Small cap value vs. total market?

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overthought
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Small cap value vs. total market?

Post by overthought » Mon Dec 11, 2017 12:02 pm

Hi all,

I'm trying to wrap my head around the utility of a small cap value tilt. Some lazy portfolios use SCV, others use total US market, some even use both. I keep reading comments to the effect of "size factor is overstated" and "value factor is missing in action," but every time I try to backtest or I see a consistent advantage to small cap value.

For example, a past post noted that 2000-2009 saw real returns of -3.5% for S&P 500 index funds vs. nearly 6.5% for small cap value index fund.

Backtesting small cap value vs. US total market asset classes, I see real CAGR of 14% and 11% in 1990-1999 (total market better), -3% and 5% in 2000-2009 (SCV wins), and 11% for both from 2010 to present day. Over the entire 27-year span, real CAGR is 7% vs. 9% (SCV wins). Comparing heat maps from 1970 to present also shows that SCV has a consistent and significant edge over total market. The effect persists if the bond is 40% long-term treasuries. The efficient frontier (based on data from 1978-present) for portfolios involving long-term treasuries, total stock market, and SCV only recommends a non-zero total stock market allocation for conservative portfolios with at least 60% bonds, gradually phasing out SCV until the bond component reaches 70%. That recommendation is exactly reversed for the 1990-1999 decade, the SCV recommendation strengthens for 2000-2009 (SCV dominates until 75% bonds), and from 2010-present the most aggressive portfolios balance SCV with total market (no bonds at all), then drop SCV entirely for conservative portfolios because SCV's higher return is not needed and its higher volatility is unwelcome.

Overall, it seems like a tilt toward SCV is well-justified, especially for folks still in the aggressive accumulation phase or who think it would help buffer against the dot com and housing crisis type events?

Or, is the argument that the small cap class changed in the last decade or so (no longer really involving "small" companies) and so is increasingly hard to distinguish from all-cap?

Disclaimer: I don't actually have any small-cap right now, I'm currently in total market and S&P 500 indices. It's just surprising to me how often portfolio analysis tools seem to suggest SCV is beneficial so I'm trying to understand what's going on here.

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Taylor Larimore
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Re: Small cap value vs. total market?

Post by Taylor Larimore » Mon Dec 11, 2017 12:07 pm

Overthought:

Mr. Bogle made a speech in Chicago in 2002 which included his thoughts about small-cap and value stocks. I was there and learned a lot. This is the link:

The Telltale Chart

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

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David Jay
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Re: Small cap value vs. total market?

Post by David Jay » Mon Dec 11, 2017 12:16 pm

I don't think anyone will dispute that SCV has outperformed TSM over the last couple of decades. The real question is whether, due to publicity, it will continue to outperform in the future. Many outperforming "factors" have been identified, only to fade after they are identified and publicized.

TSM is the default, it holds the total US market. Over-weighting specific factors is a "bet" on those individual factors. You place your bet and you take your chances. (full disclosure: I have a small SCV tilt to my portfolio)
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Small cap value vs. total market?

Post by WhiteMaxima » Mon Dec 11, 2017 12:46 pm

Past performace won't always repeat. Total market is basically an S&P500 cap weighted. Those mega company enjoy the global reach and tax advantages which small cap doesn't normally has. Personally, I think SVC has more value than S&P500 but there are many trade offs. In that sense, I will add some SCV in addition to S&P. But I can't predict it will outperform in the future.

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Taylor Larimore
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Re: Small cap value vs. total market?

Post by Taylor Larimore » Mon Dec 11, 2017 12:53 pm

I don't think anyone will dispute that SCV has outperformed TSM over the last couple of decades. The real question is whether, due to publicity, it will continue to outperform in the future. Many outperforming "factors" have been identified, only to fade after they are identified and publicized.
David Jay:

As you accurately state, "SCV has outperformed TSM over the last couple of decades." However, during the last decade, TSM has outperformed SCV. This year Total Stock Market Return is more than double Morningstar's small-cap value category return. It is probably RTM (Reversion to The Mean).

Past performance does not forecast future performance.

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

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JoMoney
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Re: Small cap value vs. total market?

Post by JoMoney » Mon Dec 11, 2017 1:03 pm

David Jay wrote:
Mon Dec 11, 2017 12:16 pm
I don't think anyone will dispute that SCV has outperformed TSM over the last couple of decades...
I will :twisted:
03/02/1993 - 03/01/2001
$10,000 in DFSVX grew to $29,276.43
$10,000 in VTSAX grew to $30,098.59

02/01/2004 - 12/10/2017
$10,000 in DFSVX grew to $32,051.69
$10,000 in VTSAX grew to $32,589.94

...so really the notable out-performance of small-value was limited to the three year period of 03/01/2001 - 02/01/2004... if you missed that period, you likely didn't see anything but higher volatility, and if you weren't using DFAs small-value fund the difference may not have even been as big. Vanguard's small-growth fund out returned the small-value fund over the same period.

