Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

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ThisJustIn
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Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by ThisJustIn » Fri Oct 26, 2018 10:11 pm

Hi,

Paul Merriman's 2-fund suggestion is out this week, see here for reference: https://paulmerriman.com/2-funds-for-li ... szITWAYicI

As far as I can understand, he suggests Target-date-fund + Small-cap value funds. I hold three-fund portfolios, which replaces the Target-date fund component of this suggestion, with lower ER. But for small-cap value funds, I can't figure out which fund (or maybe funds) I should invest. Here are my candidates from what I read around:

VONV US value ETF 0.12%
VIOV US small-cap value ETF 0.20%
VTV Vanguard Value ETF 0.05%
VBR Vanguard Small-cap value ETF 0.07%
VVIAX Vanguard Value Index Admiral Shares 0.05% / 0.17%
VSIAX Vanguard Small-Cap Value Index Admiral Shares 0.07% / 0.19%
VTRIX Vanguard International Value 0.40%

Which one or ones among these funds would you recommend? Does anyone have experience using these funds? I have tried to backtest them in portfoliovisualizer, but the timelines these funds available are so different that it is not possible to find a time period all of these funds are available more than a decade. Any suggestions which fund or funds to use for SCV component?

MotoTrojan
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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by MotoTrojan » Fri Oct 26, 2018 10:20 pm

ThisJustIn wrote:
Fri Oct 26, 2018 10:11 pm
Hi,

Paul Merriman's 2-fund suggestion is out this week, see here for reference: https://paulmerriman.com/2-funds-for-li ... szITWAYicI

As far as I can understand, he suggests Target-date-fund + Small-cap value funds. I hold three-fund portfolios, which replaces the Target-date fund component of this suggestion, with lower ER. But for small-cap value funds, I can't figure out which fund (or maybe funds) I should invest. Here are my candidates from what I read around:

VONV US value ETF 0.12%
VIOV US small-cap value ETF 0.20%
VTV Vanguard Value ETF 0.05%
VBR Vanguard Small-cap value ETF 0.07%
VVIAX Vanguard Value Index Admiral Shares 0.05% / 0.17%
VSIAX Vanguard Small-Cap Value Index Admiral Shares 0.07% / 0.19%
VTRIX Vanguard International Value 0.40%

Which one or ones among these funds would you recommend? Does anyone have experience using these funds? I have tried to backtest them in portfoliovisualizer, but the timelines these funds available are so different that it is not possible to find a time period all of these funds are available more than a decade. Any suggestions which fund or funds to use for SCV component?
If you truly want small, you'll want to ignore a few of those. I hold VIOV as I really prefer the S&P600 index. Vanguards fund uses CRSP which is a much larger tilting fund (median cap of $4.4B vs. $1.8-1.9B last time I checked). VBR is IMHO ore of a 50/50 mid/small value fund. I do hold it in my 401k; only choice. The Russell 2000 is also similarly small but does not have S&P's quality/earnings check which is a good screen that has provided a superior return in the past.

If you want to use a Mutual Fund and want to tilt to small-caps you could use Vanguards Tax-managed Small-cap too; VTMSX. Not a value fund, but it does follow the S&P600.

If you don''t mind ETFs, I'd go VIOV. IJS and SLYV follow the same index. IJS is more liquid but has a higher ER (although due to arbitrage VIOV is fine unless you are trading 6+ figure sums; the spread is never that bad). SLYV has a lower ER, but is not tax-efficient and should only be used in an IRA.

S_Track
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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by S_Track » Fri Oct 26, 2018 10:42 pm

Interesting article. He compares VG Target Date fund (TDF) to VG TDF + small cap value at varying percentages. The two fund approach does better in all time periods tested. It seems, if I understand this correctly, this is not entirely unexpected. By adding an all stock fund to the TDF you essentially increase your asset allocation toward stock. An interesting comparison would be using total Stock as your second fund, TDF + TS vs TDF + SCV. That way the asset allocation remains the same but I may not be interpreting the results correctly.

andrew99999
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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by andrew99999 » Sat Oct 27, 2018 7:59 am

