Battle of index funds- 3 against 1

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gtt561
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Battle of index funds- 3 against 1

Post by gtt561 » Tue Nov 14, 2017 3:01 pm

Interesting article, I see that he did not include any fee disclosure, I wonder how that would change the data he is presenting. Interested in the forum's opinion. It's free to register to this site if you cannot read the article.

https://www.financial-planning.com/news ... ndex-funds
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DaftInvestor
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Re: Battle of index funds- 3 against 1

Post by DaftInvestor » Tue Nov 14, 2017 3:12 pm

I'm not sure he can draw the conclusion he does with only an 18-year look. The next 18 years could have a different outcome.

What I find interesting about the article though is simply the topic/material used for the analysis. Financial Advisors know that there are now Bogleheads out there and they won't convince us to go with their Manager-fund picks so they are changing the conversation to different ways of slicing/dicing Index Funds (...thus the popularity of factor-based articles these days).

Jack FFR1846
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Re: Battle of index funds- 3 against 1

Post by Jack FFR1846 » Tue Nov 14, 2017 3:26 pm

His comparison of 3 separate funds with the same % as VTSMX is rebalanced once a year. When is that? How is that comparable to VTSMX? I thought VTSMX was rebalanced fairly often (in my head is once a day or something). To me, the article is meaningless.
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avalpert
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Re: Battle of index funds- 3 against 1

Post by avalpert » Tue Nov 14, 2017 3:37 pm

Wow, the trite analysis people are willing to put their name to to get exposure. The results he saw are simply the outcome of having a higher small and value tilt in the portfolio and choosing a start date at the tail end of a period where large-growth outperformed and was about to get whacked. Start the backtest in 2002 instead of 1999 and the difference in standard deviation is over 1%.

I'm not saying choosing different factor exposure from the total market is wrong, I do it myself, but I wouldn't pretend that I have stumbled upon some simple way to beat the market without different risk exposure.

chisey
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Re: Battle of index funds- 3 against 1

Post by chisey » Tue Nov 14, 2017 3:40 pm

He is also using three funds that don't exactly comprise the total market. Instead of the 500 fund he should be using the Mega Cap fund, which is the top 70% by market cap (with mid being 70-85 and small being 85-98).

My guess is using the 500 instead gives even the market-weighted portfolio an excess of mid-caps, juicing returns.

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Taylor Larimore
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Re: Battle of index funds- 3 against 1

Post by Taylor Larimore » Tue Nov 14, 2017 3:47 pm

gtt561:

The linked article, Three Against One: A Battle of Index Funds, picks an 18-year period beginning in 1999. It shows that Vanguard Mid-Cap and Small-Cap Funds beat the Vanguard S&P 500 Index Fund.

I saved a similar chart for the 15-year period ending in 1999. It shows that large-cap stocks (similar to the S&P 500 Index Fund) beat Mid-Cap and Small-Cap stocks.

Style......1-Yr....3 Yrs....5 Yrs....10 Yrs....15 Yrs

LCG......27.19...27.04....24.98...17.85....17.15
LCB........8.93...17.29....20.35...15.60....15.23
LCV.......-5.21....8.74.....15.16..13.36....13.45

MCG.....57.24....31.09...24.81...18.14....16.82
MCB.....11.87....12.36...16.09...14.12....14.23
MCV.....-2.56......7.23...13.20...12.77....12.64

SCG.....55.14....24.42...20.86...17.12....15.64
SCB.....17.77....10.08...15.30...13.03....12.02
SCV......3.29......3.55...12.58....11.80...11.34

Lesson learned: It is dangerous to bet on individual stock categories.
Don't look for the needle. Buy the haystack. -- Jack Bogle
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

pkcrafter
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Re: Battle of index funds- 3 against 1

Post by pkcrafter » Wed Nov 15, 2017 12:45 pm

Thanks Taylor, you are the ballast on this vessel, a.k.a. the forum. :moneybag


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.

WhiteMaxima
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Re: Battle of index funds- 3 against 1

Post by WhiteMaxima » Wed Nov 15, 2017 2:21 pm

Taylor Larimore wrote:
Tue Nov 14, 2017 3:47 pm
gtt561:

The linked article, Three Against One: A Battle of Index Funds, picks an 18-year period beginning in 1999. It shows that Vanguard Mid-Cap and Small-Cap Funds beat the Vanguard S&P 500 Index Fund.

I saved a similar chart for the 15-year period ending in 1999. It shows that large-cap stocks (similar to the S&P 500 Index Fund) beat Mid-Cap and Small-Cap stocks.

