Hedge against SCV underperformance?

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jco
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Hedge against SCV underperformance?

Post by jco » Tue Mar 31, 2020 5:13 pm

There have been a lot of threads on small-cap value funds recently (or at least is appears that way to me, a relative newcomer). The general argument for SCV is that it those funds tend to have greater risk and volatility, but the reward should also be greater over the long-run. However, there can be times when SCV seriously under performs the total stock market.

For those who have a SCV tilt, do you try to hedge against SCV under performance by also having an "opposite" tilt? I'm not sure what that would be, but if small-cap value is under performing, then it seems like large-cap growth (LCG) would probably be performing better.

Very anecdotally, I did some back performance tests comparing SCV vs LCG vs S&P500. If you start in 1972, 1980, 1990, or 2000, then SCV beats both LCG and the S&P500 (usually handily), though the victory margin narrows in 1990. If you start in 2010, then LCG beats both SCV and the S&P500. Also, it seems like both SCV and LCG tend to beat the S&P500 over the long run. You can easily see these comparisons using Portfolio Visualizer by changing the start year in the link below, e.g., by changing startYear=2010 to startYear = 1972.

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

Maybe there is something to this SCV thinking, if you can stomach the volatility.

02nz
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Re: Hedge against SCV underperformance?

Post by 02nz » Tue Mar 31, 2020 5:18 pm

Easy: buy the whole haystack instead.

livesoft
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Re: Hedge against SCV underperformance?

Post by livesoft » Tue Mar 31, 2020 5:21 pm

Buy the ticker MTUM. I own many shares of it.
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MotoTrojan
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Re: Hedge against SCV underperformance?

Post by MotoTrojan » Tue Mar 31, 2020 5:22 pm

Any hedge would move towards total market and thus reduce expected return.

There’s no such thing as a free lunch. If you want the extra expected-return you need the increased risk.

MoneyMarathon
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Re: Hedge against SCV underperformance?

Post by MoneyMarathon » Tue Mar 31, 2020 5:27 pm

jco wrote:
Tue Mar 31, 2020 5:13 pm
The general argument for SCV is that it those funds tend to have greater risk and volatility, but the reward should also be greater over the long-run. However, there can be times when SCV seriously under performs the total stock market.
The historical data cited shows basically just two periods of outperformance, 1970s-early 80s and 2000s. There were other periods earlier, but I'd be careful about extrapolating to the future. I personally would never invest in small cap value.

rascott
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Re: Hedge against SCV underperformance?

Post by rascott » Tue Mar 31, 2020 5:30 pm

You could buy LCG and kind of barbell the thing..... rebalancing along the way. But that's more of just a small tilt.

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watchnerd
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Re: Hedge against SCV underperformance?

Post by watchnerd » Tue Mar 31, 2020 5:35 pm

MotoTrojan wrote:
Tue Mar 31, 2020 5:22 pm
Any hedge would move towards total market and thus reduce expected return.

There’s no such thing as a free lunch. If you want the extra expected-return you need the increased risk.
+1

The question is a paradox.

Anything that hedges SCV risk, specifically, will also reduce SCV return.

You can't tilt towards something and away from it at the same time.

If you reduce your exposure to SCV by reducing the allocation, you also reduce potential returns from SCV.
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UpperNwGuy
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Re: Hedge against SCV underperformance?

Post by UpperNwGuy » Tue Mar 31, 2020 5:36 pm

02nz wrote:
Tue Mar 31, 2020 5:18 pm
Easy: buy the whole haystack instead.
+1

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tetractys
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Re: Hedge against SCV underperformance?

Post by tetractys » Tue Mar 31, 2020 5:38 pm

If you’re looking at different asset classes as hedges, then I imagine any single asset class would be a hedge against all others, and conversely all other asset classes would be a hedge against any single asset class. With Small Value then, also owning the rest of the market would be the hedge.

What I think you’re really asking about though, is called Modern Portfolio Theory. Allocating a portion of ones portfolio to Small Value is a simple way to engage in that, one step beyond a three fund portfolio.

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Re: Hedge against SCV underperformance?

