Equal Parts Small, Mid, Large Cap Indexes

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Alexa9
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Equal Parts Small, Mid, Large Cap Indexes

Post by Alexa9 » Sun Jul 30, 2017 10:25 am

Why is market weighted index (Total Stock Market) preferable to equal parts small, mid, and large cap indexes?
Or even small value, mid value, and large value since the value factor is even larger than the size factor?

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by jebmke » Sun Jul 30, 2017 10:36 am

Many people tilt their portfolios. I have a moderate tilt to small and mid-cap value. At one point, our equity was 70% tilted.
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by nedsaid » Sun Jul 30, 2017 10:39 am

Actually, equally splitting your stock money between Small, Mid, and Large Cap indexes is not a bad idea. Over long periods of time, you have a good chance of beating the market. Problem is, the large and smaller stocks take turns outperforming each other and these trends can last a long time. Your risk is that you would underperform the Total Stock Market Index and would give up on your strategy too soon, selling out before the smaller stocks have their period of outperformance. A risk that you are taking is that what occurred in the past may not occur in the future. History suggests that over long periods of time that small outperforms large but the effect is known and the market might take all of that premium away. We just don't know for sure.
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by jbolden1517 » Sun Jul 30, 2017 10:45 am

Alexa9 wrote:Why is market weighted index (Total Stock Market) preferable to equal parts small, mid, and large cap indexes?
Or even small value, mid value, and large value since the value factor is even larger than the size factor?
There can be some periods of time where growth is being underpriced. There can be periods of time when small is overpriced relative to large (especially small growth). Tilting value and tilting small are both very good in most situations. And let me just compound with one more advantage you didn't mention. Large USA and Large Internationally correlate strongly (especially excluding currency). The correlation between USA small and International small is lower, which means you get a much safer portfolio if you do this internationally as well.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by livesoft » Sun Jul 30, 2017 10:53 am

Alexa9 wrote:Why is market weighted index (Total Stock Market) preferable to equal parts small, mid, and large cap indexes?
It is not preferable.
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by smesman » Sun Jul 30, 2017 11:15 am

Holding equal parts small, mid, large will cause more turnover and is more vulnerable to front running. E.g. If a large cap stock goes down in value and falls out of the "large cap" bracket your large cap fund will sell it and your mid cap fund will buy a (larger) percentage of that stock.

I think holding equal parts anything (e.g. S&P 500 equal, or Russel 3000 equal) is considered to not add any value (besides tilting to small) or rebalancing bonus and just causes more turnover.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by retiredjg » Sun Jul 30, 2017 11:29 am

Alexa9 wrote:Why is market weighted index (Total Stock Market) preferable to equal parts small, mid, and large cap indexes?
Or even small value, mid value, and large value since the value factor is even larger than the size factor?
I don't think it is necessarily "preferable", just that some prefer it because they want market weights and the risk of market weight.

Equal parts of small mid and large cap would be VERY heavily tilted, more than most here would do. Tilting to mid and small and toward value adds risk to your portfolio. Some people chose that. Others don't.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by Doc » Sun Jul 30, 2017 11:33 am

livesoft wrote:
Alexa9 wrote:Why is market weighted index (Total Stock Market) preferable to equal parts small, mid, and large cap indexes?
It is not preferable.
jbolden1517 wrote:There can be some periods of time where growth is being underpriced. There can be periods of time when small is overpriced relative to large (especially small growth). Tilting value and tilting small are both very good in most situations.
Combining these two remarks: It is not preferable (livesoft) from a total return viewpoint over a long period of time unless you just prefer to not see swings in your growth curve (jbolden). These two remarks are not contradictory.

FWIW I heavily tilt to small value.
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by Alexa9 » Sun Jul 30, 2017 11:37 am

I ask this because The Three Fund Portfolio seems to be good enough for most people on here.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by retiredjg » Sun Jul 30, 2017 12:03 pm

The 3 fund portfolio certainly is good enough. But many people here tilt to small and/or value. I don't think many would suggest equal parts of large, mid, and small though.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by jbolden1517 » Sun Jul 30, 2017 12:10 pm

Alexa9 wrote:I ask this because The Three Fund Portfolio seems to be good enough for most people on here.
The three fund portfolo is a bad portfolio. Now it is a lot better than many other portfolios, but it has serious problems. The bonds don't have enough duration risk to help with correlations. The USA stock portfolio ends up looking too much like a large growth portfolio. The national and international correlate strongly with one another. The satellite aspects are diluted and not rebalanced into enough, for example the small amount of duration risk is muted with so much "better cash" that's it is hard to rebalance in and out of. And then now unlike before, because indexing and quasi-indexing have become so popular in stocks it is becoming more susceptible in the USA (and global bond market) to manipulation by control players who can skim from these funds via. float manipulation.

