Is Small Value Still A Winner?

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Taylor Larimore
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Market-Weight in U.S. Stocks

Post by Taylor Larimore »

Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
Bogleheads:

Sorry, I disagree. Total Stock Market Index Funds ALREADY hold the U.S. market weight in Value, Growth, Small and Large-cap stocks.

Best wishes.
Taylor
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randomguy
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Re: Market-Weight in U.S. Stocks

Post by randomguy »

Taylor Larimore wrote: Sat Nov 03, 2018 12:45 pm
Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
Bogleheads:

Sorry, I disagree. Total Stock Market Index Funds ALREADY hold the U.S. market weight in Value, Growth, Small and Large-cap stocks.

Best wishes.
Taylor
yes but it isnt obvious that market weight is the optimal factor weighting scheme for risk adjusted returns
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vineviz
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Re: Is Small Value Still A Winner?

Post by vineviz »

JoMoney wrote: Sat Nov 03, 2018 11:35 am Regarding Telltale Charts, since it was brought up, I thought I should point out if anyone else is interested in them that if you create an account on PortfolioVisualizer.com and upload a custom asset that has 0% return , you can then use the 'Backtest Portfolio' feature to create your own "Telltale Charts" for funds.
FWIW the "Backtest Portfolio" feature works with with a 0% total weight as well as a 100% total weight, so the zero return asset isn't necessary.

Here's a telltale chart for the Fama-French portfolio that most closely matches the S&P 600 Value index (adjusted for estimated transaction and management expenses) going much longer back in time to illustrate.

Image

The net SCV premium over the past 50+ years has been positive, but cyclical and thus prone to being sensitive to start and end point bias. PortfolioVisualizer's default start date of 1985, for instance, captures the long period in which SCV was "out of favor" from 1983 to 1999 but omits the huge boost it provided during the "Great Inflation" period from 1974 to 1981 (not to mention a full cycle prior to that as well).

Holding SCV hasn't really cost the investor much over the past 5-10 years: it was big assist from 2008 to 2011 and mild drag since then.
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indexonlyplease
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Re: Is Small Value Still A Winner?

Post by indexonlyplease »

What about the Paul Merriman idea of Target Dated Fund with svc fund for a young person starting to invest. Does this make sense.

90% TDF 10% scv
80% TDF 20% scv
70% TDF 30% scv

could this be soemething worth doing for the young person starting out and investing in the Roth IRA $5500 yr.

Is there a way to back test this using 2 funds. I see portfolio advisor you can not. No glide path.
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siamond
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Re: Is Small Value Still A Winner?

Post by siamond »

Small-Cap-Value (aka SCV) 'risk-adjusted returns' (truly misleading terminology which actually means volatility-adjusted returns) were indeed exceptional in the past (i.e. displaying a higher Sharpe ratio than the total-market, aka TSM). Although the historical evidence is pretty clear, I can fully understand the skepticism about this 'exception' staying true in the future. Personally, I am NOT betting on it...

There is a much more basic point to make though, which seems often forgotten by some. If we take a fairly diversified market segment, a well-acknowledged theory is that the higher the volatility, the higher the return. I believe few posters on this forum would debate this one. And it seems pretty obvious that a market segment made of small and undervalued companies is VERY likely to be subject to higher volatility than the whole market. Consequently, even without a higher Sharpe ratio than TSM, higher returns are to be expected for SCV. At least on (annualized) average, in the long run, and after stomach-churning vagaries.

Now why does it matter? Well, a proper definition of 'risk' is highly dependent of the specific circumstances (incl. goals & fears) of the investor. Personally, I am much more worried about low returns on the long run for my (early) retirement than I am about the inevitable ups and downs of the stock market. I actually suspect that few investors would define volatility as their primary risk if they were to think carefully about it instead of parroting the 'risk-adjusted' horrendous terminology.

So... if volatility is relatively low in one's list of financial fears, it stands to reason that SCV should remain a winner in the long-run. Because it should remain, by its very nature, a volatile market segment. Now if volatility is very high in one's list of financial fears, by all means, get more bonds. Those two perspectives are actually exactly symmetrical...
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Re: Market-Weight in U.S. Stocks

Post by UpperNwGuy »

Taylor Larimore wrote: Sat Nov 03, 2018 12:45 pm
Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
Bogleheads:

Sorry, I disagree. Total Stock Market Index Funds ALREADY hold the U.S. market weight in Value, Growth, Small and Large-cap stocks.

Best wishes.
Taylor
I agree with Taylor.
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vineviz
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Re: Market-Weight in U.S. Stocks

Post by vineviz »

Taylor Larimore wrote: Sat Nov 03, 2018 12:45 pm
Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
Sorry, I disagree. Total Stock Market Index Funds ALREADY hold the U.S. market weight in Value, Growth, Small and Large-cap stocks.
Just as Taylor never seems to tire of saying this, I'll probably never tire of pointing out the logical fallacy in this statement. The fact that total stock market funds hold U.S. market weight of stocks is neither a surprise (it's right there in the name) nor relevant to questions about diversification.

A market weight portfolio holds no special diversification qualities.
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pascalwager
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Re: Is Small Value Still A Winner?

Post by pascalwager »

JoMoney wrote: Sat Nov 03, 2018 11:35 am Regarding Telltale Charts, since it was brought up, I thought I should point out if anyone else is interested in them that if you create an account on PortfolioVisualizer.com and upload a custom asset that has 0% return , you can then use the 'Backtest Portfolio' feature to create your own "Telltale Charts" for funds.

For example, here's a chart I created that is the small-cap fund DFSCX 100% , and subtracting the S&P 500 Fund VFINX -100% ... I have to add a third asset, my zero-return asset at 100% so the total equals 100
Image
Over this period, from 1985 through August 2018 (I need to update my Zero-Return asset to extend past August) you can see the lack of any "Premium" between these funds.
Still, with no premium appearing on your chart, Portfolio Visualizer shows 11.25% CAGR for DFSCX and 10.79% for US Stock Market since 1985.

Anyway, personal endpoints are ultimately important to owners and I lump-summed into DFSCX in 1995 with a to-date premium shown on your chart. CAGR to date: 11.34%. (9.76% for US Stock Market over the same period.)
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pascalwager
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Re: Is Small Value Still A Winner?

Post by pascalwager »

Random Walker wrote: Sat Nov 03, 2018 11:40 am I believe all the factors are stronger in small stocks: value stronger in small, momentum stronger in small, profitability stronger in small. People have argued whether or not there is a risk premium associated with size. I believe there is. Whether there is or not though, one could rationally tilt to size for the sake of possible risk premium and likely strength of the other factors in small.

Dave
Rick Ferri has always said that "value is value" whether associated with large value or small value assets. Of course, small value also includes the size factor and large value does not. So I question whether "value [is actually] stronger in small" and currently understand that value is value regardless of the asset.
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pascalwager
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Re: Market-Weight in U.S. Stocks

Post by pascalwager »

Taylor Larimore wrote: Sat Nov 03, 2018 12:45 pm
Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
Bogleheads:

Sorry, I disagree. Total Stock Market Index Funds ALREADY hold the U.S. market weight in Value, Growth, Small and Large-cap stocks.

Best wishes.
Taylor
But you still don't have any factors until you add more small cap, value, momentum, etc. The total stock market is factor-neutral despite having almost every stock available for investment. You need to tilt to acquire factors.

However, if the factors don't actually provide premiums, then I guess factor diversification would be pointless and holding the total stock market would be more efficient.
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fennewaldaj
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Re: Is Small Value Still A Winner?