Post by MotoTrojan » Tue Mar 31, 2020 6:28 pm

watchnerd wrote:
Tue Mar 31, 2020 5:35 pm
MotoTrojan wrote:
Tue Mar 31, 2020 5:22 pm
Any hedge would move towards total market and thus reduce expected return.

There’s no such thing as a free lunch. If you want the extra expected-return you need the increased risk.
+1

The question is a paradox.

Anything that hedges SCV risk, specifically, will also reduce SCV return.

You can't tilt towards something and away from it at the same time.

If you reduce your exposure to SCV by reducing the allocation, you also reduce potential returns from SCV.
Maybe ex-US small-value is a good hedge for US (what I presume OP was referring to) SCV underperformance :).

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BroIceCream
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Re: Hedge against SCV underperformance?

Post by BroIceCream » Tue Mar 31, 2020 8:26 pm

I don't understand the OP. Hedging against SCV implies that SCV is a major part of the portfolio. SCV [should and] is only a fraction in my portfolio (~10%). All of the other asset classes I have respresented ARE the hedge for each other (REITs, LCB, LCV, etc) . I bumped it up, because I'm willing to add the risk beyond the paltry 2% that SCV is in a TSM fund. The goal is to take advantage of the SCV risk premium, to bump up the TSM/SP500 returns.

One could easily say that having SCV is a hedge against having a large LCB tilt (which the default "haystack" is).

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jco
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Re: Hedge against SCV underperformance?

Post by jco » Tue Mar 31, 2020 10:04 pm

BroIceCream wrote:
Tue Mar 31, 2020 8:26 pm
I don't understand the OP. Hedging against SCV implies that SCV is a major part of the portfolio. SCV [should and] is only a fraction in my portfolio (~10%). All of the other asset classes I have respresented ARE the hedge for each other (REITs, LCB, LCV, etc) . I bumped it up, because I'm willing to add the risk beyond the paltry 2% that SCV is in a TSM fund. The goal is to take advantage of the SCV risk premium, to bump up the TSM/SP500 returns.

One could easily say that having SCV is a hedge against having a large LCB tilt (which the default "haystack" is).
Let me try saying it a differently.

At least on the Bogleheads board, if someone is tilting toward a certain asset class (e.g., U.S. SCV), they presumably do so because they think that over the long run, this will lead to a greater return than the Total Stock Market (TSM) alone (presumably U.S.). However, the person tilting their portfolio (hopefully) knows that there will be perhaps long periods where SCV under performs the Total Stock Market. In that case, is there another asset class that the SCV tilter should hold in addition to SCV and TSM to "hedge" against SCV under performance.

The natural answer of course is, "Just hold the TSM and you'll never underperform the market", which is true by definition. But you can also never beat the market (which is just a fool's errand for most of us, but perhaps one can dream). But if you do want to take calculated risks to try to beat the market, is there an asset class investors often hold in addition to SCV in order to offset the periods SCV underperforms the market?

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Re: Hedge against SCV underperformance?

Post by MotoTrojan » Tue Mar 31, 2020 10:07 pm

jco wrote:
Tue Mar 31, 2020 10:04 pm
BroIceCream wrote:
Tue Mar 31, 2020 8:26 pm
I don't understand the OP. Hedging against SCV implies that SCV is a major part of the portfolio. SCV [should and] is only a fraction in my portfolio (~10%). All of the other asset classes I have respresented ARE the hedge for each other (REITs, LCB, LCV, etc) . I bumped it up, because I'm willing to add the risk beyond the paltry 2% that SCV is in a TSM fund. The goal is to take advantage of the SCV risk premium, to bump up the TSM/SP500 returns.

One could easily say that having SCV is a hedge against having a large LCB tilt (which the default "haystack" is).
Let me try saying it a differently.

At least on the Bogleheads board, if someone is tilting toward a certain asset class (e.g., U.S. SCV), they presumably do so because they think that over the long run, this will lead to a greater return than the Total Stock Market (TSM) alone (presumably U.S.). However, the person tilting their portfolio (hopefully) knows that there will be perhaps long periods where SCV under performs the Total Stock Market. In that case, is there another asset class that the SCV tilter should hold in addition to SCV and TSM to "hedge" against SCV under performance.