S_Track wrote:
Fri Oct 26, 2018 10:42 pm
Interesting article. He compares VG Target Date fund (TDF) to VG TDF + small cap value at varying percentages. The two fund approach does better in all time periods tested. It seems, if I understand this correctly, this is not entirely unexpected. By adding an all stock fund to the TDF you essentially increase your asset allocation toward stock. An interesting comparison would be using total Stock as your second fund, TDF + TS vs TDF + SCV. That way the asset allocation remains the same but I may not be interpreting the results correctly.
He's incredibly vocal on back tested small value returns. My biggest gripe is that if you tilt towards something, such as SCV, and if you ever get caught up in the idea that SCV has under performed which it can do over even a decade or two, and sell it because you are fed up with the the under performance, then the whole thing was worse than never having it. Since I can not predict whether I will mess it all up and sell after a decade of under performance, market cap weighting is better for me.

palaheel
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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by palaheel » Sat Oct 27, 2018 8:34 am

S_Track wrote:
Fri Oct 26, 2018 10:42 pm
By adding an all stock fund to the TDF you essentially increase your asset allocation toward stock.
He's relatively decreasing his internationals, too. Given his advocacy for holding internationals, I find reducing them curious.
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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by pkcrafter » Sat Oct 27, 2018 9:14 am

ThisJustIn wrote:
Fri Oct 26, 2018 10:11 pm
Hi,

Paul Merriman's 2-fund suggestion is out this week, see here for reference: https://paulmerriman.com/2-funds-for-li ... szITWAYicI

As far as I can understand, he suggests Target-date-fund + Small-cap value funds. I hold three-fund portfolios, which replaces the Target-date fund component of this suggestion, with lower ER. But for small-cap value funds, I can't figure out which fund (or maybe funds) I should invest. Here are my candidates from what I read around:

VONV US value ETF 0.12%
VIOV US small-cap value ETF 0.20%
VTV Vanguard Value ETF 0.05%
VBR Vanguard Small-cap value ETF 0.07%
VVIAX Vanguard Value Index Admiral Shares 0.05% / 0.17%
VSIAX Vanguard Small-Cap Value Index Admiral Shares 0.07% / 0.19%
VTRIX Vanguard International Value 0.40%

Which one or ones among these funds would you recommend? Does anyone have experience using these funds? I have tried to backtest them in portfoliovisualizer, but the timelines these funds available are so different that it is not possible to find a time period all of these funds are available more than a decade. Any suggestions which fund or funds to use for SCV component?
Justin, there really isn't anything new here. Merriman's idea (small value tilt) is well known here. Your list above contains some funds that aren't small caps, so they can be removed, also VBR and VSIAX are two versions of the same fund.

Small cap tilting is not easy from the emotional side because you must be fully committed to hold through long periods of underperformance. Small can underperform total market for more than 5 years at a time. It isn't good when approaching the time to needing the money. It's also very hard to watch your new tilted portfolio underperform the untilted one you used to have.

If you still want to do it, VIOV is the best choice because it's market cap is less than half of VBR/VSIAX, so more small exposure. VBR/VSIAX contain a good portion of mid.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

ThisJustIn
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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by ThisJustIn » Sat Oct 27, 2018 11:48 am

pkcrafter wrote:
Sat Oct 27, 2018 9:14 am
ThisJustIn wrote:
Fri Oct 26, 2018 10:11 pm
Hi,

Paul Merriman's 2-fund suggestion is out this week, see here for reference: https://paulmerriman.com/2-funds-for-li ... szITWAYicI

As far as I can understand, he suggests Target-date-fund + Small-cap value funds. I hold three-fund portfolios, which replaces the Target-date fund component of this suggestion, with lower ER. But for small-cap value funds, I can't figure out which fund (or maybe funds) I should invest. Here are my candidates from what I read around:

VONV US value ETF 0.12%
VIOV US small-cap value ETF 0.20%
VTV Vanguard Value ETF 0.05%
VBR Vanguard Small-cap value ETF 0.07%
VVIAX Vanguard Value Index Admiral Shares 0.05% / 0.17%
VSIAX Vanguard Small-Cap Value Index Admiral Shares 0.07% / 0.19%
VTRIX Vanguard International Value 0.40%

Which one or ones among these funds would you recommend? Does anyone have experience using these funds? I have tried to backtest them in portfoliovisualizer, but the timelines these funds available are so different that it is not possible to find a time period all of these funds are available more than a decade. Any suggestions which fund or funds to use for SCV component?
Justin, there really isn't anything new here. Merriman's idea (small value tilt) is well known here. Your list above contains some funds that aren't small caps, so they can be removed, also VBR and VSIAX are two versions of the same fund.