Post by fennewaldaj »

JoMoney wrote: Sat Nov 03, 2018 11:35 am Regarding Telltale Charts, since it was brought up, I thought I should point out if anyone else is interested in them that if you create an account on PortfolioVisualizer.com and upload a custom asset that has 0% return , you can then use the 'Backtest Portfolio' feature to create your own "Telltale Charts" for funds.

For example, here's a chart I created that is the small-cap fund DFSCX 100% , and subtracting the S&P 500 Fund VFINX -100% ... I have to add a third asset, my zero-return asset at 100% so the total equals 100
Image
Over this period, from 1985 through August 2018 (I need to update my Zero-Return asset to extend past August) you can see the lack of any "Premium" between these funds.
Of course if one was investing the whole time many of the invested dollars show a premium. I am honestly not sure if SCV and MCV will show a premium in the future. I do find the historical data compelling enough to allocate a portion of my portfolio to it but it would not be surprising to me if the historical premium has disappeared.
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Re: Market-Weight in U.S. Stocks

Post by bdpb »

vineviz wrote: Sat Nov 03, 2018 9:56 pm A market weight portfolio holds no special diversification qualities.
Doesn't it eliminate systematic risk? Is that a diversification quality?

Can one stock that meets all the right factors be more diversified than a market weight portfolio?
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Re: Market-Weight in U.S. Stocks

Post by JoMoney »

bdpb wrote: Sun Nov 04, 2018 12:28 am
vineviz wrote: Sat Nov 03, 2018 9:56 pm A market weight portfolio holds no special diversification qualities.
Doesn't it eliminate systematic risk? Is that a diversification quality?

Can one stock that meets all the right factors be more diversified than a market weight portfolio?
It also eliminates the risk associated with "small" and "value", to the extent that you believe in a risk factor model for measuring "risk premiums".
. . . Whether you decide to tilt towards value depends on whether you are willing to bear the associated risk . . . The market portfolio is always efficient . . . For most people, the market portfolio is the most sensible decision.
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Re: Is Small Value Still A Winner?

Post by 3funder »

Over many decades, small value is probably still a winner. That said, anything can be a winner or a loser when one cherrypicks dates.
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nedsaid
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Re: Is Small Value Still A Winner?

Post by nedsaid »

ClosetIndexer wrote: Sat Nov 03, 2018 4:36 am
nedsaid wrote: Thu Nov 01, 2018 5:52 pmFurthermore, it seems logical to not only diversify across asset classes but also across factors. In the old days, we used to call them investment styles. You can't help but notice that Growth and Value take turns outperforming each other. Ditto with Large and Small. Same with US and International. Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
I was with you up until here. The total stock market is, by definition, diversified between value and growth, and between small and large. When you tilt to value, you're tilting away from growth, not diversifying between the two. Ditto small and large. The diversification you're adding is, rather, additional sources of risk and return (risk factors) besides market beta (and term/credit on the bond side).
If you own the market, by definition you are exposed only to Beta or Market. The exception to this is that the large indexes might have a bit of a Quality bias because the largest and most successful companies have the largest market caps. Yes, you have Value stocks in there, you have momentum in there, you have small stocks in there but the factors all cancel each other out. Paul Merriman splits his portfolio between Value and market cap weighted indexes, in addition a good portion of his portfolio are the smaller stocks. You can't get factor exposure without tilting. For example, if you evenly balance between Growth and Value, the research shows that they just cancel each other out. If you use an index instead of Growth, this doesn't cancel out the Value effect.
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Re: Is Small Value Still A Winner?

Post by nedsaid »

Random Walker wrote: Sat Nov 03, 2018 11:40 am I believe all the factors are stronger in small stocks: value stronger in small, momentum stronger in small, profitability stronger in small. People have argued whether or not there is a risk premium associated with size. I believe there is. Whether there is or not though, one could rationally tilt to size for the sake of possible risk premium and likely strength of the other factors in small.

Dave
In addition Dave, the factors seem to work better if you pair them with Quality. Small Cap works better and Value works better. This is why I like the S&P 500 Indexes, they screen for Quality to a degree. A Morningstar expert noted that the Small Cap effect has gone away except when you use a good Small Cap Index like the S&P 600 Small Cap Index, with a good index the Small Cap effect returns with a vengeance.

Quality is mainly in the Large Cap Growth area of the market but it seems to consist of the "right" growth stocks, pretty much strong balance sheets and consistency of earnings are the key. Momentum is also largely a Large Growth phenomenon, it exists in other parts of the Morningstar Stylebox but smaller stocks are often not liquid enough to effectively short.

Dimensional Fund Advisors also found that Value works better if you set Momentum to neutral, Value is associated with negative Momentum. So pairing factors often seems to help.

There is also a paradox here. Value works but so does Quality and Momentum which are associated with Growth stocks. Low Volatility often outperforms the market but only when it is in the Value sector but Low Vol has a bit of Quality in there as well.

I have often discussed the "anti-factors" which are the lottery stocks on the Growth side and the Value traps on the Value side. Even if you screen a bit for Quality on the Small Growth sector, results improve even for the "black hole" of investing. The better indexes screen out a lot of the junk, so I argue that in many cases indexing screens a bit for Quality. One reason that Vanguard Small Value Index and Vanguard Small Growth Indexes have such similar performance records.

My thesis is that the better indexes screen out the junk and one reason indexing works so well. Active investing "works" to the degree that managers can capture the factors and to the degree that fees are low enough to not eat up the excess performance. Active management often fails because the fees are just too high.
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Re: Is Small Value Still A Winner?

Post by indexonlyplease »

needsaid,

Since you mentioned his name can you help me with this idea for my 22 year old son that puts $5500 into a Roth IRA each year.

What about the Paul Merriman idea of the 2 fund Target Dated Fund with svc fund for a young person starting to invest. Does this make sense.

90% TDF 10% scv
80% TDF 20% scv
70% TDF 30% scv

could this be soemething worth doing for the young person starting out and investing in the Roth IRA $5500 yr.

Is there a way to back test this using 2 funds. I see portfolio advisor you can not. No glide path.
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nedsaid
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Re: Market-Weight in U.S. Stocks

Post by nedsaid »

Taylor Larimore wrote: Sat Nov 03, 2018 12:45 pm
Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
Bogleheads:

Sorry, I disagree. Total Stock Market Index Funds ALREADY hold the U.S. market weight in Value, Growth, Small and Large-cap stocks.

Best wishes.
Taylor
Well, not exactly. Just over 50% of the market cap of the US Total Stock Market is in just 100 stocks. So you have a pretty strong tilt towards Mega-Caps and Mega-Cap Growth at that. Just 3% of US stock market capitalization is Small Value. Just 9% of stocks are Small-Cap and Micro-Cap. Another 18% are Mid-Cap. So 73% Large Cap and most of that are the Mega-Caps. In addition, much of the market performance in recent years has been in the FAANG stocks: Facebook, Apple, Amazon, Netflix, and Google. One could have "simplified" to six stocks rather than bothering to own thousands.

So pretty much, Total Market is largely Large Cap Growth. Half of your investment is in just 100 companies! It is a pretty lopsided investment.

Definitely, I am not saying the S&P 500 or the US Total Stock Market Index are bad investments. Actually, they are very good investments. My largest holding is the US Total Stock Market Index. But on the other hand, it is a Large-Cap and actually a Mega-Cap Index at that. Let's not kid ourselves.
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Re: Market-Weight in U.S. Stocks

Post by JoMoney »

nedsaid wrote: Sun Nov 04, 2018 2:04 pm... Just over 50% of the market cap of the US Total Stock Market is in just 100 stocks. So you have a pretty strong tilt towards Mega-Caps and Mega-Cap Growth at that. Just 3% of US stock market capitalization is Small Value. Just 9% of stocks are Small-Cap and Micro-Cap. Another 18% are Mid-Cap. So 73% Large Cap and most of that are the Mega-Caps. In addition, much of the market performance in recent years has been in the FAANG stocks: Facebook, Apple, Amazon, Netflix, and Google. One could have "simplified" to six stocks rather than bothering to own thousands.

