I don't have faith in small and value premiums

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Triple digit golfer
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I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 4:31 pm

To make this actionable, I would like to see what other people think and why they believe that small and value tilts are worth it, despite the data I will provide below.

I fully understand the small and value premiums, but I don't have faith that they will persist or give me a benefit in my accumulation phase. However, in reading Bogle's excellent "The Telltale Chart" and playing around in portfolio visualizer, I am convinced that while I don't doubt that the premiums existed in the past and likely do still exist today if the holding period is long enough, this period may be almost as long or even longer than some of us will be in the accumulation phase.

For the 27 years ended 11/30/19 (the longest I could go), a $10k initial investment and $10k annual contributions in the Vanguard Value Index and Vanguard Growth Index would have grown to $1.32 million and $1.55 million, respectively, for CAGR of 19.89% and 20.62%. Using Vanguard funds, the value premium over those 27 years was negative, at -0.73%.

For the 34 years ended 11/30/19 (the longest I could go), the same investment and contributions in the Vanguard small cap index and Vanguard 500 index would have grown to $4.10 million and $3.99 million, respectively, for CAGR of 18.81% and 18.71%. Using Vanguard funds, the size premium over those 34 years was 0.10%.

For the 21 years ended 11/30/19 (the longest I could go), the same investment and contributions in the Vanguard small cap value index and Vanguard Total Stock Index would have grown to $762k and $759k, respectively, for CAGR of 23.02% and 23.00%. Using Vanguard funds, small value beat the total market over those 21 years by just 2 basis points.

Summary, using a $10k initial investment and $10k annual contributions:
Vanguard growth index beat the value index by 0.73% CAGR over the last 27 years.
Vanguard small index beat the S&P 500 by 0.10% CAGR over the last 34 years.
Vanguard small value index beat the Total Stock Index by 0.02% CAGR over the last 21 years.


I understand that it may take decades to achieve the premiums, but how many decades is too many to wait for most investors? If there are 30 year periods with no premium or even negative premium, I am not willing to even consider it expected.

Further, three decades ago the small and value premiums were either not known or not widely known, so we have to consider the possibility that they've been arbitraged away.

People may compare stocks and bonds the same way, but I don't know of a 30 year period (although to be fair, there is a 23 year period ending in 2009) where the total bond market beat the total stock market. Additionally, the equity risk premium has historically been larger than the small or value risk premiums, and I believe personally that it will continue to be much larger over most or all rolling 20-30 year time periods.

Anyway - I am a 3 fund lumper and likely will be forever.

MotoTrojan
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Re: I don't have faith in small and value premiums

Post by MotoTrojan » Thu Dec 26, 2019 4:44 pm

What do all of these periods have in common? They end during a decade of significant large-growth outperformance.

Maybe in 5 years it'll look quite different. Maybe if you held a diverse portfolio of factors that was rebalanced over the years, you'd beat both of these options overall.

HippoSir
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Re: I don't have faith in small and value premiums

Post by HippoSir » Thu Dec 26, 2019 4:51 pm

I recall almost identical discussions in 1999/2000, after which small value went on a tear. I have no idea what the future holds, but I suspect that the things that do well over the next decade won't be the same things that did well this decade.

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Triple digit golfer
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Re: I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 4:53 pm

MotoTrojan wrote:
Thu Dec 26, 2019 4:44 pm
What do all of these periods have in common? They end during a decade of significant large-growth outperformance.

Maybe in 5 years it'll look quite different. Maybe if you held a diverse portfolio of factors that was rebalanced over the years, you'd beat both of these options overall.
True. But if the premium was really there and really worthwhile, wouldn't the earlier years of outperformance be enough to still give value the edge over 34 years? If a lesser basketball player outscored Lebron James 40 to 20 in the final game of a season, I'd still expect Lebron to have a higher season points per game average.

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Triple digit golfer
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Re: I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 4:53 pm

HippoSir wrote:
Thu Dec 26, 2019 4:51 pm
I recall almost identical discussions in 1999/2000, after which small value went on a tear. I have no idea what the future holds, but I suspect that the things that do well over the next decade won't be the same things that did well this decade.
What about 34 years?

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Triple digit golfer
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Re: I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 4:56 pm

Just to clarify, I do believe there will be a premium for small and value over most 20 to 30 year periods. I just don't believe it enough to tilt or to think I will be accumulating long enough from now to when it will be realized. I am satisfied with market or S&P 500 returns.

stan1
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Re: I don't have faith in small and value premiums

Post by stan1 » Thu Dec 26, 2019 5:07 pm

Triple digit golfer wrote:
Thu Dec 26, 2019 4:56 pm
Just to clarify, I do believe there will be a premium for small and value over most 20 to 30 year periods. I just don't believe it enough to tilt or to think I will be accumulating long enough from now to when it will be realized. I am satisfied with market or S&P 500 returns.
Then you have your answer. Both are valid approaches and neither is a wrong approach. We won't know which was best until we can look back at the past.

KlangFool
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Re: I don't have faith in small and value premiums

Post by KlangFool » Thu Dec 26, 2019 5:09 pm

OP,

You need to answer two separate questions:

A) Do you believe in SmallCapValue tilting?

B) Do you believe in Larry's portfolio where SmallCapValue is part of the strategy?

I do not believe in (A). I do (B).

20% of my portfolio is in Larry's Portfolio -> 10% SmallCapValue and 10% Intermediate-Term Treasury.

Stop looking at individual pieces. Start looking at the portfolio as a whole.

KlangFool

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Stef
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Re: I don't have faith in small and value premiums

Post by Stef » Thu Dec 26, 2019 5:12 pm

Triple digit golfer wrote:
Thu Dec 26, 2019 4:53 pm
MotoTrojan wrote:
Thu Dec 26, 2019 4:44 pm
What do all of these periods have in common? They end during a decade of significant large-growth outperformance.

Maybe in 5 years it'll look quite different. Maybe if you held a diverse portfolio of factors that was rebalanced over the years, you'd beat both of these options overall.
True. But if the premium was really there and really worthwhile, wouldn't the earlier years of outperformance be enough to still give value the edge over 34 years? If a lesser basketball player outscored Lebron James 40 to 20 in the final game of a season, I'd still expect Lebron to have a higher season points per game average.
Well no because of the compounding effect. The last years are always the most important.

marcopolo
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Re: I don't have faith in small and value premiums

Post by marcopolo » Thu Dec 26, 2019 5:12 pm

my suspicion is that it is all somewhat cyclical, and mostly noise, so people see what they want to see.

You can get positive, 0, or negative premium by carefully selecting the start and end dates.