...and while over the past 15 year specific period DFSVX had higher returns, it had lower risk-adjusted returns using volatility as the risk proxy (using the risk-factor methodology the risk of small/value is always higher risk)
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Last edited by JoMoney on Mon Dec 11, 2017 1:15 pm, edited 1 time in total.
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livesoft
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Re: Small cap value vs. total market?

Post by livesoft » Mon Dec 11, 2017 1:08 pm

I tilt to SCV and keep only 45% to 50% of my equities in large-caps. Here's what I think:

SCV is not for the buy-and-hold person. One has to rebalance into SCV when it is doing terrible and out of SCV when it has done great. The swings of SCV are much more than the swings of a total market index fund. If one merely watches SCV go up and down or go down and up, then there is no point for that person to invest in SCV.

And sometimes the rebalancing opportunities in SCV are fleeting, so if you are not paying attention, then you will miss them. Fortunately, brokerages will send an alert via e-mail or a text message when there is a rebalancing opportunity, so it is pretty hard to miss a rebalancing opportunity. For folks who do not want to worry about such alerts, then Total Stock Market is perfect for them,

Furthermore, the swings of SCV that one will get alerts on their smart phone will not show up when backtesting with Portfolio Visualizer or other means. That's because the best opportunities occur intraday. One doesn't have to act on every alert, but one should be able to act on enough of them to make a difference.
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Leif
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Re: Small cap value vs. total market?

Post by Leif » Mon Dec 11, 2017 1:09 pm

Large caps, such as TSM and TISM, will do better in some years. Small caps will do better in other years. Large caps did well in the 90s. Small caps did well in the 0s. Same type of idea for growth vs. value. So what I do is diversify not only in the total number of stocks owned, but also based on style and location (US vs. Intl.). Probably I'll always have some funds that are doing poorly. But, just as likely, I'll have some funds that are doing well. Rebalancing harvests the good crop to pay for fertilizing the poor crop.

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Re: Small cap value vs. total market?

Post by overthought » Mon Dec 11, 2017 2:10 pm

Taylor Larimore wrote:
Mon Dec 11, 2017 12:07 pm
Mr. Bogle made a speech in Chicago in 2002 which included his thoughts about small-cap and value stocks. I was there and learned a lot. This is the link:

The Telltale Chart
That was a great talk, thank you very much for the link. Too bad it's not easier to lay hands on those telltale charts he was using...

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VA_Gent
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Re: Small cap value vs. total market?

Post by VA_Gent » Mon Dec 11, 2017 2:39 pm

overthought wrote:
Mon Dec 11, 2017 2:10 pm
Taylor Larimore wrote:
Mon Dec 11, 2017 12:07 pm
Mr. Bogle made a speech in Chicago in 2002 which included his thoughts about small-cap and value stocks. I was there and learned a lot. This is the link:

The Telltale Chart
That was a great talk, thank you very much for the link. Too bad it's not easier to lay hands on those telltale charts he was using...
Try this link.
http://stockcharts.com/freecharts/perf. ... ,VBR,VTSMX

look along the top at the description of each fund. Then click the one that you want to be the base line comparison.
"In investing, what is comfortable is rarely profitable." - Robert Arnott

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saltycaper
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Re: Small cap value vs. total market?

Post by saltycaper » Mon Dec 11, 2017 2:53 pm

Taylor Larimore wrote:
Mon Dec 11, 2017 12:07 pm
Overthought:

Mr. Bogle made a speech in Chicago in 2002 which included his thoughts about small-cap and value stocks. I was there and learned a lot. This is the link:

The Telltale Chart

Best wishes.
Taylor
Somewhere out there, the hairs on the back of Larry Swedroe's neck are probably standing up, as there is yet another posting of a speech that draws some dubious conclusions.
Quod vitae sectabor iter?

venkman
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Re: Small cap value vs. total market?

Post by venkman » Tue Dec 12, 2017 12:14 am

Asset Class A is riskier than Asset Class B. While A has a documented history of outperforming B over the long term, there have been stretches when A underperformed B for an extended period. The risk/reward relationship between A and B is generally known by most investors. Assuming it fits within one's personal risk tolerance, should one invest in A, given a long investment horizon?

If A = "stocks" and B = "bonds", pretty much everyone here will be in agreement.

If A = "small cap value" and B = "total stock market", the question suddenly gets a lot murkier, for some reason.

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Re: Small cap value vs. total market?

Post by Dead Man Walking » Tue Dec 12, 2017 2:28 am

I've posted 15 year performance statistics for small cap funds before. Larry Swedroe has responded to my posts which point out that DFSVX has been outperformed by blend funds over the 15 year periods that I have tracked at Morningstar. I've pointed out that DFSVX hasn't performed as well as VTSMX (Vanguard Tax-managed Small Cap) or FSCRX (Fidelity Small Cap Discovery) on a total return basis. (I chose those funds because I own them.) When the advisor fee is factored in, the difference is more than 1%. Yesterday's total return figures are as follows: FSCRX 12.22%, VTSMX 11.99%, DFSVX 11.73%. Of course, some will point out that past performance is not a guarantee of future results. My response to that argument is that Larry's theories are based on historical performance. Please explain the difference.

