Small-Cap Value Funds: Then And Now

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Taylor Larimore
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Small-Cap Value Funds: Then And Now

Post by Taylor Larimore » Thu Jan 31, 2019 10:13 pm

Bogleheads:

Five years ago Small-Cap Value funds were doing well and heavily promoted by the financial industry:

100% Stock Portfolio in Small Cap Value??

Today Small-Cap Value funds have the WORST 5-year return of all Morningstar's 14 U.S. Equity categories.

2018 Index Performance

Lesson learned: Stick to broadly diversified total market index funds.

The Three-Fund Portfolio

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

MikeMak27
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Re: Small-Cap Value Funds: Then And Now

Post by MikeMak27 » Thu Jan 31, 2019 10:22 pm

From August of 2000 (when IJS, small cap value S&P 600) was created thru December of 2018, IJS has a CAGR of 8.55%.
IVV (S&P 500) has had a CAGR of 5.7% in that time.
So IJS would be worth 43,767 if 10,000 was invested back then and IVV would be worth 27,108.

As a result I own NO S&P 500 and have been extatic about the results.

All data provided from portfoliovisualizer.com
Mac 4 fund portfolio: 45% US small cap value (IJS, VBR), 40% Emerging Markets (IEMG, VWO, FPMAX), 10% long term US treasuries (TLT), 5% US REITS (VNQ)

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Re: Small-Cap Value Funds: Then And Now

Post by hohum » Thu Jan 31, 2019 10:32 pm

MikeMak27 wrote:
Thu Jan 31, 2019 10:22 pm
From August of 2000 (when IJS, small cap value S&P 600) was created thru December of 2018, IJS has a CAGR of 8.55%.
IVV (S&P 500) has had a CAGR of 5.7% in that time.
So IJS would be worth 43,767 if 10,000 was invested back then and IVV would be worth 27,108.

As a result I own NO S&P 500 and have been extatic about the results.

All data provided from portfoliovisualizer.com
Let's not forget Vanguard Total International. Over the same time period, CAGR 3.93%. 10,000 would be a whopping 20,027.

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Re: Small-Cap Value Funds: Then And Now

Post by MikeMak27 » Thu Jan 31, 2019 10:43 pm

Or compare IEFA (developed large cap from Europe, Asia and Australia) which has done 4.14% CAGR since it’s creation versus SCZ (small cap developed from Europe, Asia, and Australia) which has done 6.74% CAGR.
Mac 4 fund portfolio: 45% US small cap value (IJS, VBR), 40% Emerging Markets (IEMG, VWO, FPMAX), 10% long term US treasuries (TLT), 5% US REITS (VNQ)

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Re: Small-Cap Value Funds: Then And Now

Post by siamond » Thu Jan 31, 2019 11:25 pm

What does the performance of the past 5 years have to do with asset allocation 'stay the course' decisions? Answer: absolutely NOTHING.

One can make a perfectly reasonable argument to stick to total-market. One can make an equally reasonable argument to use a Small-Cap-Value tilt in their portfolio. One CANNOT make a reasonable argument based on 5 years of historical returns.

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Re: Small-Cap Value Funds: Then And Now

Post by deanmoriarty » Thu Jan 31, 2019 11:27 pm

As much as I respect the gurus of this forum, sometimes I really don’t understand: any experienced boglehead should know that judging a fund by its performance over the past 5 years is completely irrelevant, since there have been plenty of other 5 year periods where total stock market had horrible performance (look at international, which I’ve been patiently holding and tax loss harvesting for the past 5 years with horrible performance!), and yet this non-argument is now used to discourage owning an asset class which, much like total stock market, has done quite well over a period of time measured in many decades?!

Seems quite controversial to me, and would appreciate an answer telling where my logic is wrong.

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Re: Small-Cap Value Funds: Then And Now

Post by siamond » Thu Jan 31, 2019 11:32 pm

deanmoriarty wrote:
Thu Jan 31, 2019 11:27 pm
Seems quite controversial to me, and would appreciate an answer telling where my logic is wrong.
Your logic has absolutely no issue.

Hopefully, Taylor was just pulling our chain and checking who would fall for such obvious display of confirmation bias.

