Small value in 50-50 retirement portfolio

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
DesertInvestor
Posts: 73
Joined: Tue Dec 20, 2016 1:04 pm

Small value in 50-50 retirement portfolio

Post by DesertInvestor » Sat Nov 09, 2019 6:27 pm

I’m investing my parents retirement funds in 50:50 portfolio. I am doing a three fund and considering 5% REIT and 5% small value (vanguard small value index fund). Is small value even at 5% too aggressive for a retiree?

Thank you!

typical.investor
Posts: 1264
Joined: Mon Jun 11, 2018 3:17 am

Re: Small value in 50-50 retirement portfolio

Post by typical.investor » Sat Nov 09, 2019 7:37 pm

DesertInvestor wrote:
Sat Nov 09, 2019 6:27 pm
I’m investing my parents retirement funds in 50:50 portfolio. I am doing a three fund and considering 5% REIT and 5% small value (vanguard small value index fund). Is small value even at 5% too aggressive for a retiree?

Thank you!
At 50%-50%, no I don't think 5% of small value will be very noticeable. It kinda depends on how sensitive your parents are to having a fund that probably will underperform for stretches.

REITs and value might prove to be good holdings if the interest rate environment ever changes as growth stocks really get a benefit from future earnings not being reduced by inflation. Whether or not that will happen in your parent's timeline, I can't tell.

Mostly I would just bring up what you know and let them decide. Either way is a mighty fine portfolio that they really don't have to worry about too much. Do they think the potential benefit and additional work from two extra funds is worth it?

retired@50
Posts: 677
Joined: Tue Oct 01, 2019 2:36 pm

Re: Small value in 50-50 retirement portfolio

Post by retired@50 » Sat Nov 09, 2019 7:44 pm

DesertInvestor wrote:
Sat Nov 09, 2019 6:27 pm
I’m investing my parents retirement funds in 50:50 portfolio. I am doing a three fund and considering 5% REIT and 5% small value (vanguard small value index fund). Is small value even at 5% too aggressive for a retiree?

Thank you!
Depending on your parents age(s) and the size of their nest egg, this may be a fine strategy, but it will most likely benefit their beneficiaries down the road. If the growth of either of these funds starts to take off don't forget to re-balance to keep the portfolio appropriate for them...
Regards,

stan1
Posts: 7733
Joined: Mon Oct 08, 2007 4:35 pm

Re: Small value in 50-50 retirement portfolio

Post by stan1 » Sat Nov 09, 2019 8:25 pm

DesertInvestor wrote:
Sat Nov 09, 2019 6:27 pm
I’m investing my parents retirement funds in 50:50 portfolio. I am doing a three fund and considering 5% REIT and 5% small value (vanguard small value index fund). Is small value even at 5% too aggressive for a retiree?

Thank you!
I'd say the opposite, which is that 5% slices really aren't enough to make a meaningful difference compared to a three fund portfolio (at any age).

How old are your parents? Do they live off their investments or do they live almost exclusively off pension and SS income?

User avatar
willthrill81
Posts: 13991
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Small value in 50-50 retirement portfolio

Post by willthrill81 » Sat Nov 09, 2019 8:33 pm

stan1 wrote:
Sat Nov 09, 2019 8:25 pm
DesertInvestor wrote:
Sat Nov 09, 2019 6:27 pm
I’m investing my parents retirement funds in 50:50 portfolio. I am doing a three fund and considering 5% REIT and 5% small value (vanguard small value index fund). Is small value even at 5% too aggressive for a retiree?

Thank you!
I'd say the opposite, which is that 5% slices really aren't enough to make a meaningful difference compared to a three fund portfolio (at any age).

How old are your parents? Do they live off their investments or do they live almost exclusively off pension and SS income?
I agree. If you're going to tilt, 5% is the absolute minimum and 10% is much more likely to make a meaningful difference.

If you're going to tilt, tilt. If you aren't sure about tilting, then don't tilt.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
305pelusa
Posts: 1011
Joined: Fri Nov 16, 2018 10:20 pm

Re: Small value in 50-50 retirement portfolio

Post by 305pelusa » Sat Nov 09, 2019 8:35 pm

DesertInvestor wrote:
Sat Nov 09, 2019 6:27 pm
I’m investing my parents retirement funds in 50:50 portfolio. I am doing a three fund and considering 5% REIT and 5% small value (vanguard small value index fund). Is small value even at 5% too aggressive for a retiree?