The natural answer of course is, "Just hold the TSM and you'll never underperform the market", which is true by definition. But you can also never beat the market (which is just a fool's errand for most of us, but perhaps one can dream). But if you do want to take calculated risks to try to beat the market, is there an asset class investors often hold in addition to SCV in order to offset the periods SCV underperforms the market?
As answered above multiple times, anything that does a good job of zigging when SCV zags will just reduce the factor exposure and eliminate the expected outperformance.

02nz
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Re: Hedge against SCV underperformance?

Post by 02nz » Tue Mar 31, 2020 10:09 pm

jco wrote:
Tue Mar 31, 2020 10:04 pm
BroIceCream wrote:
Tue Mar 31, 2020 8:26 pm
I don't understand the OP. Hedging against SCV implies that SCV is a major part of the portfolio. SCV [should and] is only a fraction in my portfolio (~10%). All of the other asset classes I have respresented ARE the hedge for each other (REITs, LCB, LCV, etc) . I bumped it up, because I'm willing to add the risk beyond the paltry 2% that SCV is in a TSM fund. The goal is to take advantage of the SCV risk premium, to bump up the TSM/SP500 returns.

One could easily say that having SCV is a hedge against having a large LCB tilt (which the default "haystack" is).
Let me try saying it a differently.

At least on the Bogleheads board, if someone is tilting toward a certain asset class (e.g., U.S. SCV), they presumably do so because they think that over the long run, this will lead to a greater return than the Total Stock Market (TSM) alone (presumably U.S.). However, the person tilting their portfolio (hopefully) knows that there will be perhaps long periods where SCV under performs the Total Stock Market. In that case, is there another asset class that the SCV tilter should hold in addition to SCV and TSM to "hedge" against SCV under performance.

The natural answer of course is, "Just hold the TSM and you'll never underperform the market", which is true by definition. But you can also never beat the market (which is just a fool's errand for most of us, but perhaps one can dream). But if you do want to take calculated risks to try to beat the market, is there an asset class investors often hold in addition to SCV in order to offset the periods SCV underperforms the market?
That's a long way of saying: How do I have my cake and eat it, too? :P

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Re: Hedge against SCV underperformance?

Post by MotoTrojan » Tue Mar 31, 2020 10:10 pm

BroIceCream wrote:
Tue Mar 31, 2020 8:26 pm
I don't understand the OP. Hedging against SCV implies that SCV is a major part of the portfolio. SCV [should and] is only a fraction in my portfolio (~10%). All of the other asset classes I have respresented ARE the hedge for each other (REITs, LCB, LCV, etc) . I bumped it up, because I'm willing to add the risk beyond the paltry 2% that SCV is in a TSM fund. The goal is to take advantage of the SCV risk premium, to bump up the TSM/SP500 returns.

One could easily say that having SCV is a hedge against having a large LCB tilt (which the default "haystack" is).
I hold 50% in SCV leaning funds with 3/5 of it international (bulk of my ex-US is in small cap fundamental; FNDC). I’m not the only one with such a strong tilt.

Rest is in US Total Market with a slight tilt to large value via some fundamental indices.

IMHO 10% just isn’t worth the complexity or energy.

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Re: Hedge against SCV underperformance?

Post by Jags4186 » Tue Mar 31, 2020 10:14 pm

jco wrote:
Tue Mar 31, 2020 10:04 pm
The natural answer of course is, "Just hold the TSM and you'll never underperform the market", which is true by definition. But you can also never beat the market (which is just a fool's errand for most of us, but perhaps one can dream). But if you do want to take calculated risks to try to beat the market, is there an asset class investors often hold in addition to SCV in order to offset the periods SCV underperforms the market?
The simple answer to your question is no. Any tilt away from the total stock market will impact performance compared to the market. Your effort to outperform the market with riskier asset classes will come with the risk of not outperforming the market.

lgs88
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Re: Hedge against SCV underperformance?