It is almost like two noisy, out of synch Sine waves, with a positive tilt. Depending on the period you look over, one will be higher than the other.

So, choose what you want the answer to be, and then pick the appropriate time period to support your position.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Triple digit golfer
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Re: I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 5:21 pm

Stef wrote:
Thu Dec 26, 2019 5:12 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 4:53 pm
MotoTrojan wrote:
Thu Dec 26, 2019 4:44 pm
What do all of these periods have in common? They end during a decade of significant large-growth outperformance.

Maybe in 5 years it'll look quite different. Maybe if you held a diverse portfolio of factors that was rebalanced over the years, you'd beat both of these options overall.
True. But if the premium was really there and really worthwhile, wouldn't the earlier years of outperformance be enough to still give value the edge over 34 years? If a lesser basketball player outscored Lebron James 40 to 20 in the final game of a season, I'd still expect Lebron to have a higher season points per game average.
Well no because of the compounding effect. The last years are always the most important.
But 34 (!) years, negative premium. That's convincing for me, regardless of the sequence of returns.

MotoTrojan
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Re: I don't have faith in small and value premiums

Post by MotoTrojan » Thu Dec 26, 2019 5:22 pm

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

Here is 47 years. Large-value beat large-growth by enough to be worth it IMHO, but man-oh-man did small-value destroy them both, netting almost 5x the accumulated wealth.

I don't think it is uncommon for someone to have a 47 year investment horizon; remember your horizon doesn't end when your retire, but when you expire.

I also find it interesting to compare how things would look if you continued contributing through that period. The gap closes a bit, with SCV only ~doubling the accumulated wealth.

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

MotoTrojan
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Re: I don't have faith in small and value premiums

Post by MotoTrojan » Thu Dec 26, 2019 5:23 pm

Triple digit golfer wrote:
Thu Dec 26, 2019 5:21 pm
Stef wrote:
Thu Dec 26, 2019 5:12 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 4:53 pm
MotoTrojan wrote:
Thu Dec 26, 2019 4:44 pm
What do all of these periods have in common? They end during a decade of significant large-growth outperformance.

Maybe in 5 years it'll look quite different. Maybe if you held a diverse portfolio of factors that was rebalanced over the years, you'd beat both of these options overall.
True. But if the premium was really there and really worthwhile, wouldn't the earlier years of outperformance be enough to still give value the edge over 34 years? If a lesser basketball player outscored Lebron James 40 to 20 in the final game of a season, I'd still expect Lebron to have a higher season points per game average.
Well no because of the compounding effect. The last years are always the most important.
But 34 (!) years, negative premium. That's convincing for me, regardless of the sequence of returns.
See above. If 34 is convincing, shouldn't 47 be even more convincing?

Topic Author
Triple digit golfer
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Re: I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 5:26 pm

MotoTrojan wrote:
Thu Dec 26, 2019 5:23 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 5:21 pm
Stef wrote:
Thu Dec 26, 2019 5:12 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 4:53 pm
MotoTrojan wrote:
Thu Dec 26, 2019 4:44 pm
What do all of these periods have in common? They end during a decade of significant large-growth outperformance.

Maybe in 5 years it'll look quite different. Maybe if you held a diverse portfolio of factors that was rebalanced over the years, you'd beat both of these options overall.
True. But if the premium was really there and really worthwhile, wouldn't the earlier years of outperformance be enough to still give value the edge over 34 years? If a lesser basketball player outscored Lebron James 40 to 20 in the final game of a season, I'd still expect Lebron to have a higher season points per game average.
Well no because of the compounding effect. The last years are always the most important.
But 34 (!) years, negative premium. That's convincing for me, regardless of the sequence of returns.
See above. If 34 is convincing, shouldn't 47 be even more convincing?
Sure, but the onus is on the risk premia assets to outperform, not the other way around. If there's any 34 year period where it doesn't outperform, it simply takes too long and can disappear too long for me to personally think it's worth it.

As I said, I think it exists. Just in really short bursts that many may not even be able to benefit from depending on investing time frames and sequence of returns.

MotoTrojan
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Re: I don't have faith in small and value premiums

Post by MotoTrojan » Thu Dec 26, 2019 5:30 pm

Triple digit golfer wrote:
Thu Dec 26, 2019 5:26 pm
MotoTrojan wrote:
Thu Dec 26, 2019 5:23 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 5:21 pm
Stef wrote:
Thu Dec 26, 2019 5:12 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 4:53 pm


True. But if the premium was really there and really worthwhile, wouldn't the earlier years of outperformance be enough to still give value the edge over 34 years? If a lesser basketball player outscored Lebron James 40 to 20 in the final game of a season, I'd still expect Lebron to have a higher season points per game average.
Well no because of the compounding effect. The last years are always the most important.
But 34 (!) years, negative premium. That's convincing for me, regardless of the sequence of returns.
See above. If 34 is convincing, shouldn't 47 be even more convincing?
Sure, but the onus is on the risk premia assets to outperform, not the other way around. If there's any 34 year period where it doesn't outperform, it simply takes too long and can disappear too long for me to personally think it's worth it.

As I said, I think it exists. Just in really short bursts that many may not even be able to benefit from depending on investing time frames and sequence of returns.
Have you checked out the rolling return function in Portfolio Visualizer? For the data I provided, the longest period it shows is 15 years. Large-cap had an average rolling return of 11.15%, Large-value 12.02%, and Small-value 15.04%. Wouldn't a rolling return be the best comparison, as it doesn't matter what start/end dates you use?

AHTFY
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Re: I don't have faith in small and value premiums

Post by AHTFY » Thu Dec 26, 2019 5:30 pm

My beliefs are:

1) Historically there are small cap and value premia.
2) These premia are likely to be lower going forward.
3) It could take years or decades to realize these premia.
4) One would have to tilt to a significant degree, perhaps at least 25% of one's equity portfolio, to make investing the premia worthwhile.
5) The tracking error and possible decades of underperformance is more important to most people than the small additional return one may receive.

To elaborate, if one thinks the small cap + value premia will deliver 2.0% in extra returns, putting 10% in these premia gets you only 0.2% which probably isn't worth the trouble.
Putting 25% in gets you a nice 0.5% boost, which may be worth the effort, but you'll have large tracking error and possible years/decades of underperformance.

For most people, I see no reason to tilt towards premia. It's not worth the effort and/or risk of long periods of underperformance. Perhaps it would make sense for foundations with theoretically infinite time horizons, but even that assumes these premia don't disappear.

Just my 2 cents...
Last edited by AHTFY on Thu Dec 26, 2019 5:33 pm, edited 1 time in total.

