Small Cap Value heads Rejoice !!!

[Steve Reading]

Trying to learn more about PV. I'm doing a factor regression on an int. ex. US portfolio with 50% VEA and 50% DISVX. I choose 5 factor Fama & French (good choice?).

Market (Rm-Rf) 1.08 0.017 62.373 0.000 1.050...1.118
Size (SMB) 0.14 0.043 3.375 0.001 0.060...0.229
Value (HML) 0.19 0.054 3.530 0.001 0.083...0.295
Profitability (RMW) 0.14 0.077 1.749 0.082 -0.018...0.288
Investment (CMA) 0.12 0.063 1.843 0.067 -0.008...0.240
Alpha (α) -6.62bps 0.001 -0.906 0.366 -0.21%...0.08%
Annualized Alpha (α) -0.79%
https://www.portfoliovisualizer.com/fac ... tion2_1=50

Can someone explain what the Alpha (α) -6.62bps and Annualized Alpha (α) -0.79% mean, in simple terms?
And how important are they?
thank you

(a) The monthly alpha.
(b) The yearly alpha. These refer to the fact that your portfolio produced slightly lower returns than one would've expected given the exposure it had to various factors and the returns of those factors themselves.
It probably is because it loaded on negative momentum, and momentum has produced positive returns. If you re-do including momentum, the alpha becomes less negative, confirming it was the negative momentum load:
https://www.portfoliovisualizer.com/fac ... tion2_1=50

BTW, you can use the older class of VEA (VTMGX) to get a longer time period.
(c) Probably not too important since the alpha was not statistically significant.

[kolder]

What tax drag are you referring to here?

Foreign withholdings on dividends

How's that different from what I just said?

I suppose you could make the argument FNDE's stocks are paying dividends taxes in their foreign countries which VTI wouldn't. So all else equal, FNDE shouldn't have an equal investor return to VTI in the first place.

Apologies I had misread that part of your post.

My question was just if small/value tilters took extra consideration and/or had a strong home-country bias due to the slightly amplified drawbacks of having international small/value in a tax-advantaged portfolio. Or if people think it is still worth it to diversify internationally considering the potential for varying premia across countries.

Ok now I understand better what you mean. It's a good point you bring up. I pondered that couple years ago and came to the conclusion it was OK.

Revisiting my notes, I wrote for FNDC, this international tax cost comes out to ~22 bps. VEA's is closer to 16 bps. It's not ideal of course but it's a small number (certainly the ER difference is bigger to swallow). The diversification of factors globally seems to me much more worthwhile, as factors like value and size have correlations of 0.5-0.8 in USA vs Ex-USA. Not a crazy difference but easily worth the additional 6 bps to spread my SCV tilt to Ex-USA.

With EM, FNDE's tax cost over VWO is bigger (about 20 bps), but EM factors have even lower correlation (about 0.35 to USA and Ex-USA separately).
The above numbers were analysis with 2018 numbers so things might've changed.

Not to mention, if I wanted the amount of tilt I have with just using USA, I'd need a very concentrated portfolio in the USA. So there are other diversification advantages (that are much harder to quantify) from spreading factor exposure to Ex-USA.

Just my 2 cents. You could come to the opposite conclusion and I couldn't fault you

Thanks for the figures and I think this is sound reasoning.

I agree that diversifying with international is more beneficial to a tilted portfolio than a non-tilted, despite the additional cost. Personally I plan to deviate from global market cap weighting to 70/30 or 75/25 US/Int. If it wasn't for the tax drag I would probably go 60/40 or even 50/50.

[dml130]

This is a very basic question, but, how are defining "value", and which equities qualify as "value" and which do not? Is this based mainly on price to book (from my reading of HML, it looks like it's primarily based on price to book)?

[MotoTrojan]

Trying to learn more about PV. I'm doing a factor regression on an int. ex. US portfolio with 50% VEA and 50% DISVX. I choose 5 factor Fama & French (good choice?).

Market (Rm-Rf) 1.08 0.017 62.373 0.000 1.050...1.118
Size (SMB) 0.14 0.043 3.375 0.001 0.060...0.229
Value (HML) 0.19 0.054 3.530 0.001 0.083...0.295
Profitability (RMW) 0.14 0.077 1.749 0.082 -0.018...0.288
Investment (CMA) 0.12 0.063 1.843 0.067 -0.008...0.240
Alpha (α) -6.62bps 0.001 -0.906 0.366 -0.21%...0.08%
Annualized Alpha (α) -0.79%
https://www.portfoliovisualizer.com/fac ... tion2_1=50

Can someone explain what the Alpha (α) -6.62bps and Annualized Alpha (α) -0.79% mean, in simple terms?
And how important are they?
thank you

(a) The monthly alpha.
(b) The yearly alpha. These refer to the fact that your portfolio produced slightly lower returns than one would've expected given the exposure it had to various factors and the returns of those factors themselves.
It probably is because it loaded on negative momentum, and momentum has produced positive returns. If you re-do including momentum, the alpha becomes less negative, confirming it was the negative momentum load:
https://www.portfoliovisualizer.com/fac ... tion2_1=50

BTW, you can use the older class of VEA (VTMGX) to get a longer time period.
(c) Probably not too important since the alpha was not statistically significant.

Worth noting that a good bit of that negative alpha comes from expense ratio alone, in particular the DFA side.

[MotoTrojan]

This is a very basic question, but, how are defining "value", and which equities qualify as "value" and which do not? Is this based mainly on price to book (from my reading of HML, it looks like it's primarily based on price to book)?

Many ways. Some use P/B, many a composite of various things like trailing or forward P/E, cash flows, dividends, etc. Some use enterprise value metrics like EV/EBIT.

[dml130]

This is a very basic question, but, how are defining "value", and which equities qualify as "value" and which do not? Is this based mainly on price to book (from my reading of HML, it looks like it's primarily based on price to book)?

Many ways. Some use P/B, many a composite of various things like trailing or forward P/E, cash flows, dividends, etc. Some use enterprise value metrics like EV/EBIT.

But many of those metrics are only practical to evaluate individual stocks (rather than funds of stocks), correct? The only readily available and somewhat consistent metrics for etfs, from what I can tell, are P/B and dividends (for example, I can't find cash flow metrics for etfs, or can I?). Or, what are most people on here using to determine whether an etf has the "value" factor?

[MotoTrojan]

This is a very basic question, but, how are defining "value", and which equities qualify as "value" and which do not? Is this based mainly on price to book (from my reading of HML, it looks like it's primarily based on price to book)?

Many ways. Some use P/B, many a composite of various things like trailing or forward P/E, cash flows, dividends, etc. Some use enterprise value metrics like EV/EBIT.