Post by lgs88 » Tue Mar 31, 2020 10:15 pm

MotoTrojan wrote:
Tue Mar 31, 2020 5:22 pm
Any hedge would move towards total market and thus reduce expected return.

There’s no such thing as a free lunch. If you want the extra expected-return you need the increased risk.
What's struck me about SCV (to which I maintain a small tilt, ~10% of my portfolio) is how it has seriously underperformed the broader market for nigh on two decades.

That is at least evidence that it performs DIFFERENTLY than TSM. Now, will it ever outperform? Maybe simultaneously with international, another battered holding of mine... that'll be a good day!

EDIT: By the way, I disagree with your assertion that a 10% tilt isn't worth the effort. It requires minimal effort, and it offers the possibility of modest outperformance -- while also promising that my portfolio as a whole won't severely underperform as a result of my SCV allocation. I believe in factor premiums enough to hold a little through good times and bad, but not enough to put all my eggs in that basket.
merely an interested amateur

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Re: Hedge against SCV underperformance?

Post by MotoTrojan » Tue Mar 31, 2020 10:19 pm

lgs88 wrote:
Tue Mar 31, 2020 10:15 pm

What's struck me about SCV (to which I maintain a small tilt, ~10% of my portfolio) is how it has seriously underperformed the broader market for nigh on two decades.
You sure about that? It’s destroyed the broad market over the last two decades. Over the last decade it has underperformed but only the last couple of years. Ex-US small value did an even better job of crushing its total market by the way.

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

lgs88
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Re: Hedge against SCV underperformance?

Post by lgs88 » Tue Mar 31, 2020 10:24 pm

MotoTrojan wrote:
Tue Mar 31, 2020 10:19 pm
lgs88 wrote:
Tue Mar 31, 2020 10:15 pm

What's struck me about SCV (to which I maintain a small tilt, ~10% of my portfolio) is how it has seriously underperformed the broader market for nigh on two decades.
You sure about that? It’s destroyed the broad market over the last two decades. Over the last decade it has underperformed but only the last couple of years. Ex-US small value did an even better job of crushing its total market by the way.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
I stand corrected! Looks like SCV purchased as late as 2003 has outperformed the broader market in the years since.

I suppose I limit SCV allocation for the same reason I hold 25% in bonds. I am confident that stocks will outperform in the long run -- and especially that they'll outperform my boring intermediate Treasuries -- but I am not so confident with that assertion that I'd sleep well at night holding 100% stocks.

So, to answer OP's question, that's my hedge: I hold some SCV, but I've got more TSM.
merely an interested amateur

Jags4186
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Re: Hedge against SCV underperformance?

Post by Jags4186 » Tue Mar 31, 2020 10:24 pm

lgs88 wrote:
Tue Mar 31, 2020 10:15 pm

What's struck me about SCV (to which I maintain a small tilt, ~10% of my portfolio) is how it has seriously underperformed the broader market for nigh on two decades.
Where does this myth come from? Small Cap Value has crushed the SP500 over the past 2 decades. I see it keep getting repeated on this website recently.

Image

It certainly has underperformed the last 3 years, though.

Normchad
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Re: Hedge against SCV underperformance?

Post by Normchad » Tue Mar 31, 2020 10:27 pm

MotoTrojan wrote:
Tue Mar 31, 2020 10:19 pm
lgs88 wrote:
Tue Mar 31, 2020 10:15 pm

What's struck me about SCV (to which I maintain a small tilt, ~10% of my portfolio) is how it has seriously underperformed the broader market for nigh on two decades.
You sure about that? It’s destroyed the broad market over the last two decades. Over the last decade it has underperformed but only the last couple of years. Ex-US small value did an even better job of crushing its total market by the way.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
Wow, that is breathtaking outperformance, since 1985 as well as over the last two decades. No wonder it garners so much interest.

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BroIceCream
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Re: Hedge against SCV underperformance?