So pretty much, Total Market is largely Large Cap Growth. Half of your investment is in just 100 companies! It is a pretty lopsided investment.

Definitely, I am not saying the S&P 500 or the US Total Stock Market Index are bad investments. Actually, they are very good investments. My largest holding is the US Total Stock Market Index. But on the other hand, it is a Large-Cap and actually a Mega-Cap Index at that. Let's not kid ourselves.
The 'Total Stock Market' is the broad market as it's weighted, a "lopsided" investment would be to overweight the esoteric stocks that makeup 3% of the market...
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Re: Is Small Value Still A Winner?

Post by Random Walker »

Nedsaid,
Agree. Got to admit though, that quality/profitability sort of gives me the heebie jeebies. It seems to push everything in a growthy direction, which then makes me wonder why I’m tilting at all. In fact Larry has said that one positive additional side effect of quality/profitability screen is that it lessens tracking error regret. That thought makes me a bit nervy about the concept as well.

Agree that combining factors in a single fund is the most efficient way to invest in them, even if it might lower the depth of exposure to each individual factor a bit.

Dave
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Re: Is Small Value Still A Winner?

Post by nedsaid »

Random Walker wrote: Sun Nov 04, 2018 2:56 pm Nedsaid,
Agree. Got to admit though, that quality/profitability sort of gives me the heebie jeebies. It seems to push everything in a growthy direction, which then makes me wonder why I’m tilting at all. In fact Larry has said that one positive additional side effect of quality/profitability screen is that it lessens tracking error regret. That thought makes me a bit nervy about the concept as well.

Agree that combining factors in a single fund is the most efficient way to invest in them, even if it might lower the depth of exposure to each individual factor a bit.

Dave
As I said, there are paradoxes with the factors. Small Value works but so does much of Large Growth. You scratch your head and wonder how Value can work and how Momentum and Quality, which are almost the antithesis of Value, can work too.

I can see why people throw up their hands and index. The reason being is that the better indexes screen out much of the junk, or the "anti-factors" out anyway. It might be more about screening out the "anti-factors" than about tilting towards factors. This is why Vanguard Small Value Index and Vanguard Small Growth Index have such similar investment records, the worst of the junk just isn't there.

Thus it is my thesis that the better indexes have a bit of a Quality tilt built in. I know Larry would disagree but I am becoming more convinced of this by the day. When you look at all stocks, the Small-Cap effect seems to have disappeared. When you use the better Small-Cap Indexes, the Small-Cap effect returns with a vengeance. I think this is Size and Quality working together.

This is true with Value too. I think of Warren Buffett and Charley Munger. Munger convinced Buffett about Quality. Munger said that it is better to buy a great company at a good price than a good company at a great price. So Buffett changed from being a Value investor to a Value oriented investor taking into account Quality. I have often talked about the difference between picking up cigar butts for the last few puffs and buying the fine Cuban cigars at a discount.

As far as I know, I am the only one here that talks about the "anti-factors" and maybe I am just the lone nut on the forum. But I think that I am on to something here. If you have a good index that screens out the worst stocks, you are well on your way to investment success. You might be better off avoiding the bad stocks rather than trying to be in the good stocks. This is a big reason that indexing works so well. Market cap weighting assures that the largest and most successful companies will be represented in an index, a quality tilt. But that might get a laugh but won't sell a lot of books.
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Re: Market-Weight in U.S. Stocks

Post by Rowan Oak »

JoMoney wrote: Sun Nov 04, 2018 2:37 pm
nedsaid wrote: Sun Nov 04, 2018 2:04 pm... Just over 50% of the market cap of the US Total Stock Market is in just 100 stocks. So you have a pretty strong tilt towards Mega-Caps and Mega-Cap Growth at that. Just 3% of US stock market capitalization is Small Value. Just 9% of stocks are Small-Cap and Micro-Cap. Another 18% are Mid-Cap. So 73% Large Cap and most of that are the Mega-Caps. In addition, much of the market performance in recent years has been in the FAANG stocks: Facebook, Apple, Amazon, Netflix, and Google. One could have "simplified" to six stocks rather than bothering to own thousands.

So pretty much, Total Market is largely Large Cap Growth. Half of your investment is in just 100 companies! It is a pretty lopsided investment.

Definitely, I am not saying the S&P 500 or the US Total Stock Market Index are bad investments. Actually, they are very good investments. My largest holding is the US Total Stock Market Index. But on the other hand, it is a Large-Cap and actually a Mega-Cap Index at that. Let's not kid ourselves.
The 'Total Stock Market' is the broad market as it's weighted, a "lopsided" investment would be to overweight the esoteric stocks that makeup 3% of the market...
This is true.
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Re: Market-Weight in U.S. Stocks

Post by nedsaid »

JoMoney wrote: Sun Nov 04, 2018 2:37 pm
nedsaid wrote: Sun Nov 04, 2018 2:04 pm... Just over 50% of the market cap of the US Total Stock Market is in just 100 stocks. So you have a pretty strong tilt towards Mega-Caps and Mega-Cap Growth at that. Just 3% of US stock market capitalization is Small Value. Just 9% of stocks are Small-Cap and Micro-Cap. Another 18% are Mid-Cap. So 73% Large Cap and most of that are the Mega-Caps. In addition, much of the market performance in recent years has been in the FAANG stocks: Facebook, Apple, Amazon, Netflix, and Google. One could have "simplified" to six stocks rather than bothering to own thousands.

So pretty much, Total Market is largely Large Cap Growth. Half of your investment is in just 100 companies! It is a pretty lopsided investment.

Definitely, I am not saying the S&P 500 or the US Total Stock Market Index are bad investments. Actually, they are very good investments. My largest holding is the US Total Stock Market Index. But on the other hand, it is a Large-Cap and actually a Mega-Cap Index at that. Let's not kid ourselves.
The 'Total Stock Market' is the broad market as it's weighted, a "lopsided" investment would be to overweight the esoteric stocks that makeup 3% of the market...
Well, my Small Value tilts are not just over 50% of my stocks. My Small Value stocks are more like 6% of my stocks compared to 3% for the index. I have maybe 15-16% Small-Cap compared to 9% for the index. So my tilts are relatively modest, I certainly am not doing the "Larry portfolio."

Edit: I just checked. My Small-Value investments are 6% of my stocks. There has been a change with Morningstar, Small-Caps are just 6% of US Stocks and not 9%, thus Small Value has dropped from 3% to 2%. So I have triple the market weighting in Small Value. My Small-Caps are 17% compared to 6% for US Total Stock Market Index.
Last edited by nedsaid on Mon Nov 05, 2018 7:48 pm, edited 1 time in total.
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Re: Is Small Value Still A Winner?

Post by nedsaid »

indexonlyplease wrote: Sun Nov 04, 2018 1:51 pm needsaid,

Since you mentioned his name can you help me with this idea for my 22 year old son that puts $5500 into a Roth IRA each year.

What about the Paul Merriman idea of the 2 fund Target Dated Fund with svc fund for a young person starting to invest. Does this make sense.

90% TDF 10% scv
80% TDF 20% scv
70% TDF 30% scv

could this be soemething worth doing for the young person starting out and investing in the Roth IRA $5500 yr.

Is there a way to back test this using 2 funds. I see portfolio advisor you can not. No glide path.
I think Merriman's idea makes a lot of sense. Small-Cap Value should improve results but it will also produce greater volatility. I really do think you can have too much of a good thing, I have never advocated for extreme tilting. Probably any of the three choices would be good for a 22 year old. I don't know, maybe it is just me, I would pick the 10% SCV or the 20% SCV, I wouldn't go overboard here. A Target Date Fund for a 22 year old is going to be almost all stock anyways, so a SCV fund would add even more volatility, it is important your son understands this.
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Re: Is Small Value Still A Winner?

