Massive small cap tilt with low equity AA - anybody do this?

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AerialWombat
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Massive small cap tilt with low equity AA - anybody do this?

Post by AerialWombat » Sun Aug 12, 2018 2:33 pm

Based on help from this forum, which I massively appreciate, I have chosen a 30/70 stock/bond AA. Even though I'm only 40, I've chosen this AA for my securities portfolio to balance out the risk of my real estate portfolio.

For all new contributions, I've chosen absolute simplicity for the equity side: Vanguard Total World Stock Index ETF (VT).

There are an exhaustive number of threads on this board about small cap value (SCV) tilting. It appears to be the most popular tilt of all.

From The Before Times, pre-BH, I have a chunk of VSS (Vanguard Small Cap ex-US), and in a moment of weakness, I also bought some VBR (Vanguard Small Cap Value) recently.

I've read "The Talk" from Mr. Bogle about small caps. I've read rebuttals of the French/Frama research. I just discovered and read yesterday the Paul Merriman "Ultimate Buy and Hold Portfolio" with it's massive push towards the all-value portfolio. I can't recall who off the top of my head (Swedroe???), but there's a "barbell portfolio" that is all about small cap but in a low equity allocation.

I'm not asking for my own scenario, just from a theoretical point of view. Do any of you have an equity allocation less than 50%, but put that equity position disproportionately into the smalls?

Based on other threads, it would appear there are BH folks that might suggest I do something like 50% VT, 25% VBR, 25% VSS in my own portfolio, to goose the returns from my low equity allocation. I'm personally not comfortable doing that, preferring a Three Fund approach as best I can (using munis in taxable for bond portion), but I could see the allure of doing so.

Just curious what all ya'll are doing. Would be interested in hearing your rationale, if you do this, and perhaps how you allocate rest of your portfolio to either smooth the ride or otherwise balance the extra risk.

randomguy
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by randomguy » Sun Aug 12, 2018 2:52 pm

Search for "Larry Portfolio".

How much to believe in the small and value premiums is a tough one If you look at historical data, there is pretty much no reason not to go 100% small value. The periods of underperformance and the amount just isn't that big. But past doesn't dictate future. With how popular this knowledge is it isn't much of a stretch to imagine the premium going away (or being negative) over long time periods (10+ years) going forward.

Random Walker
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by Random Walker » Sun Aug 12, 2018 3:05 pm

I do the big (almost exclusive) SV tilt and decreased overall equity allocation. I’m 40% equity/36% bonds/24% alternatives. The equities are almost entirely SV and split evenly US/Int. Larry Swedroe promotes the concept of big tilt and decreased equity allocation.

I believe the rationale for it makes sense. TSM has exposure of 1 to the market factor. SV funds will have pretty much an exposure of 1 to the market factor as well. They will also be exposed significantly to the size and value factors. These factors provide additional expected premia. Moreover, size is weakly correlated with market, value uncorrelated with market, and size and value uncorrelated with each other. Of course bonds generally uncorrelated with equities, and bigger chunk of bonds will help in bad times when the correlation to equities tends to turn sharply negative. Overall, strong rationale to expect a more efficient portfolio: smaller SD for same expected return, both right and left tails lessened (left more?), smaller maximal drawdowns, closer to northwest corner of an efficient frontier chart. You can read a lot about the concept in Larry Swedroe’s Reducing The Risk Of Black Swans.

Dave

Random Walker
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by Random Walker » Sun Aug 12, 2018 3:10 pm

Also, take a look at Larry’s Your Complete Guide to Factor Based Investing.

Also, take a look at the thread I bumped today on the rewards of multi asset class investing: expand the concept beyond the few asset classes in the chart to size, value, alternatives.

Dave

venkman
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by venkman » Sun Aug 12, 2018 4:55 pm

If I recall correctly, factor returns on REITs can be explained as if REITs were 60% small value stocks and 40% high-yield bonds.

I'm personally a fan of the SCV tilt, but it may not be good diversification if your portfolio is already heavy in real estate.