Small cap tilting is not easy from the emotional side because you must be fully committed to hold through long periods of underperformance. Small can underperform total market for more than 5 years at a time. It isn't good when approaching the time to needing the money. It's also very hard to watch your new tilted portfolio underperform the untilted one you used to have.

If you still want to do it, VIOV is the best choice because it's market cap is less than half of VBR/VSIAX, so more small exposure. VBR/VSIAX contain a good portion of mid.

Paul
Yes, I'm aware of small-cap-value tilting, and all previous portfolio suggestions of Paul Merriman, it is not that new to me as well.
Thank you for your suggestion, it looks like the consensus is to go with VIOV.

ThisJustIn
Posts: 161
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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by ThisJustIn » Sat Oct 27, 2018 11:50 am

MotoTrojan wrote:
Fri Oct 26, 2018 10:20 pm
ThisJustIn wrote:
Fri Oct 26, 2018 10:11 pm
Hi,

Paul Merriman's 2-fund suggestion is out this week, see here for reference: https://paulmerriman.com/2-funds-for-li ... szITWAYicI

As far as I can understand, he suggests Target-date-fund + Small-cap value funds. I hold three-fund portfolios, which replaces the Target-date fund component of this suggestion, with lower ER. But for small-cap value funds, I can't figure out which fund (or maybe funds) I should invest. Here are my candidates from what I read around:

VONV US value ETF 0.12%
VIOV US small-cap value ETF 0.20%
VTV Vanguard Value ETF 0.05%
VBR Vanguard Small-cap value ETF 0.07%
VVIAX Vanguard Value Index Admiral Shares 0.05% / 0.17%
VSIAX Vanguard Small-Cap Value Index Admiral Shares 0.07% / 0.19%
VTRIX Vanguard International Value 0.40%

Which one or ones among these funds would you recommend? Does anyone have experience using these funds? I have tried to backtest them in portfoliovisualizer, but the timelines these funds available are so different that it is not possible to find a time period all of these funds are available more than a decade. Any suggestions which fund or funds to use for SCV component?
If you truly want small, you'll want to ignore a few of those. I hold VIOV as I really prefer the S&P600 index. Vanguards fund uses CRSP which is a much larger tilting fund (median cap of $4.4B vs. $1.8-1.9B last time I checked). VBR is IMHO ore of a 50/50 mid/small value fund. I do hold it in my 401k; only choice. The Russell 2000 is also similarly small but does not have S&P's quality/earnings check which is a good screen that has provided a superior return in the past.

If you want to use a Mutual Fund and want to tilt to small-caps you could use Vanguards Tax-managed Small-cap too; VTMSX. Not a value fund, but it does follow the S&P600.

If you don''t mind ETFs, I'd go VIOV. IJS and SLYV follow the same index. IJS is more liquid but has a higher ER (although due to arbitrage VIOV is fine unless you are trading 6+ figure sums; the spread is never that bad). SLYV has a lower ER, but is not tax-efficient and should only be used in an IRA.
Thank you for your detailed explanation. It looks like VIOV is the way to go for me. I hesitated because of 0.2% ER vs 0.07% ER of VBR, but it looks like VBR is not purely SCV fund. Will use VIOV. Thanks.

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vineviz
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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by vineviz » Sat Oct 27, 2018 11:54 am

ThisJustIn wrote:
Sat Oct 27, 2018 11:50 am
Thank you for your detailed explanation. It looks like VIOV is the way to go for me. I hesitated because of 0.2% ER vs 0.07% ER of VBR, but it looks like VBR is not purely SCV fund. Will use VIOV. Thanks.
If you're investing in a tax-advantaged account (e.g. IRA) use SPDR® S&P 600 Small Cap Value ETF (SLYV) instead: same index, lower expense ratio.