Indexing a large market is a terrific way, probably the best way to hold down expenses and expenses come off the top. But any idea can be taken too far.

People like to talk about the virtue of simplicity with respect to 3 fund. Simplicity has its costs. All investments aren't equal. CAPM isn't true, the market isn't efficient in pricing for long term returns. Valuations do matter. Diversification among low correlating assets makes a huge difference in serial returns.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by chevca » Sun Jul 30, 2017 12:22 pm

jbolden1517 wrote:The three fund portfolo is a bad portfolio.
Wow... is that statement even allowed to by said on Bogleheads? :D

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by avalpert » Sun Jul 30, 2017 1:28 pm

Alexa9 wrote:Why is market weighted index (Total Stock Market) preferable to equal parts small, mid, and large cap indexes?
Or even small value, mid value, and large value since the value factor is even larger than the size factor?
Your asking the wrong question. What is preferable depends on your desired risk exposure - you need to determine that first then you can find the cheapest portfolio to get the desired exposure.

A total market portfolio may be preferable for someone who wants just beta exposure - my hunch is equal weightings of large/mid/small indexes will never be the best way to get a desired small cap tilt (which is all you are doing here).

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by aristotelian » Sun Jul 30, 2017 1:34 pm

If you believe in owning the market, Total Stock is preferable. There are some theoretical reasons why overweighting small or mid may outperform but honestly nobody knows for sure. Even if one or the other performs better historically, there is no guarantee that the pattern will continue. Once you start slicing and dicing, you unleash a Pandora's box by making yourself more vulnerable to market timing and behavior mistakes. Much simpler to stick with owning the market.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by aristotelian » Sun Jul 30, 2017 1:36 pm

jbolden1517 wrote:
Alexa9 wrote:I ask this because The Three Fund Portfolio seems to be good enough for most people on here.
The three fund portfolo is a bad portfolio. Now it is a lot better than many other portfolios, but it has serious problems. The bonds don't have enough duration risk to help with correlations. The USA stock portfolio ends up looking too much like a large growth portfolio. The national and international correlate strongly with one another. The satellite aspects are diluted and not rebalanced into enough, for example the small amount of duration risk is muted with so much "better cash" that's it is hard to rebalance in and out of. And then now unlike before, because indexing and quasi-indexing have become so popular in stocks it is becoming more susceptible in the USA (and global bond market) to manipulation by control players who can skim from these funds via. float manipulation.

Indexing a large market is a terrific way, probably the best way to hold down expenses and expenses come off the top. But any idea can be taken too far.

People like to talk about the virtue of simplicity with respect to 3 fund. Simplicity has its costs. All investments aren't equal. CAPM isn't true, the market isn't efficient in pricing for long term returns. Valuations do matter. Diversification among low correlating assets makes a huge difference in serial returns.
We don't need to debate the merits of Total Stock again. OP's question is whether equal weighting Mid and Small is better. Since Mid and Small are highly correlated to S&P, none of your arguments against Total Stock apply to OP.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by patrick013 » Sun Jul 30, 2017 1:50 pm

Assuming that small-mid-large cap indexes include the best
profitable stocks in their universe why not give them equal
chance to perform. Everything is pricey these days even
bonds. Some value stocks still holding PE's under 20 and
growth returns for the second quarter reduced to 6% from 9%
just to be safe. I don't think the market portfolio is bad just
the market sentiment is unproven.

.02
age in bonds, buy-and-hold, 10 year business cycle

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by avalpert » Sun Jul 30, 2017 1:54 pm

patrick013 wrote:Assuming that small-mid-large cap indexes include the best
profitable stocks in their universe why not give them equal
chance to perform. Everything is pricey these days even
bonds. Some value stocks still holding PE's under 20 and
growth returns for the second quarter reduced to 6% from 9%
just to be safe. I don't think the market portfolio is bad just
the market sentiment is unproven.

.02
Why the arbitrary delimiters 'small', 'mid', 'large'? Why not give each sector 'equal chance to perform', or every individual stock? Or stocks by first letter in the ticker - why not equal weight all letters and give them equal chance to perform...

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by patrick013 » Sun Jul 30, 2017 2:09 pm

avalpert wrote:
patrick013 wrote:Assuming that small-mid-large cap indexes include the best
profitable stocks in their universe why not give them equal
chance to perform. Everything is pricey these days even
bonds. Some value stocks still holding PE's under 20 and
growth returns for the second quarter reduced to 6% from 9%
just to be safe. I don't think the market portfolio is bad just
the market sentiment is unproven.

