsehood?"
Nisiprius, Thank you for succinctly presenting date we can use to understand/evaluate your proposition. I do not find other arguments that are based on a poster's memory and recollection to be useful when reading through a thread (and "data-less", vague references can not be helpful to new readers, who clearly have not seen the history).

Re: Small cap tilt

Posted: Sat Sep 15, 2018 12:50 pm
by vineviz
DG99999 wrote:
Sat Sep 15, 2018 11:45 am
I do not find other arguments that are based on a poster's memory and recollection to be useful when reading through a thread (and "data-less", vague references can not be helpful to new readers, who clearly have not seen the history).
Surely you can understand how cumbersome (and annoying) it would be to present the entire body of evidence anew every time people trotted out the "except for 1975-1983" myth?

But I take your point: data speaks louder than vague references.

It's not true that small stocks had no outperformance relative to large stocks prior to 1975. Here's their performance from 1930 to 1974.

Image

Furthermore, small stocks outperformed large stocks pretty much from the moment Siegel made his initial assertion in 1990 until the present.

Image

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.

Re: Small cap tilt

Posted: Fri Sep 21, 2018 7:58 pm
by pascalwager
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.

Re: Small cap tilt

Posted: Fri Sep 21, 2018 8:26 pm
by wolf359
BWildt wrote:
Thu Sep 13, 2018 7:13 pm
I realize this is probably the millionth small cap discussion on this forum, but I just wanted to see how many of you Bogleheads have a tilt towards small cap, whether it be a small cap index or small cap value. As for me, I'm not sure I completely buy the evidence that there is a small cap "premium", though I admit I could most certainly be wrong on that.
If you do not strongly believe in small cap or small cap value, then do not buy it. It may underperform for very long periods of times, maybe even a decade, even if the premium persists. If you don't hold a strong belief, then you will not be able to hold it that long.


You will do just fine without it.


Personally, I tilt small cap value. However, I will achieve my goals without it paying off. I'm tilting using non-essential money. If it works, I get a bonus. If not, I'll still be ahead someone (because I used extra savings.)

Re: Small cap tilt

Posted: Fri Sep 21, 2018 9:12 pm
by calmaniac
Paul Merriman has written persuasively and evangelically about small cap value and provided what to me appear to be convincing numbers. Of course, past performance is not predictive of the future, but the analysis on his website by Jeff Mattice going back to 1928 is impressive:

https://paulmerriman.com/the-case-for-s ... -retirees/

He has a whole section of his website devoted to small cap value:

https://paulmerriman.com/all-about-small-cap-value/

Re: Small cap tilt

Posted: Fri Sep 21, 2018 10:51 pm
by pascalwager
I have a lot of large cap value, US and int'l, but very little small value. Also a lot of small cap, US and int'l. This portfolio was devised by an advisor in 1995 and did have a fair amount of deciles 6-10 value, but I sold most of it to add bonds. The decision to sell was dictated by my AA proportions--I didn't dislike the fund.

I like Larry Swedroe's ideas about factor diversification, but I don't actually believe in the various factor premiums. Maybe I just need to visit Paul Merriman's website for awhile.

Re: Small cap tilt

Posted: Fri Sep 21, 2018 11:06 pm
by pascalwager
CRTR wrote:
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.
Then, all you need is the VG extended market index fund (75%) and the VG int'l explorer fund (25%). CAGR 8.8% from 1997 to date. I might be more inclined to use the VG int'l small cap index fund rather than the explorer fund.