But many of those metrics are only practical to evaluate individual stocks (rather than funds of stocks), correct? The only readily available and somewhat consistent metrics for etfs, from what I can tell, are P/B and dividends (for example, I can't find cash flow metrics for etfs, or can I?). Or, what are most people on here using to determine whether an etf has the "value" factor?

Ah you’re asking how to compare funds, not how the funds achieve said value exposure. Clearest and most consistent way is to regress the HML factor exposure which is based on P/B, but that is less effective with some niche funds. But there’s nothing stopping you from calculating any of these other metrics for funds either; the EV/EBIT of a full ETF is still going to provide insight into how value tilted it is.

[dml130]

Ah you’re asking how to compare funds, not how the funds achieve said value exposure. Clearest and most consistent way is to regress the HML factor exposure which is based on P/B, but that is less effective with some niche funds. But there’s nothing stopping you from calculating any of these other metrics for funds either; the EV/EBIT of a full ETF is still going to provide insight into how value tilted it is.

Yes, my fault, I guess my question evolved a bit as I was asking it. Thanks though, that does answer it, I think. The papers I'm finding that discuss value seem to key in on price to book spreads and to a lesser degree price to earnings and to an even lesser extent price to sales. As you indicated, no measure is perfect and there are more elaborate ways of evaluating these funds, but I think I have a better idea of what the focus should be.

[XacTactX]

This is a very basic question, but, how are defining "value", and which equities qualify as "value" and which do not? Is this based mainly on price to book (from my reading of HML, it looks like it's primarily based on price to book)?

This is an EXCELLENT question and for me it will always be a work in process. Here is a list of the tools I use to determine value exposure (and other factors).

Portfolio Visualizer factor regression

MSCI Factor Box at ETF.com

iShares Factor Box

Morningstar has fundamental ratios like P/E, P/B, P/S, P/CF, etc.

[YRT70]

(a) The monthly alpha.
(b) The yearly alpha. These refer to the fact that your portfolio produced slightly lower returns than one would've expected given the exposure it had to various factors and the returns of those factors themselves.
It probably is because it loaded on negative momentum, and momentum has produced positive returns. If you re-do including momentum, the alpha becomes less negative, confirming it was the negative momentum load:
https://www.portfoliovisualizer.com/fac ... tion2_1=50

BTW, you can use the older class of VEA (VTMGX) to get a longer time period.
(c) Probably not too important since the alpha was not statistically significant.

Thanks for explaining. Would adding a bit of iShares Int Momentum (IMTM) be a wise move, to get rid of the negative momentum?

[Forester]

(a) The monthly alpha.
(b) The yearly alpha. These refer to the fact that your portfolio produced slightly lower returns than one would've expected given the exposure it had to various factors and the returns of those factors themselves.
It probably is because it loaded on negative momentum, and momentum has produced positive returns. If you re-do including momentum, the alpha becomes less negative, confirming it was the negative momentum load:
https://www.portfoliovisualizer.com/fac ... tion2_1=50

BTW, you can use the older class of VEA (VTMGX) to get a longer time period.
(c) Probably not too important since the alpha was not statistically significant.

Thanks for explaining. Would adding a bit of iShares Int Momentum (IMTM) be a wise move, to get rid of the negative momentum?

MSCI momentum indices have a slightly controversial rebalance rule where there's an ad hoc rebalance if volatility spikes. My take is the downside, is being stranded in low vol stocks when the market quickly resumes a bull run after a correction, the upside is avoiding the worst of a momentum crash. If you enjoy ETF complexity, you could add some IMTM and IMOM (the Alpha Architect intl momentum fund).

[MotoTrojan]

Ah you’re asking how to compare funds, not how the funds achieve said value exposure. Clearest and most consistent way is to regress the HML factor exposure which is based on P/B, but that is less effective with some niche funds. But there’s nothing stopping you from calculating any of these other metrics for funds either; the EV/EBIT of a full ETF is still going to provide insight into how value tilted it is.

Yes, my fault, I guess my question evolved a bit as I was asking it. Thanks though, that does answer it, I think. The papers I'm finding that discuss value seem to key in on price to book spreads and to a lesser degree price to earnings and to an even lesser extent price to sales. As you indicated, no measure is perfect and there are more elaborate ways of evaluating these funds, but I think I have a better idea of what the focus should be.

Wes Gray and Tobias Carlisle are both outspoken believers in enterprise value over EBIT or EBITDA. Jim O at OSAM has a great book What Works On Wallstreet that shows many different metrics including some composites dating back to early 1920's and P/B works but is not anywhere near the top dog (as Wes/Toby also have found historically). Cliff Asness is a bit more proprietary I believe but uses composites to my knowledge and doesn't focus on P/B.

P/B is the classic Fama French metric so it holds true in many academic settings and funds as well; big positive there is lower turnover as B doesn't change much, however it can struggle to account for intangibles particularly in larger companies where that is a bigger make-up these days.

[rascott]

Maybe one day they'll be rejoicing..... but it shall not be anytime soon.

[muffins14]

Can we rejoice today because the difference between small-value and large growth has become even wider today?

[dml130]

This is a very basic question, but, how are defining "value", and which equities qualify as "value" and which do not? Is this based mainly on price to book (from my reading of HML, it looks like it's primarily based on price to book)?

This is an EXCELLENT question and for me it will always be a work in process. Here is a list of the tools I use to determine value exposure (and other factors).

Portfolio Visualizer factor regression

MSCI Factor Box at ETF.com

iShares Factor Box

Morningstar has fundamental ratios like P/E, P/B, P/S, P/CF, etc.

Thanks for those links. Value is a difficult concept for me because to some degree it seems subjective. Some stocks that appear to be more "growth" might be considered as a great value by some due to strong prospects for future profit growth. And as mototrojan mentioned, even book values aren't apples to apples comparisons many times because of the way certain aspects such as "intangibles" are measured. These concepts seem even more challenging (to me, at least) when looking at funds as a whole, rather than individual stocks.

[dml130]

Wes Gray and Tobias Carlisle are both outspoken believers in enterprise value over EBIT or EBITDA. Jim O at OSAM has a great book What Works On Wallstreet that shows many different metrics including some composites dating back to early 1920's and P/B works but is not anywhere near the top dog (as Wes/Toby also have found historically). Cliff Asness is a bit more proprietary I believe but uses composites to my knowledge and doesn't focus on P/B.

P/B is the classic Fama French metric so it holds true in many academic settings and funds as well; big positive there is lower turnover as B doesn't change much, however it can struggle to account for intangibles particularly in larger companies where that is a bigger make-up these days.

Thanks for that info, much appreciated.

[MotoTrojan]

This is a very basic question, but, how are defining "value", and which equities qualify as "value" and which do not? Is this based mainly on price to book (from my reading of HML, it looks like it's primarily based on price to book)?

