Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

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nisiprius
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Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

Post by nisiprius » Wed May 23, 2018 5:44 pm

Here are the model portfolios from Larry Swedroe's 1998 "The Only Guide To Winning Investment Strategy You'll Ever Need:"

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Bill Schultheis' "Traditional Coffeehouse Portfolio:"

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Notice that those portfolios allocate 50/50 between large-cap blend and large-cap value, and 50/50 between small-cap blend and small-cap value

And a sample current "Ric GPS" portfolio from Ric Edelman's website... [allocates] 50/50 between mid-cap blend and mid-cap value. [Added: No, the Ric GPS is 50/50 small-cap growth and small-cap blend)]

Anybody happen to know the reason behind this equal split (rather than all value?)

(And before anyone asks, there isn't any obvious diversification benefit. Here's an efficient frontier chart for Fama-French small blend and small value, and the tangent portfolio is a 98% allocation to small value, 2% to small blend).

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Last edited by nisiprius on Wed May 23, 2018 9:08 pm, edited 2 times in total.
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Re: Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

Post by vineviz » Wed May 23, 2018 5:56 pm

nisiprius wrote:
Wed May 23, 2018 5:44 pm
Anybody happen to know the reason behind this equal split (rather than all value?)
Lack of conviction?
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Re: Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

Post by DaufuskieNate » Wed May 23, 2018 6:12 pm

50/50 is likely a way to introduce some tilt, but not go all-in 100%. Perceived benefits may include less tracking error and lower ER than a full-tilt portfolio.

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Re: Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

Post by lack_ey » Wed May 23, 2018 6:19 pm

Edelman's is showing as half value, half growth. Not half blend.

But yeah, I don't think there's really much hard theoretical justification here. It looks fancy, seems like a compromise between a more heavy tilt and not tilting, and so on. Though really what matters is the overall tilt and factor exposures for the cost. 50% deep value with 50% blend may be effectively similar to 100% value, just maybe with higher costs and requiring two funds.

A lot of these "traditional slice-and-dice" ideas I think come from the 2000s, back when the conception of equity investing was biased by the recent experience of different parts of the market actually looking significantly different and perhaps showing some real diversification benefit through the run-up to and popping of the tech bubble.

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Re: Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

Post by Theoretical » Wed May 23, 2018 7:10 pm

I think in its headier (lower AUM) days, DFA may have provided a far deeper tilt with tracking error, so where you might have done half small value and half small blend in the past, ishares S&P 600 Value alone gets you there now in one fund.

Also, nowadays, it's basically a DFA Core fund or a RAFI fund.
Last edited by Theoretical on Wed May 23, 2018 7:38 pm, edited 1 time in total.

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Re: Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

Post by livesoft » Wed May 23, 2018 7:14 pm

I think it is because somebody used 50/50 once and everybody else followed, so no real reason. Or maybe somebody did a study and only back-tested 50/50, so that is what you get.

Something similar happened with the dosage for baby aspirin. Ever wonder why the pills are a very oddball dose?
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Re: Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

Post by cowdoc » Wed May 23, 2018 7:54 pm

It's possible I'm the deepest Lurker here, but I had to surface for this one. Livesoft nailed it...

"325/4...that sounds about right".

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Re: Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

Post by drk » Wed May 23, 2018 8:35 pm

nisiprius wrote:
Wed May 23, 2018 5:44 pm
Anybody happen to know the reason behind this equal split (rather than all value?)
Complexity as a stand in for sophistication (and rigor).

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Re: Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

Post by nisiprius » Wed May 23, 2018 8:41 pm

lack_ey wrote:
Wed May 23, 2018 6:19 pm
Edelman's is showing as half value, half growth. Not half blend.
:oops:

I was going to replace it with something else, but the first Betterment sample portfolio I found in a Google search is all "value" ETFs, no "blend," while Wealthfront's does not have either a value or a growth tilt.
Last edited by nisiprius on Wed May 23, 2018 9:00 pm, edited 1 time in total.
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Re: Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

Post by whodidntante » Wed May 23, 2018 8:46 pm

I'm not a mind reader, but I can guess as well as anyone. It's because they are all asset classes worth owning, and we don't know which ones will perform best over our lifetime. Also maybe some MPT mumbo-jumbo.

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Re: Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

Post by nisiprius » Wed May 23, 2018 8:50 pm

livesoft wrote:
Wed May 23, 2018 7:14 pm
I think it is because somebody used 50/50 once and everybody else followed, so no real reason. Or maybe somebody did a study and only back-tested 50/50, so that is what you get.

Something similar happened with the dosage for baby aspirin. Ever wonder why the pills are a very oddball dose?
What's so oddball about "1-1/4 grains?" It's exactly a quarter of the standard adult five-grain size.

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Re: Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

Post by heyyou » Thu May 24, 2018 12:13 am

Cap weighted blend funds have plenty of growth exposure. Easier to stay the course if some easily seen slice of your portfolio is doing well. Some of us are just tubs of all of the wrong behavioral finance traits, so we timidly allocate only as far as we dare.

Value may well pay more over the long term, but retirees are steadily WDing, regardless of whether the markets are paying attention to what the economists wrote.

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Re: Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

Post by willthrill81 » Thu May 24, 2018 12:21 am

In so many words, Paul Merriman says that he advocates a 50/50 split to reduce tracking error. He argues that it will be difficult for most investors to have their portfolios look too different from 'the market'. That makes perfect sense to me.

Also, if the value premium doesn't come through for you, at least you weren't all-in with it. Even the most die-hard factor investor must admit that the factor premiums they're trying to capture might not show up when they really need them to.

Similarly, Merriman is 50% buy-and-hold and 50% trend following, largely for the same reasons.
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Re: Why do "traditional slice-and-dice" portfolios split 50/50 between value and blend?

Post by Dead Man Walking » Thu May 24, 2018 12:26 am

Investor shares of Vanguard Small Cap Value Index Fund has an 8.70% average annual return and a cumulative return of 427.79% since inception on 5/21/1998; investor class shares of Vanguard Small Cap Growth Index Fund has an 8.74% average annual return and a cumulative return of 432.06% since inception on 5/21/1998. These are the returns claimed by the Vanguard website.

When I entered the funds on the Portfolio Visualizer website, I got completely different returns. The results were from 1/1999 to 4/2018. According to Portfolio Visualizer, the value index fund outperformed the growth index fund by a significant amount - nearly $5,000. I entered 1998 as the start date for the funds. Since I rarely use Portfolio Visualizer, I may not be interpreting the results correctly. Please correct me if I screwed up.

I assume that Vanguard is reporting the returns for Vanguard's funds accurately. Consequently, I question the results reported by Portfolio Visualizer. These different results kind of changed the point that I was going to make - which was that a blend of growth and value may be the best way to go. I am not sure that my point is valid.

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