Topic Author
Triple digit golfer
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Re: I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 5:33 pm

MotoTrojan wrote:
Thu Dec 26, 2019 5:30 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 5:26 pm
MotoTrojan wrote:
Thu Dec 26, 2019 5:23 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 5:21 pm
Stef wrote:
Thu Dec 26, 2019 5:12 pm

Well no because of the compounding effect. The last years are always the most important.
But 34 (!) years, negative premium. That's convincing for me, regardless of the sequence of returns.
See above. If 34 is convincing, shouldn't 47 be even more convincing?
Sure, but the onus is on the risk premia assets to outperform, not the other way around. If there's any 34 year period where it doesn't outperform, it simply takes too long and can disappear too long for me to personally think it's worth it.

As I said, I think it exists. Just in really short bursts that many may not even be able to benefit from depending on investing time frames and sequence of returns.
Have you checked out the rolling return function in Portfolio Visualizer? For the data I provided, the longest period it shows is 15 years. Large-cap had an average rolling return of 11.15%, Large-value 12.02%, and Small-value 15.04%. Wouldn't a rolling return be the best comparison, as it doesn't matter what start/end dates you use?
Yes, but the fact that there are any long periods (say greater than 25 years) where it doesn't outperform makes me lose interest quickly.

MotoTrojan
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Re: I don't have faith in small and value premiums

Post by MotoTrojan » Thu Dec 26, 2019 5:34 pm

Triple digit golfer wrote:
Thu Dec 26, 2019 5:33 pm
MotoTrojan wrote:
Thu Dec 26, 2019 5:30 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 5:26 pm
MotoTrojan wrote:
Thu Dec 26, 2019 5:23 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 5:21 pm


But 34 (!) years, negative premium. That's convincing for me, regardless of the sequence of returns.
See above. If 34 is convincing, shouldn't 47 be even more convincing?
Sure, but the onus is on the risk premia assets to outperform, not the other way around. If there's any 34 year period where it doesn't outperform, it simply takes too long and can disappear too long for me to personally think it's worth it.

As I said, I think it exists. Just in really short bursts that many may not even be able to benefit from depending on investing time frames and sequence of returns.
Have you checked out the rolling return function in Portfolio Visualizer? For the data I provided, the longest period it shows is 15 years. Large-cap had an average rolling return of 11.15%, Large-value 12.02%, and Small-value 15.04%. Wouldn't a rolling return be the best comparison, as it doesn't matter what start/end dates you use?
Yes, but the fact that there are any long periods (say greater than 25 years) where it doesn't outperform makes me lose interest quickly.
Fair enough. There are significant periods where bonds out-performed global equity, if you use the right start/end dates.

Topic Author
Triple digit golfer
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Re: I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 5:36 pm

AHTFY wrote:
Thu Dec 26, 2019 5:30 pm
My beliefs are:

1) Historically there are small cap and value premia.
2) These premia are likely to be lower going forward.
3) It could take years or decades to realize these premia.
4) One would have to tilt to a significant degree, perhaps at least 25% of one's equity portfolio, to make investing the premia worthwhile.
5) The tracking error and possible decades of underperformance is more important to most people than the small additional return one may receive.

To elaborate, if one thinks the small cap + value premia will deliver 2.0% in extra returns, putting 10% in these premia gets you only 0.2% which probably isn't worth the trouble.
Putting 25% in gets you a nice 0.5% boost, which may be worth the effort, but you'll have large tracking error and possible years/decades of underperformance.

For most people, I see no reason to tilt towards premia. It's not worth the effort and/or risk of long periods of underperformance. Perhaps it would make sense for foundations with theoretically infinite time horizons, but even that assumes these premia don't disappear.

Just my 2 cents...
I agree with every word of that. I had considered 10-20% of equity, but for a best case 0.4% increase, and likely lower moving forward in my opinion, it doesn't seem worth it. I can save more to get the extra boost without the risk.

MotoTrojan
Posts: 9275
Joined: Wed Feb 01, 2017 8:39 pm

Re: I don't have faith in small and value premiums

Post by MotoTrojan » Thu Dec 26, 2019 5:37 pm

Triple digit golfer wrote:
Thu Dec 26, 2019 5:36 pm
AHTFY wrote:
Thu Dec 26, 2019 5:30 pm
My beliefs are:

1) Historically there are small cap and value premia.
2) These premia are likely to be lower going forward.
3) It could take years or decades to realize these premia.
4) One would have to tilt to a significant degree, perhaps at least 25% of one's equity portfolio, to make investing the premia worthwhile.
5) The tracking error and possible decades of underperformance is more important to most people than the small additional return one may receive.

To elaborate, if one thinks the small cap + value premia will deliver 2.0% in extra returns, putting 10% in these premia gets you only 0.2% which probably isn't worth the trouble.
Putting 25% in gets you a nice 0.5% boost, which may be worth the effort, but you'll have large tracking error and possible years/decades of underperformance.

For most people, I see no reason to tilt towards premia. It's not worth the effort and/or risk of long periods of underperformance. Perhaps it would make sense for foundations with theoretically infinite time horizons, but even that assumes these premia don't disappear.

Just my 2 cents...
I agree with every word of that. I had considered 10-20% of equity, but for a best case 0.4% increase, and likely lower moving forward in my opinion, it doesn't seem worth it. I can save more to get the extra boost without the risk.
I can agree with that. I have about 40-50% in small-value between US and ex-US, with the rest in large-cap (mostly US), but I plan to start purchasing some value-leaning US large-cap as well. I only hold 30% Internationally so having most/all of it in small-value gives me some further diversification, while also increasing expected return.

AHTFY
Posts: 169
Joined: Mon Jul 23, 2018 2:33 pm

Re: I don't have faith in small and value premiums

Post by AHTFY » Thu Dec 26, 2019 5:38 pm

Triple digit golfer wrote:
Thu Dec 26, 2019 5:36 pm
AHTFY wrote:
Thu Dec 26, 2019 5:30 pm
My beliefs are:

1) Historically there are small cap and value premia.
2) These premia are likely to be lower going forward.
3) It could take years or decades to realize these premia.
4) One would have to tilt to a significant degree, perhaps at least 25% of one's equity portfolio, to make investing the premia worthwhile.
5) The tracking error and possible decades of underperformance is more important to most people than the small additional return one may receive.

To elaborate, if one thinks the small cap + value premia will deliver 2.0% in extra returns, putting 10% in these premia gets you only 0.2% which probably isn't worth the trouble.
Putting 25% in gets you a nice 0.5% boost, which may be worth the effort, but you'll have large tracking error and possible years/decades of underperformance.