This is an EXCELLENT question and for me it will always be a work in process. Here is a list of the tools I use to determine value exposure (and other factors).

Portfolio Visualizer factor regression

MSCI Factor Box at ETF.com

iShares Factor Box

Morningstar has fundamental ratios like P/E, P/B, P/S, P/CF, etc.

Thanks for those links. Value is a difficult concept for me because to some degree it seems subjective. Some stocks that appear to be more "growth" might be considered as a great value by some due to strong prospects for future profit growth. And as mototrojan mentioned, even book values aren't apples to apples comparisons many times because of the way certain aspects such as "intangibles" are measured. These concepts seem even more challenging (to me, at least) when looking at funds as a whole, rather than individual stocks.

There is value factor investing, and traditional fundamental value investing which I think often get confused but are quite different. A traditional value investor is looking at specific companies and trying to determine if the current market price is less than the intrinsic value, and thus there is a margin of safety and expectation of outperformance. As you touched on, you could use this sort of justification to purchase something like Amazon which is certainly a growth company by most definitions.

Value factor investing on the other hand is not really looking at individual stocks and saying they are underpriced, but relies on both a risk and behavioral component that historically has generated outperformance overall for baskets of stocks that are cheap on a number of metrics.

So while some factor investors will concentrate in hopes of getting really high factor exposure (say QVAL which only holds ~40 stocks), most will hold a more diversified portfolio to remove idiosyncratic risk. A traditional fundamental value investor on the other hand has done in-depth stock specific analysis and thus will generally hold way less stocks since they want to concentrate into their best ideas.

[MotoTrojan]

Speaking of intangibles and book value, here is a pretty interesting paper.

https://alphaarchitect.com/2020/09/21/i ... t-expired/

Have only read the summary, but they show that while composite weights of metrics such as B/P, E/P, S/P etc... did outperform the raw B/P, an adjusted B/P which included intangibles (not sure how they were calculated) actually took the cake by more than 2% above the composite methods.

[MotoTrojan]

Can we rejoice today because the difference between small-value and large growth has become even wider today?

Still a good ways to go to the extreme set earlier this month, no?

[BergeronsBuddies]

Can we rejoice today because the difference between small-value and large growth has become even wider today?

Isn't that what is great about being a Small Cap Value believer, we can cheer when SCV outperforms because, well its outperforming, and we can also cheer when it underperforms, since we know it will be an even greater outperformance!

A bit tongue in cheek, but we are grasping at straws here to allow ourselves to keep "Staying the Course" on SCV.

[MotoTrojan]

Can we rejoice today because the difference between small-value and large growth has become even wider today?

Isn't that what is great about being a Small Cap Value believer, we can cheer when SCV outperforms because, well its outperforming, and we can also cheer when it underperforms, since we know it will be an even greater outperformance!

A bit tongue in cheek, but we are grasping at straws here to allow ourselves to keep "Staying the Course" on SCV.

Amen! Maybe it’s simply because I have 20-30 years before I plan to touch this money but I’m not losing any sleep. No pain no premium. Maybe this is what it takes to shake out the premium arbitragers.

[dml130]

Thanks for those links. Value is a difficult concept for me because to some degree it seems subjective. Some stocks that appear to be more "growth" might be considered as a great value by some due to strong prospects for future profit growth. And as mototrojan mentioned, even book values aren't apples to apples comparisons many times because of the way certain aspects such as "intangibles" are measured. These concepts seem even more challenging (to me, at least) when looking at funds as a whole, rather than individual stocks.

There is value factor investing, and traditional fundamental value investing which I think often get confused but are quite different. A traditional value investor is looking at specific companies and trying to determine if the current market price is less than the intrinsic value, and thus there is a margin of safety and expectation of outperformance. As you touched on, you could use this sort of justification to purchase something like Amazon which is certainly a growth company by most definitions.

Value factor investing on the other hand is not really looking at individual stocks and saying they are underpriced, but relies on both a risk and behavioral component that historically has generated outperformance overall for baskets of stocks that are cheap on a number of metrics.

So while some factor investors will concentrate in hopes of getting really high factor exposure (say QVAL which only holds ~40 stocks), most will hold a more diversified portfolio to remove idiosyncratic risk. A traditional fundamental value investor on the other hand has done in-depth stock specific analysis and thus will generally hold way less stocks since they want to concentrate into their best ideas.

So, I guess, in a sense, investing in a "value" mutual fund (preferably low cost) where the fund manager does that in depth analysis of intrinsic value could be complementary to investing in those "value" etfs that are more simple and systematic in their approach. Probably most on here aren't fans of mixing and matching like that (especially with mutual funds), but it's something I've been doing.

[rascott]

Can we rejoice today because the difference between small-value and large growth has become even wider today?

Isn't that what is great about being a Small Cap Value believer, we can cheer when SCV outperforms because, well its outperforming, and we can also cheer when it underperforms, since we know it will be an even greater outperformance!

A bit tongue in cheek, but we are grasping at straws here to allow ourselves to keep "Staying the Course" on SCV.

The entire practice of SCV investing appears to be grasping at straws.... yet I bought more today. I could have bought a house or two with the money I've lost grasping at SCV straws over last couple of years. But grasp, I shall.

[nzahir]

How is DFSVX doing so much better than other small cap values today? Around a 3-4% difference. Shouldn't Avuv be doing similar

[rascott]

How is DFSVX doing so much better than other small cap values today? Around a 3-4% difference. Shouldn't Avuv be doing similar

That's a mutual fund, it's price won't update until after the market close. I guarantee it'll be down bigly

[MotoTrojan]

How is DFSVX doing so much better than other small cap values today? Around a 3-4% difference. Shouldn't Avuv be doing similar

Answered above but I’ll just say again, short term price swings is not a helpful metric IMHO for deciding which fund to use.

[nzahir]

How is DFSVX doing so much better than other small cap values today? Around a 3-4% difference. Shouldn't Avuv be doing similar

That's a mutual fund, it's price won't update until after the market close. I guarantee it'll be down bigly

Forgot about that, but will it make a 4% difference?

Could be another huge opportunity coming up

[MotoTrojan]

Thanks for those links. Value is a difficult concept for me because to some degree it seems subjective. Some stocks that appear to be more "growth" might be considered as a great value by some due to strong prospects for future profit growth. And as mototrojan mentioned, even book values aren't apples to apples comparisons many times because of the way certain aspects such as "intangibles" are measured. These concepts seem even more challenging (to me, at least) when looking at funds as a whole, rather than individual stocks.

There is value factor investing, and traditional fundamental value investing which I think often get confused but are quite different. A traditional value investor is looking at specific companies and trying to determine if the current market price is less than the intrinsic value, and thus there is a margin of safety and expectation of outperformance. As you touched on, you could use this sort of justification to purchase something like Amazon which is certainly a growth company by most definitions.