Post by Rowan Oak »

JoMoney wrote: Sat Nov 03, 2018 9:58 am
vineviz wrote: Sat Nov 03, 2018 9:55 am
JoMoney wrote: Sat Nov 03, 2018 9:44 am "Diversification" is a strategy to mitigate risk.
Factor investors intentionally increase their risk in hopes of chasing returns they believe are represented in some risk/return factor model.
I seriously doubt that all "factor investors" are doing things more similarly than all Boglehead investors are.

Still, I suspect the thing that is being implied here is based on a misunderstanding of both diversification and factor investing.

Diversification involves something more than an attempt to "mitigate" risk. After all, an investor could reduce risk by simply holding a portfolio entirely comprised of 30 day treasury bills. Rather, diversification is an attempt to balance the risk of a portfolio across multiple uncorrelated sources of risk.

All investors take on risk to improve their expected returns, whether they are "factor investors" or not. There is no basis for presuming that most factor investors are actually taking on MORE risk than other investors. In fact I suspect that most factor investors are simply more aware of the risks they are taking than other investors are.
Yes, your misunderstanding of "Diversification" and it's purpose is the cause for lots of confusion.
Luckily, diversification is pretty simple:
"The traditional index fund by definition, basically represents the entire stock market basket, not just a few scattered eggs. It eliminates the risk of picking individual stocks, the risk of emphasizing certain market sectors, and the risk of manager selection. Only stock market risk remains." - Jack Bogle
Total Market Index funds save a lot of time too by not worrying with all this factor/tilt/slice and dice/market timing stuff.
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Re: Market-Weight in U.S. Stocks

Post by fennewaldaj »

JoMoney wrote: Sun Nov 04, 2018 2:37 pm
nedsaid wrote: Sun Nov 04, 2018 2:04 pm... Just over 50% of the market cap of the US Total Stock Market is in just 100 stocks. So you have a pretty strong tilt towards Mega-Caps and Mega-Cap Growth at that. Just 3% of US stock market capitalization is Small Value. Just 9% of stocks are Small-Cap and Micro-Cap. Another 18% are Mid-Cap. So 73% Large Cap and most of that are the Mega-Caps. In addition, much of the market performance in recent years has been in the FAANG stocks: Facebook, Apple, Amazon, Netflix, and Google. One could have "simplified" to six stocks rather than bothering to own thousands.

So pretty much, Total Market is largely Large Cap Growth. Half of your investment is in just 100 companies! It is a pretty lopsided investment.

Definitely, I am not saying the S&P 500 or the US Total Stock Market Index are bad investments. Actually, they are very good investments. My largest holding is the US Total Stock Market Index. But on the other hand, it is a Large-Cap and actually a Mega-Cap Index at that. Let's not kid ourselves.
The 'Total Stock Market' is the broad market as it's weighted, a "lopsided" investment would be to overweight the esoteric stocks that makeup 3% of the market...
I get not wanting to blow up a small portion of the market but small value companies are pretty normal companies. Lots of small financial firms, small industrials ect. And they are really not all that small when it comes down to it.
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Re: Is Small Value Still A Winner?

Post by stan1 »

I believe there are more than 100 mega cap companies worth investing in. S&P 500 and TSM hold trivial amounts of companies beneath the Top 100 capitalizations. Back in the day actively managed funds like PRIMECAP, Capital Opportunity, Windsor and Wellington were how I would have done it. Boglehead response would have been "if you have to go active those are the best low cost choices". Today there are lower cost and tax efficient ways to diversify away from mega cap stocks. Factors give a basis for an alternative between market capitalization and equal weighting. Does it matter? Probably not but I sleep better with a little less concentration in the FAANG. No one can say that factor investing is too expensive these days.

I do find it somewhat entertaining when the total market advocates come out in other threads against holding any international equities all the while large cap domestic has done well in the recent decade. We still get a few people claiming international is too expensive. Yes I do think there's some market timing going on.
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Re: Is Small Value Still A Winner?

Post by indexonlyplease »

nedsaid wrote: Sun Nov 04, 2018 5:41 pm
indexonlyplease wrote: Sun Nov 04, 2018 1:51 pm needsaid,

Since you mentioned his name can you help me with this idea for my 22 year old son that puts $5500 into a Roth IRA each year.

What about the Paul Merriman idea of the 2 fund Target Dated Fund with svc fund for a young person starting to invest. Does this make sense.

90% TDF 10% scv
80% TDF 20% scv
70% TDF 30% scv

could this be soemething worth doing for the young person starting out and investing in the Roth IRA $5500 yr.

Is there a way to back test this using 2 funds. I see portfolio advisor you can not. No glide path.
I think Merriman's idea makes a lot of sense. Small-Cap Value should improve results but it will also produce greater volatility. I really do think you can have too much of a good thing, I have never advocated for extreme tilting. Probably any of the three choices would be good for a 22 year old. I don't know, maybe it is just me, I would pick the 10% SCV or the 20% SCV, I wouldn't go overboard here. A Target Date Fund for a 22 year old is going to be almost all stock anyways, so a SCV fund would add even more volatility, it is important your son understands this.
Thanks, it is hard to disagree with someone like Paul that is spending his life now educating people. I have to believe he is on to something good for investors.
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Re: Is Small Value Still A Winner?

Post by nedsaid »

indexonlyplease wrote: Sun Nov 04, 2018 7:24 pm
nedsaid wrote: Sun Nov 04, 2018 5:41 pm
indexonlyplease wrote: Sun Nov 04, 2018 1:51 pm needsaid,

Since you mentioned his name can you help me with this idea for my 22 year old son that puts $5500 into a Roth IRA each year.

What about the Paul Merriman idea of the 2 fund Target Dated Fund with svc fund for a young person starting to invest. Does this make sense.

90% TDF 10% scv
80% TDF 20% scv
70% TDF 30% scv

could this be soemething worth doing for the young person starting out and investing in the Roth IRA $5500 yr.

Is there a way to back test this using 2 funds. I see portfolio advisor you can not. No glide path.
I think Merriman's idea makes a lot of sense. Small-Cap Value should improve results but it will also produce greater volatility. I really do think you can have too much of a good thing, I have never advocated for extreme tilting. Probably any of the three choices would be good for a 22 year old. I don't know, maybe it is just me, I would pick the 10% SCV or the 20% SCV, I wouldn't go overboard here. A Target Date Fund for a 22 year old is going to be almost all stock anyways, so a SCV fund would add even more volatility, it is important your son understands this.
Thanks, it is hard to disagree with someone like Paul that is spending his life now educating people. I have to believe he is on to something good for investors.
Paul is one of the good guys. Unfortunately for him, we have been in a US Large Growth market since the 2008-2009 financial crisis, so the Merriman portfolio would trail a similarly weighted Taylor Larimore 3 fund portfolio. One of the risks you take with tilting is that your tilts might be out of favor for an extended period of time, in this case it has been a decade now. My suspicion is that Value will roar back as some point but we don't know when.
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Re: Is Small Value Still A Winner?

Post by ClosetIndexer »

vineviz wrote: Sat Nov 03, 2018 5:46 am
ClosetIndexer wrote: Sat Nov 03, 2018 4:36 am
nedsaid wrote: Thu Nov 01, 2018 5:52 pmFurthermore, it seems logical to not only diversify across asset classes but also across factors. In the old days, we used to call them investment styles. You can't help but notice that Growth and Value take turns outperforming each other. Ditto with Large and Small. Same with US and International. Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
I was with you up until here. The total stock market is, by definition, diversified between value and growth, and between small and large. When you tilt to value, you're tilting away from growth, not diversifying between the two. Ditto small and large. The diversification you're adding is, rather, additional sources of risk and return (risk factors) besides market beta (and term/credit on the bond side).
This is a common misperception.