For most people, I see no reason to tilt towards premia. It's not worth the effort and/or risk of long periods of underperformance. Perhaps it would make sense for foundations with theoretically infinite time horizons, but even that assumes these premia don't disappear.

Just my 2 cents...
I agree with every word of that. I had considered 10-20% of equity, but for a best case 0.4% increase, and likely lower moving forward in my opinion, it doesn't seem worth it. I can save more to get the extra boost without the risk.
I also considered putting 5% or 10% of my portfolio is SCV, but then realized it wouldn't make a difference. I'm not willing to put 25% and even then I'm not sure it would be worth it.

The only almost convincing argument I have heard was that SCV is due for a rally after years of underperformance, but that would be market timing.

Topic Author
Triple digit golfer
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Re: I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 5:39 pm

MotoTrojan wrote:
Thu Dec 26, 2019 5:34 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 5:33 pm
MotoTrojan wrote:
Thu Dec 26, 2019 5:30 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 5:26 pm
MotoTrojan wrote:
Thu Dec 26, 2019 5:23 pm


See above. If 34 is convincing, shouldn't 47 be even more convincing?
Sure, but the onus is on the risk premia assets to outperform, not the other way around. If there's any 34 year period where it doesn't outperform, it simply takes too long and can disappear too long for me to personally think it's worth it.

As I said, I think it exists. Just in really short bursts that many may not even be able to benefit from depending on investing time frames and sequence of returns.
Have you checked out the rolling return function in Portfolio Visualizer? For the data I provided, the longest period it shows is 15 years. Large-cap had an average rolling return of 11.15%, Large-value 12.02%, and Small-value 15.04%. Wouldn't a rolling return be the best comparison, as it doesn't matter what start/end dates you use?
Yes, but the fact that there are any long periods (say greater than 25 years) where it doesn't outperform makes me lose interest quickly.
Fair enough. There are significant periods where bonds out-performed global equity, if you use the right start/end dates.
True, but I don't think 30 years. And I bet it's fewer and further between than large outperforming small and growth outperforming value equities.

I have always been a lumper, though. I figure if I make more than average income, save a higher than average percentage, and earn an average return on my portfolio, I have to end up above average, right? If the market hits the fan, then I'll be right there with everybody else, but likely a bit better due to income and savings rates. That's my irrational rationale for being a total market lumper.

Topic Author
Triple digit golfer
Posts: 4609
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Re: I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 5:41 pm

MotoTrojan wrote:
Thu Dec 26, 2019 5:37 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 5:36 pm
AHTFY wrote:
Thu Dec 26, 2019 5:30 pm
My beliefs are:

1) Historically there are small cap and value premia.
2) These premia are likely to be lower going forward.
3) It could take years or decades to realize these premia.
4) One would have to tilt to a significant degree, perhaps at least 25% of one's equity portfolio, to make investing the premia worthwhile.
5) The tracking error and possible decades of underperformance is more important to most people than the small additional return one may receive.

To elaborate, if one thinks the small cap + value premia will deliver 2.0% in extra returns, putting 10% in these premia gets you only 0.2% which probably isn't worth the trouble.
Putting 25% in gets you a nice 0.5% boost, which may be worth the effort, but you'll have large tracking error and possible years/decades of underperformance.

For most people, I see no reason to tilt towards premia. It's not worth the effort and/or risk of long periods of underperformance. Perhaps it would make sense for foundations with theoretically infinite time horizons, but even that assumes these premia don't disappear.

Just my 2 cents...
I agree with every word of that. I had considered 10-20% of equity, but for a best case 0.4% increase, and likely lower moving forward in my opinion, it doesn't seem worth it. I can save more to get the extra boost without the risk.
I can agree with that. I have about 40-50% in small-value between US and ex-US, with the rest in large-cap (mostly US), but I plan to start purchasing some value-leaning US large-cap as well. I only hold 30% Internationally so having most/all of it in small-value gives me some further diversification, while also increasing expected return.
That is worth it even if the premium is small. I don't have the guts for that large of a tilt.

Topic Author
Triple digit golfer
Posts: 4609
Joined: Mon May 18, 2009 5:57 pm

Re: I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 5:41 pm

AHTFY wrote:
Thu Dec 26, 2019 5:38 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 5:36 pm
AHTFY wrote:
Thu Dec 26, 2019 5:30 pm
My beliefs are:

1) Historically there are small cap and value premia.
2) These premia are likely to be lower going forward.
3) It could take years or decades to realize these premia.
4) One would have to tilt to a significant degree, perhaps at least 25% of one's equity portfolio, to make investing the premia worthwhile.
5) The tracking error and possible decades of underperformance is more important to most people than the small additional return one may receive.

To elaborate, if one thinks the small cap + value premia will deliver 2.0% in extra returns, putting 10% in these premia gets you only 0.2% which probably isn't worth the trouble.
Putting 25% in gets you a nice 0.5% boost, which may be worth the effort, but you'll have large tracking error and possible years/decades of underperformance.

For most people, I see no reason to tilt towards premia. It's not worth the effort and/or risk of long periods of underperformance. Perhaps it would make sense for foundations with theoretically infinite time horizons, but even that assumes these premia don't disappear.

Just my 2 cents...
I agree with every word of that. I had considered 10-20% of equity, but for a best case 0.4% increase, and likely lower moving forward in my opinion, it doesn't seem worth it. I can save more to get the extra boost without the risk.
I also considered putting 5% or 10% of my portfolio is SCV, but then realized it wouldn't make a difference. I'm not willing to put 25% and even then I'm not sure it would be worth it.

The only almost convincing argument I have heard was that SCV is due for a rally after years of underperformance, but that would be market timing.
Your last point is why I even considered it, and then I backed off after realizing I was considering market timing.

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Re: I don't have faith in small and value premiums

Post by celia » Thu Dec 26, 2019 5:43 pm

Triple digit golfer wrote:
Thu Dec 26, 2019 4:31 pm
For the 27 years ended 11/30/19 (the longest I could go), ...

For the 34 years ended 11/30/19 (the longest I could go), ...

For the 21 years ended 11/30/19 (the longest I could go), ...
Why are you comparing things in different time periods? Would it be fair to compare a decade (or longer) that contained a Great Depression with one that contained a world war or a huge stock market crash or a bull market? Of course one will give more favorable results for anything you are measuring. Change those decade begin and end dates to be 5 years earlier or later, and you will get completely different results.