Value factor investing on the other hand is not really looking at individual stocks and saying they are underpriced, but relies on both a risk and behavioral component that historically has generated outperformance overall for baskets of stocks that are cheap on a number of metrics.

So while some factor investors will concentrate in hopes of getting really high factor exposure (say QVAL which only holds ~40 stocks), most will hold a more diversified portfolio to remove idiosyncratic risk. A traditional fundamental value investor on the other hand has done in-depth stock specific analysis and thus will generally hold way less stocks since they want to concentrate into their best ideas.

So, I guess, in a sense, investing in a "value" mutual fund (preferably low cost) where the fund manager does that in depth analysis of intrinsic value could be complementary to investing in those "value" etfs that are more simple and systematic in their approach. Probably most on here aren't fans of mixing and matching like that (especially with mutual funds), but it's something I've been doing.

I presume you mean active funds because a mutual fund can be a index fund, but even some “active” value funds are still targeting factor exposure via a systematic approach, while others could be a bottoms up fundamental active fund.

I prefer systematic investing and think humans only reduce performance beyond that personally. Not sure I see how they’d compliment each other.

[MotoTrojan]

How is DFSVX doing so much better than other small cap values today? Around a 3-4% difference. Shouldn't Avuv be doing similar

That's a mutual fund, it's price won't update until after the market close. I guarantee it'll be down bigly

Forgot about that, but will it make a 4% difference?

Could be another huge opportunity coming up

I’m not sure what you’re saying. It’s return from Friday would be similar to ETFs like AVUV/SLYV’s closing return on Friday. Today it’ll have a price change similar to how those ETFs close. There’s no way to arbitrage that.

[dml130]

I presume you mean active funds because a mutual fund can be a index fund, but even some “active” value funds are still targeting factor exposure via a systematic approach, while others could be a bottoms up fundamental active fund.

I prefer systematic investing and think humans only reduce performance beyond that personally. Not sure I see how they’d compliment each other.

Yes, sorry, I meant active funds. Okay, fair point.

[Massdriver]

I bought some more this morning, AVDV and SLYV.

[Steve Reading]

(a) The monthly alpha.
(b) The yearly alpha. These refer to the fact that your portfolio produced slightly lower returns than one would've expected given the exposure it had to various factors and the returns of those factors themselves.
It probably is because it loaded on negative momentum, and momentum has produced positive returns. If you re-do including momentum, the alpha becomes less negative, confirming it was the negative momentum load:
https://www.portfoliovisualizer.com/fac ... tion2_1=50

BTW, you can use the older class of VEA (VTMGX) to get a longer time period.
(c) Probably not too important since the alpha was not statistically significant.

Thanks for explaining. Would adding a bit of iShares Int Momentum (IMTM) be a wise move, to get rid of the negative momentum?

Some time ago, I looked at the index it tracks and found a significant amount of negative alpha that was statistically significant. I decided I didn't know enough to conclude if that was OK or not so I opted against it.

FWIW, I prefer funds that incorporate the momentum already (like ISCF and EMGF). And I tilt slightly positive in US momentum to undo some of my ex-usa negative momentum (by holding a bunch of VFMF). US and Ex-USA momentum are rather highly correlated so I figured this would get me close to momentum-neutral.

Just my approach.

[MotoTrojan]

(a) The monthly alpha.
(b) The yearly alpha. These refer to the fact that your portfolio produced slightly lower returns than one would've expected given the exposure it had to various factors and the returns of those factors themselves.
It probably is because it loaded on negative momentum, and momentum has produced positive returns. If you re-do including momentum, the alpha becomes less negative, confirming it was the negative momentum load:
https://www.portfoliovisualizer.com/fac ... tion2_1=50

BTW, you can use the older class of VEA (VTMGX) to get a longer time period.
(c) Probably not too important since the alpha was not statistically significant.

Thanks for explaining. Would adding a bit of iShares Int Momentum (IMTM) be a wise move, to get rid of the negative momentum?

Some time ago, I looked at the index it tracks and found a significant amount of negative alpha that was statistically significant. I decided I didn't know enough to conclude if that was OK or not so I opted against it.

FWIW, I prefer funds that incorporate the momentum already (like ISCF and EMGF). And I tilt slightly positive in US momentum to undo some of my ex-usa negative momentum (by holding a bunch of VFMF). US and Ex-USA momentum are rather highly correlated so I figured this would get me close to momentum-neutral.

Just my approach.

If one isn’t willing (or wanting) to hold significant positive momentum along with value I’ve never really understood why you’d want to avoid a little negative at the cost of less other exposures; maybe just me trying to justify my reduced complexity. If reducing that negative helps, why not go significantly positive. I guess you could counter to me with “if a bit of value helps, why not go 100%”.

There is good evidence out there that a barbell of value and momentum works well but it’s never spoken to me the same way value does.

[Steve Reading]

(a) The monthly alpha.
(b) The yearly alpha. These refer to the fact that your portfolio produced slightly lower returns than one would've expected given the exposure it had to various factors and the returns of those factors themselves.
It probably is because it loaded on negative momentum, and momentum has produced positive returns. If you re-do including momentum, the alpha becomes less negative, confirming it was the negative momentum load:
https://www.portfoliovisualizer.com/fac ... tion2_1=50

BTW, you can use the older class of VEA (VTMGX) to get a longer time period.
(c) Probably not too important since the alpha was not statistically significant.

Thanks for explaining. Would adding a bit of iShares Int Momentum (IMTM) be a wise move, to get rid of the negative momentum?

Some time ago, I looked at the index it tracks and found a significant amount of negative alpha that was statistically significant. I decided I didn't know enough to conclude if that was OK or not so I opted against it.

FWIW, I prefer funds that incorporate the momentum already (like ISCF and EMGF). And I tilt slightly positive in US momentum to undo some of my ex-usa negative momentum (by holding a bunch of VFMF). US and Ex-USA momentum are rather highly correlated so I figured this would get me close to momentum-neutral.

Just my approach.

If one isn’t willing (or wanting) to hold significant positive momentum along with value I’ve never really understood why you’d want to avoid a little negative at the cost of less other exposures; maybe just me trying to justify my reduced complexity. If reducing that negative helps, why not go significantly positive. I guess you could counter to me with “if a bit of value helps, why not go 100%”.

There is good evidence out there that a barbell of value and momentum works well but it’s never spoken to me the same way value does.

I had a lengthy discussion with Uncorrelated about this in this thread before. My answer then (and now) is that you should tilt positive momentum if you believe it will have a positive expected return. You should tilt negative momentum if you believe it will have a negative expected return. And if you don't have any views on it, you should be neutral, just like the Total Stock Market.