Re: Small cap tilt

Posted: Sat Sep 22, 2018 8:53 am
by CRTR
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

Re: Small cap tilt

Posted: Sat Sep 22, 2018 9:26 am
by Dulocracy
BWildt wrote:
Thu Sep 13, 2018 7:13 pm
As for me, I'm not sure I completely buy the evidence that there is a small cap "premium"
Don't do it! You answered your own question. When I first joined this site there were so many small value investors who would talk about it on a regular basis; however, now they are much fewer in number. Many gave up after a decade of lower than average returns, because they did not have the patience to wait the 30 to 40 years it can take for the premium to show up. The premium may never show up in my lifetime, and I recognize that. Nonetheless, my investments are tilted about 20% total towards small and value. I do not know how they are faring right now because I quite honestly have stopped comparing to the market as a whole. When the premium does show up, I shall stop investing with a tilt, for I certainly shall not live to see the next premium.

Because you seem uncertain as to whether or not this premium exists, you will likely cell after about 10 years, losing money. This is not because of lack of ability on your part, but lack of belief in the system of investing that you have chosen.

Anytime someone asks on this site for someone to convince them that small value is the way to go, I recommend that they not go that path. So many who do turn away from it.

Re: Small cap tilt

Posted: Sat Sep 22, 2018 9:43 am
by vineviz
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.

Re: Small cap tilt

Posted: Sat Sep 22, 2018 12:32 pm
by ruralavalon
Here is what I see comparing past total return of small-cap and S&P 500 funds.

Historically the small-cap fund has had similar long-term total return to the S&P 500 fund. Over the 42 years since the creation of the first index fund (a S&P 500 fund) the total return of the S&P 500 index and small-cap funds has been very similar, at times the small-cap fund has done better, at times the S&P 500 index fund has done better, and overall the S&P 500 index fund has done a little better. Morningstar, "Growth of $10k", VFINX vs NAESX. Vanguard Small-cap Index Fund Investor Shares (NAESX) currently uses the CRSP small cap index, has used a different index in the past, has not always been an index fund, it began as an actively managed fund.

Can anyone suggest other funds to use for a comparison?

Re: Small cap tilt

Posted: Sat Sep 22, 2018 12:40 pm
by HEDGEFUNDIE
ruralavalon wrote:
Sat Sep 22, 2018 12:32 pm
Here is what I see comparing past total return of small-cap and S&P 500 funds.

Historically the small-cap fund has had similar long-term total return to the S&P 500 fund. Over the 42 years since the creation of the first index fund (a S&P 500 fund) the total return of the S&P 500 index and small-cap funds has been very similar, at times the small-cap fund has done better, at times the S&P 500 index fund has done better, and overall the S&P 500 index fund has done a little better. Morningstar, "Growth of $10k", VFINX vs NAESX. Vanguard Small-cap Index Fund Investor Shares (NAESX) currently uses the CRSP small cap index, has used a different index in the past, has not always been an index fund, it began as an actively managed fund.

Can anyone suggest other funds to use for a comparison?
Try IJR for S&P 600 small cap blend. It only has 20 years of history but has consistently outperformed S&P 500 over that period.

Re: Small cap tilt

Posted: Sat Sep 22, 2018 1:19 pm
by vineviz
ruralavalon wrote:
Sat Sep 22, 2018 12:32 pm
Here is what I see comparing past total return of small-cap and S&P 500 funds.

Can anyone suggest other funds to use for a comparison?
I made a custom benchmark in PortfolioVisualizer that contains every small cap fund I could find with an inception date before 12/31/1991 and an expense ratio of 1.00% or less. This is an equal weight portfolio of 21 funds, rebalanced monthly. So this benchmark is the real-world performance, net of fees, that a small cap investor would have realistically received.

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Here's a link to the Fund Performance page, in case you want to play with different dates etc.: https://www.portfoliovisualizer.com/fun ... F21%2F2018

EDIT TO ADD: Since the inception of IJR (iShares Core S&P Small-Cap ETF S&P 600 index fund), this benchmark has underperformed IJR by about 100bps which is almost exactly what I estimate to be the the difference in expenses and turnover costs. Going forward, a small cap investor using a S&P 600 index fund would likely beat this benchmark by about one percentage point per year IMHO.