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by whodidntante » Sun Aug 12, 2018 5:04 pm

Random Walker wrote:
Sun Aug 12, 2018 3:10 pm
Also, take a look at Larry’s Your Complete Guide to Factor Based Investing.
I agree this is a good book on the subject. It's readable even for those without a finance background. Well, I think so at least. I have a finance background so maybe I can't judge that. LOL

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by jebmke » Sun Aug 12, 2018 5:13 pm

We sort of did this during accumulation years. Equity was around 60% or so and 65-75% of our equity was small and mid-cap value.

Normally I would have had a higher equity allocation and more traditional portfolio but my spouse was in the business (managing small cap portfolio) and we decided to put all her profit sharing and pension funds in the firms value portfolio. My job was in a cyclical business so we decided to keep a higher bond allocation than normal give all these factors. It worked out for us - we stayed with the SC/MC-V high tilt from mid-80s to about 2005.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Random Walker
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by Random Walker » Sun Aug 12, 2018 5:47 pm

whodidntante wrote:
Sun Aug 12, 2018 5:04 pm
Random Walker wrote:
Sun Aug 12, 2018 3:10 pm
Also, take a look at Larry’s Your Complete Guide to Factor Based Investing.
I agree this is a good book on the subject. It's readable even for those without a finance background. Well, I think so at least. I have a finance background so maybe I can't judge that. LOL
I have no finance background and find the book very readable

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by DaufuskieNate » Tue Aug 14, 2018 7:19 am

My equity allocation is entirely SCV for U.S. and Developed Markets, and a tilt toward SVC in Emerging markets. I do this because I find the evidence of long term returns on these factors to be compelling. I accept the risk of returns not matching other benchmarks for long periods of time.

I am making an assumption here, but if your real estate portfolio is in the U.S., your allocation to International equities may turn out to be a good diversifier.

AerialWombat
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by AerialWombat » Fri Aug 17, 2018 4:52 pm

Thanks so much for everybody's insight on this. I've had much reading to do over the past week, and I'm getting more comfortable with the idea of doing 50% VT, 25% VBR, and 25% VSS in my equity slice. The Larry Portfolio is certainly compelling.
DaufuskieNate wrote:
Tue Aug 14, 2018 7:19 am
I am making an assumption here, but if your real estate portfolio is in the U.S., your allocation to International equities may turn out to be a good diversifier.
Yes, my real estate is 100% U.S. and is likely to remain so. I agree with the diversification assessment. Not sure I have the nerve to do the tilt you're doing, but tilt I think I shall.

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by MotoTrojan » Fri Aug 17, 2018 6:06 pm

AerialWombat wrote:
Fri Aug 17, 2018 4:52 pm
Thanks so much for everybody's insight on this. I've had much reading to do over the past week, and I'm getting more comfortable with the idea of doing 50% VT, 25% VBR, and 25% VSS in my equity slice. The Larry Portfolio is certainly compelling.
DaufuskieNate wrote:
Tue Aug 14, 2018 7:19 am
I am making an assumption here, but if your real estate portfolio is in the U.S., your allocation to International equities may turn out to be a good diversifier.
Yes, my real estate is 100% U.S. and is likely to remain so. I agree with the diversification assessment. Not sure I have the nerve to do the tilt you're doing, but tilt I think I shall.
Strongly suggest you swap VBR out for VIOV. S&P600’s median cap size is under half that of Vanguards CRSP index. VBR is more of a mid/small value fund. If you believe in the small premium this will maximize your exposure (and in theory return). Less VIOV mixed with VT(I) wil give you equal exposure to a larger VBR holding.

