Very heavy SCV tilt: when to add "pure" beta exposure (if at all)?

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empb
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Very heavy SCV tilt: when to add "pure" beta exposure (if at all)?

Post by empb »

Have been following the forum for 13+ years, largely since I started working. Since that time, I have been overwhelmingly tilted to small-value stocks; perhaps more than any poster I can recall.

As net worth has increased over the last few years, this tilt seems extreme even amongst factor-heads and I'm perhaps in need of an intervention!

My IPS would dictate: 50% US small-cap value / 25% ex-US small / 25% cap-weighted emerging markets with eventual slope towards 10% long-term government bonds. To date, no issues sticking with this portfolio and no reason to think that will change but it was written at a very different stage of my life.

Essentially the question is: is it totally reckless to continue as-is? Or would it be prudent to "backfill" with VTI?

If you are a Tell-Tale Chart type, please don't bother; I've been around long enough! :happy

Vitals
Age: 37; US/UK Dual Citizen
Top tax bracket in both US and UK; so dividend minimization is a priority
New worth: $3.1M
Expenses: roughly $50k (£38k) annually
New contributions: $400k-800k annually
85/15 Taxable/Tax-Advantaged

Goal
Perhaps early retirement (say, 2-3 years) with an towards leaving a significant charitable legacy. I do not believe I will outspend the portfolio in my (or my partner's) lifetime.

Current Portfolio

Code: Select all

20% VIOV
24% VBR (TLH partner; no new contributions)
24% VSS
15% VWO
8% Cap-weighted global stuff (UK pension)
1% EDV/Long UK Gilts
5% Excellent Adventure (filling out all US tax-advantaged space)
3% home equity
Notes
1. Due to specific tax arrangements between US/UK, I was forced to switch entirely into HMRC reporting funds last year. That was a death knell for ex-US SCV tilt.
2. Large imbedded capital gains, so selling is not an option.
Last edited by empb on Mon Apr 05, 2021 10:17 am, edited 2 times in total.
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willthrill81
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Re: Very heavy SCV tilt: when to add "pure" beta exposure (if at all)?

Post by willthrill81 »

As long as you're persuaded that factors are real and largely independent of each other, I don't know why you would want to specifically 'overweight' one factor over another (i.e., add more beta). SCV still has a lot of beta exposure.
“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
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empb
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Re: Very heavy SCV tilt: when to add "pure" beta exposure (if at all)?

Post by empb »

willthrill81 wrote: Mon Apr 05, 2021 10:16 am As long as you're persuaded that factors are real and largely independent of each other, I don't know why you would want to specifically 'overweight' one factor over another (i.e., add more beta). SCV still has a lot of beta exposure.
Agree; but the impetus is less "I don't have enough Beta" and more "I haven't seen anyone else tilting like this".
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vineviz
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Re: Very heavy SCV tilt: when to add "pure" beta exposure (if at all)?

Post by vineviz »

empb wrote: Mon Apr 05, 2021 10:14 am
Essentially the question is: is it totally reckless to continue as-is? Or would it be prudent to "backfill" with VTI?
No and no.

Diversification is arguably more important for decumulators, not less. So your allocation is not “reckless “.

And if you want to “backfill”, the cheap beta fund should include international stocks anyway. So not VTI.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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retired@50
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Re: Very heavy SCV tilt: when to add "pure" beta exposure (if at all)?

Post by retired@50 »

empb wrote: Mon Apr 05, 2021 10:19 am
Agree; but the impetus is less "I don't have enough Beta" and more "I haven't seen anyone else tilting like this".
The red phrase above sounds like it could have come from Warren Buffett. Extraordinary results are achieved by very few investors.

Regards,
This is one person's opinion. Nothing more.
dcabler
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Re: Very heavy SCV tilt: when to add "pure" beta exposure (if at all)?

Post by dcabler »

empb wrote: Mon Apr 05, 2021 10:19 am
willthrill81 wrote: Mon Apr 05, 2021 10:16 am As long as you're persuaded that factors are real and largely independent of each other, I don't know why you would want to specifically 'overweight' one factor over another (i.e., add more beta). SCV still has a lot of beta exposure.
Agree; but the impetus is less "I don't have enough Beta" and more "I haven't seen anyone else tilting like this".
Search for "Larry Portfolio" on this forum and you will see a tilt like this. To be fair, that portfolio falls into the "low-volatility" category and, as such, is heavily weighted towards bonds to better offset the volatility of SCV (and some other assets that have been added over the years as it evolved).

Cheers.
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empb
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Re: Very heavy SCV tilt: when to add "pure" beta exposure (if at all)?

Post by empb »

vineviz wrote: Mon Apr 05, 2021 10:21 am
empb wrote: Mon Apr 05, 2021 10:14 am
Essentially the question is: is it totally reckless to continue as-is? Or would it be prudent to "backfill" with VTI?
No and no.

Diversification is arguably more important for decumulators, not less. So your allocation is not “reckless “.

And if you want to “backfill”, the cheap beta fund should include international stocks anyway. So not VTI.
Thanks for reply. Your own portfolio (such as it's described here) has a discrete "core" allocation to S&P 500. Is that for behavioural reasons (wife etc)? Or due to 401k limitations?
Last edited by empb on Mon Apr 05, 2021 10:52 am, edited 1 time in total.
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empb
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Re: Very heavy SCV tilt: when to add "pure" beta exposure (if at all)?