Style......1-Yr....3 Yrs....5 Yrs....10 Yrs....15 Yrs

LCG......27.19...27.04....24.98...17.85....17.15
LCB........8.93...17.29....20.35...15.60....15.23
LCV.......-5.21....8.74.....15.16..13.36....13.45

MCG.....57.24....31.09...24.81...18.14....16.82
MCB.....11.87....12.36...16.09...14.12....14.23
MCV.....-2.56......7.23...13.20...12.77....12.64

SCG.....55.14....24.42...20.86...17.12....15.64
SCB.....17.77....10.08...15.30...13.03....12.02
SCV......3.29......3.55...12.58....11.80...11.34

Lesson learned: It is dangerous to bet on individual stock categories.
Don't look for the needle. Buy the haystack. -- Jack Bogle
Best wishes.
Taylor
17% vs 13% over 18 year is pretty large difference. Based on this, I will just buy one single fund: the Vanguard Total Stock Market and forget about it.

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Taylor Larimore
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Two minds. Same conclusion.

Post by Taylor Larimore » Wed Nov 15, 2017 3:34 pm

17% vs 13% over 18 year is pretty large difference. Based on this, I will just buy one single fund: the Vanguard Total Stock Market and forget about it.
WhiteMaxima:

I arrived at the same conclusion for a U.S. stock fund.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

staythecourse
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Re: Battle of index funds- 3 against 1

Post by staythecourse » Wed Nov 15, 2017 4:24 pm

I would agree with Taylor that cherry picking makes a difference in proving WHATEVER one wants.

Interestingly, I am not sure that supports going with 100% TSM since 70% of it is LCB. If different asset classes do well at different time periods (as shown from the authors starting 18 year period and Taylor's ending 18 year period) then doesn't it behoove the investor to be more equal weighted since they don't know in advance which 18 year period (for example) they will be investing through?

I would think using the arguments something did well in one period and did not in another period might make more sense to hedge one's bet, no? I am not advocating for equal weighted or market cap, but the conclusion reached after reading Taylor's eloquent (and correct) response is not, "Just put it in TSM". Shouldn't the conclusion be diversify since NO ONE knows what will do best going forward. I have no problem with 100% TSM, but it is a "bet" of sorts on LCB as it will do what SP500 or DJ does.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Taylor Larimore
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Is TSM a bet on Large Cap Blend?

Post by Taylor Larimore » Wed Nov 15, 2017 5:04 pm

I have no problem with 100% TSM, but it is a "bet" of sorts on LCB as it will do what SP500 or DJ does.
staythecourse:

The investment industry would like us to believe that Total Stock Market Index Fund (TSM) is a "bet of sorts" on Large Cap Blend (LCB) stocks so they can sell us additional funds.

Read what experts say (especially John Norstad):

viewtopic.php?f=10&t=156579

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

staythecourse
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Re: Battle of index funds- 3 against 1

Post by staythecourse » Wed Nov 15, 2017 9:20 pm

Taylor Larimore wrote:
Wed Nov 15, 2017 5:04 pm
I have no problem with 100% TSM, but it is a "bet" of sorts on LCB as it will do what SP500 or DJ does.
staythecourse:

The investment industry would like us to believe that Total Stock Market Index Fund (TSM) is a "bet of sorts" on Large Cap Blend (LCB) stocks so they can sell us additional funds.

Read what experts say (especially John Norstad):

viewtopic.php?f=10&t=156579

Best wishes.
Taylor
Much respect to you, but some of those quotes: 1. Don't talk about "the market" as being synonymous, but reference as passive index vs. active debate, 2. Does not refute anything I just said, and/ or 3. Not accurate depiction of the quote from the author. As one example, I read Chris Jones book of Financial Engines and his reference to the Market Portfolio is one where all the assets are held in the weight held throughout the world. Hence, his "market portfolio" is NOT a reference to the TSM. If I am wrong I apologize, but don't think so.

Maybe I am not understanding, but a lot of those quotes don't seem to support the: TSM is the best and only way to invest. Quoting another great author, "There are many roads to Dublin", which I am sure you will remember :D .

TSM is a great approach to investing (no doubt). Just curious, as I mentioned if different stuff does well at different times doesn't it make more sense to be as diversified as possible? Being 100% TSM is not much different then being 100% SP500. Not a bad plan, but aren't you betting/ hoping for investment climates where large (and usually growth) do well vs. small and value? If so, then what is wrong with someone else supporting say 70%% small and value?