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Re: Small-Cap Value Funds: Then And Now

Post by vineviz » Fri Feb 01, 2019 7:00 am

siamond wrote:
Thu Jan 31, 2019 11:25 pm
What does the performance of the past 5 years have to do with asset allocation 'stay the course' decisions? Answer: absolutely NOTHING.

One can make a perfectly reasonable argument to stick to total-market. One can make an equally reasonable argument to use a Small-Cap-Value tilt in their portfolio. One CANNOT make a reasonable argument based on 5 years of historical returns.
Well said.
"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: Small-Cap Value Funds: Then And Now

Post by OldSport » Fri Feb 01, 2019 7:14 am

Interesting discussion. THIS is exactly why I promote a five fund portfolio.

Equity portion can be something like this (assuming 70/30 US/Intl):
35-40% Total Stock
30-35% Small Cap or SCV
15-20% Total Intl
10-15% EM

We cannot predict or time the market. All we do know with a reasonable degree of certainty is that different asset classes & subclasses will outperform others and vice versa some of the time. We do not know which ones and we do not know when.

That's why I like a five fund portfolio with periodic rebalancing to capture zig-zag throughout the ups and downs. Pick an AA and stick to it. Not only rebalance between stocks/bonds and US/Intl but between sub asset classes.

Stay the course!

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Re: Small-Cap Value Funds: Then And Now

Post by sabtastic » Fri Feb 01, 2019 9:26 am

Love this. Thank you, Taylor!

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Re: Small-Cap Value Funds: Then And Now

Post by DecumulatorDoc » Fri Feb 01, 2019 8:19 pm

Taylor, a small cap value tilt was heavily promoted on this website, not just by the "financial industry." Those of us that chose this course, realized that small cap value would not outperform over every period, something I guess the OP has forgotten. If the post is not a joke, it sure is disappointing to see this from a forum leader. When I look at the introduction to this forum I am reminded:

Bogleheads® emphasize regular saving, broad diversification, and sticking to one's investment plan regardless of market conditions."

So apparently that has changed? Please don't forget, the mantra of the Boglehead forum is not the "three fund portfolio", but instead it is "stay the course."

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Re: Small-Cap Value Funds: Then And Now

Post by zuma » Sat Feb 02, 2019 4:47 am

siamond wrote:
Thu Jan 31, 2019 11:25 pm
What does the performance of the past 5 years have to do with asset allocation 'stay the course' decisions? Answer: absolutely NOTHING.

One can make a perfectly reasonable argument to stick to total-market. One can make an equally reasonable argument to use a Small-Cap-Value tilt in their portfolio. One CANNOT make a reasonable argument based on 5 years of historical returns.
Agreed.

I'm a total-market investor myself, but including a small-cap tilt is a reasonable way to invest for those who are willing to stick to it over the long term. Looking at an arbitrary five-year period of data is not a good way to choose an investing strategy. And, as is often stated here: there are many roads to Dublin.

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Re: Small-Cap Value Funds: Then And Now

Post by DecumulatorDoc » Sat Feb 02, 2019 8:34 am

Taylor is enthusiastic for the three fund portfolio, apparently to a fault. For those that chose a different road to Dublin, be encouraged by Rick Ferri's quote from 2014 about staying the course if your IPS directs an exposure to small cap value:

"Behavior is another issue. A tilted portfolio can underperform for many years (see Expect Years of Pain before Market Gain for details). A prolonged underperformance period makes tilting risky from a behavioral perspective. Some people are impatient and will jump out of a strategy after a few bad years. This is exactly what investors should not do because it locks in a lower long-term return. The strategy has to be diligently maintained in order for it to be successful. Tilting is a life-long investment ideal."
https://www.etf.com/sections/index-inve ... -tilt.html

If it's one thing this forum has taught me, its that I should stay the course according to my Investment Policy Statement. By doing this I will not fall prey to bias, and other behavioral misdeeds that lead to diminished returns. For anyone that may be influenced to change course by Taylor's post citing 5 years of underperformance, I encourage you to read this book: The Little Book of Behavioral Investing: How not to be your own worst enemy.