Vanguard's small cap growth and small cap value index funds have under performed DFSVX. Yesterday's results show that NAESX (Vanguard Small Cap Index) was close to DFSVX with a 15 year return of 11.69%. This may be due to the fact that NAESX has some mid-cap exposure (Mel's unloved midcaps).

Over the years, I have noticed that the difference in performance between growth and value funds is determined by when the funds are purchased and when they are sold. It's the old buy low sell high principle. Since I have never been able to determine the highs and lows, I've chosen to invest in blend funds. I figure that I have a better chance of a good total return. I don't have historical data to prove my observation. I'm not a researcher or an advisor nor am I marketing funds or advisory services.

DMW

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privatefarmer
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Re: Small cap value vs. total market?

Post by privatefarmer » Tue Dec 12, 2017 8:26 am

venkman wrote:
Tue Dec 12, 2017 12:14 am
Asset Class A is riskier than Asset Class B. While A has a documented history of outperforming B over the long term, there have been stretches when A underperformed B for an extended period. The risk/reward relationship between A and B is generally known by most investors. Assuming it fits within one's personal risk tolerance, should one invest in A, given a long investment horizon?

If A = "stocks" and B = "bonds", pretty much everyone here will be in agreement.

If A = "small cap value" and B = "total stock market", the question suddenly gets a lot murkier, for some reason.
Bingo. If everyone agrees that small small cap stocks are riskier, then they should be discounted and expected to have a higher return.

Solo Prosperity
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Re: Small cap value vs. total market?

Post by Solo Prosperity » Tue Dec 12, 2017 1:50 pm

SCV (Any any other factor/strategy) will give you the "opportunity" to out-perform the market, nothing else. Value, and other factors, have, can, and will, go very long periods of under-performance compared to the market, sometimes as long as multiple decades. You need to believe in the factor for the long-haul. If not, there is no point (Unless you are with Mr. Arnott on the timing of factors debate) as no one can reliably tell if a factor has "stopped working" or is just "temporarily under-performing" given how long they can become out of favor before snapping back (Mean Reversion).

I believe in Value and Momentum (I do get positive small exposure, but I do not target it specifically). I'm still out on Low-Vol and Quality, but continue to read research and do my own testing on it. It is possible that those two other factors will get added one day, but I will really need to be confidant in them before I do.

Tamalak
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Re: Small cap value vs. total market?

Post by Tamalak » Tue Dec 12, 2017 2:46 pm

Taylor Larimore wrote:
Mon Dec 11, 2017 12:53 pm

Past performance does not forecast future performance.
How can this AND RTM both be true? If something outperforms for a while, doesn't RTM forecast future poorer performance and vice versa?

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Re: Small cap value vs. total market?

Post by saltycaper » Tue Dec 12, 2017 2:58 pm

If anyone is not using past performance to forecast future performance, I would like to know what they are using to forecast future performance. If they are not forecasting future performance, they are either lying, unaware, or in denial.
Quod vitae sectabor iter?

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Taylor Larimore
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Past Performance ?

Post by Taylor Larimore » Tue Dec 12, 2017 3:10 pm

Bogleheads:

When I am unsure, I listen to experts:
Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."
Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."
What Experts Say About Past Performance

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

WhiteMaxima
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Re: Small cap value vs. total market?

Post by WhiteMaxima » Tue Dec 12, 2017 3:31 pm

What to explain SCV outperform total stock market since 1928. If the reason still exists, then it is not hard to predict it will do the same in the future assuming investor will hold it long enough.

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Ethelred
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Re: Past Performance ?

Post by Ethelred » Tue Dec 12, 2017 3:40 pm

Taylor Larimore wrote:
Tue Dec 12, 2017 3:10 pm
Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."
Taylor,

Do you see the irony of using a quote from a financial advisor and author whose portfolio tilts to both small cap and value, to argue against tilting to small cap and value?

The coffeehouse portfolio consists of:
10% large-cap blend
10% large-cap value
10% small-cap blend
10% small-cap value
10% REITs
10% International
40% Fixed income

http://www.coffeehouseinvestor.com/coff ... ortfolios/

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patrick013
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Re: Small cap value vs. total market?

Post by patrick013 » Tue Dec 12, 2017 3:42 pm

saltycaper wrote:
Tue Dec 12, 2017 2:58 pm
If anyone is not using past performance to forecast future performance, I would like to know what they are using to forecast future performance. If they are not forecasting future performance, they are either lying, unaware, or in denial.
A stochastic model is a tool for estimating probability distributions of potential outcomes by allowing for random variation in one or more inputs over time. The random variation is usually based on fluctuations observed in historical data for a selected period using standard time-series techniques.