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by vineviz » Fri Aug 17, 2018 6:20 pm

MotoTrojan wrote:
Fri Aug 17, 2018 6:06 pm
AerialWombat wrote:
Fri Aug 17, 2018 4:52 pm
Thanks so much for everybody's insight on this. I've had much reading to do over the past week, and I'm getting more comfortable with the idea of doing 50% VT, 25% VBR, and 25% VSS in my equity slice. The Larry Portfolio is certainly compelling.
DaufuskieNate wrote:
Tue Aug 14, 2018 7:19 am
I am making an assumption here, but if your real estate portfolio is in the U.S., your allocation to International equities may turn out to be a good diversifier.
Yes, my real estate is 100% U.S. and is likely to remain so. I agree with the diversification assessment. Not sure I have the nerve to do the tilt you're doing, but tilt I think I shall.
Strongly suggest you swap VBR out for VIOV. S&P600’s median cap size is under half that of Vanguards CRSP index. VBR is more of a mid/small value fund. If you believe in the small premium this will maximize your exposure (and in theory return). Less VIOV mixed with VT(I) wil give you equal exposure to a larger VBR holding.
I agree with this: VIOV is far superior as a small cap value fund.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by patrick013 » Fri Aug 17, 2018 7:06 pm

AerialWombat wrote:
Sun Aug 12, 2018 2:33 pm
I'm not asking for my own scenario, just from a theoretical point of view. Do any of you have an equity allocation less than 50%, but put that equity position disproportionately into the smalls?
Yes, but into a small cap general index or blend index. Why ? Decades
go by where growth beats value then value beats growth. Sometimes
several decade's return are correlated between growth and value then
value or growth has better returns for a whole decade. So be it.

Having equal AA between value and growth should help cash flow. Value
still has somewhat better long term returns which is good considering
high priced markets but lengthy periods are observed where withdrawing
from growth would be better as returns were more positive. Traditionally
stocks provide a hedge on inflation so maybe sticking with value would
do that job better. So one way you should have better cash flow the other
way, sticking with value, you should have better long term total return, at
least stat-wise.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by AerialWombat » Fri Aug 17, 2018 7:30 pm

vineviz wrote:
Fri Aug 17, 2018 6:20 pm
MotoTrojan wrote:
Fri Aug 17, 2018 6:06 pm
Strongly suggest you swap VBR out for VIOV. S&P600’s median cap size is under half that of Vanguards CRSP index. VBR is more of a mid/small value fund. If you believe in the small premium this will maximize your exposure (and in theory return). Less VIOV mixed with VT(I) wil give you equal exposure to a larger VBR holding.
I agree with this: VIOV is far superior as a small cap value fund.
I have read several other BH threads re: VIOV vs VBR vs IJS.

What it comes down to for me is that VBR is commission-free for me in my Solo 401k, VIOV is not. Since I invest almost weekly, I'm not willing to pay $6.95 per transaction. VBR also has a lower ER than VIOV or IJS.

mickens16
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by mickens16 » Fri Aug 17, 2018 9:14 pm

AerialWombat wrote:
Fri Aug 17, 2018 7:30 pm
vineviz wrote:
Fri Aug 17, 2018 6:20 pm
MotoTrojan wrote:
Fri Aug 17, 2018 6:06 pm
Strongly suggest you swap VBR out for VIOV. S&P600’s median cap size is under half that of Vanguards CRSP index. VBR is more of a mid/small value fund. If you believe in the small premium this will maximize your exposure (and in theory return). Less VIOV mixed with VT(I) wil give you equal exposure to a larger VBR holding.
I agree with this: VIOV is far superior as a small cap value fund.
I have read several other BH threads re: VIOV vs VBR vs IJS.

What it comes down to for me is that VBR is commission-free for me in my Solo 401k, VIOV is not. Since I invest almost weekly, I'm not willing to pay $6.95 per transaction. VBR also has a lower ER than VIOV or IJS.
Where is your solo 401K at? If Fidelity IJS should be commission free or Schwab has SLYV commission free.