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Re: Small-Cap Value Funds: Then And Now

Post by MathIsMyWayr » Sat Feb 02, 2019 8:51 am

DecumulatorDoc wrote:
Sat Feb 02, 2019 8:34 am
Taylor is enthusiastic for the three fund portfolio, apparently to a fault. For those that chose a different road to Dublin, be encouraged by Rick Ferri's quote from 2014 about staying the course if your IPS directs an exposure to small cap value:

"Behavior is another issue. A tilted portfolio can underperform for many years (see Expect Years of Pain before Market Gain for details). A prolonged underperformance period makes tilting risky from a behavioral perspective. Some people are impatient and will jump out of a strategy after a few bad years. This is exactly what investors should not do because it locks in a lower long-term return. The strategy has to be diligently maintained in order for it to be successful. Tilting is a life-long investment ideal."
https://www.etf.com/sections/index-inve ... -tilt.html

If it's one thing this forum has taught me, its that I should stay the course according to my Investment Policy Statement. By doing this I will not fall prey to bias, and other behavioral misdeeds that lead to diminished returns. For anyone that may be influenced to change course by Taylor's post citing 5 years of underperformance, I encourage you to read this book: The Little Book of Behavioral Investing: How not to be your own worst enemy.
Taylor never said that the three fund portfolio is unconditionally the best at all the time. According to him, any significant deviation from it may be costly or its benefit may not be worth the time, effort and anxiety for the majority of investors, not to mention the behavioral errors.

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Re: Small-Cap Value Funds: Then And Now

Post by harvestbook » Sat Feb 02, 2019 9:38 am

The lesson I just learned is that apparently I've been getting a bargain on all the small-cap value stocks I've been buying over the last five years.
I'm not smart enough to know, and I can't afford to guess.

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Re: Small-Cap Value Funds: Then And Now

Post by David Jay » Sat Feb 02, 2019 10:54 am

harvestbook wrote:
Sat Feb 02, 2019 9:38 am
The lesson I just learned is that apparently I've been getting a bargain on all the small-cap value stocks I've been buying over the last five years.
There ya’ go...
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Small-Cap Value Funds: Then And Now

Post by Fat-Tailed Contagion » Sat Feb 02, 2019 11:21 am

Buy Signal?

Reminder to always view asset classes to context of entire portfolio including correlation coefficients and rebalancing opportunities.

A major human bias is looking at short-term past performance of an asset class and thinking/(knowing) it will continue to be so in the future.
“The intelligent investor is a realist who sells to optimists and buys from pessimists.” | ― Benjamin Graham, The Intelligent Investor

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Re: Small-Cap Value Funds: Then And Now

Post by Mako52 » Sat Feb 02, 2019 10:49 pm

I really don't care what 5 recent years of SCV returns look like considering it took 14 years for the S&P index fund I lump summed into in 1998 to reach its original value.

Lump sum may work for some, may not for others. SCV may work for some, may not for others. Small caps are an ugly path to better than average returns over the very long run.

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Re: Small-Cap Value Funds: Then And Now

Post by Earl Lemongrab » Sun Feb 03, 2019 1:19 am

Mako52 wrote:
Sat Feb 02, 2019 10:49 pm
I really don't care what 5 recent years of SCV returns look like considering it took 14 years for the S&P index fund I lump summed into in 1998 to reach its original value.
Not on a total return basis. Even if lumped at the very highest point in 1998, which was near the end of the year, the index recovered from the subsequent 2000 crash (after going up substantially) and was back at that value by mid 2004.

Even choosing the absolute peak before the crash, in August 2000, the value recovered by September of 2006.

So about six years in either case. Even if you forgot about dividends, you get roughly similar results from a price chart.
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Re: Small-Cap Value Funds: Then And Now

Post by Mako52 » Sun Feb 03, 2019 9:02 am

Earl Lemongrab wrote:
Sun Feb 03, 2019 1:19 am
Mako52 wrote:
Sat Feb 02, 2019 10:49 pm
I really don't care what 5 recent years of SCV returns look like considering it took 14 years for the S&P index fund I lump summed into in 1998 to reach its original value.
Not on a total return basis. Even if lumped at the very highest point in 1998, which was near the end of the year, the index recovered from the subsequent 2000 crash (after going up substantially) and was back at that value by mid 2004.

Even choosing the absolute peak before the crash, in August 2000, the value recovered by September of 2006.