Thank you!
5% (I'm assuming that's 10% of the equities) just won't change things either way.
Just FYI, REITs are, ironically, expensive enough nowadays that it's essentially a growth fund. It'll basically negate any value exposure from the SCV fund.

averagedude
Posts: 771
Joined: Sun May 13, 2018 3:41 pm

Re: Small value in 50-50 retirement portfolio

Post by averagedude » Sat Nov 09, 2019 8:40 pm

Sounds completely reasonable for a retiree.

User avatar
nedsaid
Posts: 12779
Joined: Fri Nov 23, 2012 12:33 pm

Re: Small value in 50-50 retirement portfolio

Post by nedsaid » Sun Nov 10, 2019 12:25 pm

willthrill81 wrote:
Sat Nov 09, 2019 8:33 pm
stan1 wrote:
Sat Nov 09, 2019 8:25 pm
DesertInvestor wrote:
Sat Nov 09, 2019 6:27 pm
I’m investing my parents retirement funds in 50:50 portfolio. I am doing a three fund and considering 5% REIT and 5% small value (vanguard small value index fund). Is small value even at 5% too aggressive for a retiree?

Thank you!
I'd say the opposite, which is that 5% slices really aren't enough to make a meaningful difference compared to a three fund portfolio (at any age).

How old are your parents? Do they live off their investments or do they live almost exclusively off pension and SS income?
I agree. If you're going to tilt, 5% is the absolute minimum and 10% is much more likely to make a meaningful difference.

If you're going to tilt, tilt. If you aren't sure about tilting, then don't tilt.
This is the challenge of tilting. How little is too little and how much is too much? A second question would be what vehicle to use for Small/Value tilting? Their is the Bridgeway product which has a high loading on Size and Value, the iShares S&P 600 Small Cap Value Index ETF which has a high loading on Size and not so much on Value, and the "bad" Vanguard Small Cap Value Index which has a lot of Mid-Caps and a lot of Core stocks in it. The "good products" are definitely pure Small/Value plays, the "bad products" not so much Value loading and a lot of Mid-Caps. For older investors, the "bad" products would be just fine as Mid-Caps while not the optimal solution but are less volatile and will deliver good enough performance. Or maybe just use a Mid/Value Index.
A fool and his money are good for business.

User avatar
Kenkat
Posts: 5357
Joined: Thu Mar 01, 2007 11:18 am
Location: Cincinnati, OH

Re: Small value in 50-50 retirement portfolio

Post by Kenkat » Sun Nov 10, 2019 12:33 pm

I know a lot of people say that 5% is not enough to make a difference but I disagree. In the OP’s case, they would be moving a total of 10% of the portfolio out of the three fund. If the three fund was 50 bond / 40 TSM / 10 Total International and the 10% was moved out of TSM, this represents 25% of the total domestic equity holdings and makes the domestic equity slice quite a bit different in my opinion.

Is this a good idea? I think so but it is not clear cut in any way, with much discussion on both sides. If you do it, you need to have the resolve to stick to it as you might lag TSM for years, perhaps a lifetime.

Topic Author
DesertInvestor
Posts: 73
Joined: Tue Dec 20, 2016 1:04 pm

Re: Small value in 50-50 retirement portfolio

Post by DesertInvestor » Sun Nov 10, 2019 1:36 pm

Not a huge next egg. Just over a million. Ages 72 and 65. Both still working so not living off income. Plus delayed social security till 70 so there is that benefit as well.
retired@50 wrote:
Sat Nov 09, 2019 7:44 pm
DesertInvestor wrote:
Sat Nov 09, 2019 6:27 pm
I’m investing my parents retirement funds in 50:50 portfolio. I am doing a three fund and considering 5% REIT and 5% small value (vanguard small value index fund). Is small value even at 5% too aggressive for a retiree?

Thank you!
Depending on your parents age(s) and the size of their nest egg, this may be a fine strategy, but it will most likely benefit their beneficiaries down the road. If the growth of either of these funds starts to take off don't forget to re-balance to keep the portfolio appropriate for them...
Regards,

User avatar
ruralavalon
Posts: 16720
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Small value in 50-50 retirement portfolio

Post by ruralavalon » Sun Nov 10, 2019 3:18 pm

DesertInvestor wrote:
Sat Nov 09, 2019 6:27 pm
I’m investing my parents retirement funds in 50:50 portfolio. I am doing a three fund and considering 5% REIT and 5% small value (vanguard small value index fund). Is small value even at 5% too aggressive for a retiree?