Re: Small cap tilt

Posted: Sat Sep 22, 2018 2:32 pm
by ruralavalon
vineviz wrote:
Sat Sep 22, 2018 1:19 pm
ruralavalon wrote:
Sat Sep 22, 2018 12:32 pm
Here is what I see comparing past total return of small-cap and S&P 500 funds.

Can anyone suggest other funds to use for a comparison?
I made a custom benchmark in PortfolioVisualizer that contains every small cap fund I could find with an inception date before 12/31/1991 and an expense ratio of 1.00% or less. This is an equal weight portfolio of 21 funds, rebalanced monthly. So this benchmark is the real-world performance, net of fees, that a small cap investor would have realistically received.

Image

Here's a link to the Fund Performance page, in case you want to play with different dates etc.: https://www.portfoliovisualizer.com/fun ... F21%2F2018

EDIT TO ADD: Since the inception of IJR (iShares Core S&P Small-Cap ETF S&P 600 index fund), this benchmark has underperformed IJR by about 100bps which is almost exactly what I estimate to be the the difference in expenses and turnover costs. Going forward, a small cap investor using a S&P 600 index fund would likely beat this benchmark by about one percentage point per year IMHO.
I am not very familiar with portfolio visualizer. Is that total return or share price?

I couldn't get your link to work.

Re: Small cap tilt

Posted: Sat Sep 22, 2018 2:45 pm
by nisiprius
vineviz wrote:
Sat Sep 22, 2018 1:19 pm
Here's a link to the Fund Performance page, in case you want to play with different dates etc.: https://www.portfoliovisualizer.com/fun ... F21%2F2018
PortfolioVisualizer links don't preserve custom portfolios or assets. Your link gives me an error, "Unknown symbol: SCFUNDS," because, of course, I don't have a custom portfolio named SCFUNDS. I don't know exactly what one needs to do to provide the necessary data to let someone else play around with your data.

For starters, could you repost your chart but enlarge the screenshot to show the various measurements, CAGR, Stdev, Max drawdown, Sharpe ratio, etc. so we can see how much of that outperformance shows up as risk-adjusted return?

Re: Small cap tilt

Posted: Sat Sep 22, 2018 4:24 pm
by vineviz
ruralavalon wrote:
Sat Sep 22, 2018 2:32 pm
I am not very familiar with portfolio visualizer. Is that total return or share price?

I couldn't get your link to work.
This comparison was using total return for both portfolios.

And I'm sorry about the link. See my reply below for a new link and some more details.

Re: Small cap tilt

Posted: Sat Sep 22, 2018 4:27 pm
by vineviz
nisiprius wrote:
Sat Sep 22, 2018 2:45 pm
vineviz wrote:
Sat Sep 22, 2018 1:19 pm
Here's a link to the Fund Performance page, in case you want to play with different dates etc.: https://www.portfoliovisualizer.com/fun ... F21%2F2018
PortfolioVisualizer links don't preserve custom portfolios or assets. Your link gives me an error, "Unknown symbol: SCFUNDS," because, of course, I don't have a custom portfolio named SCFUNDS. I don't know exactly what one needs to do to provide the necessary data to let someone else play around with your data.

For starters, could you repost your chart but enlarge the screenshot to show the various measurements, CAGR, Stdev, Max drawdown, Sharpe ratio, etc. so we can see how much of that outperformance shows up as risk-adjusted return?
That's embarrassing.

Here's a link to PV that includes the underlying assets instead of the combined benchmark.

https://www.portfoliovisualizer.com/bac ... n21_1=4.76

And here's the performance summary.

Image

Re: Small cap tilt

Posted: Sat Sep 22, 2018 10:09 pm
by pascalwager
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.

Edit: The CAGR comparisons are invalid because of differing starting dates. See later post for corrections using 2008 starting date.