[dml130]

I presume you mean active funds because a mutual fund can be a index fund, but even some “active” value funds are still targeting factor exposure via a systematic approach, while others could be a bottoms up fundamental active fund.

I prefer systematic investing and think humans only reduce performance beyond that personally. Not sure I see how they’d compliment each other.

Speaking of the above, vanguard has a small cap fund (not necessarily "value" though) that seems to be systematic and likely targets value factors in addition to others using a proprietary system.

https://investor.vanguard.com/mutual-fu ... olio/vstcx

Does anybody have any opinions of this fund?

[MotoTrojan]

I presume you mean active funds because a mutual fund can be a index fund, but even some “active” value funds are still targeting factor exposure via a systematic approach, while others could be a bottoms up fundamental active fund.

I prefer systematic investing and think humans only reduce performance beyond that personally. Not sure I see how they’d compliment each other.

Speaking of the above, vanguard has a small cap fund (not necessarily "value" though) that seems to be systematic and likely targets value factors in addition to others using a proprietary system.

https://investor.vanguard.com/mutual-fu ... olio/vstcx

Does anybody have any opinions of this fund?

The fund invests in small-capitalization domestic equity securities based on the advisor’s assessment of the relative return potential of the securities. The advisor selects securities that it believes offer an appropriate balance between strong growth prospects and reasonable valuations relative to their industry peers. The advisor does this by using a quantitative process to evaluate all of the securities in the fund’s benchmark, the MSCI US Small Cap 1750 Index, while seeking to maintain a risk profile similar to that of the index. Under normal circumstances, at least 80% of the Fund’s assets will be invested in small-cap equity securities.

I don't know anything about it but would want more specifics than this.

Regression shows statistically significant negative alpha on top of a slightly positive value, quality, and momentum loading and a healthy does of small.

https://www.portfoliovisualizer.com/fac ... sion=false

Doesn't seem like it offering anything at all and returns were about even with VBR, which had way more value loading (should've done worse, hence the negative alpha on the active fund).

https://www.portfoliovisualizer.com/bac ... ion3_3=100

[manlymatt83]

Will everyone's transition from TSM/SCV (say 50% TSM and 50% SCV) to something more conservative as they near retirement be linear, or exponential?

For example, is it possible to formulate 80 - age as your SCV allocation so the number drops 1% each year until you hit 0%, or will it be better to pick a percentage (30% for example) and keep that fixed while dropping the total equity % in relation to bonds as you near retirement?

Paul Merriman has creative formulas (like 1.5x age in TSM, everything else in SCV) that essentially shrinks SCV exposure over time.

Others say stay fixed for life (70/30) and then just increase bond allocation.

[Day9]

Will everyone's transition from TSM/SCV (say 50% TSM and 50% SCV) to something more conservative as they near retirement be linear, or exponential?

For example, is it possible to formulate 80 - age as your SCV allocation so the number drops 1% each year until you hit 0%, or will it be better to pick a percentage (30% for example) and keep that fixed while dropping the total equity % in relation to bonds as you near retirement?

Paul Merriman has creative formulas (like 1.5x age in TSM, everything else in SCV) that essentially shrinks SCV exposure over time.

Others say stay fixed for life (70/30) and then just increase bond allocation.

Larry Swedroe says when time horizons are short is precisely when it becomes most important to diversify among factors and not just put all your eggs in the Market Beta basket.

Following his logic one would keep their strong tilts and increase their safe bond allocation. Known as the "Larry Portfolio".

[manlymatt83]

Will everyone's transition from TSM/SCV (say 50% TSM and 50% SCV) to something more conservative as they near retirement be linear, or exponential?

For example, is it possible to formulate 80 - age as your SCV allocation so the number drops 1% each year until you hit 0%, or will it be better to pick a percentage (30% for example) and keep that fixed while dropping the total equity % in relation to bonds as you near retirement?

Paul Merriman has creative formulas (like 1.5x age in TSM, everything else in SCV) that essentially shrinks SCV exposure over time.

Others say stay fixed for life (70/30) and then just increase bond allocation.

Larry Swedroe says when time horizons are short is precisely when it becomes most important to diversify among factors and not just put all your eggs in the Market Beta basket.

Following his logic one would keep their strong tilts and increase their safe bond allocation. Known as the "Larry Portfolio".

Interesting. So sounds like I need to get on portfolio visualizer and somehow calculate a percentage allocation of VTI/VXUS + AVUV/AVDV/DGS that gets me through age 100, and then add in bonds over time.

[MotoTrojan]

Will everyone's transition from TSM/SCV (say 50% TSM and 50% SCV) to something more conservative as they near retirement be linear, or exponential?

For example, is it possible to formulate 80 - age as your SCV allocation so the number drops 1% each year until you hit 0%, or will it be better to pick a percentage (30% for example) and keep that fixed while dropping the total equity % in relation to bonds as you near retirement?

Paul Merriman has creative formulas (like 1.5x age in TSM, everything else in SCV) that essentially shrinks SCV exposure over time.

Others say stay fixed for life (70/30) and then just increase bond allocation.

Larry Swedroe says when time horizons are short is precisely when it becomes most important to diversify among factors and not just put all your eggs in the Market Beta basket.

Following his logic one would keep their strong tilts and increase their safe bond allocation. Known as the "Larry Portfolio".

Interesting. So sounds like I need to get on portfolio visualizer and somehow calculate a percentage allocation of VTI/VXUS + AVUV/AVDV/DGS that gets me through age 100, and then add in bonds over time.

Not sure what PV is going to tell you there. Why not pick a fixed allocation of equity and just reduce that as you add bonds?

There are two camps here, the camp that thinks tilting gets you more expected return but with commiserate risk, and those that think it diversifies risk (increases risk-adjusted return). The 1st camp would remove tilts until they are 100% market cap before adding bonds. The 2nd cap would leave their tilts as a % of equity, reduce equity overall, and maybe even hold more bonds than they otherwise would.

I personally am somewhere in-between but will likely keep most of my tilt and just dilute with bonds.

[Steve Reading]

Will everyone's transition from TSM/SCV (say 50% TSM and 50% SCV) to something more conservative as they near retirement be linear, or exponential?

For example, is it possible to formulate 80 - age as your SCV allocation so the number drops 1% each year until you hit 0%, or will it be better to pick a percentage (30% for example) and keep that fixed while dropping the total equity % in relation to bonds as you near retirement?

Paul Merriman has creative formulas (like 1.5x age in TSM, everything else in SCV) that essentially shrinks SCV exposure over time.

Others say stay fixed for life (70/30) and then just increase bond allocation.

Larry Swedroe says when time horizons are short is precisely when it becomes most important to diversify among factors and not just put all your eggs in the Market Beta basket.

Following his logic one would keep their strong tilts and increase their safe bond allocation. Known as the "Larry Portfolio".