AerialWombat
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by AerialWombat » Fri Aug 17, 2018 9:19 pm

mickens16 wrote:
Fri Aug 17, 2018 9:14 pm
AerialWombat wrote:
Fri Aug 17, 2018 7:30 pm
vineviz wrote:
Fri Aug 17, 2018 6:20 pm
MotoTrojan wrote:
Fri Aug 17, 2018 6:06 pm
Strongly suggest you swap VBR out for VIOV. S&P600’s median cap size is under half that of Vanguards CRSP index. VBR is more of a mid/small value fund. If you believe in the small premium this will maximize your exposure (and in theory return). Less VIOV mixed with VT(I) wil give you equal exposure to a larger VBR holding.
I agree with this: VIOV is far superior as a small cap value fund.
I have read several other BH threads re: VIOV vs VBR vs IJS.

What it comes down to for me is that VBR is commission-free for me in my Solo 401k, VIOV is not. Since I invest almost weekly, I'm not willing to pay $6.95 per transaction. VBR also has a lower ER than VIOV or IJS.
Where is your solo 401K at? If Fidelity IJS should be commission free or Schwab has SLYV commission free.
E*Trade.

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siamond
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by siamond » Fri Aug 17, 2018 9:52 pm

AerialWombat wrote:
Fri Aug 17, 2018 7:30 pm
vineviz wrote:
Fri Aug 17, 2018 6:20 pm
MotoTrojan wrote:
Fri Aug 17, 2018 6:06 pm
Strongly suggest you swap VBR out for VIOV. S&P600’s median cap size is under half that of Vanguards CRSP index. VBR is more of a mid/small value fund. If you believe in the small premium this will maximize your exposure (and in theory return). Less VIOV mixed with VT(I) wil give you equal exposure to a larger VBR holding.
I agree with this: VIOV is far superior as a small cap value fund.
I have read several other BH threads re: VIOV vs VBR vs IJS.

What it comes down to for me is that VBR is commission-free for me in my Solo 401k, VIOV is not. Since I invest almost weekly, I'm not willing to pay $6.95 per transaction. VBR also has a lower ER than VIOV or IJS.
AerialWombat, you got that exactly right. Furthermore, the folks having an issue with VBR tend to judge its historical performance at a time (before 2013) where the fund meandered between the S&P 600 SCV index (which VIOV stayed anchored on) and the MSCI SCV index. Since then, VBR settled on the CRSP SCV index, which displayed a superior performance than S&P and MSCI when backtested since 2002, and appears to be a well constructed index. Of course, simply judging on the past 15 years of (index) performance might not be fully significant, but for me, this is good enough to stick to VBR for the future, trust Vanguard with its index selection, and the lower ER reinforces my decision.

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by HEDGEFUNDIE » Fri Aug 17, 2018 10:14 pm

siamond wrote:
Fri Aug 17, 2018 9:52 pm
AerialWombat wrote:
Fri Aug 17, 2018 7:30 pm
vineviz wrote:
Fri Aug 17, 2018 6:20 pm
MotoTrojan wrote:
Fri Aug 17, 2018 6:06 pm
Strongly suggest you swap VBR out for VIOV. S&P600’s median cap size is under half that of Vanguards CRSP index. VBR is more of a mid/small value fund. If you believe in the small premium this will maximize your exposure (and in theory return). Less VIOV mixed with VT(I) wil give you equal exposure to a larger VBR holding.
I agree with this: VIOV is far superior as a small cap value fund.
I have read several other BH threads re: VIOV vs VBR vs IJS.

What it comes down to for me is that VBR is commission-free for me in my Solo 401k, VIOV is not. Since I invest almost weekly, I'm not willing to pay $6.95 per transaction. VBR also has a lower ER than VIOV or IJS.
AerialWombat, you got that exactly right. Furthermore, the folks having an issue with VBR tend to judge its historical performance at a time (before 2013) where the fund meandered between the S&P 600 SCV index (which VIOV stayed anchored on) and the MSCI SCV index. Since then, VBR settled on the CRSP SCV index, which displayed a superior performance than S&P and MSCI when backtested since 2002, and appears to be a well constructed index. Of course, simply judging on the past 15 years of (index) performance might not be fully significant, but for me, this is good enough to stick to VBR for the future, trust Vanguard with its index selection, and the lower ER reinforces my decision.
Except that VBR is 59% mid cap stocks! And only 52% value.

http://portfolios.morningstar.com/fund/ ... ture=en_US

It might be a fine fund, but small cap value it is not.