Most develop a confidence interval or an overall average(s). The inputs shouldn't
be all stats but also fundamentals, historical and expected (meaning guesses). Will
the EPS for the 500 reach 120 ? You'll know the day after it does. :)

Will small cap beat large cap ? It has for many decades statistically by some amount.
Fundamentally are efficiencies, new technologies and new products still occurring ?
It has a higher beta so some profit efficiency must be occurring.
age in bonds, buy-and-hold, 10 year business cycle

Solo Prosperity
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Re: Small cap value vs. total market?

Post by Solo Prosperity » Tue Dec 12, 2017 3:42 pm

Mean Reversion seems to be a force in our world within and outside of investing. The problem with Mean Reversion is that it may point us towards a higher probability outcome, but it does not help us with the timing of such outcomes. U.S. Stocks surpassed Great Depression valuations in late 1996, but the market rose over 100% over the next 3 1/2 years.

A lot of investor started over-weighting International, specifically EM, late 2014, but the U.S. went on to beat International by ~15% over the next two years...not exactly a short time to be wrong over. Saying two years feels like nothing, but imaging making that change and then watching the change fail to materialize for 730 days...

Now I say all this as someone who believes strongly in mean reversion, but I have learned over the years, that what mean reversion can tell us is somewhat limited, and investors need to know that so that when they make a change based on "mean reversion", it could take awhile (years) to materialize.

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Re: Small cap value vs. total market?

Post by wolf359 » Tue Dec 12, 2017 3:44 pm

WhiteMaxima wrote:
Tue Dec 12, 2017 3:31 pm
What to explain SCV outperform total stock market since 1928. If the reason still exists, then it is not hard to predict it will do the same in the future assuming investor will hold it long enough.
You mean, hold it for 89 years? I don't think I'll live that long <grin>.

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Re: Small cap value vs. total market?

Post by WhiteMaxima » Tue Dec 12, 2017 3:47 pm

You can pass on to your heir, step up. fun of BH is about watching the number going up, right?

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Taylor Larimore
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Re: Small cap value vs. total market?

Post by Taylor Larimore » Tue Dec 12, 2017 3:52 pm

WhiteMaxima wrote:
Tue Dec 12, 2017 3:31 pm
What to explain SCV outperform total stock market since 1928. If the reason still exists, then it is not hard to predict it will do the same in the future assuming investor will hold it long enough.
WhiteMaxima:

In a speech to the Morningstar Investment Forum, Mr. Bogle discusses "Six Manifestations of RTM." Small Cap Value stocks are "Manifestation #1":

The Telltale Chart

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

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Re: Past Performance ?

Post by azanon » Tue Dec 12, 2017 3:58 pm

Taylor Larimore wrote:
Tue Dec 12, 2017 3:10 pm
Bogleheads:

When I am unsure, I listen to experts:
Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."
Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."
What Experts Say About Past Performance

Best wishes.
Taylor
I've got to figure out how to be dubbed an expert so my opinions can be given a higher status. Despite Appeal to Authority being no argument at all because it's a logical fallacy, there's so many people that don't realize that.

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Re: Past Performance ?

Post by Tamalak » Tue Dec 12, 2017 4:05 pm

azanon wrote:
Tue Dec 12, 2017 3:58 pm
Taylor Larimore wrote:
Tue Dec 12, 2017 3:10 pm
Bogleheads:

When I am unsure, I listen to experts:
Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."
Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."
What Experts Say About Past Performance

Best wishes.
Taylor
I've got to figure out how to be dubbed an expert so my opinions can be given a higher status. Despite Appeal to Authority being no argument at all because it's a logical fallacy, there's so many people that don't realize that.
First, you gotta write a book, several if possible, second you need to make sure people put your quotes in bold font. Your words will then be the conclusive end of any discussion!

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Re: Small cap value vs. total market?

Post by spdoublebass » Tue Dec 12, 2017 4:06 pm

I've followed this thread and it has been very interesting.

I do have a question, just to make sure I understand and I'm doing the math right.

Discloser: relatively new investor, currently no tilt, I have nothing against tilting and find the evidence compelling.


I will make up numbers just to keep things simple.

Say there are two portfolios, both with a 60/40 AA:

Portfolio A= 60% TSM, 40% TBM (No SCV tilt)
Portfolio B= 54% TSM, 6% SCV, TBM 40% (10% of equity tilt)

Lets say the Annual returns for the funds were:
TSM 8%, SCV 10%, TBM 3%

Then that would mean each overall portfolio would return:

Portfolio A = 6%
Portfolio B = 6.12%

Is this math correct?
I am not pointing this out because I think .12% is irrelevant, only to make sure I fully understand.

This makes sense because I often hear from people who tilt, you have to make sure your tilt is sizable enough to make the difference you are trying for.