The market portfolio has many important characteristics, but it is not the most diversified portfolio. It is trivially easy to construct a portfolio that is more diversified than the total stock market.

Since “growth” is not a true risk factor, it may be that some definitions arbitrarily classify it as the opposite of value but that’s more of a tautological approach than a technical approach to diversification.
I didn't say the TSM is the most diversified portfolio. I said that it is diversified between value and growth, and between large and small. In order to increase your diversification in terms of risk factors, you need to tilt toward some parts of the market and away from others; that's not the same as "diversifying across value and growth, small and large".

I think we actually agree with each other. I tilt as well, and certainly agree with diversifying across risk factors. I just don't want people to have misconceptions about what that means. If you think of value tilting as diversifying across growth and value for instance, it won't make much sense when you look at the TSM and see that it contains all the growth stocks and all the value stocks.
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Re: Is Small Value Still A Winner?

Post by ClosetIndexer »

nedsaid wrote: Sun Nov 04, 2018 1:01 pm
ClosetIndexer wrote: Sat Nov 03, 2018 4:36 am
nedsaid wrote: Thu Nov 01, 2018 5:52 pmFurthermore, it seems logical to not only diversify across asset classes but also across factors. In the old days, we used to call them investment styles. You can't help but notice that Growth and Value take turns outperforming each other. Ditto with Large and Small. Same with US and International. Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
I was with you up until here. The total stock market is, by definition, diversified between value and growth, and between small and large. When you tilt to value, you're tilting away from growth, not diversifying between the two. Ditto small and large. The diversification you're adding is, rather, additional sources of risk and return (risk factors) besides market beta (and term/credit on the bond side).
If you own the market, by definition you are exposed only to Beta or Market. The exception to this is that the large indexes might have a bit of a Quality bias because the largest and most successful companies have the largest market caps. Yes, you have Value stocks in there, you have momentum in there, you have small stocks in there but the factors all cancel each other out. Paul Merriman splits his portfolio between Value and market cap weighted indexes, in addition a good portion of his portfolio are the smaller stocks. You can't get factor exposure without tilting. For example, if you evenly balance between Growth and Value, the research shows that they just cancel each other out. If you use an index instead of Growth, this doesn't cancel out the Value effect.
The very definition of the factor returns are the returns of long-short slices of the market sorted by those factors, so yes, of course TSM will not have exposure to any except market beta. And yes, what ultimately matters if the total factor exposure of your portfolio. (Although when constructing a portfolio it can be useful to consider how the factors are defined—for example, you can create a value factor by sorting stocks on various value metrics, such as price to book, price to earnings, etc., or a combination. There are also choices like when to update the price - see AQR's HML-DEV factor vs the classic HML. How you construct the factors will affect their associated premiums, both when analyzing history, and when building funds and portfolios.)

Regarding splitting a portfolio between tilted funds and market indexes, you could certainly do that if you wanted a very mild tilt. Generally it's difficult to get more than a 0.3 value weighting or so with broadly diversified (in terms of # of stocks to diversify non-systematic risks) long-only funds though, especially globally diversified, so I personally wouldn't want to water them down with TSM funds. To each their own though.
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Re: Is Small Value Still A Winner?

Post by nedsaid »

ClosetIndexer wrote: Tue Nov 06, 2018 1:02 am
nedsaid wrote: Sun Nov 04, 2018 1:01 pm
ClosetIndexer wrote: Sat Nov 03, 2018 4:36 am
nedsaid wrote: Thu Nov 01, 2018 5:52 pmFurthermore, it seems logical to not only diversify across asset classes but also across factors. In the old days, we used to call them investment styles. You can't help but notice that Growth and Value take turns outperforming each other. Ditto with Large and Small. Same with US and International. Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
I was with you up until here. The total stock market is, by definition, diversified between value and growth, and between small and large. When you tilt to value, you're tilting away from growth, not diversifying between the two. Ditto small and large. The diversification you're adding is, rather, additional sources of risk and return (risk factors) besides market beta (and term/credit on the bond side).
If you own the market, by definition you are exposed only to Beta or Market. The exception to this is that the large indexes might have a bit of a Quality bias because the largest and most successful companies have the largest market caps. Yes, you have Value stocks in there, you have momentum in there, you have small stocks in there but the factors all cancel each other out. Paul Merriman splits his portfolio between Value and market cap weighted indexes, in addition a good portion of his portfolio are the smaller stocks. You can't get factor exposure without tilting. For example, if you evenly balance between Growth and Value, the research shows that they just cancel each other out. If you use an index instead of Growth, this doesn't cancel out the Value effect.
The very definition of the factor returns are the returns of long-short slices of the market sorted by those factors, so yes, of course TSM will not have exposure to any except market beta. And yes, what ultimately matters if the total factor exposure of your portfolio. (Although when constructing a portfolio it can be useful to consider how the factors are defined—for example, you can create a value factor by sorting stocks on various value metrics, such as price to book, price to earnings, etc., or a combination. There are also choices like when to update the price - see AQR's HML-DEV factor vs the classic HML. How you construct the factors will affect their associated premiums, both when analyzing history, and when building funds and portfolios.)

Regarding splitting a portfolio between tilted funds and market indexes, you could certainly do that if you wanted a very mild tilt. Generally it's difficult to get more than a 0.3 value weighting or so with broadly diversified (in terms of # of stocks to diversify non-systematic risks) long-only funds though, especially globally diversified, so I personally wouldn't want to water them down with TSM funds. To each their own though.
My response is though I want to tilt towards Value, I don't want to be 100% out of the Large Growth stocks. The 1/2 Value and 1/2 Stock Indexes is a compromise. Yes, you get less of a Value weighting but you also get less tracking error during times when Large Growth predominates. I (so far) don't own long/short funds, so I have to get my factor tilts on the long side. There are trade-offs in portfolio construction, for me I don't do extreme tilts.
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Re: Is Small Value Still A Winner?

Post by nedsaid »

Random Walker wrote: Sun Nov 04, 2018 2:56 pm Nedsaid,
Agree. Got to admit though, that quality/profitability sort of gives me the heebie jeebies. It seems to push everything in a growthy direction, which then makes me wonder why I’m tilting at all. In fact Larry has said that one positive additional side effect of quality/profitability screen is that it lessens tracking error regret. That thought makes me a bit nervy about the concept as well.

Agree that combining factors in a single fund is the most efficient way to invest in them, even if it might lower the depth of exposure to each individual factor a bit.

Dave
It is a paradox of factor investing that both Value and certain elements of Growth both work well. Your doubts about tilting come about because the better indexes screen out most of the "anti-factors", which I define as the Lottery Stocks and the Value Traps. My guess is that it is easier to screen out the Lottery Stocks. So my opinion is that market weighting does give you a tilt towards Profitability/Quality. One reason indexing works so well, the worst stocks just are not represented. In addition, your indexes are tilted towards the largest and most successful companies. Pretty much, market cap weighted indexing does most of the heavy lifting. A cynic could say it isn't worth the effort to factor tilt as the gains beyond the indexes might be pretty small.
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Re: Is Small Value Still A Winner?

Post by randomguy »

indexonlyplease wrote: Sun Nov 04, 2018 7:24 pm
nedsaid wrote: Sun Nov 04, 2018 5:41 pm
indexonlyplease wrote: Sun Nov 04, 2018 1:51 pm needsaid,

Since you mentioned his name can you help me with this idea for my 22 year old son that puts $5500 into a Roth IRA each year.