So about six years in either case. Even if you forgot about dividends, you get roughly similar results from a price chart.
With dividends reinvested, and no additional money put into the account, and my keeping track of it on a quarterly basis, it bottomed out in Q1 2009, (slightly less than the original amount put in) and only consistently stayed above the original basis from June 2009 onward. So that's essentially 10 lost years.

https://www.portfoliovisualizer.com/bac ... ion1_1=100

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Re: Small-Cap Value Funds: Then And Now

Post by Earl Lemongrab » Sun Feb 03, 2019 12:23 pm

Mako52 wrote:
Sun Feb 03, 2019 9:02 am
Earl Lemongrab wrote:
Sun Feb 03, 2019 1:19 am
Mako52 wrote:
Sat Feb 02, 2019 10:49 pm
I really don't care what 5 recent years of SCV returns look like considering it took 14 years for the S&P index fund I lump summed into in 1998 to reach its original value.
Not on a total return basis. Even if lumped at the very highest point in 1998, which was near the end of the year, the index recovered from the subsequent 2000 crash (after going up substantially) and was back at that value by mid 2004.

Even choosing the absolute peak before the crash, in August 2000, the value recovered by September of 2006.

So about six years in either case. Even if you forgot about dividends, you get roughly similar results from a price chart.
With dividends reinvested, and no additional money put into the account, and my keeping track of it on a quarterly basis, it bottomed out in Q1 2009, (slightly less than the original amount put in) and only consistently stayed above the original basis from June 2009 onward. So that's essentially 10 lost years.
That's changing the statement significantly by adding in a subsequent crash to the one that it had already recovered from. You need to state your points more clearly.
Play Gloria!

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Re: Small-Cap Value Funds: Then And Now

Post by DeadPoets » Sun Feb 03, 2019 9:55 pm

Taylor Larimore wrote:
Thu Jan 31, 2019 10:13 pm
Bogleheads:

Five years ago Small-Cap Value funds were doing well and heavily promoted by the financial industry:

100% Stock Portfolio in Small Cap Value??

Today Small-Cap Value funds have the WORST 5-year return of all Morningstar's 14 U.S. Equity categories.

2018 Index Performance

Lesson learned: Stick to broadly diversified total market index funds.

The Three-Fund Portfolio

Best wishes
Taylor
Reversion to the mean.

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Re: Small-Cap Value Funds: Then And Now

Post by White Coat Investor » Sun Feb 03, 2019 10:34 pm

Don't tilt to factors more than you believe in factors for the long haul. Even if they are real (and they may not be) there will be long periods of underperformance, like the last five years.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Small-Cap Value Funds: Then And Now

Post by MotoTrojan » Sun Feb 03, 2019 11:19 pm

OldSport wrote:
Fri Feb 01, 2019 7:14 am
Interesting discussion. THIS is exactly why I promote a five fund portfolio.

Equity portion can be something like this (assuming 70/30 US/Intl):
35-40% Total Stock
30-35% Small Cap or SCV
15-20% Total Intl
10-15% EM

We cannot predict or time the market. All we do know with a reasonable degree of certainty is that different asset classes & subclasses will outperform others and vice versa some of the time. We do not know which ones and we do not know when.

That's why I like a five fund portfolio with periodic rebalancing to capture zig-zag throughout the ups and downs. Pick an AA and stick to it. Not only rebalance between stocks/bonds and US/Intl but between sub asset classes.

Stay the course!
No International small-cap tilt?

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Re: Small-Cap Value Funds: Then And Now

Post by azanon » Mon Feb 04, 2019 10:51 am

White Coat Investor wrote:
Sun Feb 03, 2019 10:34 pm
Don't tilt to factors more than you believe in factors for the long haul. Even if they are real (and they may not be) there will be long periods of underperformance, like the last five years.
Yes that's the better lesson.

I'm reminded of something Rick F taught me - the difference between philosophy, strategy, and discipline. Our philosophy is similar, mainly low cost, B&H with rebalance, investing in sound asset classes. Strategy can be different (market cap weighted, vs. tilting, for example). And the last thing you want to see, is an expert trying to shake someone's discipline because a particular strategy hasn't worked so well in the past 5 years. Stay the course, despite the naysayers!