Also I think Livesoft's point above shouldn't be overlooked:
"SCV is not for the buy-and-hold person. One has to rebalance into SCV when it is doing terrible and out of SCV when it has done great. The swings of SCV are much more than the swings of a total market index fund. If one merely watches SCV go up and down or go down and up, then there is no point for that person to invest in SCV."


For myself, being inexperienced, when I read about tilting it can seem like I"m missing out on huge possible gains (which it could be huge gains for large portfolios).
I am not comfortable at this time to put a large portion of my AA in a tilt. So I conclude TSM is good enough for me at this time.
I'm trying to think, but nothing happens

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Re: Small cap value vs. total market?

Post by Doc » Tue Dec 12, 2017 4:33 pm

How about a chart that doesn't cherry pick durations and endpoints.

A five year rolling return chart for SCV and TSM: (DFIHX added to get better presentation of funds of interest by minimizing the aggravating "bars')

Image

http://quotes.morningstar.com/chart/fun ... 22%3A60%7D
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Re: Small cap value vs. total market?

Post by pkcrafter » Tue Dec 12, 2017 4:39 pm

Hey, small cappers. Time to jump in is right now! The January effect will be big this year and it will start in late December. How do I know? I know because I am better at making predictions then I am at making money from predictions. :happy

Paul
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Re: Small cap value vs. total market?

Post by Longtermgrowth » Wed Dec 13, 2017 1:58 am

spdoublebass wrote:
Tue Dec 12, 2017 4:06 pm
Also I think Livesoft's point above shouldn't be overlooked:
"SCV is not for the buy-and-hold person. One has to rebalance into SCV when it is doing terrible and out of SCV when it has done great. The swings of SCV are much more than the swings of a total market index fund. If one merely watches SCV go up and down or go down and up, then there is no point for that person to invest in SCV."
I have seen this mentioned a few times by livesoft, which has made me question my tilt since I don't want to constantly rebalance throughout the year. However, comparing international tickers VXUS (total international), VSS (FTSE ex-U.S. small cap) and even an 80/20 blend of DLS (WisdomTree international small cap dividend fund) and DGS (WisdomTree Emerging markets smallcap), just letting them ride resulted in better outcomes for the small cap funds over the period that portfoliovisualizer shows...

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Re: Small cap value vs. total market?

Post by triceratop » Wed Dec 13, 2017 2:12 am

Longtermgrowth wrote:
Wed Dec 13, 2017 1:58 am
spdoublebass wrote:
Tue Dec 12, 2017 4:06 pm
Also I think Livesoft's point above shouldn't be overlooked:
"SCV is not for the buy-and-hold person. One has to rebalance into SCV when it is doing terrible and out of SCV when it has done great. The swings of SCV are much more than the swings of a total market index fund. If one merely watches SCV go up and down or go down and up, then there is no point for that person to invest in SCV."
I have seen this mentioned a few times by livesoft, which has made me question my tilt since I don't want to constantly rebalance throughout the year. However, comparing international tickers VXUS (total international), VSS (FTSE ex-U.S. small cap) and even an 80/20 blend of DLS (WisdomTree international small cap dividend fund) and DGS (WisdomTree Emerging markets smallcap), just letting them ride resulted in better outcomes for the small cap funds over the period that portfoliovisualizer shows...
Imho, you shouldn't (or at least I don't) let a notorious, if amusing and possibly even successful, market timer influence your decision to buy and hold if you are convinced by the evidence for factors. Livesoft doesn't appear to have a strong opinion on the actual factor-based rationale for owning SCV; he appears to like the asset class because it is volatile and provides plenty of buying and selling opportunities. This is my impression, at least. My guess is he would have more of a Thaler perspective on factors than a Fama.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Small cap value vs. total market?

Post by Longtermgrowth » Wed Dec 13, 2017 2:24 am

Thanks triceratop, yes I know livesoft is well known here for successful market timing, and I have seen the opportunities abundant in small caps myself. Along with you, livesoft, and a number of others here, I hold your opinions in high regard.

Thought I would add a chart of the above tickers I mentioned: https://www.portfoliovisualizer.com/bac ... tion4_3=20

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randomizer
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Re: Small cap value vs. total market?

Post by randomizer » Wed Dec 13, 2017 2:28 am

I'm too lazy and totally uninterested in tilts. Give me the total market.
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Re: Small cap value vs. total market?

Post by deltaneutral83 » Wed Dec 13, 2017 9:14 am

Merriman posted a podcast on SCV recently.

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Re: Small cap value vs. total market?

Post by saltycaper » Wed Dec 13, 2017 11:06 pm

patrick013 wrote:
Tue Dec 12, 2017 3:42 pm
saltycaper wrote:
Tue Dec 12, 2017 2:58 pm
If anyone is not using past performance to forecast future performance, I would like to know what they are using to forecast future performance. If they are not forecasting future performance, they are either lying, unaware, or in denial.
A stochastic model is a tool for estimating probability distributions of potential outcomes by allowing for random variation in one or more inputs over time. The random variation is usually based on fluctuations observed in historical data for a selected period using standard time-series techniques.