Thank you!
Age 74, retired, no pension, no annuity, and we have a 50/50 asset allocation.

We have about 25% of domestic stocks (8% of portfolio) in small-cap value. I am planning to drop that small-cap value tilt, to simplify.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
DesertInvestor
Posts: 73
Joined: Tue Dec 20, 2016 1:04 pm

Re: Small value in 50-50 retirement portfolio

Post by DesertInvestor » Wed Nov 13, 2019 4:29 pm

ruralavalon wrote:
Sun Nov 10, 2019 3:18 pm
DesertInvestor wrote:
Sat Nov 09, 2019 6:27 pm
I’m investing my parents retirement funds in 50:50 portfolio. I am doing a three fund and considering 5% REIT and 5% small value (vanguard small value index fund). Is small value even at 5% too aggressive for a retiree?

Thank you!
Age 74, retired, no pension, no annuity, and we have a 50/50 asset allocation.

We have about 25% of domestic stocks (8% of portfolio) in small-cap value. I am planning to drop that small-cap value tilt, to simplify.
Thank you! My dad's age is about there. No pension or annuity. Max social security benefits, but still working and plans to continue for a few more years. Do you do any other tilt besides small cap on your retirement portfolio? And you do simple total bond market? (I have 70% total US bonds/30% foreign bonds corresponding to vanguard target retirement allocation).

youngpleb
Posts: 287
Joined: Mon Oct 16, 2017 7:06 pm
Location: VA, USA

Re: Small value in 50-50 retirement portfolio

Post by youngpleb » Wed Nov 13, 2019 10:17 pm

SCV often contains a good amount of REITs inside itself, so I'd probably just put all 10% into SCV and be done with it.

aristotelian
Posts: 6480
Joined: Wed Jan 11, 2017 8:05 pm

Re: Small value in 50-50 retirement portfolio

Post by aristotelian » Wed Nov 13, 2019 10:53 pm

With someone else's money, I would not do anything more exotic than total market. Otherwise, it is your fault if they underperform. If you are going to tilt (again, I would not), you should do more than 5% if you want it to make any difference.

What is your motivation for taking additional risk on their behalf?

chw
Posts: 712
Joined: Thu May 24, 2012 4:22 pm

Re: Small value in 50-50 retirement portfolio

Post by chw » Wed Nov 13, 2019 11:11 pm

nedsaid wrote:
Sun Nov 10, 2019 12:25 pm
willthrill81 wrote:
Sat Nov 09, 2019 8:33 pm
stan1 wrote:
Sat Nov 09, 2019 8:25 pm
DesertInvestor wrote:
Sat Nov 09, 2019 6:27 pm
I’m investing my parents retirement funds in 50:50 portfolio. I am doing a three fund and considering 5% REIT and 5% small value (vanguard small value index fund). Is small value even at 5% too aggressive for a retiree?

Thank you!
I'd say the opposite, which is that 5% slices really aren't enough to make a meaningful difference compared to a three fund portfolio (at any age).

How old are your parents? Do they live off their investments or do they live almost exclusively off pension and SS income?
I agree. If you're going to tilt, 5% is the absolute minimum and 10% is much more likely to make a meaningful difference.

If you're going to tilt, tilt. If you aren't sure about tilting, then don't tilt.
This is the challenge of tilting. How little is too little and how much is too much? A second question would be what vehicle to use for Small/Value tilting? Their is the Bridgeway product which has a high loading on Size and Value, the iShares S&P 600 Small Cap Value Index ETF which has a high loading on Size and not so much on Value, and the "bad" Vanguard Small Cap Value Index which has a lot of Mid-Caps and a lot of Core stocks in it. The "good products" are definitely pure Small/Value plays, the "bad products" not so much Value loading and a lot of Mid-Caps. For older investors, the "bad" products would be just fine as Mid-Caps while not the optimal solution but are less volatile and will deliver good enough performance. Or maybe just use a Mid/Value Index.
Agree about finding the right balance of SCV, and the proper fund to use. I am at about 17% of equities using IJS (iShares S&P 600), which has worked well for me for several years.