The times LC does well you will look great and the one who is SCV will look like an allstar when they do well. Either way there are times you will outperform and times the other does. Interesting, how folks look at tell tale chart and see justification for 100%TSM/ LCB, but instead I see a reason to be 50/50 TSM/ SCV. That way no matter what is up or down I will have a more smooth equity return.

I don't have the answer just thinking out loud.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

vencat
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Re: Battle of index funds- 3 against 1

Post by vencat » Wed Nov 15, 2017 9:24 pm

I hold a large chunk of US Total stock market index.
However,
1. Academic studies quoted by Swedroe, Bernstein, Ferri, Robert T, Merriman etc have shown us the benefit of tilting to small value. ( I'm not even venturing into other factors)
2. Check Morningstar and Portfoliovisualizer( check with asset subclasses and real funds/etfs). Returns vary annually and SD higher for small value indicating a rebalancing bonus but more importantly returns are higher for SV. Don't know how to paste neat return graphs like Nisi.
3. Personal experience with Vanguard Tax Managed Small Cap and more recently wife's 401K DFA portfolio has been very favorable.

I know many Bogleheads crave the elegance and simplicity of the Three fund portfolio but:

Everything should be made as simple as possible, but not simpler.

avalpert
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Re: Battle of index funds- 3 against 1

Post by avalpert » Wed Nov 15, 2017 9:31 pm

staythecourse wrote:
Wed Nov 15, 2017 9:20 pm
Taylor Larimore wrote:
Wed Nov 15, 2017 5:04 pm
I have no problem with 100% TSM, but it is a "bet" of sorts on LCB as it will do what SP500 or DJ does.
staythecourse:

The investment industry would like us to believe that Total Stock Market Index Fund (TSM) is a "bet of sorts" on Large Cap Blend (LCB) stocks so they can sell us additional funds.

Read what experts say (especially John Norstad):

viewtopic.php?f=10&t=156579

Best wishes.
Taylor
Much respect to you, but some of those quotes: 1. Don't talk about "the market" as being synonymous, but reference as passive index vs. active debate, 2. Does not refute anything I just said, and/ or 3. Not accurate depiction of the quote from the author. As one example, I read Chris Jones book of Financial Engines and his reference to the Market Portfolio is one where all the assets are held in the weight held throughout the world. Hence, his "market portfolio" is NOT a reference to the TSM. If I am wrong I apologize, but don't think so.

Maybe I am not understanding, but a lot of those quotes don't seem to support the: TSM is the best and only way to invest. Quoting another great author, "There are many roads to Dublin", which I am sure you will remember :D .

TSM is a great approach to investing (no doubt). Just curious, as I mentioned if different stuff does well at different times doesn't it make more sense to be as diversified as possible? Being 100% TSM is not much different then being 100% SP500. Not a bad plan, but aren't you betting/ hoping for investment climates where large (and usually growth) do well vs. small and value? If so, then what is wrong with someone else supporting say 70%% small and value?

The times LC does well you will look great and the one who is SCV will look like an allstar when they do well. Either way there are times you will outperform and times the other does. Interesting, how folks look at tell tale chart and see justification for 100%TSM/ LCB, but instead I see a reason to be 50/50 TSM/ SCV. That way no matter what is up or down I will have a more smooth equity return.

I don't have the answer just thinking out loud.

Good luck.
The total stock market does not represent a bet on any particular segment - it represents the market consensus balance of all segments. Any deviation from that is taking a particular position on the segments you choose to overweight. 'Large caps' (depending on exactly how you define that group) tend to dominate not because you are betting on large caps but because the market has valued them as a larger share of the market overall.

That doesn't mean deviations can't be justified - but arbitrary deviations and equal weighting are not on their own justifications. If you were to look at performance by first letter in the ticker you will find different periods where different letters outperformed - that doesn't mean it provides a reason to equal weight by letter.

For what it is worth, I do have significant exposure to small and value because I believe the research and risk stories behind them.

JBTX
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Re: Battle of index funds- 3 against 1

Post by JBTX » Wed Nov 15, 2017 10:08 pm

As pointed out by Taylor and others, the data was cherry picked tailor made to get the desired result. Buying large caps in 1999, right before they crash, while small caps had previously not gone up nearly as much by 1999, and did not fall as much either.

Personally, I'm not sold that the market weighting is necessarily the best weighting. However, I can't really answer the logical follow on question - what IS the best weighting? Long term I'd probably prefer to be slightly tilted to smaller caps, but an equal weighting methodology seems rather extreme and arbitrary.

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