Post by BroIceCream » Tue Mar 31, 2020 10:29 pm

lgs88 wrote:
Tue Mar 31, 2020 10:15 pm
What's struck me about SCV ... is how it has seriously underperformed the broader market for nigh on two decades.
I don't know if the "two decades" is fully accurate. In this source of different asset classes, the Callan Table (link below) shows how they can change from year to year.
Just looking at the #1 and #2 spots for the last 20 years, SCV and LCB have been in those spots about the same, but the key message is that there are lots of classes that can be incorporated to do some hedging.

https://www.callan.com/wp-content/uploa ... -Table.pdf

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Re: Hedge against SCV underperformance?

Post by MotoTrojan » Tue Mar 31, 2020 10:31 pm

Jags4186 wrote:
Tue Mar 31, 2020 10:24 pm
lgs88 wrote:
Tue Mar 31, 2020 10:15 pm

What's struck me about SCV (to which I maintain a small tilt, ~10% of my portfolio) is how it has seriously underperformed the broader market for nigh on two decades.
Where does this myth come from? Small Cap Value has crushed the SP500 over the past 2 decades. I see it keep getting repeated on this website recently.

Image

It certainly has underperformed the last 3 years, though.
It all came from 2000-2002 so in a couple years the previous 2 decade period may look less impressive, but I’ll take my chances over the long run. It’s amazing how much of a lead it seems to keep pulling but just setting the start to January 2003 makes it near equal.

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Re: Hedge against SCV underperformance?

Post by MikeMak27 » Tue Mar 31, 2020 10:35 pm

I pair IJS with IEMG (Large Cap Emerging Market)
They’ve both underperformed the S&P 500 over the past 3 year.
Mak 3 fund portfolio: 50% US small cap value & US Small cap (IJS, IJR), 40% Emerging Markets (IEMG, VWO, FPADX), 10% US REIT (VNQ)

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Re: Hedge against SCV underperformance?

Post by Jags4186 » Tue Mar 31, 2020 10:49 pm

MotoTrojan wrote:
Tue Mar 31, 2020 10:31 pm
It all came from 2000-2002 so in a couple years the previous 2 decade period may look less impressive, but I’ll take my chances over the long run. It’s amazing how much of a lead it seems to keep pulling but just setting the start to January 2003 makes it near equal.
Of course, it's all a matter of perspective and framing. If you don't include 2017-2019 then it's pretty ugly for the SP500.

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watchnerd
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Re: Hedge against SCV underperformance?

Post by watchnerd » Tue Mar 31, 2020 10:52 pm

jco wrote:
Tue Mar 31, 2020 10:04 pm
But if you do want to take calculated risks to try to beat the market, is there an asset class investors often hold in addition to SCV in order to offset the periods SCV underperforms the market?
No, there isn't.

Anything that would have a perfect negative correlation to SCV will reduce the times when SCV outperforms.

Or a partially negative correlation which would partially reduce the outperformance.

Perhaps you might dwell on the idea that, if such a magical asset like you're wishing for existed, then wouldn't everyone would use it to get all of the upside and none of the downside of SCV?
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watchnerd
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Re: Hedge against SCV underperformance?

Post by watchnerd » Tue Mar 31, 2020 11:00 pm

Jags4186 wrote:
Tue Mar 31, 2020 10:14 pm

The simple answer to your question is no. Any tilt away from the total stock market will impact performance compared to the market. Your effort to outperform the market with riskier asset classes will come with the risk of not outperforming the market.
+1

There seems to be a fairly common misconception that you can tilt away from the market and only get the upsides of doing so, and not the downsides.

I'm reminded of the TBM owners complaining right now that they're underperforming Treasuries in a bad market, while if they held Treasuries in a good market, they would moan that they underperformed TBM. ;)
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jco
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Re: Hedge against SCV underperformance?

Post by jco » Tue Mar 31, 2020 11:05 pm

watchnerd wrote:
Tue Mar 31, 2020 10:52 pm
jco wrote:
Tue Mar 31, 2020 10:04 pm
But if you do want to take calculated risks to try to beat the market, is there an asset class investors often hold in addition to SCV in order to offset the periods SCV underperforms the market?
No, there isn't.

Anything that would have a perfect negative correlation to SCV will reduce the times when SCV outperforms.

Or a partially negative correlation which would partially reduce the outperformance.