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Re: I don't have faith in small and value premiums

Post by AHTFY » Thu Dec 26, 2019 5:44 pm

Triple digit golfer wrote:
Thu Dec 26, 2019 5:41 pm
AHTFY wrote:
Thu Dec 26, 2019 5:38 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 5:36 pm
AHTFY wrote:
Thu Dec 26, 2019 5:30 pm
My beliefs are:

1) Historically there are small cap and value premia.
2) These premia are likely to be lower going forward.
3) It could take years or decades to realize these premia.
4) One would have to tilt to a significant degree, perhaps at least 25% of one's equity portfolio, to make investing the premia worthwhile.
5) The tracking error and possible decades of underperformance is more important to most people than the small additional return one may receive.

To elaborate, if one thinks the small cap + value premia will deliver 2.0% in extra returns, putting 10% in these premia gets you only 0.2% which probably isn't worth the trouble.
Putting 25% in gets you a nice 0.5% boost, which may be worth the effort, but you'll have large tracking error and possible years/decades of underperformance.

For most people, I see no reason to tilt towards premia. It's not worth the effort and/or risk of long periods of underperformance. Perhaps it would make sense for foundations with theoretically infinite time horizons, but even that assumes these premia don't disappear.

Just my 2 cents...
I agree with every word of that. I had considered 10-20% of equity, but for a best case 0.4% increase, and likely lower moving forward in my opinion, it doesn't seem worth it. I can save more to get the extra boost without the risk.
I also considered putting 5% or 10% of my portfolio is SCV, but then realized it wouldn't make a difference. I'm not willing to put 25% and even then I'm not sure it would be worth it.

The only almost convincing argument I have heard was that SCV is due for a rally after years of underperformance, but that would be market timing.
Your last point is why I even considered it, and then I backed off after realizing I was considering market timing.
I have no problem with market timing, per se, as long as one realizes that's what they're doing. Perhaps not very Boglehead of me. But if I knew SCV would rebound, I'd definitely invest. But of course, we don't know. SCV could have years more of underperformance even if the SCV premia is real and returns eventually.

I wonder how many SCV tilters right now are subconsciously trying to time the market.

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Re: I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 5:48 pm

celia wrote:
Thu Dec 26, 2019 5:43 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 4:31 pm
For the 27 years ended 11/30/19 (the longest I could go), ...

For the 34 years ended 11/30/19 (the longest I could go), ...

For the 21 years ended 11/30/19 (the longest I could go), ...
Why are you comparing things in different time periods? Would it be fair to compare a decade (or longer) that contained a Great Depression with one that contained a world war or a huge stock market crash or a bull market? Of course one will give more favorable results for anything you are measuring. Change those decade begin and end dates to be 5 years earlier or later, and you will get completely different results.
Sure, but my point is that if any long time period (say 25+ years) of underperformance exists, it raises questions.

I used the longest time periods I could conveniently find. The point was that there are decades-long periods of under performance, which in and if itself makes it a strategy I don't want to use.

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Re: I don't have faith in small and value premiums

Post by MotoTrojan » Thu Dec 26, 2019 5:53 pm

Is the last 19 years a reasonable time-span to compare? Fund choice matters too. This comparison more than doubled your gain.

https://www.portfoliovisualizer.com/bac ... ion2_2=100


Also looking at just the last 10 years (during this raging large-cap bull) you can actually see that the S&P600 value fund was comfortably ahead of the S&P500 until last Christmas' correction.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

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Re: I don't have faith in small and value premiums

Post by Trader Joe » Thu Dec 26, 2019 5:54 pm

Triple digit golfer wrote:
Thu Dec 26, 2019 4:31 pm
To make this actionable, I would like to see what other people think and why they believe that small and value tilts are worth it, despite the data I will provide below.

I fully understand the small and value premiums, but I don't have faith that they will persist or give me a benefit in my accumulation phase. However, in reading Bogle's excellent "The Telltale Chart" and playing around in portfolio visualizer, I am convinced that while I don't doubt that the premiums existed in the past and likely do still exist today if the holding period is long enough, this period may be almost as long or even longer than some of us will be in the accumulation phase.

For the 27 years ended 11/30/19 (the longest I could go), a $10k initial investment and $10k annual contributions in the Vanguard Value Index and Vanguard Growth Index would have grown to $1.32 million and $1.55 million, respectively, for CAGR of 19.89% and 20.62%. Using Vanguard funds, the value premium over those 27 years was negative, at -0.73%.

For the 34 years ended 11/30/19 (the longest I could go), the same investment and contributions in the Vanguard small cap index and Vanguard 500 index would have grown to $4.10 million and $3.99 million, respectively, for CAGR of 18.81% and 18.71%. Using Vanguard funds, the size premium over those 34 years was 0.10%.

For the 21 years ended 11/30/19 (the longest I could go), the same investment and contributions in the Vanguard small cap value index and Vanguard Total Stock Index would have grown to $762k and $759k, respectively, for CAGR of 23.02% and 23.00%. Using Vanguard funds, small value beat the total market over those 21 years by just 2 basis points.

Summary, using a $10k initial investment and $10k annual contributions:
Vanguard growth index beat the value index by 0.73% CAGR over the last 27 years.
Vanguard small index beat the S&P 500 by 0.10% CAGR over the last 34 years.
Vanguard small value index beat the Total Stock Index by 0.02% CAGR over the last 21 years.


I understand that it may take decades to achieve the premiums, but how many decades is too many to wait for most investors? If there are 30 year periods with no premium or even negative premium, I am not willing to even consider it expected.

Further, three decades ago the small and value premiums were either not known or not widely known, so we have to consider the possibility that they've been arbitraged away.

People may compare stocks and bonds the same way, but I don't know of a 30 year period (although to be fair, there is a 23 year period ending in 2009) where the total bond market beat the total stock market. Additionally, the equity risk premium has historically been larger than the small or value risk premiums, and I believe personally that it will continue to be much larger over most or all rolling 20-30 year time periods.

Anyway - I am a 3 fund lumper and likely will be forever.
I agree with you. I would never invest in either small or value oriented investments (index or otherwise).

I only invest in either VFIAX or VTSAX and I am very happy.

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Re: I don't have faith in small and value premiums

Post by MotoTrojan » Thu Dec 26, 2019 5:56 pm

And here is an interesting 26 year period.

Note that I am showing 100% S&P500, 100% SCV, and 50/50. While the SCV outperformed overall, it had the lowest sharpe ratio. By going 50/50 you barely reduce overall return, but greatly reduce volatility and increase sharpe to the highest of all three.

https://www.portfoliovisualizer.com/bac ... tion2_3=50

I don't think it is reflective of these strategies to look at them in isolation. Often the benefits are best seen when evaluating the overall portfolios performance.

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Re: I don't have faith in small and value premiums

Post by AHTFY » Thu Dec 26, 2019 6:02 pm

MotoTrojan wrote:
Thu Dec 26, 2019 5:56 pm
And here is an interesting 26 year period.