User avatar
nedsaid
Posts: 12779
Joined: Fri Nov 23, 2012 12:33 pm

Re: Small value in 50-50 retirement portfolio

Post by nedsaid » Wed Nov 13, 2019 11:50 pm

chw wrote:
Wed Nov 13, 2019 11:11 pm
nedsaid wrote:
Sun Nov 10, 2019 12:25 pm
willthrill81 wrote:
Sat Nov 09, 2019 8:33 pm
stan1 wrote:
Sat Nov 09, 2019 8:25 pm
DesertInvestor wrote:
Sat Nov 09, 2019 6:27 pm
I’m investing my parents retirement funds in 50:50 portfolio. I am doing a three fund and considering 5% REIT and 5% small value (vanguard small value index fund). Is small value even at 5% too aggressive for a retiree?

Thank you!
I'd say the opposite, which is that 5% slices really aren't enough to make a meaningful difference compared to a three fund portfolio (at any age).

How old are your parents? Do they live off their investments or do they live almost exclusively off pension and SS income?
I agree. If you're going to tilt, 5% is the absolute minimum and 10% is much more likely to make a meaningful difference.

If you're going to tilt, tilt. If you aren't sure about tilting, then don't tilt.
This is the challenge of tilting. How little is too little and how much is too much? A second question would be what vehicle to use for Small/Value tilting? Their is the Bridgeway product which has a high loading on Size and Value, the iShares S&P 600 Small Cap Value Index ETF which has a high loading on Size and not so much on Value, and the "bad" Vanguard Small Cap Value Index which has a lot of Mid-Caps and a lot of Core stocks in it. The "good products" are definitely pure Small/Value plays, the "bad products" not so much Value loading and a lot of Mid-Caps. For older investors, the "bad" products would be just fine as Mid-Caps while not the optimal solution but are less volatile and will deliver good enough performance. Or maybe just use a Mid/Value Index.
Agree about finding the right balance of SCV, and the proper fund to use. I am at about 17% of equities using IJS (iShares S&P 600), which has worked well for me for several years.
This is why I do a lot of eyeballing and don't use tools like Portfolio Visualizer to find an optimal mix. All Portfolio Visualizer can do is optimize a portfolio based upon past data. No one knows what the future holds and thus no one knows the optimal factor tilts. Part of the eyeballing process is looking at the factor portfolios that the experts have created.

Like a scratch cook, I just add the ingredients without being too precise. A dash of this and a dab of that. If something looks good, I will throw it in there. Certainly I do my research and look at model portfolios and then try to weigh all of that against my personal situation. But I don't use detailed spreadsheets. So pretty much I throw together the dish hoping that it will taste good when I am all done.

The other thing you can do is look at future expected returns as calculated by experts like Bill Bernstein, Larry Swedroe, or the good folks at Vanguard. Others do these calculations and they are based upon valuation. So you might overweight those asset classes with higher expected future returns even more than you ordinarily would which is sort of a mild timing strategy or strategic asset allocation. So you do all of that, cross your fingers and hope for the best. There is no precision in this, just that an educated guess is better than an uneducated guess.

Finding the optimal mix is one challenge, the other is finding the correct vehicles. No matter what you pick, you will face criticism. Vanguard Small-Cap Value Index has too many Mid-Caps and many of its stocks are not Value Stocks. The S&P 600 Small-Cap Value Index is criticized for being too much like the S&P 600 Small-Cap Index. The DFA and Bridgeway products are criticized for their performance over the last decade.

The "bad" Small/Value factor products have been outperforming the "good products" because we have been in a Growth market for a decade. At some point, the Growth/Value dynamic will change but we don't know when. My sense is that now would be a good time to buy the "good" Small/Value factor products as the Growth trend has been in place for a decade now. At some point the worm will turn.

If you are young, I would just go with the "good" Small/Value factor products and not worry about performance. Over many years, the superior Small and Value loading should lead to better performance. If you are relatively old, probably not worth worrying about, the "bad" Small/Value factor products should give you good enough performance with less volatility than the "good" products. When you are old, you probably want less volatility anyway. Older investors might just tilt with a Mid-Cap Value Index.
A fool and his money are good for business.

User avatar
BroIceCream
Posts: 20
Joined: Tue Oct 30, 2018 11:31 pm
Location: California

Re: Small value in 50-50 retirement portfolio

Post by BroIceCream » Thu Nov 14, 2019 11:36 pm

This article by Chris Pedersen was just posted this week on the impact of varying amouts of SCV in a retirement portfolio.

https://paulmerriman.com/two-funds-for- ... tirement/

Post Reply