.02
Why the arbitrary delimiters 'small', 'mid', 'large'? Why not give each sector 'equal chance to perform', or every individual stock? Or stocks by first letter in the ticker - why not equal weight all letters and give them equal chance to perform...
Well just the stocks in the three indexes anyway. Indexes have to be selective.
Core US Growth (ticker IUSG) used to have over 1400 stocks I think small-mid-large
cap. Now it has under 600 stocks mid-large cap only, Selecting stocks with
higher profit growth better I hope. That's how they approach better performance.
Never was completely set on market weight so my portfolio is a little goofy.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by Doc » Sun Jul 30, 2017 3:40 pm

chevca wrote:
jbolden1517 wrote:The three fund portfolo is a bad portfolio.
Wow... is that statement even allowed to by said on Bogleheads? :D
Say what? Even Jack Bogle has been critical of both TBM and international.
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by mickeyd » Sun Jul 30, 2017 3:53 pm

Alexa9 wrote:Why is market weighted index (Total Stock Market) preferable to equal parts small, mid, and large cap indexes?
Or even small value, mid value, and large value since the value factor is even larger than the size factor?
Simplicity.
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by nedsaid » Sun Jul 30, 2017 3:53 pm

chevca wrote:
jbolden1517 wrote:The three fund portfolo is a bad portfolio.
Wow... is that statement even allowed to by said on Bogleheads? :D
The three fund portfolio is actually a good portfolio but it has its drawbacks. Pretty much the arguments revolve around factors and factor tilting. For US and International Total Stock Market Indexes, you are exposed only to the market factor. As the argument goes, an investor should invest not only across asset classes by also factors. Most tilters will tilt towards Size (Small Cap) and Value. If you are a DFA Investor, there is a pinch of Momentum thrown into their Value funds.

Another part of the theory is that Large and Small and Value and Growth take turns outperforming each other. In theory, factor tilting should provide a less volatile portfolio than simply a market weighted index. You should get some things zigging while others zag. Academic research says, in addition, that over long time periods that Small outperforms Large and that Value outperforms Growth. With Small/Value tilting, you should get better returns with less volatility, in theory anyway.

How does it work in real life? Depends on when you look. The 1990's were are Large Growth decade and Small/Value tilters would have looked silly during that time period but would have been vindicated from 2000 through 2007. Since the 2008-2009 financial crisis, Value, particularly Large Value, has trailed the market. Small Value still has done fairly well over the last 10 years, beating the S&P 500 Index, but losing to the Small Growth Index by a hair. So the tilters got all the girls back in 2007. Since the financial crisis, tilting has been mildly disappointing. The advocates of tilting all say that this is a strategy that requires patience.

Right now, the simple three fund portfolio is looking mighty, mighty fine. This is mostly due to disappointing performance from Value since the financial crisis. At whatever point Value comes back strong people will be asking why do we need that plain old boring three fund portfolio? It will go back and forth over time. Given a long enough time horizon, a tilted portfolio should win out. At least it always did in the past.
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by jbolden1517 » Sun Jul 30, 2017 4:04 pm

aristotelian wrote: We don't need to debate the merits of Total Stock again. OP's question is whether equal weighting Mid and Small is better. Since Mid and Small are highly correlated to S&P, none of your arguments against Total Stock apply to OP.
While small is correlated to S&P500 it isn't correlated to international small. And that does make a difference. As for the merits of TSM, of course it comes up. The whole point of any kind of tilt is whether one wants to take positions in building an optimal portfolio or just passive let the market determine the portfolio for slightly lower fees and to match "market return".

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by jbolden1517 » Sun Jul 30, 2017 4:14 pm

avalpert wrote:Why not give each sector 'equal chance to perform
Arguably that's very close to what one does with simple quantitative passive value funds. Generally value funds end up looking like a mix of 3 sector funds, the most beaten down sectors at any given time. As sectors recover they move out of value funds. Of course a sector rotation strategy: holding each sector in equal weight and rebalancing outperforms by about 1.5%. Within sectors you are still cap weighted so not shockingly this sort of strategy gets about 1/2 the value premium. It does seem like a good way to hold SP500 growth without having to endure the worst, most overvalued bubble stocks being a large percentage of the portfolio since they are concentrated in a few sectors.