VIOV and IJS have historically been slightly more tax-efficient than SLYV, so I'd probably use VIOV in a taxable account.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

MotoTrojan
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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by MotoTrojan » Sat Oct 27, 2018 10:02 pm

ThisJustIn wrote:
Sat Oct 27, 2018 11:50 am
MotoTrojan wrote:
Fri Oct 26, 2018 10:20 pm
ThisJustIn wrote:
Fri Oct 26, 2018 10:11 pm
Hi,

Paul Merriman's 2-fund suggestion is out this week, see here for reference: https://paulmerriman.com/2-funds-for-li ... szITWAYicI

As far as I can understand, he suggests Target-date-fund + Small-cap value funds. I hold three-fund portfolios, which replaces the Target-date fund component of this suggestion, with lower ER. But for small-cap value funds, I can't figure out which fund (or maybe funds) I should invest. Here are my candidates from what I read around:

VONV US value ETF 0.12%
VIOV US small-cap value ETF 0.20%
VTV Vanguard Value ETF 0.05%
VBR Vanguard Small-cap value ETF 0.07%
VVIAX Vanguard Value Index Admiral Shares 0.05% / 0.17%
VSIAX Vanguard Small-Cap Value Index Admiral Shares 0.07% / 0.19%
VTRIX Vanguard International Value 0.40%

Which one or ones among these funds would you recommend? Does anyone have experience using these funds? I have tried to backtest them in portfoliovisualizer, but the timelines these funds available are so different that it is not possible to find a time period all of these funds are available more than a decade. Any suggestions which fund or funds to use for SCV component?
If you truly want small, you'll want to ignore a few of those. I hold VIOV as I really prefer the S&P600 index. Vanguards fund uses CRSP which is a much larger tilting fund (median cap of $4.4B vs. $1.8-1.9B last time I checked). VBR is IMHO ore of a 50/50 mid/small value fund. I do hold it in my 401k; only choice. The Russell 2000 is also similarly small but does not have S&P's quality/earnings check which is a good screen that has provided a superior return in the past.

If you want to use a Mutual Fund and want to tilt to small-caps you could use Vanguards Tax-managed Small-cap too; VTMSX. Not a value fund, but it does follow the S&P600.

If you don''t mind ETFs, I'd go VIOV. IJS and SLYV follow the same index. IJS is more liquid but has a higher ER (although due to arbitrage VIOV is fine unless you are trading 6+ figure sums; the spread is never that bad). SLYV has a lower ER, but is not tax-efficient and should only be used in an IRA.
Thank you for your detailed explanation. It looks like VIOV is the way to go for me. I hesitated because of 0.2% ER vs 0.07% ER of VBR, but it looks like VBR is not purely SCV fund. Will use VIOV. Thanks.
Excellent choice IMHO. When back-testing against VBR be aware that VBR did change it's index a while back. Can't recall what it used to track may have been the Russell 2K.

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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by Jags4186 » Wed Oct 31, 2018 6:38 pm

I’ve listened to Paul Merriman’s podcast for about 2 years. I really enjoy it. He influenced me to tilt towards small value and I hope it will pay off.

That said, I am getting sort of sick of listening to his constantly changing advice. Since I’ve started listening to him he has recommended the following portfolios:

Ultimate Buy and Hold: 10 equity index funds split evenly + bonds at either 0%, 40%, or 60% for aggressive, moderate, and conservative
Ultimate Buy and Hold 70/30 US/Int’l: in case you prefer weighting to US over Int’l
All Value portfolio
All Small Cap Value portfolio
Merriman’s extremely complicated “target date” portfolio
Merriman 2-fund target date portfolio (3 variations given)

How can someone keep up with his ever shifting advice? I understand that these are all somewhat similar with similar end goal performance, but it certainly does feel like flavor of the month with him. I get that he has tried to simplify, offer options, etc. etc. but there has been no clarification that I can see of what is the most preferred based on your level of wanting to be anal.