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Re: Small-Cap Value Funds: Then And Now

Post by Dead Man Walking » Mon Feb 04, 2019 9:28 pm

When I began investing nearly 50 years ago, I read the arguments for both value and growth. Over the years, I noticed that a significant variable in performance was when I purchased a fund, whether it be value or growth, and when I sold the fund. For example, when Vanguard offered both growth and value small cap index funds in 1998, I purchased an equal amount of each. Over the years one or the other would outperform depending on whether growth or value was in vogue. They were of about equal value when I sold both and bought tax-managed small cap because I was simplifying my equity fund holdings. I chose a blend fund in order to capture the return of both growth and value over the long term.

DMW

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Re: Small-Cap Value Funds: Then And Now

Post by pdavi21 » Mon Feb 04, 2019 9:47 pm

Small value has a lot of real estate, financial and not a lot of Healthcare, Technology.

Factor investing is closeted Sector investing. I'm just trolling...
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: Small-Cap Value Funds: Then And Now

Post by Fryxell » Fri Jul 12, 2019 12:46 am

That’s recency bias. Over the last 20 years, long-term treasuries have outperformed equities, and with less volatility. So perhaps I should start a thread titled: “Total Market Funds: Then And Now.” And then look at the last 20 years. During the same time, small value stocks also outperformed the total stock market.

https://www.portfoliovisualizer.com/bac ... total3=100

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Re: Small-Cap Value Funds: Then And Now

Post by whodidntante » Fri Jul 12, 2019 7:21 am

That's called chasing performance and it's caused by recency bias.

If TSM trails SCV the next five years, should I sell TSM and invest all my money in SCV funds?

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Re: Small-Cap Value Funds: Then And Now

Post by Sandtrap » Fri Jul 12, 2019 7:24 am

pdavi21 wrote:
Mon Feb 04, 2019 9:47 pm
Small value has a lot of real estate, financial and not a lot of Healthcare, Technology.

Factor investing is closeted Sector investing. (good point) I'm just trolling...
So go the moderate route and add REIT's and a touch more Total Stock instead of SCV???

j
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RTM

Post by JoMoney » Fri Jul 12, 2019 7:46 am

26 years... Real world since factor fund inception... Small-Value no "premium" over Small-Blend...
Image

37+ years , Small no "premium" over S&P 500
Image
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Small-Cap Value Funds: Then And Now

Post by Alchemist » Fri Jul 12, 2019 9:35 pm

MikeMak27 wrote:
Thu Jan 31, 2019 10:22 pm
From August of 2000 (when IJS, small cap value S&P 600) was created thru December of 2018, IJS has a CAGR of 8.55%.
IVV (S&P 500) has had a CAGR of 5.7% in that time.
So IJS would be worth 43,767 if 10,000 was invested back then and IVV would be worth 27,108.

As a result I own NO S&P 500 and have been extatic about the results.

All data provided from portfoliovisualizer.com
When did you start investing in IJS? Was it in 2000? Or was it 2004/anytime in the last 15 years when it has underperformed TSM by 54 bps?

https://www.portfoliovisualizer.com/bac ... 0&total3=0

Also ran a backtest on the portfolio in your signature. VWO only goes back to 2006, but since then your portfolio has underperformed another 90/10 portfolio using just S&P 500 and Total Bond market 8.54% vs 7.84% with much higher volatility and larger drawdown. TSM instead of S&P 500 increases that gap slightly by 10 bps.

https://www.portfoliovisualizer.com/bac ... 0&total3=0

None of us know how these will perform in the future, humility not hubris is required in the face of the unknown. I do not tilt but understand why some do. Just like my 100% U.S. allocation, a factor bet is a bet. We ought to be honest about that.

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Re: Small-Cap Value Funds: Then And Now

Post by bgreat » Sat Jul 13, 2019 1:15 am

Taylor Larimore wrote:
Thu Jan 31, 2019 10:13 pm
Today Small-Cap Value funds have the WORST 5-year return of all Morningstar's 14 U.S. Equity categories.

Lesson learned: Stick to broadly diversified total market index funds.
Taylor, please, you're embarassing yourself.

Remind yourself of Bogle's important words: "stay the course". 5 years is irrelevant. Even if you believe that small cap value is trash, you're throwing away your principles of long-term focus here just to bash on a different investing strategy, and that's truly sad to see.

(And every single small-cap or value advocate can tell you that it will underperform for long periods. Long meaning 10-20-30 years.)