So while you meant that sarcastically, it isn't a bad idea at all.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by aj76er » Sun Jul 30, 2017 4:24 pm

jbolden1517 wrote:because indexing and quasi-indexing have become so popular in stocks it is becoming more susceptible in the USA (and global bond market) to manipulation by control players who can skim from these funds via. float manipulation.
I've seen you mention this before but I'm not sure what it means. Could you please explain it?
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by jbolden1517 » Sun Jul 30, 2017 4:58 pm

aj76er wrote:
jbolden1517 wrote:because indexing and quasi-indexing have become so popular in stocks it is becoming more susceptible in the USA (and global bond market) to manipulation by control players who can skim from these funds via. float manipulation.
I've seen you mention this before but I'm not sure what it means. Could you please explain it?
Sure. Index funds aim to hold a constant percentage of a stock. Which means the dominant trading strategy excluding increasing the percentage ownership for index funds is to buy dilution (buy stock when control investors or the company sell shares) and sell concentration (sell into buybacks). Between indexing and quasi indexing (funds that in the aggregate act like index funds because they want to track closely to the market) we are at about 70% of the SP500.

If 70% of a stock's float is going to be bought regardless of price it becomes incredibly profitable for a company to create float and sell shares to index funds (I'm including quasi-indexing and passive here) as a way to use index funds as a cheap source of financing. In a normal market investors are rationally pricing stocks based on their future discounted dividends using a discount rate that adjusts for risk. Under normal valuation doubling the number of shares merely cuts the share price in half. Doubling the number of shares should have no impact on market cap. But of course index funds don't rationally evaluate the future stream of dividends. Indexers hold a constant portion of any stock, buying or selling based on float not dividend prospects. So when the number of shares double they have to slowly raise they buy target till they get the shares back in balance. This is the same thing that happens to short investors in a short squeeze. They will end up paying far more than the company is worth. Just imagine a stock with a P/B of 5 doubling its number of shares. The indexers go from holding 70% to 35% and thus have to buy 1/3 of the company or 2/3rds of the new float. If the P/B stays constant (doubtful the control investors would be quite that greedy but it explains the principle) that means the indexers end up with the same 70% of the assets and also a large cash position they paid $5 for every $1 of.

Now that cheap financing benefits the company and the passive investors own 70% of the company. So 70% of the lost $4 is going from their right pocket to the left pocket the same as if the index fund had directly written a loan to the company and then written the loan off. But the remaining $1.20 just fell on the floor. Its going to go to control investors, other investors, short sellers... That drain is huge. All this can be completely above board and disclosed because indexes don't read prospectus or PR statements. Companies can tell investors openly they are manipulating their float to squeeze index funds and the index funds still buy. Something similar to this happened for a decade (and arguably is still happening) to VPACX. Essentially you are in the business of funding negative interest bonds to SP500 high P/E stocks.

On the low side the opposite things happen to beaten down stocks that are buying back. Control investors can diminish float which forces index funds to sell to them, which allows them to diminish float cheaply, which forces more selling.... So after having the indexers sit for years while a company restructures its debt and is about to take off, control investors can essentially buy back at 2/3rds of the company cheaply from indexers and quasi-indexers. And not only that they can both games serially. Forcing the index funds to buy high, drive the stock down, sell low, let the stock rise, buy high... in an unending cycle.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by aristotelian » Sun Jul 30, 2017 7:15 pm

jbolden1517 wrote:
aristotelian wrote: We don't need to debate the merits of Total Stock again. OP's question is whether equal weighting Mid and Small is better. Since Mid and Small are highly correlated to S&P, none of your arguments against Total Stock apply to OP.
While small is correlated to S&P500 it isn't correlated to international small. And that does make a difference. As for the merits of TSM, of course it comes up. The whole point of any kind of tilt is whether one wants to take positions in building an optimal portfolio or just passive let the market determine the portfolio for slightly lower fees and to match "market return".
OP did not ask about international small either.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by jbolden1517 » Sun Jul 30, 2017 7:19 pm

aristotelian wrote: OP did not ask about international small either.
Yes he did. He asked why was TSM preferable or not to various tilts. That was precisely his question. The disadvantages for portfolio construction in using TSM is part of the answer.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by aristotelian » Sun Jul 30, 2017 7:37 pm

jbolden1517 wrote:
aristotelian wrote: OP did not ask about international small either.
Yes he did. He asked why was TSM preferable or not to various tilts. That was precisely his question. The disadvantages for portfolio construction in using TSM is part of the answer.
OP asked about TSM versus equal weight size and value favors. Does not mention international at all. Certainly I would advise anyone to hold international but that is a separate question. I would be interested in your opinion on OP's question as I know you do not favor market weighting. But the argument for weighting size and value factors is increased risk/return, not non-correlation. I would expect OP's proposed portfolios to perform just as badly at the same time as the S&P since all domestic stocks are subject to the same risk factors.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by jbolden1517 » Sun Jul 30, 2017 8:15 pm