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siamond
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by siamond » Fri Aug 17, 2018 10:23 pm

HEDGEFUNDIE wrote:
Fri Aug 17, 2018 10:14 pm
Except that VBR is 59% mid cap stocks! And only 52% value.

http://portfolios.morningstar.com/fund/ ... ture=en_US

It might be a fine fund, but small cap value it is not.
According to Morningstar recent redefinition of styles and its methodology, maybe not. According to CRSP well-researched indices and methodology (documented here), yes, it is. Between the two, I know who I trust...

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by Random Walker » Fri Aug 17, 2018 11:31 pm

AerialWombat wrote:
Fri Aug 17, 2018 4:52 pm
Not sure I have the nerve to do the tilt you're doing, but tilt I think I shall.
Remember that a big part of the Larry Portfolio concept is to tilt all or heavily to SV AND increase the overall safe bond allocation. The concept can really be tailored to any risk tolerance.

Dave

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by vineviz » Fri Aug 17, 2018 11:59 pm

siamond wrote:
Fri Aug 17, 2018 10:23 pm
HEDGEFUNDIE wrote:
Fri Aug 17, 2018 10:14 pm
Except that VBR is 59% mid cap stocks! And only 52% value.

http://portfolios.morningstar.com/fund/ ... ture=en_US

It might be a fine fund, but small cap value it is not.
According to Morningstar recent redefinition of styles and its methodology, maybe not. According to CRSP well-researched indices and methodology (documented here), yes, it is. Between the two, I know who I trust...
VBR isn't a bad fund, but both the small cap and value tilts of a fund are objectively quantifiable.

The S&P 600 based funds (IJS, SLYV, VIOV) are unquestionably more focused on smaller stocks and deeper value stocks than VBR.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by fennewaldaj » Sat Aug 18, 2018 1:07 am

vineviz wrote:
Fri Aug 17, 2018 11:59 pm
siamond wrote:
Fri Aug 17, 2018 10:23 pm
HEDGEFUNDIE wrote:
Fri Aug 17, 2018 10:14 pm
Except that VBR is 59% mid cap stocks! And only 52% value.

http://portfolios.morningstar.com/fund/ ... ture=en_US

It might be a fine fund, but small cap value it is not.
According to Morningstar recent redefinition of styles and its methodology, maybe not. According to CRSP well-researched indices and methodology (documented here), yes, it is. Between the two, I know who I trust...
VBR isn't a bad fund, but both the small cap and value tilts of a fund are objectively quantifiable.

The S&P 600 based funds (IJS, SLYV, VIOV) are unquestionably more focused on smaller stocks and deeper value stocks than VBR.
obviously s+p 600 value is smaller but i am not sure it is fair to say it is that much more valuey. It is per p/b but that is not the only way it can be measured. VBR has a lower forward and trailing p/e for example. For whatever morningstar style boxes are worth vbr has more in the value ones (52 vs. 41). The s+P indexes have more overlap between value and growth and the crsp ones.

AerialWombat
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by AerialWombat » Sat Aug 18, 2018 1:09 am

Random Walker wrote:
Fri Aug 17, 2018 11:31 pm
AerialWombat wrote:
Fri Aug 17, 2018 4:52 pm
Not sure I have the nerve to do the tilt you're doing, but tilt I think I shall.
Remember that a big part of the Larry Portfolio concept is to tilt all or heavily to SV AND increase the overall safe bond allocation. The concept can really be tailored to any risk tolerance.

Dave
Agreed. That’s why my securities AA is 30/70 stocks/bonds, which would normally be considered wacky for my age (40).

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by vineviz » Sat Aug 18, 2018 1:14 am

fennewaldaj wrote:
Sat Aug 18, 2018 1:07 am
For whatever morningstar style boxes are worth vbr has more in the value ones (52 vs. 41).
The way Morningstar constructs their style boxes, a value/growth comparison between a midcap fund (like VBR) and a small cap fund (like VIOV) is distorted, unfortunately.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by garlandwhizzer » Sat Aug 18, 2018 12:32 pm

vineviz wrote:
The S&P 600 based funds (IJS, SLYV, VIOV) are unquestionably more focused on smaller stocks and deeper value stocks than VBR.