Most develop a confidence interval or an overall average(s). The inputs shouldn't
be all stats but also fundamentals, historical and expected (meaning guesses). Will
the EPS for the 500 reach 120 ? You'll know the day after it does. :)

Will small cap beat large cap ? It has for many decades statistically by some amount.
Fundamentally are efficiencies, new technologies and new products still occurring ?
It has a higher beta so some profit efficiency must be occurring.
Excellent that you mention the addition of randomness by way of stochastic modeling, which, as you note, seems as though it would be of limited usefulness without some basis that relies on historical data.
Quod vitae sectabor iter?

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Re: Small cap value vs. total market?

Post by saltycaper » Wed Dec 13, 2017 11:23 pm

Taylor Larimore wrote:
Tue Dec 12, 2017 3:52 pm

In a speech to the Morningstar Investment Forum, Mr. Bogle discusses "Six Manifestations of RTM." Small Cap Value stocks are "Manifestation #1":

The Telltale Chart
In that section, Bogle confirms the outperformance of small-cap stocks, even if he eliminates the period where there was the most outperformance. The chart he shows has a clear trendline that would be even more dramatic if it was not cut off, by virtue of when he gave his speech, just as a period of significant small-cap outperformance was beginning. And that section does not show what you say it shows, as small-cap value stocks, the subject here, are not discussed in that section.
Quod vitae sectabor iter?

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Re: Small cap value vs. total market?

Post by willthrill81 » Wed Dec 13, 2017 11:51 pm

saltycaper wrote:
Tue Dec 12, 2017 2:58 pm
If anyone is not using past performance to forecast future performance, I would like to know what they are using to forecast future performance. If they are not forecasting future performance, they are either lying, unaware, or in denial.
+1

How many investors in stocks are not expecting them to perform in at least somewhat of a manner similarly to how they've performed for the last 200 years? I'll venture that number is close to zero.

A dyed-in-the-wool Boglehead will tell you that s/he isn't doing anything to forecast future performance (unless doing so would lead to a higher savings rate or lower withdrawal rate). :wink:

Regarding SCV specifically, there has only been one twenty year period where it did not outperform the S&P 500. Contrary to what many purport, that does not smack of 'irregular' performance for any investor claiming to be in it for the long haul.
“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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Re: Small cap value vs. total market?

Post by willthrill81 » Wed Dec 13, 2017 11:54 pm

Tamalak wrote:
Tue Dec 12, 2017 2:46 pm
Taylor Larimore wrote:
Mon Dec 11, 2017 12:53 pm

Past performance does not forecast future performance.
How can this AND RTM both be true? If something outperforms for a while, doesn't RTM forecast future poorer performance and vice versa?
Yes, it does, even though it may take a while to occur. Excellent observation.
“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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Re: Small cap value vs. total market?

Post by steve roy » Thu Dec 14, 2017 1:48 am

Tilting to small caps and/or value is a fine strategy. (I do it myself.)

HOWEVER, you can choose a Vanguard LifeStrategy of Target Date Retirement Fund with automated allocations and rebalancings, and out-perform what I'm doing (80% domestic stocks, 20% foreign stocks; small cap and value tilt) by a comfortable margin. Why? Because Vanguard's asset allocation funds have a much bigger slice of foreign stocks, and depending on the year, a bigger allotment of foreign equities does better than a small/value tilt and smaller foreign allocation. Performances vary widely year to year, all depends on the time-frame. (Frustrating, isn't it?)

I tell people that if they want simple, if they want somebody else to do most of the lifting of the piano, do the LifeStrategy thing or choose a Target Date Fund. This has the added benefit (as Mike Piper has said elsewhere) of minimizing the chances of making bad decisions. You've set up an allocation, it's automatic, and all you have to do is keep adding money to the LS or TD funds without trying to overthink market ups and downs.

Don't spread this around, but ANY reasonable allocation, using large and small cap stocks, using a value tilt or not, and adding a slug of bonds, will very likely get you to a satisfactory place.

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Re: Small cap value vs. total market?

Post by TonyDAntonio » Thu Dec 14, 2017 2:38 am

I've had a slice and dice portfolio for 10 years including 50% in an international slice and dice. Before that I was 20 years invested in some vanilla 401k funds that probably mapped to large cap US. I'd have a lot more money had I stayed in that fund! My point though is that with all the international and small and value underperformance over the last 10 years I still have a fair amount of money. You will make money (probably) no matter if you go the SCV route or the TSM route.

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Re: Small cap value vs. total market?

Post by Longtermgrowth » Thu Dec 14, 2017 3:58 am

deltaneutral83 wrote:
Wed Dec 13, 2017 9:14 am
Merriman posted a podcast on SCV recently.
This one? https://paulmerriman.com/?powerpress_pinw=16819-podcast

I really enjoyed listening to that while watching the Geminid meteor shower tonight.