aristotelian wrote:(order of sentences changed) OP asked about TSM versus equal weight size and value favors. Does not mention international at all. But the argument for weighting size and value factors is increased risk/return, not non-correlation.
He mentioned cap weighting between mid and small still not equal weight. He asked what the advantages are. I made the argument for non-correlation.
aristotelian wrote: Certainly I would advise anyone to hold international but that is a separate question.
I'm not agreeing it is a separate question. I'm arguing one of the advantages of small is it allows for reducing correlation with international.
aristotelian wrote: I would be interested in your opinion on OP's question as I know you do not favor market weighting. I would expect OP's proposed portfolios to perform just as badly at the same time as the S&P since all domestic stocks are subject to the same risk factors.
I think small gives him a bit of a boost and value gives him a boost. So I suspect he does somewhat but I'm not clear enough on what he was proposing to have a good idea. My opinion is that something like Larry's 4x4 is better than market weighting. But I like a harder value /small tilt (in general) something like Schwab with 2/3rds pure value, 1/3rd market weight. Use growth as the satellite not the core and value as the core not the satellite.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by Alexa9 » Sun Jul 30, 2017 8:24 pm

I meant to do the same with international to clarify. Total International and Small International. Don't know of a Mid Cap International.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by hightower » Sun Jul 30, 2017 8:36 pm

About 30% of our portfolio is equal parts small mid and large. Not really by choice. My wife's 491k sucks and has no cheap total stock funds. So I buy equal parts of the 3 cheapest funds which happen to be those.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by jbolden1517 » Sun Jul 30, 2017 8:58 pm

Alexa9 wrote:I meant to do the same with international to clarify. Total International and Small International. Don't know of a Mid Cap International.
A lot of inexpensive small funds end up being midcap. You won't have trouble finding those. If you are planning on doing both:

a) overweighting small USA and small international is a huge advantage because of the low correlation
b) value tilting both is a huge advantage

So for 50/50 something like
20% small value USA
20% small value international
20% value USA (will tilt large/mid)
20% value international (will tilt large / mid)
20% cap weighted global (tilts large growth)

If you are willing to throw in EM on your international you can get the correlation way way down. Single country value is expensive but you get terrific diversification. (Not sure how complex you are willing to get). Frontier markets I'm being forced to index but enjoying the returns. Otherwise I do EM value.

So main change I'd do is move away from equal and go unequal with a small bias.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by avalpert » Sun Jul 30, 2017 9:41 pm

patrick013 wrote:
avalpert wrote:
patrick013 wrote:Assuming that small-mid-large cap indexes include the best
profitable stocks in their universe why not give them equal
chance to perform. Everything is pricey these days even
bonds. Some value stocks still holding PE's under 20 and
growth returns for the second quarter reduced to 6% from 9%
just to be safe. I don't think the market portfolio is bad just
the market sentiment is unproven.

.02
Why the arbitrary delimiters 'small', 'mid', 'large'? Why not give each sector 'equal chance to perform', or every individual stock? Or stocks by first letter in the ticker - why not equal weight all letters and give them equal chance to perform...
Well just the stocks in the three indexes anyway. Indexes have to be selective.
huh? I don't think you understand how these indexes are constructed and what they are designed to accomplish.
Core US Growth (ticker IUSG) used to have over 1400 stocks I think small-mid-large
cap. Now it has under 600 stocks mid-large cap only,
Maybe they changed indexes at some point but they are attempting to track the S&P 900 growth index so 569 mid-large stocks would be exactly what they should hold - not with any selection based on guessing on future profit growth but designed to track the underlying index

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by avalpert » Sun Jul 30, 2017 9:44 pm

jbolden1517 wrote:
avalpert wrote:Why not give each sector 'equal chance to perform
Arguably that's very close to what one does with simple quantitative passive value funds.
That doesn't follow at all from the chart you posted - there is nothing in the there that suggests equal sector weighting would be a good way to get your desired value and size exposures.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by Dead Man Walking » Sun Jul 30, 2017 9:51 pm

What happened to Mel's unloved midcaps?

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by patrick013 » Sun Jul 30, 2017 9:57 pm

avalpert wrote: huh? I don't think you understand how these indexes are constructed and what they are designed to accomplish.
Index replacement based on estimated future profit growth. That is all
they are designed to do. The Russell 3000 growth index was a better index,
rules based only, but the smaller S&P Growth index has fewer stocks so they
probably went with that so as not to water the fund down with lesser quality
stocks, in this case stocks with lesser growth rates estimated and projected.
600 stocks is alot less than 1400 stocks especially as I am guessing they can't
find more than 600 stocks with acceptable growth rates then.