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sleepysurf
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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by sleepysurf » Wed Oct 31, 2018 11:00 pm

In his most recent podcast, article, and better yet, the video... https://www.youtube.com/watch?v=6CLzymhuVYs&t=13s, Paul and collaborator Chris Pedersen clearly explain the rationale for yet another portfolio, this tweaked Target Date model, offering an impressive backtesting analysis. They do add some complexity at the end, using Large Cap Value instead of (or in addition to) Small Cap Value, but their logic makes sense, as few 401k plans typically offer a Small Cap Value option.

One can certainly argue that Paul is now offering too many variations on a theme. However, for those unable/unwilling to implement his "Ultimate Buy and Hold" approach, and myriad variations, this new "2 Funds for Life" portfolio is, IMHO, a much simpler and compelling option.
Retired 2018 | ~50/45/5 (partially sliced and diced)

DesertInvestor
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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by DesertInvestor » Wed Nov 07, 2018 3:46 pm

I've really struggled as well trying to figure out the best way to value tilt since listening to his podcast over the last year. I'm going to do it via my Roth IRA at vanguard. So I guess SLYV (SPDR s&p 600 small cap value eft) it is? Chris Pederson also recommended that one to me, but also the vanguard etf. I guess if you wanted to be less aggressive and you are unsure about it, SBR could be way to go? I'm a three fund investor so this would be my fourth fund.
vineviz wrote:
Sat Oct 27, 2018 11:54 am
ThisJustIn wrote:
Sat Oct 27, 2018 11:50 am
Thank you for your detailed explanation. It looks like VIOV is the way to go for me. I hesitated because of 0.2% ER vs 0.07% ER of VBR, but it looks like VBR is not purely SCV fund. Will use VIOV. Thanks.
If you're investing in a tax-advantaged account (e.g. IRA) use SPDR® S&P 600 Small Cap Value ETF (SLYV) instead: same index, lower expense ratio.

VIOV and IJS have historically been slightly more tax-efficient than SLYV, so I'd probably use VIOV in a taxable account.

rj49
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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by rj49 » Wed Nov 07, 2018 11:56 pm

It's not worth following his advice, IMHO, since as others have mentioned, he constantly switches recommendations based on cherry-picked past returns. For years he was dismissive of Jack Bogle, implying he was misguided for recommending US total market and bond investing, and he used past returns of his DFA and other slice-and-dice portfolio, which is course looked wonderful from 2000-2007, but since then the TSM approach has outperformed, so he's acknowledging that but also using the concentrated years of SV outperformance in a completely different investing and economic world. I remember he also conveniently happened to endorse TIPS right when they were outperforming, as did others, like Scott Burns, and of course everyone was all gung-ho for REITS until 2007, with people like David Swenson recommending them for 20% of a portfolio. The lesson is not to follow recommended portfolios of any investment advisor, because they're usually meant to sell books, DFA funds, or advisory services. That said, even Mr. Bogle had some strange portfolio recommendations for his first book on mutual funds, telling retirees to have most of their stock allocation in a combination of large cap value and equity-income, also cherry picking the history of 5% or so yields for those funds. If you follow all the trendy portfolios--Coffeehouse, Harry Browne, the Larry Portfolio, etc, you'll go crazy and do endless market timing and reacting to what's hot. Even what turned out to be a really great simple portfolio, the Scott Burns Couch Potato portfolio of 50% SP500/50% TBM, ended up being constantly fiddled with and revised as he threw in hot asset classes at the time, like international and TIPS. Obsessive engineering types crunching numbers for all their factors didn't take into account that the dominance of the FAANG stocks, so now the total markets advocates can gloat and the three-fund portfolio gets more attention than the slice-and-dicers did when their chosen funds were hot. But who knows what the future will hold, so at least Merriman is acknowledging that for most people a Target Retirement fund is just fine.

General
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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by General » Thu Nov 08, 2018 8:49 am

Great points rj49 :!:

UpperNwGuy
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Re: Paul Merriman's 2-fund portfolio: Suggestions for small-cap funds

Post by UpperNwGuy » Thu Nov 08, 2018 10:29 am

General wrote:
Thu Nov 08, 2018 8:49 am
Great points rj49 :!:
+1

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