Re: Small cap tilt

Posted: Sun Sep 23, 2018 2:00 am
by NYCwriter
I hold Vanguard Small Cap Blend (VB) and also own the Vanguard Strategic Equity Fund, which is mid-cap. I can't really offer a good argument for holding the active fund anymore, except that I still have long holdings in companies like Apple, Amazon, JnJ, V that are at the top of the food chain, and have been gradually reducing those holdings to prioritize my core Total Stock holding. I was worried about being top heavy.

My plan is to close the active fund, and I'm thinking I might exchange VB for IJR or VIO or just leave it.

Re: Small cap tilt

Posted: Sun Sep 23, 2018 2:55 am
by JoMoney
I use a S&P 500 index fund, which effectively means I have a negative tilt/exposure to small-caps (SmL risk factor).
There's are many reasons why I don't think passive investors should be reaching to above-average risks hoping for something extra. For this post, I'll just focus on the many 30+ year periods (as long as many peoples investment lifes) where small-caps in particular didn't have any "premium"
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In fact, using his data-set for small caps, Wharton Prof. Jeremey Siegel has suggested that the entire small-cap "premium" relies on an unusual period between 1975-1983 , if you remove that period and the highest 9 years from large-caps and perform monte carlo simulations small caps underperform in majority of simulations.
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Re: Small cap tilt

Posted: Sun Sep 23, 2018 6:37 am
by randomizer
I don't have a small cap tilt, or a small cap value tilt, because I place great value on simplicity. I can see though why you could want one; there are rational arguments for it for sure. I do have an EM tilt though, not because I wanted to place a "bet" but because that's just how it turned out. I will get out of the tilt when I can.

Re: Small cap tilt

Posted: Sun Sep 23, 2018 6:38 am
by petulant
vineviz wrote:
Sat Sep 22, 2018 4:27 pm
nisiprius wrote:
Sat Sep 22, 2018 2:45 pm
vineviz wrote:
Sat Sep 22, 2018 1:19 pm
Here's a link to the Fund Performance page, in case you want to play with different dates etc.: https://www.portfoliovisualizer.com/fun ... F21%2F2018
PortfolioVisualizer links don't preserve custom portfolios or assets. Your link gives me an error, "Unknown symbol: SCFUNDS," because, of course, I don't have a custom portfolio named SCFUNDS. I don't know exactly what one needs to do to provide the necessary data to let someone else play around with your data.

For starters, could you repost your chart but enlarge the screenshot to show the various measurements, CAGR, Stdev, Max drawdown, Sharpe ratio, etc. so we can see how much of that outperformance shows up as risk-adjusted return?
That's embarrassing.

Here's a link to PV that includes the underlying assets instead of the combined benchmark.

https://www.portfoliovisualizer.com/bac ... n21_1=4.76

And here's the performance summary.

Image
Since the stdev is notably higher for the small cap funds, wouldn't it be more appropriate to increase the bond allocation until they're at risk parity, then compare results? Interestingly, I found that a 15% allocation to total bond made stdev very comparable, but still results in outperformance of about 90 bps. Here's a link:

https://www.portfoliovisualizer.com/bac ... ion22_1=15

Re: Small cap tilt

Posted: Sun Sep 23, 2018 7:00 am
by vineviz
JoMoney wrote:
Sun Sep 23, 2018 2:55 am
In fact, using his data-set for small caps, Wharton Prof. Jeremey Siegel has suggested that the entire small-cap "premium" relies on an unusual period between 1975-1983 , if you remove that period and the highest 9 years from large-caps and perform monte carlo simulations small caps underperform in majority of simulations.
This Siegel "suggestion" is one of the most oft-repeated falsehoods I see on this forum. This is at least the second time in this post alone.
vineviz wrote:
Sat Sep 15, 2018 12:50 pm
It's not true that small stocks had no outperformance relative to large stocks prior to 1975. Here's their performance from 1930 to 1974.