What about the Paul Merriman idea of the 2 fund Target Dated Fund with svc fund for a young person starting to invest. Does this make sense.

90% TDF 10% scv
80% TDF 20% scv
70% TDF 30% scv

could this be soemething worth doing for the young person starting out and investing in the Roth IRA $5500 yr.

Is there a way to back test this using 2 funds. I see portfolio advisor you can not. No glide path.
I think Merriman's idea makes a lot of sense. Small-Cap Value should improve results but it will also produce greater volatility. I really do think you can have too much of a good thing, I have never advocated for extreme tilting. Probably any of the three choices would be good for a 22 year old. I don't know, maybe it is just me, I would pick the 10% SCV or the 20% SCV, I wouldn't go overboard here. A Target Date Fund for a 22 year old is going to be almost all stock anyways, so a SCV fund would add even more volatility, it is important your son understands this.
Thanks, it is hard to disagree with someone like Paul that is spending his life now educating people. I have to believe he is on to something good for investors.

If you don't go overboard, what is the point? If you get 3% out performance on 10% of your portfolio, it really doesn't move the needle much. Seems like if you believe in SV going 30% or so is the only way to go. And yes now is probably a better time to to SV when we have had a decade or so where the premium didn't show up is a better time for this strategy than in 2009 when we just had a decade where this strategy did pay off.
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Re: Is Small Value Still A Winner?

Post by nedsaid »

randomguy wrote: Mon Nov 12, 2018 12:24 pm
indexonlyplease wrote: Sun Nov 04, 2018 7:24 pm
nedsaid wrote: Sun Nov 04, 2018 5:41 pm
indexonlyplease wrote: Sun Nov 04, 2018 1:51 pm needsaid,

Since you mentioned his name can you help me with this idea for my 22 year old son that puts $5500 into a Roth IRA each year.

What about the Paul Merriman idea of the 2 fund Target Dated Fund with svc fund for a young person starting to invest. Does this make sense.

90% TDF 10% scv
80% TDF 20% scv
70% TDF 30% scv

could this be soemething worth doing for the young person starting out and investing in the Roth IRA $5500 yr.

Is there a way to back test this using 2 funds. I see portfolio advisor you can not. No glide path.
I think Merriman's idea makes a lot of sense. Small-Cap Value should improve results but it will also produce greater volatility. I really do think you can have too much of a good thing, I have never advocated for extreme tilting. Probably any of the three choices would be good for a 22 year old. I don't know, maybe it is just me, I would pick the 10% SCV or the 20% SCV, I wouldn't go overboard here. A Target Date Fund for a 22 year old is going to be almost all stock anyways, so a SCV fund would add even more volatility, it is important your son understands this.
Thanks, it is hard to disagree with someone like Paul that is spending his life now educating people. I have to believe he is on to something good for investors.

If you don't go overboard, what is the point? If you get 3% out performance on 10% of your portfolio, it really doesn't move the needle much. Seems like if you believe in SV going 30% or so is the only way to go. And yes now is probably a better time to to SV when we have had a decade or so where the premium didn't show up is a better time for this strategy than in 2009 when we just had a decade where this strategy did pay off.
The problem is that Small Value is just 2% of the US Total Stock Market, if you also consider Mid Value, then you are up to 8%. Something in me just doesn't want to cram all my equity investment into 2% of the market. I don't think you are advocating this, but you raise an important question. How much of a tilt is really needed affect performance? Sounds like you are saying 30% of the 2 fund portfolio, I would lean more towards 20%. A 20% weighting should cause your portfolio to outperform by 0.6%, a 30% weighting would get you to 0.9% outperformance. That is if the Small/Value premium persists. I would hope to outperform with tilts by 0.50% to 1.00%. So keep in mind, the more you tilt, the more possible outperformance but at the cost of greater volatility of the portfolio and possibly greater tracking error.
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Re: Is Small Value Still A Winner?

Post by cheezit »

nedsaid wrote: Thu Nov 01, 2018 5:52 pm Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
Ned,

While I am a tilter myself, at least over the range of dates for which I have convenient access to data, this has not been the case. Cap-weighted total US market showed a lower stdev and max drawdown than either equal-weighting [small|med|large][value|growth] or using SCV to tilt a market equity portfolio. So far as I can tell, this result holds if you invest a lump sum at the beginning instead of DCAing as an investor would have likely done if this had been their investing career, and it holds if you change the rebalancing strategy. It also holds if you reduce the date range to more recent times (eg. 2000-present); doing this has the side effect of making all three portfolios behave almost identically, incidentally.
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Re: Is Small Value Still A Winner?

Post by vineviz »

nedsaid wrote: Mon Nov 12, 2018 1:45 pm
randomguy wrote: Mon Nov 12, 2018 12:24 pm If you don't go overboard, what is the point? If you get 3% out performance on 10% of your portfolio, it really doesn't move the needle much. Seems like if you believe in SV going 30% or so is the only way to go. And yes now is probably a better time to to SV when we have had a decade or so where the premium didn't show up is a better time for this strategy than in 2009 when we just had a decade where this strategy did pay off.
The problem is that Small Value is just 2% of the US Total Stock Market, if you also consider Mid Value, then you are up to 8%. Something in me just doesn't want to cram all my equity investment into 2% of the market. I don't think you are advocating this, but you raise an important question. How much of a tilt is really needed affect performance? Sounds like you are saying 30% of the 2 fund portfolio, I would lean more towards 20%. A 20% weighting should cause your portfolio to outperform by 0.6%, a 30% weighting would get you to 0.9% outperformance. That is if the Small/Value premium persists. I would hope to outperform with tilts by 0.50% to 1.00%. So keep in mind, the more you tilt, the more possible outperformance but at the cost of greater volatility of the portfolio and possibly greater tracking error.
I think you make a good point about the tradeoff between expected return and risk/tracking error.

One objective way to look at the problem is to find the ratio of target date fund and small cap value that maximizes diversity. This would be roughly 60% target date fund and 40% small cap value fund.

Using Vanguard Target Retirement 2045 and iShares S&P Small-Cap 600 Value ETF as the funds, 40% small cap value would have increased volatility and return enough that the blend had a higher risk-adjusted return. There have been a few years where the blend substantially outperformed or underperformed the target date fund alone, but the investor would have been rewarded for the risk they were taking.

https://www.portfoliovisualizer.com/opt ... ymbol2=ijs

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Re: Is Small Value Still A Winner?

Post by nedsaid »

cheezit wrote: Mon Nov 12, 2018 2:04 pm
nedsaid wrote: Thu Nov 01, 2018 5:52 pm Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
Ned,

While I am a tilter myself, at least over the range of dates for which I have convenient access to data, this has not been the case. Cap-weighted total US market showed a lower stdev and max drawdown than either equal-weighting [small|med|large][value|growth] or using SCV to tilt a market equity portfolio. So far as I can tell, this result holds if you invest a lump sum at the beginning instead of DCAing as an investor would have likely done if this had been their investing career, and it holds if you change the rebalancing strategy. It also holds if you reduce the date range to more recent times (eg. 2000-present); doing this has the side effect of making all three portfolios behave almost identically, incidentally.
Not surprising as we have been in a Large Cap Growth market for a decade now. Tilting would not have helped whether you made a lump sum investment in 2008 or if you dollar-cost-averaged your investment into the markets over that decade. A Total Market Index during the last decade would have beaten Small/Value tilted portfolios or so-called equal weight indexes. Large Growth just overpowered everything else, particularly the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks.
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Re: Is Small Value Still A Winner?