Perhaps you might dwell on the idea that, if such a magical asset like you're wishing for existed, then wouldn't everyone would use it to get all of the upside and none of the downside of SCV?
I actually thought the same thing before I asked the question on the board. I figured the answer was no, but I hoped that at a minimum, I could learn something useful for the future. I've consolidated most of my holdings into TSM, but I'm still in the process of deciding whether I can commit to a full two or three-fund portfolio. Unfortunately (or really, fortunately) I bet heavily on LCG the last 10 years, which has worked out really well. But it was sheer beginner's luck and had nothing to do with a well-principled IPS. With that kind of luck to start out, it's difficult to not hope for doing just a bit better than the market. Of course, I got destroyed like all the other buy-and-hold folks since February, which doesn't say much about my forecasting ability.

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jco
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Re: Hedge against SCV underperformance?

Post by jco » Tue Mar 31, 2020 11:11 pm

02nz wrote:
Tue Mar 31, 2020 10:09 pm
That's a long way of saying: How do I have my cake and eat it, too? :P
Who wouldn't want to eat the cake that they have? :P In all seriousness, I never understood that saying until I heard it stated the British way: You can't eat your cake and have it too.

It's hard to hear all the SCV-tilters sing the virtues of SCV without getting just a little curious about what they like about it. Maybe this is like my investing Rumspringa, where I decide whether I'm willing to truly commit to the Boglehead-way? Taylor et al.'s Boglehead's guide to investing is pretty persuasive, but I'm still thinking about a few different aspects of it.

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watchnerd
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Re: Hedge against SCV underperformance?

Post by watchnerd » Tue Mar 31, 2020 11:17 pm

jco wrote:
Tue Mar 31, 2020 11:11 pm

It's hard to hear all the SCV-tilters sing the virtues of SCV without getting just a little curious about what they like about it. Maybe this is like my investing Rumspringa, where I decide whether I'm willing to truly commit to the Boglehead-way? Taylor et al.'s Boglehead's guide to investing is pretty persuasive, but I'm still thinking about a few different aspects of it.
I used to tilt to SCV.

I gave it up for behavioral / psychological reasons.

Plus, I realized the odds were more in my favor to reach my goals more quickly by just saving and investing more, instead of rolling the dice by trying to outperform the market...and sometimes underperforming it.

I realized if I wanted more returns from equities, I could just hold more equities...both in percentage terms and in dollars.
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unclescrooge
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Re: Hedge against SCV underperformance?

Post by unclescrooge » Tue Mar 31, 2020 11:18 pm

watchnerd wrote:
Tue Mar 31, 2020 5:35 pm
MotoTrojan wrote:
Tue Mar 31, 2020 5:22 pm
Any hedge would move towards total market and thus reduce expected return.

There’s no such thing as a free lunch. If you want the extra expected-return you need the increased risk.
+1

The question is a paradox.

Anything that hedges SCV risk, specifically, will also reduce SCV return.

You can't tilt towards something and away from it at the same time.

If you reduce your exposure to SCV by reducing the allocation, you also reduce potential returns from SCV.
This!

If you can't stomach the volatility, either didn't own it or own less.

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Re: Hedge against SCV underperformance?

Post by 02nz » Tue Mar 31, 2020 11:23 pm

MotoTrojan wrote:
Tue Mar 31, 2020 10:31 pm
Jags4186 wrote:
Tue Mar 31, 2020 10:24 pm
lgs88 wrote:
Tue Mar 31, 2020 10:15 pm

What's struck me about SCV (to which I maintain a small tilt, ~10% of my portfolio) is how it has seriously underperformed the broader market for nigh on two decades.
Where does this myth come from? Small Cap Value has crushed the SP500 over the past 2 decades. I see it keep getting repeated on this website recently.

Image

It certainly has underperformed the last 3 years, though.
It all came from 2000-2002 so in a couple years the previous 2 decade period may look less impressive, but I’ll take my chances over the long run. It’s amazing how much of a lead it seems to keep pulling but just setting the start to January 2003 makes it near equal.
I hate charts that show the growth of $10K (or whatever amount), because hardly anybody invests that way, and you can get practically any result you want (ok, I'm exaggerating here) by choosing the "right' starting date.