So index replacement is one of the best Advisor's there is IMO.

I make up my AA nobody else.
age in bonds, buy-and-hold, 10 year business cycle

jbolden1517
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by jbolden1517 » Sun Jul 30, 2017 10:19 pm

avalpert wrote:
jbolden1517 wrote:
avalpert wrote:Why not give each sector 'equal chance to perform
Arguably that's very close to what one does with simple quantitative passive value funds.
That doesn't follow at all from the chart you posted - there is nothing in the there that suggests equal sector weighting would be a good way to get your desired value and size exposures.
Oh I agree it doesn't follow from the chart I posted. The chart was mainly showing how sector slicing and rebalancing on sectors work. That the sectors have substantial variance from the SP500 and do rotate annually having a faster bull and bear cycle than the market as a whole. I should mention with equal weighted sectors an investor picks up a lot of extra volatility with this strategy. Smaller sectors are much more volatile than the market as a whole, by overweighting variances increase.

Essentially the sector strategy you proposed (sarcastically) is sort of an alternative to small and value. You could still add small value. Equal sector weightings using cap weighted funds pulls average size down a bit but mostly it is still large cap. Equal weighing by stock (like Guggenheim) gets you a midcap. Midcap is kind of sweet spot for the market having better return than either small or large. You don't get the international low correlation advantages though.

The value tilt you do get because growth tends to be concentrated in a small number of sectors as does value. Take for example DFA's focus on P/B tilt . Classically industries go through cycles having to do with marketwide demand for their products that affects P/B ratios far more than individual company performance. Thus if you want to capture value you want low P/B within an industry more than low P/B across the market. Here is a good article on the basic tie between simple quantitative value metrics and sector bias (taking a much more negative view of value than I do): http://www.etf.com/sections/etf-strateg ... nopaging=1
and the reason Bettermint (among others) recommend sector neutral strategies used by iShares Edge MSCI USA Value Factor ETF (VLUE) and the Fidelity Value Factor ETF (FVAL). A more detailed version of the argument: http://rnm.simon.rochester.edu/research/ROCatXR.pdf

Beyond this I might be losing the thread of what we are discussing.

avalpert
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by avalpert » Sun Jul 30, 2017 10:23 pm

patrick013 wrote:
avalpert wrote: huh? I don't think you understand how these indexes are constructed and what they are designed to accomplish.
Index replacement based on estimated future profit growth. That is all
they are designed to do. The Russell 3000 growth index was a better index,
rules based only, but the smaller S&P Growth index has fewer stocks so they
probably went with that so as not to water the fund down with lesser quality
stocks, in this case stocks with lesser growth rates estimated and projected.
600 stocks is alot less than 1400 stocks especially as I am guessing they can't
find more than 600 stocks with acceptable growth rates then.

So index replacement is one of the best Advisor's there is IMO.

I make up my AA nobody else.
This is just pure nonsense. The S&P 900 consists of their large and midcap index, the Russell 3000 includes small cap. Are you saying that smaller cap are lesser quality stocks? And stocks with 'acceptable growth rates' happen to line up with market cap?

If I was a betting man I would bet that any index shift was driven largely by negotiated licensing costs.

avalpert
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by avalpert » Sun Jul 30, 2017 10:26 pm

jbolden1517 wrote:
avalpert wrote:
jbolden1517 wrote:
avalpert wrote:Why not give each sector 'equal chance to perform
Arguably that's very close to what one does with simple quantitative passive value funds.
That doesn't follow at all from the chart you posted - there is nothing in the there that suggests equal sector weighting would be a good way to get your desired value and size exposures.
Oh I agree it doesn't follow from the chart I posted. The chart was mainly showing how sector slicing and rebalancing on sectors work. That the sectors have substantial variance from the SP500 and do rotate annually having a faster bull and bear cycle than the market as a whole. I should mention with equal weighted sectors an investor picks up a lot of extra volatility with this strategy. Smaller sectors are much more volatile than the market as a whole, by overweighting variances increase.

Essentially the sector strategy you proposed (sarcastically) is sort of an alternative to small and value.
I'm pretty sure this is the thread of the discussion - yes, any equal weighting (whether by sector, alphabetical, size, individual stock) will be some way of increasing small and value exposure it is just more expensive and less effective way to get that exposure than using indexes designed to target that exposure.