Post by nedsaid »

vineviz wrote: Mon Nov 12, 2018 2:23 pm
nedsaid wrote: Mon Nov 12, 2018 1:45 pm
randomguy wrote: Mon Nov 12, 2018 12:24 pm If you don't go overboard, what is the point? If you get 3% out performance on 10% of your portfolio, it really doesn't move the needle much. Seems like if you believe in SV going 30% or so is the only way to go. And yes now is probably a better time to to SV when we have had a decade or so where the premium didn't show up is a better time for this strategy than in 2009 when we just had a decade where this strategy did pay off.
The problem is that Small Value is just 2% of the US Total Stock Market, if you also consider Mid Value, then you are up to 8%. Something in me just doesn't want to cram all my equity investment into 2% of the market. I don't think you are advocating this, but you raise an important question. How much of a tilt is really needed affect performance? Sounds like you are saying 30% of the 2 fund portfolio, I would lean more towards 20%. A 20% weighting should cause your portfolio to outperform by 0.6%, a 30% weighting would get you to 0.9% outperformance. That is if the Small/Value premium persists. I would hope to outperform with tilts by 0.50% to 1.00%. So keep in mind, the more you tilt, the more possible outperformance but at the cost of greater volatility of the portfolio and possibly greater tracking error.
I think you make a good point about the tradeoff between expected return and risk/tracking error.

One objective way to look at the problem is to find the ratio of target date fund and small cap value that maximizes diversity. This would be roughly 60% target date fund and 40% small cap value fund.

Using Vanguard Target Retirement 2045 and iShares S&P Small-Cap 600 Value ETF as the funds, 40% small cap value would have increased volatility and return enough that the blend had a higher risk-adjusted return. There have been a few years where the blend substantially outperformed or underperformed the target date fund alone, but the investor would have been rewarded for the risk they were taking.

https://www.portfoliovisualizer.com/opt ... ymbol2=ijs

Image
Thanks for your response. At least based upon past data, the "sweet spot" would be 60% Target Date 2045 and 40% Small-Cap Value. Going forward, this would be a good bet. We don't, however, know what the future holds but this is an informed guess.

Your approach is probably better than my eyeballing approach. I still need to learn how to better utilize portfolio visualizer. But again, this is based upon past data. We don't know what the optimal 2 fund mix would be but 40% looks and feels right.

Part of this is that my expectations for Small/Value tilting are modest, so I suppose my tilts are modest as well.
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Re: Is Small Value Still A Winner?

Post by randomguy »

nedsaid wrote: Mon Nov 12, 2018 1:45 pm
The problem is that Small Value is just 2% of the US Total Stock Market, if you also consider Mid Value, then you are up to 8%. Something in me just doesn't want to cram all my equity investment into 2% of the market. I don't think you are advocating this, but you raise an important question. How much of a tilt is really needed affect performance? Sounds like you are saying 30% of the 2 fund portfolio, I would lean more towards 20%. A 20% weighting should cause your portfolio to outperform by 0.6%, a 30% weighting would get you to 0.9% outperformance. That is if the Small/Value premium persists. I would hope to outperform with tilts by 0.50% to 1.00%. So keep in mind, the more you tilt, the more possible outperformance but at the cost of greater volatility of the portfolio and possibly greater tracking error.
The old Larry portfolio is basically 100% SV for the US equity portion. I think you can use the logic of 500+ companies across a bunch of industries is diversified enough and at the levels you are buying, you are liquid enough. Obviously the more you deviated from your benchmark, the more tracking error you will get. Thats life. Down at 10% I think the gains aren't worth the complexity and added risks of making investing mistakes (either increasing your SV allocation when it is doing well or selling it when it trails). If you don't believe in it enough to make a 30%+ of US equity bet, I am not sure it is worth holding. You also run the risk of being an asset collector (well how about 10% SV, another 10% momentum, reits sound good, low volatility did well last year,...) where you can basically counter act all your tilts:)

Bengen found that about 30% maximized US SWR (the 4.5% rule). Personally I can't imagine going over 50% and tend to sit about 40% with a good chunk of that being more midcap than small cap. There aren't many funds that are really small caps that have low enough ER for me. I don't beleive in the premium enough to pay a .7% added ER :)
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Re: Is Small Value Still A Winner?

Post by MJW »

nedsaid wrote: Mon Nov 12, 2018 3:09 pm Not surprising as we have been in a Large Cap Growth market for a decade now. Tilting would not have helped whether you made a lump sum investment in 2008 or if you dollar-cost-averaged your investment into the markets over that decade. A Total Market Index during the last decade would have beaten Small/Value tilted portfolios or so-called equal weight indexes. Large Growth just overpowered everything else, particularly the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks.
I wonder how many SCV tilters with weaker convictions are starting to bail on their strategy. Perhaps a decade isn't considered long-term with respect to investing, but it is a significant amount of time to have passed in most people's lives.
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Re: Is Small Value Still A Winner?

Post by randomguy »

MJW wrote: Mon Nov 12, 2018 3:18 pm
nedsaid wrote: Mon Nov 12, 2018 3:09 pm Not surprising as we have been in a Large Cap Growth market for a decade now. Tilting would not have helped whether you made a lump sum investment in 2008 or if you dollar-cost-averaged your investment into the markets over that decade. A Total Market Index during the last decade would have beaten Small/Value tilted portfolios or so-called equal weight indexes. Large Growth just overpowered everything else, particularly the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks.
I wonder how many SCV tilters with weaker convictions are starting to bail on their strategy. Perhaps a decade isn't considered long-term with respect to investing, but it is a significant amount of time to have passed in most people's lives.
Right now we are talking about a less than .5% of a difference between vanguards total market and small value. I doubt that keeps anyone up at night:) Now a person who bought in 2017 right after the big outperformance of 2016 might be wondering if they made the right choice as they are underperforming by around 15%
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nedsaid
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Re: Is Small Value Still A Winner?

Post by nedsaid »

randomguy wrote: Mon Nov 12, 2018 3:18 pm
nedsaid wrote: Mon Nov 12, 2018 1:45 pm
The problem is that Small Value is just 2% of the US Total Stock Market, if you also consider Mid Value, then you are up to 8%. Something in me just doesn't want to cram all my equity investment into 2% of the market. I don't think you are advocating this, but you raise an important question. How much of a tilt is really needed affect performance? Sounds like you are saying 30% of the 2 fund portfolio, I would lean more towards 20%. A 20% weighting should cause your portfolio to outperform by 0.6%, a 30% weighting would get you to 0.9% outperformance. That is if the Small/Value premium persists. I would hope to outperform with tilts by 0.50% to 1.00%. So keep in mind, the more you tilt, the more possible outperformance but at the cost of greater volatility of the portfolio and possibly greater tracking error.
The old Larry portfolio is basically 100% SV for the US equity portion. I think you can use the logic of 500+ companies across a bunch of industries is diversified enough and at the levels you are buying, you are liquid enough. Obviously the more you deviated from your benchmark, the more tracking error you will get. Thats life. Down at 10% I think the gains aren't worth the complexity and added risks of making investing mistakes (either increasing your SV allocation when it is doing well or selling it when it trails). If you don't believe in it enough to make a 30%+ of US equity bet, I am not sure it is worth holding. You also run the risk of being an asset collector (well how about 10% SV, another 10% momentum, reits sound good, low volatility did well last year,...) where you can basically counter act all your tilts:)

Bengen found that about 30% maximized US SWR (the 4.5% rule). Personally I can't imagine going over 50% and tend to sit about 40% with a good chunk of that being more midcap than small cap. There aren't many funds that are really small caps that have low enough ER for me. I don't beleive in the premium enough to pay a .7% added ER :)
The Larry portfolio is a good one and it is diversified across International Developed Small Value and International Emerging Small Value as well. So actually there are thousands of companies here. Perhaps my conviction just isn't strong enough but somehow I just don't believe in extreme tilts. It is just that I have been at this for over 30 years now and have seen things come and go and I just don't want to put all my eggs in the Small/Value basket. I have seen the Size and Value premiums come and go (and hopefully come again) and seen the earnings and price momentum strategy ebb and flow over the years. I have seen Index Optimization work brilliantly and then fade. Plus I know that the academic findings are being published like crazy. Investment strategies, even the best of them, have their good times and bad times.