Interesting. So sounds like I need to get on portfolio visualizer and somehow calculate a percentage allocation of VTI/VXUS + AVUV/AVDV/DGS that gets me through age 100, and then add in bonds over time.

What you really should do is figure out your beliefs about factors. That is the vital step that will dictate how you un-tilt your portfolio near retirement (or whether you should do that at all!).
Here's a post with some of the questions you'll want to ponder. This is the hard part. Managing your portfolio given your answers is actually the easy part:
viewtopic.php?p=5498403#p5498403

[manlymatt83]

Will everyone's transition from TSM/SCV (say 50% TSM and 50% SCV) to something more conservative as they near retirement be linear, or exponential?

For example, is it possible to formulate 80 - age as your SCV allocation so the number drops 1% each year until you hit 0%, or will it be better to pick a percentage (30% for example) and keep that fixed while dropping the total equity % in relation to bonds as you near retirement?

Paul Merriman has creative formulas (like 1.5x age in TSM, everything else in SCV) that essentially shrinks SCV exposure over time.

Others say stay fixed for life (70/30) and then just increase bond allocation.

Larry Swedroe says when time horizons are short is precisely when it becomes most important to diversify among factors and not just put all your eggs in the Market Beta basket.

Following his logic one would keep their strong tilts and increase their safe bond allocation. Known as the "Larry Portfolio".

Interesting. So sounds like I need to get on portfolio visualizer and somehow calculate a percentage allocation of VTI/VXUS + AVUV/AVDV/DGS that gets me through age 100, and then add in bonds over time.

Not sure what PV is going to tell you there. Why not pick a fixed allocation of equity and just reduce that as you add bonds?

There are two camps here, the camp that thinks tilting gets you more expected return but with commiserate risk, and those that think it diversifies risk (increases risk-adjusted return). The 1st camp would remove tilts until they are 100% market cap before adding bonds. The 2nd cap would leave their tilts as a % of equity, reduce equity overall, and maybe even hold more bonds than they otherwise would.

I personally am somewhere in-between but will likely keep most of my tilt and just dilute with bonds.

I am also somewhere in-between. My gut is to be 50/50 TSM & SCV through age 45 or so, and then slowly add bonds + reduce SCV exposure until I'm somewhere around 60/40 TSM/Bonds and 80/20 TSM/SCV through retirement.

[MotoTrojan]

Will everyone's transition from TSM/SCV (say 50% TSM and 50% SCV) to something more conservative as they near retirement be linear, or exponential?

For example, is it possible to formulate 80 - age as your SCV allocation so the number drops 1% each year until you hit 0%, or will it be better to pick a percentage (30% for example) and keep that fixed while dropping the total equity % in relation to bonds as you near retirement?

Paul Merriman has creative formulas (like 1.5x age in TSM, everything else in SCV) that essentially shrinks SCV exposure over time.

Others say stay fixed for life (70/30) and then just increase bond allocation.

Larry Swedroe says when time horizons are short is precisely when it becomes most important to diversify among factors and not just put all your eggs in the Market Beta basket.

Following his logic one would keep their strong tilts and increase their safe bond allocation. Known as the "Larry Portfolio".

Interesting. So sounds like I need to get on portfolio visualizer and somehow calculate a percentage allocation of VTI/VXUS + AVUV/AVDV/DGS that gets me through age 100, and then add in bonds over time.

Not sure what PV is going to tell you there. Why not pick a fixed allocation of equity and just reduce that as you add bonds?

There are two camps here, the camp that thinks tilting gets you more expected return but with commiserate risk, and those that think it diversifies risk (increases risk-adjusted return). The 1st camp would remove tilts until they are 100% market cap before adding bonds. The 2nd cap would leave their tilts as a % of equity, reduce equity overall, and maybe even hold more bonds than they otherwise would.

I personally am somewhere in-between but will likely keep most of my tilt and just dilute with bonds.

I am also somewhere in-between. My gut is to be 50/50 TSM & SCV through age 45 or so, and then slowly add bonds + reduce SCV exposure until I'm somewhere around 60/40 TSM/Bonds and 80/20 TSM/SCV through retirement.

Seems like a valid plan given that belief; nice that it tapers off your factor exposure more slowly to reduce any timing regret. I think a linear reduction in tilt from 50/50 to 80/20 as your overall equity goes from 100/0 to 60/40 would be a fine way to accomplish this. I frankly haven't quite settled on a bond allocation in retirement and my portfolio isn't large enough now to really know emotionally what I'll want to do, but I could see myself being more in the 70/30 camp. Time will tell.

[manlymatt83]

Will everyone's transition from TSM/SCV (say 50% TSM and 50% SCV) to something more conservative as they near retirement be linear, or exponential?

For example, is it possible to formulate 80 - age as your SCV allocation so the number drops 1% each year until you hit 0%, or will it be better to pick a percentage (30% for example) and keep that fixed while dropping the total equity % in relation to bonds as you near retirement?

Paul Merriman has creative formulas (like 1.5x age in TSM, everything else in SCV) that essentially shrinks SCV exposure over time.

Others say stay fixed for life (70/30) and then just increase bond allocation.

Larry Swedroe says when time horizons are short is precisely when it becomes most important to diversify among factors and not just put all your eggs in the Market Beta basket.

Following his logic one would keep their strong tilts and increase their safe bond allocation. Known as the "Larry Portfolio".

Interesting. So sounds like I need to get on portfolio visualizer and somehow calculate a percentage allocation of VTI/VXUS + AVUV/AVDV/DGS that gets me through age 100, and then add in bonds over time.

What you really should do is figure out your beliefs about factors. That is the vital step that will dictate how you un-tilt your portfolio near retirement (or whether you should do that at all!).
Here's a post with some of the questions you'll want to ponder. This is the hard part. Managing your portfolio given your answers is actually the easy part:
viewtopic.php?p=5498403#p5498403

In having listened to almost all of Paul Merriman's podcast episodes over the years, this is what I know/believe:

- Small & Value over time beat, but only in the sense of higher risk, higher reward. I do believe max drawdowns on SCV *will* remain larger than TSM over the next 50 years. Small Cap Growth doesn't interest me.
- I am not smart enough to know where that higher risk, higher reward stands when it comes to risk adjusted returns. I am willing to learn. But I also know that I only avoid buying individual stocks (other than BRK-B) because of my SCV holdings... I need to "be different" somewhere, or I change my mind over time. If for some reason I got out of AVUV/AVDV, I'd probably buy a few hundred shares of TWTR instead... just to have something to watch. But I am 37. When I am 50 or 60, I may want less risk.... will definitely add bonds by then, but may also reduce SCV exposure no matter what (whether it has been doing great, or poorly).
- Drawdowns don't bother me. I watched my portfolio drop from S&P 3300 to S&P 2200 in March and just bought more. Didn't sell, didn't lose sleep.