Post by empb »

dcabler wrote: Mon Apr 05, 2021 10:30 am
empb wrote: Mon Apr 05, 2021 10:19 am
willthrill81 wrote: Mon Apr 05, 2021 10:16 am As long as you're persuaded that factors are real and largely independent of each other, I don't know why you would want to specifically 'overweight' one factor over another (i.e., add more beta). SCV still has a lot of beta exposure.
Agree; but the impetus is less "I don't have enough Beta" and more "I haven't seen anyone else tilting like this".
Search for "Larry Portfolio" on this forum and you will see a tilt like this. To be fair, that portfolio falls into the "low-volatility" category and, as such, is heavily weighted towards bonds to better offset the volatility of SCV (and some other assets that have been added over the years as it evolved).

Cheers.
Thanks, aware of the Larry portfolio but can't get onboard with crowding out that much equity with short-term treasuries. If I have to hold bonds, I want as few and as volatile as possible.
whereskyle
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Re: Very heavy SCV tilt: when to add "pure" beta exposure (if at all)?

Post by whereskyle »

empb wrote: Mon Apr 05, 2021 10:14 am Have been following the forum for 13+ years, largely since I started working. Since that time, I have been overwhelmingly tilted to small-value stocks; perhaps more than any poster I can recall.

As net worth has increased over the last few years, this tilt seems extreme even amongst factor-heads and I'm perhaps in need of an intervention!

My IPS would dictate: 50% US small-cap value / 25% ex-US small / 25% cap-weighted emerging markets with eventual slope towards 10% long-term government bonds. To date, no issues sticking with this portfolio and no reason to think that will change but it was written at a very different stage of my life.

Essentially the question is: is it totally reckless to continue as-is? Or would it be prudent to "backfill" with VTI?

If you are a Tell-Tale Chart type, please don't bother; I've been around long enough! :happy

Vitals
Age: 37; US/UK Dual Citizen
Top tax bracket in both US and UK; so dividend minimization is a priority
New worth: $3.1M
Expenses: roughly $50k (£38k) annually
New contributions: $400k-800k annually
85/15 Taxable/Tax-Advantaged

Goal
Perhaps early retirement (say, 2-3 years) with an towards leaving a significant charitable legacy. I do not believe I will outspend the portfolio in my (or my partner's) lifetime.

Current Portfolio

Code: Select all

20% VIOV
24% VBR (TLH partner; no new contributions)
24% VSS
15% VWO
8% Cap-weighted global stuff (UK pension)
1% EDV/Long UK Gilts
5% Excellent Adventure (filling out all US tax-advantaged space)
3% home equity
Notes
1. Due to specific tax arrangements between US/UK, I was forced to switch entirely into HMRC reporting funds last year. That was a death knell for ex-US SCV tilt.
2. Large imbedded capital gains, so selling is not an option.
If you want to take risk off the table, I'd start loading up on Intermediate Treasuries and start making your port look more like the Larry portfolio.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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vineviz
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Re: Very heavy SCV tilt: when to add "pure" beta exposure (if at all)?

Post by vineviz »

empb wrote: Mon Apr 05, 2021 10:49 am
vineviz wrote: Mon Apr 05, 2021 10:21 am
empb wrote: Mon Apr 05, 2021 10:14 am
Essentially the question is: is it totally reckless to continue as-is? Or would it be prudent to "backfill" with VTI?
No and no.

Diversification is arguably more important for decumulators, not less. So your allocation is not “reckless “.

And if you want to “backfill”, the cheap beta fund should include international stocks anyway. So not VTI.
Thanks for reply. Your own portfolio (such as it's described here) has a discrete "core" allocation to S&P 500. Is that for behavioural reasons (wife etc)? Or due to 401k limitations?
I've made a few changes to my fund lineup since my last update, but the S&P 500 fund is in there purely because of 401k access: the S&P 500 fund in the plan has a net expense ratio of 6bps: the total market index fund is 30bps and the only SCV fund is 69bps.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
dcabler
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Re: Very heavy SCV tilt: when to add "pure" beta exposure (if at all)?

Post by dcabler »

empb wrote: Mon Apr 05, 2021 10:51 am
dcabler wrote: Mon Apr 05, 2021 10:30 am
empb wrote: Mon Apr 05, 2021 10:19 am
willthrill81 wrote: Mon Apr 05, 2021 10:16 am As long as you're persuaded that factors are real and largely independent of each other, I don't know why you would want to specifically 'overweight' one factor over another (i.e., add more beta). SCV still has a lot of beta exposure.
Agree; but the impetus is less "I don't have enough Beta" and more "I haven't seen anyone else tilting like this".
Search for "Larry Portfolio" on this forum and you will see a tilt like this. To be fair, that portfolio falls into the "low-volatility" category and, as such, is heavily weighted towards bonds to better offset the volatility of SCV (and some other assets that have been added over the years as it evolved).

Cheers.
Thanks, aware of the Larry portfolio but can't get onboard with crowding out that much equity with short-term treasuries. If I have to hold bonds, I want as few and as volatile as possible.
There's more than one version of the Larry Portfolio, including ones that use intermediate or long treasuries.
One with intermediate treasuries: https://portfoliocharts.com/portfolio/larry-portfolio/

I had backed into my own version of the Larry Portfolio before I had ever heard it mentioned - by using the Simba spreadsheet on this forum and matching weighted volatility, assuming zero correlation between SCV and Intermediate bonds. I ultimately decided against it - seemed too finely balanced on a knife edge for my taste....

Cheers.
Wade Garrett
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Re: Very heavy SCV tilt: when to add "pure" beta exposure (if at all)?

Post by Wade Garrett »

empb wrote: Mon Apr 05, 2021 10:14 am Essentially the question is: is it totally reckless to continue as-is? Or would it be prudent to "backfill" with VTI?
Not totally reckless to continue as is.

I wouldn't backfill with VTI. If you're going to backfill with anything, I would do it with momentum.
"I'm not an inventor. I'm an improver. I see things that are wrong, and I improve them." - Larry David, Curb Your Enthusiasm
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