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Re: Small-Cap Value Funds: Then And Now

Post by Taylor Larimore » Sat Jul 13, 2019 2:51 am

bgreat wrote:Taylor, please, you're embarassing yourself.
bgreat:

I should have made clear that Small-Cap Value's bottom 5-year past-performance does not mean small-cap funds will continue to be at the bottom of 14 Morningstar Style Funds. I would expect (no one really knows) Small-Cap Value stocks to eventually have a period of superior performance as they return to the median (RTM).

The purpose of my post was to show the danger of factor funds seriously under-performing the market. Even if the money is not needed, no one enjoys owning a fund that needs constant re-balancing and also trails the market.

The solution is to own a simple, low-cost, diversified total market index fund which never needs rebalancing, never suffers below-market returns and is guaranteed to out-perform most investors.

What Experts Say About Total Market Index Funds
Jack Bogle's Words of Wisdom: "Indexing provides an 'odds on' bet that an investor can outpace most other equity funds, and a virtual guarantee that his performance will never be at the bottom of the deck."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: RTM

Post by Forester » Sat Jul 13, 2019 3:26 am

JoMoney wrote:
Fri Jul 12, 2019 7:46 am
26 years... Real world since factor fund inception... Small-Value no "premium" over Small-Blend...
Image

37+ years , Small no "premium" over S&P 500
Image
50-50 rebalanced portfolio beats either on its own

https://www.portfoliovisualizer.com/bac ... total3=100

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Re: Small-Cap Value Funds: Then And Now

Post by Elric » Sat Jul 13, 2019 8:21 am

Taylor Larimore wrote:
Sat Jul 13, 2019 2:51 am
Jack Bogle's Words of Wisdom: "Indexing provides an 'odds on' bet that an investor can outpace most other equity funds, and a virtual guarantee that his performance will never be at the bottom of the deck."
Best wishes.
Taylor
Nothing against indexing, owning the market, or the 3-fund portfolio (most of the stock portion of my portfolio is in an S&P index fund, and some others are legacy, as Taylor discusses), but it's equally true that indexing provides an odds on bet that an investor will underperform some other funds and that indexing is guaranteed to never be at the top of the deck. Not a critique of OP, but of those who mistakenly take things to the extreme and think nothing can beat an index fund. Just saw another thread where the poster though such a thing was impossible over the long haul.
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Re: Small-Cap Value Funds: Then And Now

Post by Jags4186 » Sat Jul 13, 2019 8:32 am

Elric wrote:
Sat Jul 13, 2019 8:21 am
Taylor Larimore wrote:
Sat Jul 13, 2019 2:51 am
Jack Bogle's Words of Wisdom: "Indexing provides an 'odds on' bet that an investor can outpace most other equity funds, and a virtual guarantee that his performance will never be at the bottom of the deck."
Best wishes.
Taylor
Nothing against indexing, owning the market, or the 3-fund portfolio (most of the stock portion of my portfolio is in an S&P index fund, and some others are legacy, as Taylor discusses), but it's equally true that indexing provides an odds on bet that an investor will underperform some other funds and that indexing is guaranteed to never be at the top of the deck. Not a critique of OP, but of those who mistakenly take things to the extreme and think nothing can beat an index fund. Just saw another thread where the poster though such a thing was impossible over the long haul.
I don't think any index investor is under any allusions that indexing is guarranteed to beat actively managed funds. Indexing however should guarantee you to be at a minimum in the top 50% of returns for whatever index is being benchmarked, and in practice does better than that.

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Re: Small-Cap Value Funds: Then And Now

Post by F150HD » Sat Jul 13, 2019 8:49 am

deleted

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Re: Small-Cap Value Funds: Then And Now

Post by vineviz » Sat Jul 13, 2019 9:16 am

Jags4186 wrote:
Sat Jul 13, 2019 8:32 am
I don't think any index investor is under any allusions that indexing is guarranteed to beat actively managed funds. Indexing however should guarantee you to be at a minimum in the top 50% of returns for whatever index is being benchmarked, and in practice does better than that.
Thankfully, we don't have to choose between indexing and investing in small cap value fund.