So is PXSV, Invesco Russell 2000 Pure Value ETF, which is a deep exposure SCV fund, basically micro-cap deep value with much heavier loads to both value and size. In spite of that, PXSV has underperformed VBR rather consistently throughout its 14 year existence. Construction of SCV indexes is more complicated than just maximally loading up on small and value because of issues like negative momentum, negative quality, substantial negative alpha, and increased cost. I don't think we can assume that a fund with higher loads to S and V will automatically outperform one with lesser loads. Construction of factor indexes involves more art than science IMO.

Garland Whizzer

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siamond
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by siamond » Sat Aug 18, 2018 1:12 pm

garlandwhizzer wrote:
Sat Aug 18, 2018 12:32 pm
[...] I don't think we can assume that a fund with higher loads to S and V will automatically outperform one with lesser loads. Construction of factor indexes involves more art than science IMO.
Yes, totally agreed. And a good index also has to be defined in a practical manner, so that index funds can actually track the index in an efficient manner. CRSP, S&P and others care about that. Morningstar does not, because no real-life fund follows their definitions (I think?)... Their top priority is marketing themselves, way different from a proper index provider. In my opinion, Morningstar is very useful for factual data (e.g. price, dividends, expense ratio, etc), historical and present, but whenever they start to interpret the data (e.g. star system, style boxes, wacky PE math), one should really ignore the noise...

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by siamond » Sat Aug 18, 2018 1:33 pm

AerialWombat wrote:
Sun Aug 12, 2018 2:33 pm
Based on help from this forum, which I massively appreciate, I have chosen a 30/70 stock/bond AA. Even though I'm only 40, I've chosen this AA for my securities portfolio to balance out the risk of my real estate portfolio. [...] Based on other threads, it would appear there are BH folks that might suggest I do something like 50% VT, 25% VBR, 25% VSS in my own portfolio, to goose the returns from my low equity allocation. I'm personally not comfortable doing that, preferring a Three Fund approach as best I can (using munis in taxable for bond portion), but I could see the allure of doing so.
Back to the OP's original question... I think you're trying to have your cake and eat it too. When being fairly young, you have a LOT of time in front of you during which you'll need your portfolio to grow and provide sustained income during retirement.

A 30/70 is really hard to justify at your age, UNLESS the 30% equities are designed based on the most aggressive risk/reward asset classes (e.g. small-cap-value, Int'l small, emerging markets). This is called a 'barbell' portfolio, and stemmed from the 'black swan' ideas of Nicholas Taleb. Then the 70% bonds, which typically create quite a drag on the growth of the portfolio, can be justified because of the desire to tame the very hectic ups and downs of risky equities. Historically, this worked remarkably well, providing steady growth with little hiccups. Personally, I have a lot of reservations about such approach, it is pretty hard to trust that it will keep working well in a time of low/rising interest rates, but this is just a perception.

Now mixing a regular 3-funds approach with such 30/70 AA at your age, I don't know, this breaks the barbell logic, and this seems to put fear of volatility way ahead of more important long-term goals.

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by garlandwhizzer » Sat Aug 18, 2018 3:03 pm

I agree with Siamond that a 30/70 portfolio is extremely conservative for someone about 40 regardless of which equity assets you choose for the 30%. Of course if you're already very rich and don't need significant portfolio growth over decades, you can do anything you want and it will work. If you're 40 and need significant portfolio growth to meet anticipated retirement needs or financial goals, 30/70 is a long way from optimal IMO. 70/30 is more like it. Personally I was 100/0 until I retired at 50 and have gradually increased bonds since.