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patrick013
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by patrick013 » Sun Jul 30, 2017 10:44 pm

avalpert wrote:
patrick013 wrote:
avalpert wrote: huh? I don't think you understand how these indexes are constructed and what they are designed to accomplish.
Index replacement based on estimated future profit growth. That is all
they are designed to do. The Russell 3000 growth index was a better index,
rules based only, but the smaller S&P Growth index has fewer stocks so they
probably went with that so as not to water the fund down with lesser quality
stocks, in this case stocks with lesser growth rates estimated and projected.
600 stocks is alot less than 1400 stocks especially as I am guessing they can't
find more than 600 stocks with acceptable growth rates then.

So index replacement is one of the best Advisor's there is IMO.

I make up my AA nobody else.
This is just pure nonsense. The S&P 900 consists of their large and midcap index, the Russell 3000 includes small cap. Are you saying that smaller cap are lesser quality stocks? And stocks with 'acceptable growth rates' happen to line up with market cap?

If I was a betting man I would bet that any index shift was driven largely by negotiated licensing costs.
When ticker IUSG started it was a Russell 3000 growth index. I kinda
wished they kept it that way. Sorry if I forgot to mention that. Today
I look and it's changed to a S&P 900 growth index. So be it. The total
return for 10 years is over 9%. Other metrics about average. Not bad
for a growth fund.
age in bonds, buy-and-hold, 10 year business cycle

jbolden1517
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by jbolden1517 » Sun Jul 30, 2017 11:15 pm

avalpert wrote: I'm pretty sure this is the thread of the discussion - yes, any equal weighting (whether by sector, alphabetical, size, individual stock) will be some way of increasing small and value exposure it is just more expensive and less effective way to get that exposure than using indexes designed to target that exposure.
OK. Now that I get the point.
I'd agree with you that equal weighting Small, Middle, Large isn't a particularly good way to get more small exposure. I don't agree it all that much more expensive. Passive value tilting is becoming more about non-cap weighting, while more traditional houses like Vanguard still cap weight and just screen. IMHO that's an independent discussion. I think a fairly good case can be made for sales weighting as an alternative to cap weighting based on evidence. The track record for earnings weighting (WisdomTree) and dividend weighting (lots) are going to take time to play out. It makes sense but lots of ideas make sense and then don't pan out (I should say I'm holding earnings weighted ETFs myself, so I'm taking the gamble).

As for sectors and industries... I think this goes beyond 3 factor investing. Capitalist countries have business cycles and within those subcycles. Different types of industries and sectors perform well in different parts of the business cycle. Value funds tend to ignore this, while sector strategies tend to embrace this. Catching the up part and then selling to rebalance towards sectors likely to benefit from the next subcycle.

So for example in the early-cycle industries that are able to benefit from a surge in orders and would get one are going to see the biggest boost. Mid-cycle is going to boost those companies that take longer to ramp up and can benefit from a steadier increase. Late cycle companies that are inflation sensitive start to falter while those that aren't harmed by high labor costs are still quite profitable. And then finally contraction doesn't hit all sectors equally. For example healthcare generally doesn't experience this cycle at all. Most technology companies aren't terrible interest rate sensitive so over heating doesn't hurt them. Restaurants are highly labor cost dependent and are a luxury good...

Value doesn't capture this nearly as well, while sector (or better industry) weighting does. And again as I mentioned sector strategies tend to create a midcap not small cap focus.

So I think we are disagreeing. These strategies aren't all the same in how they play out.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by Alexa9 » Mon Jul 31, 2017 5:47 am

Another reason I mention this as a strategy is because mid caps are ignored with a small tilt. Yes, Total Stock Market has some midcaps, but it is mostly large cap. People that tilt to small value and are missing out on mid caps/mid cap value which performs pretty well.

jbolden1517
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by jbolden1517 » Mon Jul 31, 2017 7:15 am

Alexa9 wrote:Another reason I mention this as a strategy is because mid caps are ignored with a small tilt. Yes, Total Stock Market has some midcaps, but it is mostly large cap. People that tilt to small value and are missing out on mid caps/mid cap value which performs pretty well.
They don't just perform pretty well. Of the large, middle, small (excluding micro and nano) they perform best. The problem is you often pick up the volatility of small and the high correlations of large. One of the reasons for federal employees that even though I am not a fan of cap weight: VEXMX is a fund I have liked for many years.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by rkhusky » Mon Jul 31, 2017 7:49 am

If you want an equal weight portfolio, using equal weights for cap-weighted large, mid and small indexes is better than equal weighting individual stocks in terms of efficiency, cost and logic.
The most important aspect in either cap-weighting or using a tilt is to stick with it. Jumping between allocations based on current market performance is a sure way of under-performing.
It is also important to understand the risks and potential rewards that a particular asset allocation may engender.