[manlymatt83]

Larry Swedroe says when time horizons are short is precisely when it becomes most important to diversify among factors and not just put all your eggs in the Market Beta basket.

Following his logic one would keep their strong tilts and increase their safe bond allocation. Known as the "Larry Portfolio".

Interesting. So sounds like I need to get on portfolio visualizer and somehow calculate a percentage allocation of VTI/VXUS + AVUV/AVDV/DGS that gets me through age 100, and then add in bonds over time.

Not sure what PV is going to tell you there. Why not pick a fixed allocation of equity and just reduce that as you add bonds?

There are two camps here, the camp that thinks tilting gets you more expected return but with commiserate risk, and those that think it diversifies risk (increases risk-adjusted return). The 1st camp would remove tilts until they are 100% market cap before adding bonds. The 2nd cap would leave their tilts as a % of equity, reduce equity overall, and maybe even hold more bonds than they otherwise would.

I personally am somewhere in-between but will likely keep most of my tilt and just dilute with bonds.

I am also somewhere in-between. My gut is to be 50/50 TSM & SCV through age 45 or so, and then slowly add bonds + reduce SCV exposure until I'm somewhere around 60/40 TSM/Bonds and 80/20 TSM/SCV through retirement.

Seems like a valid plan given that belief; nice that it tapers off your factor exposure more slowly to reduce any timing regret. I think a linear reduction in tilt from 50/50 to 80/20 as your overall equity goes from 100/0 to 60/40 would be a fine way to accomplish this. I frankly haven't quite settled on a bond allocation in retirement and my portfolio isn't large enough now to really know emotionally what I'll want to do, but I could see myself being more in the 70/30 camp. Time will tell.

Agree that time will tell. Having a plan now to save as a JPG and look back on will help me. Thanks for your input!

[Steve Reading]

Will everyone's transition from TSM/SCV (say 50% TSM and 50% SCV) to something more conservative as they near retirement be linear, or exponential?

For example, is it possible to formulate 80 - age as your SCV allocation so the number drops 1% each year until you hit 0%, or will it be better to pick a percentage (30% for example) and keep that fixed while dropping the total equity % in relation to bonds as you near retirement?

Paul Merriman has creative formulas (like 1.5x age in TSM, everything else in SCV) that essentially shrinks SCV exposure over time.

Others say stay fixed for life (70/30) and then just increase bond allocation.

Larry Swedroe says when time horizons are short is precisely when it becomes most important to diversify among factors and not just put all your eggs in the Market Beta basket.

Following his logic one would keep their strong tilts and increase their safe bond allocation. Known as the "Larry Portfolio".

Interesting. So sounds like I need to get on portfolio visualizer and somehow calculate a percentage allocation of VTI/VXUS + AVUV/AVDV/DGS that gets me through age 100, and then add in bonds over time.

What you really should do is figure out your beliefs about factors. That is the vital step that will dictate how you un-tilt your portfolio near retirement (or whether you should do that at all!).
Here's a post with some of the questions you'll want to ponder. This is the hard part. Managing your portfolio given your answers is actually the easy part:
viewtopic.php?p=5498403#p5498403

In having listened to almost all of Paul Merriman's podcast episodes over the years, this is what I know/believe:

- Small & Value over time beat, but only in the sense of higher risk, higher reward. I do believe max drawdowns on SCV *will* remain larger than TSM over the next 50 years. Small Cap Growth doesn't interest me.
- I am not smart enough to know where that higher risk, higher reward stands when it comes to risk adjusted returns. I am willing to learn. But I also know that I only avoid buying individual stocks (other than BRK-B) because of my SCV holdings... I need to "be different" somewhere, or I change my mind over time. If for some reason I got out of AVUV/AVDV, I'd probably buy a few hundred shares of TWTR instead... just to have something to watch. But I am 37. When I am 50 or 60, I may want less risk.... will definitely add bonds by then, but may also reduce SCV exposure no matter what (whether it has been doing great, or poorly).
- Drawdowns don't bother me. I watched my portfolio drop from S&P 3300 to S&P 2200 in March and just bought more. Didn't sell, didn't lose sleep.

Like I said, figuring out your own personal beliefs is by far the hardest part. Holding a lot of SCV when young is consistent with either view but holding some SCV when retired can only be consistent with a view that you believe you will obtain higher utility than the average market participant by tilting.

Here's a very quick and dirty way to figure out how to ramp down. It's not optimal but it'll be close actually. Probably closer than the age rules of thumb above.
1) Estimate your target final retirement portfolio nest egg in future dollars (say that's $3M, in 2050 dollars).
2) Discount that value to the present. The discount rate you use should be the portfolio's own rate of return. That obviously depends on your retirement AA. Say you want a 50/50 stock/bond split, with the stocks 80/20 TSM/SCV. Call it a 4% rate of return just as a first-order approximation. So that's $920k in today's dollars.
3) You want to invest that $920K today with your retirement allocation. So you'd want $460K in stocks, out of which $92K is in SCV.

Every year, re-do the above. Take the following action based on your results:
1) If you have more in SCV but less in stocks in general than above, do nothing. This is saying that yes, you have more SCV than you'd want but that's OK because you're trying to make your portfolio riskier as a young investor (pseudo-leverage).
2) If you have less in SCV and less in stocks, do nothing as well.
3) If you have more in stocks but less in SCV as above, then you could do nothing as well. Technically you should sell stocks (but not SCV stocks) and since you're asking specifically about SCV, we can ignore this.
4) If you have more in SCV and more in stocks than above, then sell SCV and buy bonds, until you achieve level 3 right above.


What this creates is a personalized glidepath. If SCV does very well, you'll de-tilt faster. If SCV does very poorly, you'll de-tilt slower. And the above is crude of course, so I'd only sell if the SCV portion seems much higher than what you calculated in step 4. If it's reasonably close, just don't bother.

[Robert T]

There are two camps here, the camp that thinks tilting gets you more expected return but with commiserate risk, and those that think it diversifies risk (increases risk-adjusted return). The 1st camp would remove tilts until they are 100% market cap before adding bonds. The 2nd cap would leave their tilts as a % of equity, reduce equity overall, and maybe even hold more bonds than they otherwise would.

The first seems to hold true in a CAPM world, and where the non-equity portion is assumed to be cash.

e.g.
Market portfolio - beta = 1.0
Riskier portfolio - beta = 1.2
83% risker portfolio * 17% cash - overall beta = 1 (1.2 * 0.83 = 1.0).
In this case shifting from riskier portfolio to market portfolio is equivalent to adding cash position to riskier portfolio.