Note that I am showing 100% S&P500, 100% SCV, and 50/50. While the SCV outperformed overall, it had the lowest sharpe ratio. By going 50/50 you barely reduce overall return, but greatly reduce volatility and increase sharpe to the highest of all three.

https://www.portfoliovisualizer.com/bac ... tion2_3=50

I don't think it is reflective of these strategies to look at them in isolation. Often the benefits are best seen when evaluating the overall portfolios performance.
You get an 0.87% CAGR for an extra 1.54% stdev by going to 50-50 rather than just 100% S&P500. You also increase the drawndown from 50.97% to 55.76%. But your Sharpe does go up by 0.02.

I'm not saying there's no benefit, but it does seem small and hardly worth the effort and extra risk.

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Re: I don't have faith in small and value premiums

Post by sf_tech_saver » Thu Dec 26, 2019 6:03 pm

Buy VTI and focus on increasing the value of your human capital in your career and you will far outperform any trivial factor tilt :sharebeer
VTI is a modern marvel

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Re: I don't have faith in small and value premiums

Post by JoMoney » Thu Dec 26, 2019 6:06 pm

MotoTrojan wrote:
Thu Dec 26, 2019 5:56 pm
And here is an interesting 26 year period.

Note that I am showing 100% S&P500, 100% SCV, and 50/50. While the SCV outperformed overall, it had the lowest sharpe ratio. By going 50/50 you barely reduce overall return, but greatly reduce volatility and increase sharpe to the highest of all three.

https://www.portfoliovisualizer.com/bac ... tion2_3=50

I don't think it is reflective of these strategies to look at them in isolation. Often the benefits are best seen when evaluating the overall portfolios performance.
And yet DFSCX, DFA's Small-Cap Blend fund beat it's Small-Cap Value fund (DSFVX) over the life of the value fund... LINK
And over the life time of the DFSCX fund Small-Cap fund, the S&P 500 fund had higher returns LINK
"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: I don't have faith in small and value premiums

Post by Steve Reading » Thu Dec 26, 2019 6:08 pm

Triple digit golfer wrote:
Thu Dec 26, 2019 4:31 pm
To make this actionable, I would like to see what other people think and why they believe that small and value tilts are worth it, despite the data I will provide below.

I fully understand the small and value premiums, but I don't have faith that they will persist or give me a benefit in my accumulation phase. However, in reading Bogle's excellent "The Telltale Chart" and playing around in portfolio visualizer, I am convinced that while I don't doubt that the premiums existed in the past and likely do still exist today if the holding period is long enough, this period may be almost as long or even longer than some of us will be in the accumulation phase.

For the 27 years ended 11/30/19 (the longest I could go), a $10k initial investment and $10k annual contributions in the Vanguard Value Index and Vanguard Growth Index would have grown to $1.32 million and $1.55 million, respectively, for CAGR of 19.89% and 20.62%. Using Vanguard funds, the value premium over those 27 years was negative, at -0.73%.

For the 34 years ended 11/30/19 (the longest I could go), the same investment and contributions in the Vanguard small cap index and Vanguard 500 index would have grown to $4.10 million and $3.99 million, respectively, for CAGR of 18.81% and 18.71%. Using Vanguard funds, the size premium over those 34 years was 0.10%.

For the 21 years ended 11/30/19 (the longest I could go), the same investment and contributions in the Vanguard small cap value index and Vanguard Total Stock Index would have grown to $762k and $759k, respectively, for CAGR of 23.02% and 23.00%. Using Vanguard funds, small value beat the total market over those 21 years by just 2 basis points.

Summary, using a $10k initial investment and $10k annual contributions:
Vanguard growth index beat the value index by 0.73% CAGR over the last 27 years.
Vanguard small index beat the S&P 500 by 0.10% CAGR over the last 34 years.
Vanguard small value index beat the Total Stock Index by 0.02% CAGR over the last 21 years.


I understand that it may take decades to achieve the premiums, but how many decades is too many to wait for most investors? If there are 30 year periods with no premium or even negative premium, I am not willing to even consider it expected.

Further, three decades ago the small and value premiums were either not known or not widely known, so we have to consider the possibility that they've been arbitraged away.

People may compare stocks and bonds the same way, but I don't know of a 30 year period (although to be fair, there is a 23 year period ending in 2009) where the total bond market beat the total stock market. Additionally, the equity risk premium has historically been larger than the small or value risk premiums, and I believe personally that it will continue to be much larger over most or all rolling 20-30 year time periods.

Anyway - I am a 3 fund lumper and likely will be forever.
Here’s why I believe it:

Junk bonds have higher yields than treasury bonds. That’s because they’re riskier and need to compensate you. Otherwise they’re an obvious free lunch no?

Value stocks literally cost less for a unit of earning/book market/etc. It’s like they yield more right now. Either you think that’s a free lunch, or they’re just riskier stocks with potentially uncertain futures (just like junk bonds). And that demands a premium. In fact, the premium IS that they cost less, making them value stocks.

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Re: I don't have faith in small and value premiums

Post by Ocean77 » Thu Dec 26, 2019 6:09 pm

The important thing is to stick with whatever strategy you selected, and not switch forth and back. If you include value and/or small stocks or not is much less important than that in the long run. If you "don't have faith in small and value premiums", then better not invest in them, or else you may be tempted to give up on them at some point.

Going forward, there will be long periods where the S&P500 underperforms value or small stocks. Be prepared to hang in there.

As for me, I include value and small cap funds in my portfolio for diversification, for when those times come. Any extra return would be gravy, but I don't count on that.

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Re: I don't have faith in small and value premiums

Post by dcabler » Thu Dec 26, 2019 6:12 pm

Triple digit golfer wrote:
Thu Dec 26, 2019 4:31 pm
To make this actionable, I would like to see what other people think and why they believe that small and value tilts are worth it, despite the data I will provide below.

I fully understand the small and value premiums, but I don't have faith that they will persist or give me a benefit in my accumulation phase. However, in reading Bogle's excellent "The Telltale Chart" and playing around in portfolio visualizer, I am convinced that while I don't doubt that the premiums existed in the past and likely do still exist today if the holding period is long enough, this period may be almost as long or even longer than some of us will be in the accumulation phase.

For the 27 years ended 11/30/19 (the longest I could go), a $10k initial investment and $10k annual contributions in the Vanguard Value Index and Vanguard Growth Index would have grown to $1.32 million and $1.55 million, respectively, for CAGR of 19.89% and 20.62%. Using Vanguard funds, the value premium over those 27 years was negative, at -0.73%.