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nedsaid
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by nedsaid » Mon Jul 31, 2017 9:27 pm

Dead Man Walking wrote:What happened to Mel's unloved midcaps?

DMW
See, the Mid-Caps are unloved after all! Shhh!!! Keep it a secret between you and me. If Mid-Caps become popular, we won't get their wonderful performance in the future!
A fool and his money are good for business.

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Alexa9
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by Alexa9 » Tue Aug 01, 2017 12:24 pm

Total Stock Market & Total International are basically large cap funds; therefore not diversified by market cap; therefore the simple Three Fund Portfolio and cap weighting is very flawed IMO. I don't see why large caps are preferable to an equal amount of large, mid, and small caps over the long term.

avalpert
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by avalpert » Tue Aug 01, 2017 3:30 pm

Alexa9 wrote:Total Stock Market & Total International are basically large cap funds; therefore not diversified by market cap; therefore the simple Three Fund Portfolio and cap weighting is very flawed IMO. I don't see why large caps are preferable to an equal amount of large, mid, and small caps over the long term.
If you want to go buy the value of every penny stock as you do Apple go right ahead - but it isn't those who use the market weighting to guide their relative allocations who are very flawed.

For the record, I do tilt to small factor recognizing that it is increasing the risk of my portfolio with the hope that I generate additional return to compensate for that risk - I am under no illusion that I am more diversified than the market weightings.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by Doc » Tue Aug 01, 2017 4:17 pm

avalpert wrote:For the record, I do tilt to small factor recognizing that it is increasing the risk of my portfolio with the hope that I generate additional return to compensate for that risk - I am under no illusion that I am more diversified than the market weightings
If you follow the arguments presented in "Reducing the Risk of Black Swans: Using the Science of Investing to Capture Returns With Less Volatility" by Larry Swedroe and Kevin Grogan, you can get the benefits of the small value overweight without increasing the overall portfolio risk by increasing your bond allocation.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Alexa9
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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by Alexa9 » Tue Aug 01, 2017 5:14 pm

avalpert wrote:
Alexa9 wrote:Total Stock Market & Total International are basically large cap funds; therefore not diversified by market cap; therefore the simple Three Fund Portfolio and cap weighting is very flawed IMO. I don't see why large caps are preferable to an equal amount of large, mid, and small caps over the long term.
If you want to go buy the value of every penny stock as you do Apple go right ahead - but it isn't those who use the market weighting to guide their relative allocations who are very flawed.

For the record, I do tilt to small factor recognizing that it is increasing the risk of my portfolio with the hope that I generate additional return to compensate for that risk - I am under no illusion that I am more diversified than the market weightings.
Small caps ≠ penny stocks. I would be happy with just a small cap index fund vs. total stock market and feel it is perfectly diversified with more volatility and greater returns than large caps. However, I wouldn't do that, I would also include equal amounts of mid and large caps.

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Re: Equal Parts Small, Mid, Large Cap Indexes

Post by avalpert » Tue Aug 01, 2017 5:33 pm

Alexa9 wrote:
avalpert wrote:
Alexa9 wrote:Total Stock Market & Total International are basically large cap funds; therefore not diversified by market cap; therefore the simple Three Fund Portfolio and cap weighting is very flawed IMO. I don't see why large caps are preferable to an equal amount of large, mid, and small caps over the long term.
If you want to go buy the value of every penny stock as you do Apple go right ahead - but it isn't those who use the market weighting to guide their relative allocations who are very flawed.

For the record, I do tilt to small factor recognizing that it is increasing the risk of my portfolio with the hope that I generate additional return to compensate for that risk - I am under no illusion that I am more diversified than the market weightings.
Small caps ≠ penny stocks.
Why not? What is your cut off and what makes it principled as opposed to arbitrary?
I would be happy with just a small cap index fund vs. total stock market and feel it is perfectly diversified with more volatility and greater returns than large caps.
More volatility and higher expected returns? So you mean take on more risk - at least that is what you would expect from taking on more compensated risk, it is not what you would expect from increasing diversification...
However, I wouldn't do that, I would also include equal amounts of mid and large caps.
What is a mid-cap? What is a small-cap? What is a large-cap? Why those three categories why not equal weight five categories of size? Why not 10 or 20? Why not 1 or 2?

To me this smacks of constructing a portfolio based on random thoughts and feelings rather than systemic, rational analysis.

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