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Re: Small cap value vs. total market?

Post by Mark D » Fri Jan 05, 2018 10:25 am

willthrill81 wrote:
Wed Dec 13, 2017 11:54 pm
Tamalak wrote:
Tue Dec 12, 2017 2:46 pm
Taylor Larimore wrote:
Mon Dec 11, 2017 12:53 pm

Past performance does not forecast future performance.
How can this AND RTM both be true? If something outperforms for a while, doesn't RTM forecast future poorer performance and vice versa?
Yes, it does, even though it may take a while to occur. Excellent observation.
Hello, I have enjoyed reading these forums from time to time and this is my first post. About RTM: if what Bogle means in that 2002 talk, and what RTM means here, is the phenomenon of reversion to the mean described in probability theory and statistics, then, if I understand correctly, "past performance does not forecast future performance" and RTM are not inconsistent with one another. Yes, RTM says that future performance, in relation to past performance, is going to be worse, but it is not saying that the future performance will be poorer than it would have been if the past outperformance had not occurred. Right?

I think this was explained by TheEternalVortex in 2010. viewtopic.php?p=651182#p651182

Mark

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Re: Small cap value vs. total market?

Post by willthrill81 » Fri Jan 05, 2018 1:49 pm

Mark D wrote:
Fri Jan 05, 2018 10:25 am
willthrill81 wrote:
Wed Dec 13, 2017 11:54 pm
Tamalak wrote:
Tue Dec 12, 2017 2:46 pm
Taylor Larimore wrote:
Mon Dec 11, 2017 12:53 pm

Past performance does not forecast future performance.
How can this AND RTM both be true? If something outperforms for a while, doesn't RTM forecast future poorer performance and vice versa?
Yes, it does, even though it may take a while to occur. Excellent observation.
Hello, I have enjoyed reading these forums from time to time and this is my first post. About RTM: if what Bogle means in that 2002 talk, and what RTM means here, is the phenomenon of reversion to the mean described in probability theory and statistics, then, if I understand correctly, "past performance does not forecast future performance" and RTM are not inconsistent with one another. Yes, RTM says that future performance, in relation to past performance, is going to be worse, but it is not saying that the future performance will be poorer than it would have been if the past outperformance had not occurred. Right?

I think this was explained by TheEternalVortex in 2010. viewtopic.php?p=651182#p651182

Mark
The problem with the "past performance does not predict future performance" statement is that it assumes that returns are 'memory-less'. That is demonstrably false; over the short- and mid-term, equities tend to perform in a similar way to how they have in the recent past. This is the well-studied momentum effect. Over the long-term, however, RTM tends to set in on a macro level.

On a macro level, returns are not random.
“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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Re: Small cap value vs. total market?

Post by Mark D » Fri Jan 05, 2018 3:48 pm

willthrill81 wrote:
Fri Jan 05, 2018 1:49 pm
Mark D wrote:
Fri Jan 05, 2018 10:25 am
willthrill81 wrote:
Wed Dec 13, 2017 11:54 pm
Tamalak wrote:
Tue Dec 12, 2017 2:46 pm
Taylor Larimore wrote:
Mon Dec 11, 2017 12:53 pm

Past performance does not forecast future performance.
How can this AND RTM both be true? If something outperforms for a while, doesn't RTM forecast future poorer performance and vice versa?
Yes, it does, even though it may take a while to occur. Excellent observation.
Hello, I have enjoyed reading these forums from time to time and this is my first post. About RTM: if what Bogle means in that 2002 talk, and what RTM means here, is the phenomenon of reversion to the mean described in probability theory and statistics, then, if I understand correctly, "past performance does not forecast future performance" and RTM are not inconsistent with one another. Yes, RTM says that future performance, in relation to past performance, is going to be worse, but it is not saying that the future performance will be poorer than it would have been if the past outperformance had not occurred. Right?

I think this was explained by TheEternalVortex in 2010. viewtopic.php?p=651182#p651182

Mark
The problem with the "past performance does not predict future performance" statement is that it assumes that returns are 'memory-less'. That is demonstrably false; over the short- and mid-term, equities tend to perform in a similar way to how they have in the recent past. This is the well-studied momentum effect. Over the long-term, however, RTM tends to set in on a macro level.

On a macro level, returns are not random.
OK thanks. If I understand correctly, you are saying that past performance and future performance are not statistically independent of one another. Okay, but my point was that RTM does not imply anything one way or the other about independence. I took Tamalak to have understood RTM something along the lines of the gambler's fallacy, and I wanted to point out that it need not be so understood. Yes?

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Re: Small cap value vs. total market?