Image

Furthermore, small stocks outperformed large stocks pretty much from the moment Siegel made his initial assertion in 1990 until the present.

Image

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.

Re: Small cap tilt

Posted: Sun Sep 23, 2018 7:50 am
by JoMoney
vineviz wrote:
Sun Sep 23, 2018 7:00 am
...
This Siegel "suggestion" is one of the most oft-repeated falsehoods I see on this forum. This is at least the second time in this post alone.
...
Your reconstructed data conflicts with the reconstructed data he used.
Morningstar's benchmark composite of real world small-cap mutual funds performed much worse than any of the academic reconstructions for sure. CHART LINK

Re: Small cap tilt

Posted: Sun Sep 23, 2018 8:10 am
by vineviz
JoMoney wrote:
Sun Sep 23, 2018 7:50 am
vineviz wrote:
Sun Sep 23, 2018 7:00 am
...
This Siegel "suggestion" is one of the most oft-repeated falsehoods I see on this forum. This is at least the second time in this post alone.
...
Your reconstructed data conflicts with the reconstructed data he used.
We used the same dataset, except I showed it up until the present.

JoMoney wrote:
Sun Sep 23, 2018 7:50 am
Morningstar's benchmark composite of real world small-cap mutual funds performed much worse than any of the academic reconstructions for sure. CHART LINK
First, that’s an incorrect interpretation of the data.

Second, that composite is itself problematic because of the paltry number of small blend open end funds that existed before 1980. There were three, I think. That doesn’t make the data useless, but it’s not obviously a better proxy for the low cost index funds we have available today.

Re: Small cap tilt

Posted: Sun Sep 23, 2018 8:24 am
by JoMoney
vineviz wrote:
Sun Sep 23, 2018 8:10 am
JoMoney wrote:
Sun Sep 23, 2018 7:50 am
vineviz wrote:
Sun Sep 23, 2018 7:00 am
...
This Siegel "suggestion" is one of the most oft-repeated falsehoods I see on this forum. This is at least the second time in this post alone.
...
Your reconstructed data conflicts with the reconstructed data he used.
We used the same dataset, except I showed it up until the present.
No, Prof. Siegel's small-cap stock data was not the same as the Ibbotson data.
vineviz wrote:
Sun Sep 23, 2018 8:10 am
JoMoney wrote:
Sun Sep 23, 2018 7:50 am
Morningstar's benchmark composite of real world small-cap mutual funds performed much worse than any of the academic reconstructions for sure. CHART LINK
First, that’s an incorrect interpretation of the data.

Second, that composite is itself problematic because of the paltry number of small blend open end funds that existed before 1980. There were three, I think. That doesn’t make the data useless, but it’s not obviously a better proxy for the low cost index funds we have available today.
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.

Re: Small cap tilt

Posted: Sun Sep 23, 2018 10:14 am
by nisiprius
With regard to Siegel's small caps and 1975-1983, I've been doing some poking around in the data myself, nothing I want to show yet, and might not get it finished, but I'm now inclining to the view that vineviz is right.

I think this is quite possibly the result of data mining by Siegel.

The issue is the old devil, endpoints, and small-caps are volatile enough for even one month to make a big difference. So if you look at a lot of periods of a decade or so, sooner or later you're going to fine one in which stars line up to create a period with abnormally low or high return relative to the rest.

To put it another way, just as the gains of the stock market can be almost entirely attributed to a small number of "superstocks," and just as the performance of the stock market can be almost entirely attributed to a small number of big days ("if you missed the ten best days in the market," etc.), it is probably true that any outperformance by anything is bursty, and, after the fact, can be claimed to be concentrated within a small period of time.

(We see this in reverse, too, as when people want to excuse bad performance by their favorite investment in 2008-2009, on the grounds that 2008-2009 was anomalous and shouldn't count).

(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?)

But I now do have considerable doubts about 1975-1983 thing and I'll try to remember to stop bringing it up.