For the 34 years ended 11/30/19 (the longest I could go), the same investment and contributions in the Vanguard small cap index and Vanguard 500 index would have grown to $4.10 million and $3.99 million, respectively, for CAGR of 18.81% and 18.71%. Using Vanguard funds, the size premium over those 34 years was 0.10%.

For the 21 years ended 11/30/19 (the longest I could go), the same investment and contributions in the Vanguard small cap value index and Vanguard Total Stock Index would have grown to $762k and $759k, respectively, for CAGR of 23.02% and 23.00%. Using Vanguard funds, small value beat the total market over those 21 years by just 2 basis points.

Summary, using a $10k initial investment and $10k annual contributions:
Vanguard growth index beat the value index by 0.73% CAGR over the last 27 years.
Vanguard small index beat the S&P 500 by 0.10% CAGR over the last 34 years.
Vanguard small value index beat the Total Stock Index by 0.02% CAGR over the last 21 years.


I understand that it may take decades to achieve the premiums, but how many decades is too many to wait for most investors? If there are 30 year periods with no premium or even negative premium, I am not willing to even consider it expected.

Further, three decades ago the small and value premiums were either not known or not widely known, so we have to consider the possibility that they've been arbitraged away.

People may compare stocks and bonds the same way, but I don't know of a 30 year period (although to be fair, there is a 23 year period ending in 2009) where the total bond market beat the total stock market. Additionally, the equity risk premium has historically been larger than the small or value risk premiums, and I believe personally that it will continue to be much larger over most or all rolling 20-30 year time periods.

Anyway - I am a 3 fund lumper and likely will be forever.
If you're happy with being a 3-funder, then stick with it - nothing wrong with it at all. Many here do.

Have you checked the factor loadings of the Vanguard funds over the periods you show above? I wouldn't just go by the name of a fund in order to determine whether or not it has much of a particular factor loading and whether or not that might be somewhat offset by another factor. Typically funds that call them self "small" and/or "value", etc. are doing so based on their own criteria which might not align with F-F definitions or Morningstar's definitions.

For example, VIVAX (Vanguard's Value fund) has a value loading over the entire period of 0.31, but it has a negative size loading of -0.17. The 36 month rolling regression shows that the size factor has always been negative.

Did you also take into account that Vanguard switched index providers for a number of their funds around 2013 and that the factor loadings might have changed? 2013 to the present isn't much time, but you can go to the CRSP website and download monthly data from farther back in time, then you can upload that to portfoliovisualizer to check out the factor loadings, returns, etc. of the indexes they currently track.

In Portfoliovisualizer, you can also look at rolling factor regressions to see how they change over time for any given fund. (and they most certainly do change for many funds).

Vanguard's small cap fund shows a clear drop in size loading beginning around 2013 and a more modest drop in value loading (which wasn't large to begin with as one might expect). A corresponding drop in alpha has also happened over that period.

Finally their small cap value fund (VISVX) has reasonably strong loading of size at 0.51 and value of 0.59 from 1998 to 2019, but again, the rolling regressions show the size loading experienced a modest drop starting in 2013 and a more significant value drop at about the same time. Before then, there was quite a bit of variability in the size and value loadings in that fund.

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Re: I don't have faith in small and value premiums

Post by AHTFY » Thu Dec 26, 2019 6:13 pm

305pelusa wrote:
Thu Dec 26, 2019 6:08 pm

Here’s why I believe it:

Junk bonds have higher yields than treasury bonds. That’s because they’re riskier and need to compensate you. Otherwise they’re an obvious free lunch no?

Value stocks literally cost less for a unit of earning/book market/etc. It’s like they yield more right now. Either you think that’s a free lunch, or they’re just riskier stocks with potentially uncertain futures (just like junk bonds). And that demands a premium. In fact, the premium IS that they cost less, making them value stocks.
It's more than that. If you were simply being paid for taking more risk, you could do the same by buying more of the broad market (changing your allocation or using leverage). The key is that these small and value premia are uncorrelated to the market. Thus your return in theory goes up more than your risk does.

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Re: I don't have faith in small and value premiums

Post by Steve Reading » Thu Dec 26, 2019 6:17 pm

AHTFY wrote:
Thu Dec 26, 2019 6:13 pm
305pelusa wrote:
Thu Dec 26, 2019 6:08 pm

Here’s why I believe it:

Junk bonds have higher yields than treasury bonds. That’s because they’re riskier and need to compensate you. Otherwise they’re an obvious free lunch no?

Value stocks literally cost less for a unit of earning/book market/etc. It’s like they yield more right now. Either you think that’s a free lunch, or they’re just riskier stocks with potentially uncertain futures (just like junk bonds). And that demands a premium. In fact, the premium IS that they cost less, making them value stocks.
It's more than that. If you were simply being paid for taking more risk, you could do the same by buying more of the broad market (changing your allocation or using leverage). The key is that these small and value premia are uncorrelated to the market. Thus your return in theory goes up more than your risk does.
^This is an argument as to why you might want to tilt instead of just increasing beta or leveraging.

My response is simply why I believe value will outperform growth over the long run, given the same beta.

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Re: I don't have faith in small and value premiums

Post by AHTFY » Thu Dec 26, 2019 6:18 pm

I want to add that I have less confidence in the small cap premium because there are fewer truly small cap stocks these days. The number of publicly traded companies in the US has fallen in half since 1997. It has become too costly for small companies to go public. So today's small caps are not the same as the small caps of yesteryear. I don't know how much of an effect that has, but I bet it's not trivial.

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Re: I don't have faith in small and value premiums

Post by Seasonal » Thu Dec 26, 2019 6:22 pm

My concerns with tilting towards small and value are diversification (you're putting a lot of eggs in a small part of the market) and cost (which tends to be higher than broad market indexes). In addition, the efficient market justification for tilting includes that it has a higher degree of risk, but risk includes the possibility of bad performance for a very long time, which is not great for people with finite lifespans.

Market cap weights have, to my mind, a firmer foundation and should have lower costs. Here's a thread on that subject. viewtopic.php?f=10&t=207804&p=3186893

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Triple digit golfer
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Re: I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 6:24 pm

MotoTrojan wrote:
Thu Dec 26, 2019 5:53 pm
Is the last 19 years a reasonable time-span to compare? Fund choice matters too. This comparison more than doubled your gain.

https://www.portfoliovisualizer.com/bac ... ion2_2=100


Also looking at just the last 10 years (during this raging large-cap bull) you can actually see that the S&P600 value fund was comfortably ahead of the S&P500 until last Christmas' correction.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
Sure. I'm not saying there are no premiums. I just don't have faith in them showing up in any reasonable time period. I would have expected them to be there in basically any 25 year period, but I came to find out it may take much longer than that to realize any premium, even a small one.