For instance, my largest holding is a small cap value index fund: SPDR S&P 600 Small Cap Value ETF (SLYV).
"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: Small-Cap Value Funds: Then And Now

Post by abuss368 » Sat Jul 13, 2019 12:27 pm

Taylor Larimore wrote:
Thu Jan 31, 2019 10:13 pm
Bogleheads:

Five years ago Small-Cap Value funds were doing well and heavily promoted by the financial industry:

100% Stock Portfolio in Small Cap Value??

Today Small-Cap Value funds have the WORST 5-year return of all Morningstar's 14 U.S. Equity categories.

2018 Index Performance

Lesson learned: Stick to broadly diversified total market index funds.

The Three-Fund Portfolio

Best wishes
Taylor
Interesting. Thank you for sharing Taylor.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Small-Cap Value Funds: Then And Now

Post by abuss368 » Sat Jul 13, 2019 12:30 pm

Sandtrap wrote:
Fri Jul 12, 2019 7:24 am
pdavi21 wrote:
Mon Feb 04, 2019 9:47 pm
Small value has a lot of real estate, financial and not a lot of Healthcare, Technology.

Factor investing is closeted Sector investing. (good point) I'm just trolling...
So go the moderate route and add REIT's and a touch more Total Stock instead of SCV???

j
That is a strategy. My understanding is Small Cap funds include 10% - 20% in REITs (not sure of actual percentage and probably fluctuates).
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Re: Small-Cap Value Funds: Then And Now

Post by vineviz » Sat Jul 13, 2019 1:11 pm

pdavi21 wrote:
Mon Feb 04, 2019 9:47 pm
Small value has a lot of real estate, financial and not a lot of Healthcare, Technology.

Factor investing is closeted Sector investing. I'm just trolling...
It's probably more reasonable to say that sector investing is closeted factor investing: a REIT fund is effectively just a multi-factor fund with market beta, size, value, and term as the factors.

I wonder how many Bogleheads are fine with factor investing just as long as it's not CALLED factor investing?

An investor who overweights REITs but disapproves of SCV tilting definitely has a logical contradiction on their hands.
"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: Small-Cap Value Funds: Then And Now

Post by matjen » Sat Jul 13, 2019 1:39 pm

Taylor Larimore wrote:
Sat Jul 13, 2019 2:51 am

The purpose of my post was to show the danger of factor funds seriously under-performing the market. Even if the money is not needed, no one enjoys owning a fund that needs constant re-balancing and also trails the market.

The solution is to own a simple, low-cost, diversified total market index fund which never needs rebalancing, never suffers below-market returns and is guaranteed to out-perform most investors.
Has this actually happened? I think your language is tad hyperbolic. Even during these tough times for small cap value here are Robert T.'s portfolios.
https://socialize.morningstar.com/NewSo ... &viewTab=6

Here is the Total Market Portfolio. Returns 7.75%
Image



Here is a Small Cap Value Tilted Portfolio with only four funds. Returns: 8.61%
Image
Last edited by matjen on Sun Jul 14, 2019 7:57 am, edited 1 time in total.
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Beating the Market?

Post by Taylor Larimore » Sat Jul 13, 2019 1:52 pm

Elric wrote:Nothing against indexing, owning the market, or the 3-fund portfolio (most of the stock portion of my portfolio is in an S&P index fund, and some others are legacy, as Taylor discusses), but it's equally true that indexing provides an odds on bet that an investor will underperform some other funds and that indexing is guaranteed to never be at the top of the deck.
[ quoted author corrected -- admin LadyGeek]

Bogleheads:

Never being at the bottom of the deck is more important than the risk of striving to be at the "top of the deck."
Jack Bogle's Words of Wisdom: "The simple fact is that trying to select a mutual fund that will outpace the stock market over the long term is, using Cervantes's formulation, like "looking for a needle in the haystack."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Beating the Market?

Post by Jags4186 » Sat Jul 13, 2019 2:03 pm

Taylor Larimore wrote:
Sat Jul 13, 2019 1:52 pm
Elric wrote:Nothing against indexing, owning the market, or the 3-fund portfolio (most of the stock portion of my portfolio is in an S&P index fund, and some others are legacy, as Taylor discusses), but it's equally true that indexing provides an odds on bet that an investor will underperform some other funds and that indexing is guaranteed to never be at the top of the deck.
[ quoted author corrected -- admin LadyGeek]

Bogleheads:

Never being at the bottom of the deck is more important than the risk of striving to be at the "top of the deck."
Jack Bogle's Words of Wisdom: "The simple fact is that trying to select a mutual fund that will outpace the stock market over the long term is, using Cervantes's formulation, like "looking for a needle in the haystack."
Best wishes.
Taylor
Hi Taylor,

You are quoting me but I did not say that.