Factor outperformance in the future is expected to be less than in the past partly due to more efficient current markets and partly due to the growing popularity of factor approaches running up against capacity restraints for these factors. There's a limit to how much money you can sink into SCV, which is at maximum 3% of total market weight, without elevating its price and hence destroying the very thing you seek. There was a time when you could buy solid SCV firms with PE <10 and PB <1. That was the heyday of SCV outperformance, the fuel for Fama & French's original paper in 1992. There are no such ultra-cheap high quality SCV firms hanging around now waiting for buyers. The low hanging fruit was picked decades ago. It's a bit more of a struggle now. Personally, I don't think it wise to hugely reduce equity exposure and count on huge SCV outperformance to make up for it.

Garland Whizzer

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by AerialWombat » Sat Aug 18, 2018 3:11 pm

siamond wrote:
Sat Aug 18, 2018 1:33 pm
Now mixing a regular 3-funds approach with such 30/70 AA at your age, I don't know, this breaks the barbell logic, and this seems to put fear of volatility way ahead of more important long-term goals.
I definitely hear what you’re saying. But just to be clear, I’m 30/70 in my *securities* portfolio. Right now my AA breaks down more like 50/15/35 — direct real estate/stocks/bonds.

I consider my rentals to be more “equity-like” than “bond-like”, although they are a distinct asset class. Thus, I overweight bonds to balance against both real estate AND stocks. Also, the rentals are my true retirement plan, the 401k is “plan B” or “supplemental” in my mind, especially having started so late.

This thread did lead me to the Larry/barbell portfolio, and I do buy into the notion, albeit uncomfortably.

AerialWombat
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by AerialWombat » Sat Aug 18, 2018 3:19 pm

garlandwhizzer wrote:
Sat Aug 18, 2018 3:03 pm
The low hanging fruit was picked decades ago. It's a bit more of a struggle now. Personally, I don't think it wise to hugely reduce equity exposure and count on huge SCV outperformance to make up for it.
See post I wrote above. Real estate is my anchor, securities are the “backup plan”.

I’m not counting on the equity gains for anything. I actually fathom that I’ll never touch it, and it will pass to charity when I croak. I’m not sure if that’s an argument for or against factor tilting (see, I’m learning lingo!), but both sides make valid points.

Kinda reminds me of similar arguments on both sides of that giant US vs International thread going on.

Maybe I should just put it all in small cap value in emerging markets only, and roll them dice! :)

That was a joke.

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Doc
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by Doc » Sat Aug 18, 2018 5:37 pm

We are 50/50 AA with 40% of the equity as small.

VBR is NOT small. VIOV has a very low trading volume. I would prefer IJS. To get around the high cost of frequent purchases just put your regular contributions into the CRSP fund and swap it for IJS once a year.
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.

AerialWombat
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by AerialWombat » Sun Aug 19, 2018 5:15 pm

Doc wrote:
Sat Aug 18, 2018 5:37 pm
To get around the high cost of frequent purchases just put your regular contributions into the CRSP fund and swap it for IJS once a year.
That's actually a genius idea. I honestly never would have thought of that. Thanks!

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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by MotoTrojan » Sun Aug 19, 2018 6:28 pm

AerialWombat wrote:
Sun Aug 19, 2018 5:15 pm
Doc wrote:
Sat Aug 18, 2018 5:37 pm
To get around the high cost of frequent purchases just put your regular contributions into the CRSP fund and swap it for IJS once a year.
That's actually a genius idea. I honestly never would have thought of that. Thanks!
Considering this is a tax-sheltered account, SLYV will give you the same index and a lower ER. Tax-management hasn't been as good as VIOV/IJS but that won't matter.

This idea seems sound though and will save you a few bucks.

acegolfer
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Re: Massive small cap tilt with low equity AA - anybody do this?

Post by acegolfer » Sun Aug 19, 2018 7:36 pm

AerialWombat wrote:
Sun Aug 12, 2018 2:33 pm
I'm not asking for my own scenario, just from a theoretical point of view. Do any of you have an equity allocation less than 50%, but put that equity position disproportionately into the smalls?
From theoretical point of view, it won't be efficient. small is not on the multi-factor efficient frontier.

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