I would guess that moving forward, a true SV fund (maybe not Vanguard) will beat the market by 1% over most 25 year periods. But I don't have faith that it won't underperform by that amount either.

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Re: I don't have faith in small and value premiums

Post by AHTFY » Thu Dec 26, 2019 6:31 pm

Triple digit golfer wrote:
Thu Dec 26, 2019 6:24 pm
I would guess that moving forward, a true SV fund (maybe not Vanguard) will beat the market by 1% over most 25 year periods. But I don't have faith that it won't underperform by that amount either.
But again, if you tilt to SV by putting 25% into it, you're only getting 0.25% in extra returns. Not worth the effort, IMHO.

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Re: I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 6:35 pm

AHTFY wrote:
Thu Dec 26, 2019 6:31 pm
Triple digit golfer wrote:
Thu Dec 26, 2019 6:24 pm
I would guess that moving forward, a true SV fund (maybe not Vanguard) will beat the market by 1% over most 25 year periods. But I don't have faith that it won't underperform by that amount either.
But again, if you tilt to SV by putting 25% into it, you're only getting 0.25% in extra returns. Not worth the effort, IMHO.
Agreed.

But the opposite has also crossed my mind. That is, it is likely to outperform, so why not put some in it? Even in the more unlikely than nit event that it underperforms, it probably won't be by much. But that doesn't seem like a good reason to invest in something, so I decided against it. And also, it could be by a lot, and although I tell myself I wouldn't abandon the strategy, I haven't been tested after, say, a 5 year period of 5% underperformance.

It just isn't for me. Seems Bogleheads hover around half lumpers and have tilters. I've seen outstanding, smart people on here in each camp.

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Re: I don't have faith in small and value premiums

Post by MotoTrojan » Thu Dec 26, 2019 6:38 pm

For those that don't buy in to the value premium persisting, do you invest at global market-weight or tilt to US? I would think a diversified global portfolio with a strong small-value tilt (heck, even 100% SCV) would be less risky over the next 50 years than a 100% S&P500 portfolio.

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Re: I don't have faith in small and value premiums

Post by Triple digit golfer » Thu Dec 26, 2019 6:44 pm

MotoTrojan wrote:
Thu Dec 26, 2019 6:38 pm
For those that don't buy in to the value premium persisting, do you invest at global market-weight or tilt to US? I would think a diversified global portfolio with a strong small-value tilt (heck, even 100% SCV) would be less risky over the next 50 years than a 100% S&P500 portfolio.
I agree with that. I hold 70/30 U.S./International, for no other reason than it's what I'm comfortable with and know I can and will stick with long term, which is more important than anything else in my book.

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Re: I don't have faith in small and value premiums

Post by JoMoney » Thu Dec 26, 2019 6:56 pm

MotoTrojan wrote:
Thu Dec 26, 2019 6:38 pm
For those that don't buy in to the value premium persisting, do you invest at global market-weight or tilt to US? I would think a diversified global portfolio with a strong small-value tilt (heck, even 100% SCV) would be less risky over the next 50 years than a 100% S&P500 portfolio.
I just use a S&P 500 fund.
Curious if you have some 'different' measurement of risk than volatility, given adding any amount of small-value or international would increase volatility in the portfolio, yet you believe it will be lower risk going forward. Do you also believe it will have lower returns going forward since small-value will be "less risky" ?
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Random Walker
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Joined: Fri Feb 23, 2007 8:21 pm

Re: I don't have faith in small and value premiums

Post by Random Walker » Thu Dec 26, 2019 6:59 pm

Here’s some good international evidence supporting the premia. Larry Swedroe reviews a paper on the subject. Size requires excluding the stocks with high investment and low profitability. Notable that the other factor premia are greatest in the small stocks.

https://alphaarchitect.com/2019/12/26/i ... -premiums/

Dave

MotoTrojan
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Joined: Wed Feb 01, 2017 8:39 pm

Re: I don't have faith in small and value premiums

Post by MotoTrojan » Thu Dec 26, 2019 6:59 pm

JoMoney wrote:
Thu Dec 26, 2019 6:56 pm
MotoTrojan wrote:
Thu Dec 26, 2019 6:38 pm
For those that don't buy in to the value premium persisting, do you invest at global market-weight or tilt to US? I would think a diversified global portfolio with a strong small-value tilt (heck, even 100% SCV) would be less risky over the next 50 years than a 100% S&P500 portfolio.
I just use a S&P 500 fund.
Curious if you have some 'different' measurement of risk than volatility, given adding any amount of small-value or international would increase volatility in the portfolio, yet you believe it will be lower risk going forward. Do you also believe it will have lower returns going forward since small-value will be "less risky" ?
Unsystematic risk from investing in one country has nothing to do with volatility, but it’s difficult to evaluate quantitatively since it’s uncompensated.

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JoMoney
Posts: 8740
Joined: Tue Jul 23, 2013 5:31 am

Re: I don't have faith in small and value premiums

Post by JoMoney » Thu Dec 26, 2019 7:08 pm

MotoTrojan wrote:
Thu Dec 26, 2019 6:59 pm
JoMoney wrote:
Thu Dec 26, 2019 6:56 pm
MotoTrojan wrote:
Thu Dec 26, 2019 6:38 pm
For those that don't buy in to the value premium persisting, do you invest at global market-weight or tilt to US? I would think a diversified global portfolio with a strong small-value tilt (heck, even 100% SCV) would be less risky over the next 50 years than a 100% S&P500 portfolio.
I just use a S&P 500 fund.
Curious if you have some 'different' measurement of risk than volatility, given adding any amount of small-value or international would increase volatility in the portfolio, yet you believe it will be lower risk going forward. Do you also believe it will have lower returns going forward since small-value will be "less risky" ?
Unsystematic risk from investing in one country has nothing to do with volatility, but it’s difficult to evaluate quantitatively since it’s uncompensated.
Well that makes it convenient if you have no way of measuring if your belief that a "global portfolio with a strong small-value tilt (heck, even 100% SCV) would be less risky" is true.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

acegolfer
Posts: 1790
Joined: Tue Aug 25, 2009 9:40 am

Re: I don't have faith in small and value premiums

Post by acegolfer » Thu Dec 26, 2019 7:09 pm

AHTFY wrote:
Thu Dec 26, 2019 6:13 pm
The key is that these small and value premia are uncorrelated to the market.
This may be true for factors. But not for SCV. The correlation between SCV and TSM > 80%.

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