Thanks

[ I corrected the quote -- admin LadyGeek]

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Re: Small-Cap Value Funds: Then And Now

Post by willthrill81 » Sat Jul 13, 2019 2:07 pm

Taylor Larimore wrote:
Sat Jul 13, 2019 2:51 am
The purpose of my post was to show the danger of factor funds seriously under-performing the market. Even if the money is not needed, no one enjoys owning a fund that needs constant re-balancing and also trails the market.
What's so special about the market (i.e. TSM)? Are we guaranteed that TSM will provide the returns we need to achieve our goals and that tilting toward factors is only motivated by greed?

I could just as easily point to TSM and say that there is a danger of it seriously under-performing (fill in the blank), which it has at times in the past. For instance, from 2000-2009, the real return of VTSMX (TSM) was -2.73%. For VISVX (Vanguard's SCV fund), it was 5.04%.

All that the recent under-performance indicates to me is what I've said here many times: no one should tilt toward factors unless they are confident that they can stick with them for years, perhaps a decade or longer, of under-performance compared to TSM.

If you're trying to warn people against performance chasing, I agree. If you're trying to convince people that only TSM is a worthwhile U.S. equity asset class to own, I disagree.
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Re: Small-Cap Value Funds: Then And Now

Post by abuss368 » Sat Jul 13, 2019 2:11 pm

I always loved Jack Bogle's words of wisdom (and always will): Don't search for the needle in the haystack, own the haystack!

Thank you Mr. Bogle.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: RTM

Post by Alchemist » Sat Jul 13, 2019 2:49 pm

Forester wrote:
Sat Jul 13, 2019 3:26 am
JoMoney wrote:
Fri Jul 12, 2019 7:46 am
26 years... Real world since factor fund inception... Small-Value no "premium" over Small-Blend...
Image

37+ years , Small no "premium" over S&P 500
Image
50-50 rebalanced portfolio beats either on its own

https://www.portfoliovisualizer.com/bac ... total3=100
That is called moving the goal posts. The point of JoMoney's post was to point out the failure of the factor model in predicting returns of live funds. The value premium did not show up for the 26 years of live performance in the small cap space and the small cap premium has not shown up over the 36 years it has been investable in a real mutual fund.

Those mutual funds are also founded/run by the same people who created the factor model to begin with. Importantly, investors in those funds did not seriously harm their investment returns vs the S&P 500 but they got roughly the market return for higher cost (significantly higher costs for the required DFA advisor fee) and much higher volatility.
Last edited by Alchemist on Sat Jul 13, 2019 2:50 pm, edited 1 time in total.

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Re: Small-Cap Value Funds: Then And Now

Post by vineviz » Sat Jul 13, 2019 2:49 pm

abuss368 wrote:
Sat Jul 13, 2019 2:11 pm
I always loved Jack Bogle's words of wisdom (and always will): Don't search for the needle in the haystack, own the haystack!
Don't forget the rest of the quote:
Don't search for the needle in the haystack, own the haystack! Except for the needles listed on the London Stock Exchange: don't own those.
:o
"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: RTM

Post by vineviz » Sat Jul 13, 2019 3:00 pm

Alchemist wrote:
Sat Jul 13, 2019 2:49 pm
The point of JoMoney's post was to point out the failure of the factor model in predicting returns of live funds. The value premium did not show up for the 26 years of live performance in the small cap space and the small cap premium has not shown up over the 36 years it has been investable in a real mutual fund.
So many problems here:

1) His post provided no evidence that is relevant to the ability of "factor models" to "predict the return of these funds.
2) Factor models are not supposed to "predict" future unconditional returns of live funds, so an ability or inability to do so is beside the point.
3) Factor models are designed to explain the performance of assets, which is something they do quite well.
4) His post provided no evidence that would support or refute a claim that the value or size "premium did not show up".
5) Both size and value were definitely "investable" for more than 36 years. Indeed, it was the observed real (out)performance of such investments that necessitated the formation of multifactor asset pricing models to begin with.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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