But most people don't only hold cash as fixed income. They add term, and some add default risk to fixed income. 'Term risk' through US treasuries has been a great diversifier over the past few decades. i.e. long-term treasuries had much higher return than cash during market downturns (e.g. 1998, 2001-02, 2008, 2020). As a result SD was lower, and Sharpe higher for 83% riskier portfolio' + 17% intermediate treasuries, than the '83% riskier portfolio + 17% cash', and the 100 % '[equity] market portfolio'.

So in this case there was a 'diversification benefit' by adding an additional source of risk "term risk" due to low correlation when the market tanked. A similar 'diversification benefit' story is often extended to 'within stock risk' e.g. some diversification benefits of adding small and value exposure as correlations <1. However, almost the opposite of US treasuries, these correlations tend to 1 in market crashes - leading to the sometimes observed lower Sharpe but increased negative skewness (downside risk).

Now some say (e.g. Ben Inker of GMO) that at current rates, longer-term treasuries will have a much lower diversification benefit going forward (as nothing left for Fed to cut when market tanks). Perhaps this is true - question is will it have 'zero' effect (similar to cash i.e. term = 0)? Or will it still have some diversification effect.

These aspects are often lost in the discussions on 'not necessary to hold bonds if you tilt equity portfolio to higher risk, just hold 100% TSM instead - on the assumption that these are equivalent".
.

[manlymatt83]

Larry Swedroe says when time horizons are short is precisely when it becomes most important to diversify among factors and not just put all your eggs in the Market Beta basket.

Following his logic one would keep their strong tilts and increase their safe bond allocation. Known as the "Larry Portfolio".

Interesting. So sounds like I need to get on portfolio visualizer and somehow calculate a percentage allocation of VTI/VXUS + AVUV/AVDV/DGS that gets me through age 100, and then add in bonds over time.

What you really should do is figure out your beliefs about factors. That is the vital step that will dictate how you un-tilt your portfolio near retirement (or whether you should do that at all!).
Here's a post with some of the questions you'll want to ponder. This is the hard part. Managing your portfolio given your answers is actually the easy part:
viewtopic.php?p=5498403#p5498403

In having listened to almost all of Paul Merriman's podcast episodes over the years, this is what I know/believe:

- Small & Value over time beat, but only in the sense of higher risk, higher reward. I do believe max drawdowns on SCV *will* remain larger than TSM over the next 50 years. Small Cap Growth doesn't interest me.
- I am not smart enough to know where that higher risk, higher reward stands when it comes to risk adjusted returns. I am willing to learn. But I also know that I only avoid buying individual stocks (other than BRK-B) because of my SCV holdings... I need to "be different" somewhere, or I change my mind over time. If for some reason I got out of AVUV/AVDV, I'd probably buy a few hundred shares of TWTR instead... just to have something to watch. But I am 37. When I am 50 or 60, I may want less risk.... will definitely add bonds by then, but may also reduce SCV exposure no matter what (whether it has been doing great, or poorly).
- Drawdowns don't bother me. I watched my portfolio drop from S&P 3300 to S&P 2200 in March and just bought more. Didn't sell, didn't lose sleep.

Like I said, figuring out your own personal beliefs is by far the hardest part. Holding a lot of SCV when young is consistent with either view but holding some SCV when retired can only be consistent with a view that you believe you will obtain higher utility than the average market participant by tilting.

Here's a very quick and dirty way to figure out how to ramp down. It's not optimal but it'll be close actually. Probably closer than the age rules of thumb above.
1) Estimate your target final retirement portfolio nest egg in future dollars (say that's $3M, in 2050 dollars).
2) Discount that value to the present. The discount rate you use should be the portfolio's own rate of return. That obviously depends on your retirement AA. Say you want a 50/50 stock/bond split, with the stocks 80/20 TSM/SCV. Call it a 4% rate of return just as a first-order approximation. So that's $920k in today's dollars.
3) You want to invest that $920K today with your retirement allocation. So you'd want $460K in stocks, out of which $92K is in SCV.

Every year, re-do the above. Take the following action based on your results:
1) If you have more in SCV but less in stocks in general than above, do nothing. This is saying that yes, you have more SCV than you'd want but that's OK because you're trying to make your portfolio riskier as a young investor (pseudo-leverage).
2) If you have less in SCV and less in stocks, do nothing as well.
3) If you have more in stocks but less in SCV as above, then you could do nothing as well. Technically you should sell stocks (but not SCV stocks) and since you're asking specifically about SCV, we can ignore this.
4) If you have more in SCV and more in stocks than above, then sell SCV and buy bonds, until you achieve level 3 right above.


What this creates is a personalized glidepath. If SCV does very well, you'll de-tilt faster. If SCV does very poorly, you'll de-tilt slower. And the above is crude of course, so I'd only sell if the SCV portion seems much higher than what you calculated in step 4. If it's reasonably close, just don't bother.

Thanks for this! This will make a fun exercise in Excel later tonight.

[typical.investor]

Now some say (e.g. Ben Inker of GMO) that at current rates, longer-term treasuries will have a much lower diversification benefit going forward (as nothing left for Fed to cut when market tanks). Perhaps this is true - question is will it have 'zero' effect (similar to cash i.e. term = 0)? Or will it still have some diversification effect.

These aspects are often lost in the discussions on 'not necessary to hold bonds if you tilt equity portfolio to higher risk, just hold 100% TSM instead - on the assumption that these are equivalent".

But what is that assumption of lower diversification based off of? Small rate movement? Lower yields? A change in how convexity behaves?

My understanding is that term (duration) exposure becomes more sensitive at lower rates. So I'd expect the diversification of longer-term treasuries to still be there. Granted that also means higher risk (and greater NAV loss) if rates rise, but I'd expect rates to again fall in any economic downturn. Stagflation of course would be killer but absent a complete global reshuffling or similar crisis that causes severe shortage, where would that originate from? We've had some supply trouble recently, but even lower demand. OK, stagflation can't be ruled out as a possibility, but overall I'd expect dropping rates when the economy weakens and thus a diversification benefit.



I wonder if low rates won't affect SCV the same way. That is, at low rates growth stocks benefit as the future earning baked into the price aren't reduced by inflation giving them a higher value today. But a small change in rates/inflation would seem to have a more dramatic impact when valuations are highest and current value is based on earning projected years and years out. Of course future earnings should also include some potential to price inflation changes in so wouldn't be exactly like bonds.

[vineviz]

But what is that assumption of lower diversification based off of? Small rate movement? Lower yields? A change in how convexity behaves?

I wouldn't give it much thought: the argument for "lower diversification" almost always comes from someone trying to sell investors on something other than Treasury bonds.

As you point out, a claim that the diversification benefits of bonds has decreased can only mean that either correlations have increased or variance has decreased. Without a cogent argument for one of those two things having occurred (or being likely to occur) the claim is prima facie unsupported.