Post by willthrill81 » Fri Jan 05, 2018 4:25 pm

Mark D wrote:
Fri Jan 05, 2018 3:48 pm
willthrill81 wrote:
Fri Jan 05, 2018 1:49 pm
Mark D wrote:
Fri Jan 05, 2018 10:25 am
willthrill81 wrote:
Wed Dec 13, 2017 11:54 pm
Tamalak wrote:
Tue Dec 12, 2017 2:46 pm


How can this AND RTM both be true? If something outperforms for a while, doesn't RTM forecast future poorer performance and vice versa?
Yes, it does, even though it may take a while to occur. Excellent observation.
Hello, I have enjoyed reading these forums from time to time and this is my first post. About RTM: if what Bogle means in that 2002 talk, and what RTM means here, is the phenomenon of reversion to the mean described in probability theory and statistics, then, if I understand correctly, "past performance does not forecast future performance" and RTM are not inconsistent with one another. Yes, RTM says that future performance, in relation to past performance, is going to be worse, but it is not saying that the future performance will be poorer than it would have been if the past outperformance had not occurred. Right?

I think this was explained by TheEternalVortex in 2010. viewtopic.php?p=651182#p651182

Mark
The problem with the "past performance does not predict future performance" statement is that it assumes that returns are 'memory-less'. That is demonstrably false; over the short- and mid-term, equities tend to perform in a similar way to how they have in the recent past. This is the well-studied momentum effect. Over the long-term, however, RTM tends to set in on a macro level.

On a macro level, returns are not random.
OK thanks. If I understand correctly, you are saying that past performance and future performance are not statistically independent of one another. Okay, but my point was that RTM does not imply anything one way or the other about independence. I took Tamalak to have understood RTM something along the lines of the gambler's fallacy, and I wanted to point out that it need not be so understood. Yes?
The gambler's fallacy does not apply to asset class returns because the returns are not random (i.e. returns are not independent of each other). RTM does indeed directly imply that returns are not independent of each other.
“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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Re: Small cap value vs. total market?

Post by Alexa9 » Fri Jan 05, 2018 4:32 pm

If this isn't reason to tilt to small cap (value) I don't know what is:

The Top 100 (largest) Holdings in VTI (Total Stock Market) make up 53% of the fund (Out of 3,600)
The Top 200 Holdings in VTI make up 67% of the fund
The Top 300 Holdings in VTI make up 75% of the fund
The Top 400 Holdings in VTI make up 80% of the fund
The Top 500 Holdings in VTI make up 83% of the fund

Even more surprising!:
The Bottom 1000 (smallest) Holdings in VTI make up just 0.2% of the fund
The Bottom 2000 Holdings in VTI make up 2% of the fund
The Bottom 3000 Holdings in VTI make up 13% of the fund

VTI is not much different than VOO (S&P 500). It is essentially a Large Cap Fund.
Last edited by Alexa9 on Fri Jan 05, 2018 4:35 pm, edited 1 time in total.

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Re: Small cap value vs. total market?

Post by willthrill81 » Fri Jan 05, 2018 4:35 pm

Alexa9 wrote:
Fri Jan 05, 2018 4:32 pm
If this isn't reason to tilt to small cap (value) I don't know what is:

The Top 100 (largest) Holdings in VTI make up 53% of the fund (Out of 3,600)
The Top 200 Holdings in VTI make up 67% of the fund
The Top 300 Holdings in VTI make up 75% of the fund
The Top 400 Holdings in VTI make up 80% of the fund
The Top 500 Holdings in VTI make up 83% of the fund

Even more surprising!:
The Bottom 1000 (smallest) Holdings in VTI make up just 0.2% of the fund
The Bottom 2000 Holdings in VTI make up 2% of the fund
The Bottom 3000 Holdings in VTI make up 13% of the fund

VTI is not much different than VOO (S&P 500)
How does that lead one to conclude that tilting toward SCV is appropriate?
“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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Re: Small cap value vs. total market?

Post by grog » Fri Jan 05, 2018 4:41 pm

venkman wrote:
Tue Dec 12, 2017 12:14 am
Asset Class A is riskier than Asset Class B. While A has a documented history of outperforming B over the long term, there have been stretches when A underperformed B for an extended period. The risk/reward relationship between A and B is generally known by most investors. Assuming it fits within one's personal risk tolerance, should one invest in A, given a long investment horizon?

If A = "stocks" and B = "bonds", pretty much everyone here will be in agreement.

If A = "small cap value" and B = "total stock market", the question suddenly gets a lot murkier, for some reason.
But you wouldn’t sub SCV and TSM one for one, would you? Shouldn’t the comparison be between TSM and SCV diluted with fixed income/cash? Does SCV give you, if not a free lunch, the claimed free dessert?

Backtesting with hypothetical portfolios suggests yes until about 15 years ago, coincidentally just a few years after when actual small value index funds became readily available.

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Re: Small cap value vs. total market?

Post by hoops777 » Fri Jan 05, 2018 4:41 pm

Compare the world today to 50 years ago,including how investments are traded.I am not really buying the importance of past results on so many levels.It is a brave new world and I wish all of you luck.
K.I.S.S........so easy to say so difficult to do.

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