To your second point, too much diversification can cancel out the benefits of factor tilting. What I am seeing is that Quality/Profitability helps both the Size and Value factors. If you combine Quality with Size and Value, that is probably the best an individual can do. Combine too much and pretty much your factors cancel each other out. It seems that Value and Growth both work but Growth only works if you have the "right" Growth stocks. There is evidence that momentum set to neutral helps Value as well. So this is getting pretty complex to implement.

The frustrating thing is to learn that it isn't enough to invest in Small Cap Value but to invest in the right funds to best capture the premiums. So Vanguard Small-Cap Value Index isn't good enough and those who really know what they are doing need to be in the DFA Small Value Fund. Except that my "terrible" Vanguard product has been beating the "superior" DFA product. But then again, Vanguard has higher market caps and is less Valuey, in a Large Growth stock market this should not be surprising. So I was "dumb" but really was "smart" without knowing how really "dumb" or "smart" I really was. I was "dumb" for investing in the Vanguard Small-Cap Value Index ETF but "smart" for anticipating that in a Large Growth market that Vanguard would outperform DFA. Most likely, I just didn't quite know what I was doing. I just bought what the Merriman folks told me to buy.

So I don't know, I am cautious by nature. Like to make educated bets but don't overdo it. Then folks say, why do you bother? Hard to say how little tilt is too little and how much tilt is too much? I don't have the answer.
A fool and his money are good for business.
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Re: Is Small Value Still A Winner?

Post by nedsaid »

MJW wrote: Mon Nov 12, 2018 3:18 pm
nedsaid wrote: Mon Nov 12, 2018 3:09 pm Not surprising as we have been in a Large Cap Growth market for a decade now. Tilting would not have helped whether you made a lump sum investment in 2008 or if you dollar-cost-averaged your investment into the markets over that decade. A Total Market Index during the last decade would have beaten Small/Value tilted portfolios or so-called equal weight indexes. Large Growth just overpowered everything else, particularly the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks.
I wonder how many SCV tilters with weaker convictions are starting to bail on their strategy. Perhaps a decade isn't considered long-term with respect to investing, but it is a significant amount of time to have passed in most people's lives.
I have not bailed. Actually I have a larger Large Value tilt than a Small Value tilt. I think Large Value is due but I don't know when.
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Re: Is Small Value Still A Winner?

Post by nedsaid »

randomguy wrote: Mon Nov 12, 2018 3:25 pm
MJW wrote: Mon Nov 12, 2018 3:18 pm
nedsaid wrote: Mon Nov 12, 2018 3:09 pm Not surprising as we have been in a Large Cap Growth market for a decade now. Tilting would not have helped whether you made a lump sum investment in 2008 or if you dollar-cost-averaged your investment into the markets over that decade. A Total Market Index during the last decade would have beaten Small/Value tilted portfolios or so-called equal weight indexes. Large Growth just overpowered everything else, particularly the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks.
I wonder how many SCV tilters with weaker convictions are starting to bail on their strategy. Perhaps a decade isn't considered long-term with respect to investing, but it is a significant amount of time to have passed in most people's lives.
Right now we are talking about a less than .5% of a difference between vanguards total market and small value. I doubt that keeps anyone up at night:) Now a person who bought in 2017 right after the big outperformance of 2016 might be wondering if they made the right choice as they are underperforming by around 15%
That is why you need patience and long time horizons. If my tilts can produce an excess return of 0.50% to 1.00% a year, compounded over many years, it will be worth it. If they don't, it gave me something to post about here on the Bogleheads forum.
A fool and his money are good for business.
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Re: Is Small Value Still A Winner?

Post by cheezit »

nedsaid wrote: Mon Nov 12, 2018 3:09 pm
cheezit wrote: Mon Nov 12, 2018 2:04 pm
nedsaid wrote: Thu Nov 01, 2018 5:52 pm Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
Ned,

While I am a tilter myself, at least over the range of dates for which I have convenient access to data, this has not been the case. Cap-weighted total US market showed a lower stdev and max drawdown than either equal-weighting [small|med|large][value|growth] or using SCV to tilt a market equity portfolio. So far as I can tell, this result holds if you invest a lump sum at the beginning instead of DCAing as an investor would have likely done if this had been their investing career, and it holds if you change the rebalancing strategy. It also holds if you reduce the date range to more recent times (eg. 2000-present); doing this has the side effect of making all three portfolios behave almost identically, incidentally.
Not surprising as we have been in a Large Cap Growth market for a decade now. Tilting would not have helped whether you made a lump sum investment in 2008 or if you dollar-cost-averaged your investment into the markets over that decade. A Total Market Index during the last decade would have beaten Small/Value tilted portfolios or so-called equal weight indexes. Large Growth just overpowered everything else, particularly the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks.
That's true, but my naive expectation wouldn't have been that the outperformance of LCG over the last 10 (really 5) years would be so powerful as to make the size and value factors worthless (actually negative worth) diversifiers over the 46+ year period I looked at in terms of reducing stdev or max drawdown. The size and value factors still juiced returns over that period by a substantial margin though. To me this is evidence for the contention that fixed income, especially high-quality fixed income, is the only way to really "smooth the ride".
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Re: Is Small Value Still A Winner?

Post by nedsaid »

cheezit wrote: Mon Nov 12, 2018 3:49 pm
nedsaid wrote: Mon Nov 12, 2018 3:09 pm
cheezit wrote: Mon Nov 12, 2018 2:04 pm
nedsaid wrote: Thu Nov 01, 2018 5:52 pm Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
Ned,

While I am a tilter myself, at least over the range of dates for which I have convenient access to data, this has not been the case. Cap-weighted total US market showed a lower stdev and max drawdown than either equal-weighting [small|med|large][value|growth] or using SCV to tilt a market equity portfolio. So far as I can tell, this result holds if you invest a lump sum at the beginning instead of DCAing as an investor would have likely done if this had been their investing career, and it holds if you change the rebalancing strategy. It also holds if you reduce the date range to more recent times (eg. 2000-present); doing this has the side effect of making all three portfolios behave almost identically, incidentally.
Not surprising as we have been in a Large Cap Growth market for a decade now. Tilting would not have helped whether you made a lump sum investment in 2008 or if you dollar-cost-averaged your investment into the markets over that decade. A Total Market Index during the last decade would have beaten Small/Value tilted portfolios or so-called equal weight indexes. Large Growth just overpowered everything else, particularly the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks.
That's true, but my naive expectation wouldn't have been that the outperformance of LCG over the last 10 (really 5) years would be so powerful as to make the size and value factors worthless (actually negative worth) diversifiers over the 46+ year period I looked at in terms of reducing stdev or max drawdown. The size and value factors still juiced returns over that period by a substantial margin though. To me this is evidence for the contention that fixed income, especially high-quality fixed income, is the only way to really "smooth the ride".
Yep, I have often wondered if just adding bonds are the way to reduce volatility but with the price of reducing return as well. The academics say that you can add non-correlating asset classes to a portfolio and you might both increase returns and reduce volatility doing that. I have found that the diversification into non-correlating asset classes sometimes works and sometimes it doesn't. In a crisis, asset classes tend to correlate and on the way down. Doesn't. . .always. . .work.
A fool and his money are good for business.
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