To show a better approximation of returns a real investor might have gotten, I compared a monthly $100 investment (increased for inflation) starting in 2000 and ending in 2020. SCV finishes at $71K, TSM beats it with $79K.

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Steve Reading
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Re: Hedge against SCV underperformance?

Post by Steve Reading » Tue Mar 31, 2020 11:34 pm

02nz wrote:
Tue Mar 31, 2020 11:23 pm
MotoTrojan wrote:
Tue Mar 31, 2020 10:31 pm
Jags4186 wrote:
Tue Mar 31, 2020 10:24 pm
lgs88 wrote:
Tue Mar 31, 2020 10:15 pm

What's struck me about SCV (to which I maintain a small tilt, ~10% of my portfolio) is how it has seriously underperformed the broader market for nigh on two decades.
Where does this myth come from? Small Cap Value has crushed the SP500 over the past 2 decades. I see it keep getting repeated on this website recently.

Image

It certainly has underperformed the last 3 years, though.
It all came from 2000-2002 so in a couple years the previous 2 decade period may look less impressive, but I’ll take my chances over the long run. It’s amazing how much of a lead it seems to keep pulling but just setting the start to January 2003 makes it near equal.
I hate charts that show the growth of $10K (or whatever amount), because hardly anybody invests that way, and you can get practically any result you want (ok, I'm exaggerating here) by choosing the "right' starting date.

To show a better approximation of returns a real investor might have gotten, I compared a monthly $100 investment (increased for inflation) starting in 2000 and ending in 2020. SCV finishes at $71K, TSM beats it with $79K.
All that does is overweight more recent returns and underweight the older ones. It is true that might be more representative of those who tilted in the past, but how is that a “better” comparison?

All I want to know when I compare TSM vs SCV is what might occur in the future. A graph that shows the growth of 10k at least equally weights results through time. To the extent the future will look like ANY past year, this is a better comparison. I have no reason to believe that the next decade will be more like 2010-2020 than 2000-2010. So why use a graph that over weights the former? How is that “better”?

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Re: Hedge against SCV underperformance?

Post by 02nz » Tue Mar 31, 2020 11:43 pm

Steve Reading wrote:
Tue Mar 31, 2020 11:34 pm
All that does is overweight more recent returns and underweight the older ones. It is true that might be more representative of those who tilted in the past, but how is that a “better” comparison?

All I want to know when I compare TSM vs SCV is what might occur in the future. A graph that shows the growth of 10k at least equally weights results through time. To the extent the future will look like ANY past year, this is a better comparison. I have no reason to believe that the next decade will be more like 2010-2020 than 2000-2010. So why use a graph that over weights the former? How is that “better”?
I'm not trying to tell you what might occur in the future, because I don't know and because it's a fool's errand. My point was that most real investors didn't do as well over time with such a tilt as a chart showing one investment at a single point in time suggests.

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Re: Hedge against SCV underperformance?

Post by Steve Reading » Tue Mar 31, 2020 11:59 pm

02nz wrote:
Tue Mar 31, 2020 11:43 pm
Steve Reading wrote:
Tue Mar 31, 2020 11:34 pm
02nz wrote:
Tue Mar 31, 2020 11:23 pm
MotoTrojan wrote:
Tue Mar 31, 2020 10:31 pm
Jags4186 wrote:
Tue Mar 31, 2020 10:24 pm


Where does this myth come from? Small Cap Value has crushed the SP500 over the past 2 decades. I see it keep getting repeated on this website recently.

Image

It certainly has underperformed the last 3 years, though.
It all came from 2000-2002 so in a couple years the previous 2 decade period may look less impressive, but I’ll take my chances over the long run. It’s amazing how much of a lead it seems to keep pulling but just setting the start to January 2003 makes it near equal.
I hate charts that show the growth of $10K (or whatever amount), because hardly anybody invests that way, and you can get practically any result you want (ok, I'm exaggerating here) by choosing the "right' starting date.

To show a better approximation of returns a real investor might have gotten, I compared a monthly $100 investment (increased for inflation) starting in 2000 and ending in 2020. SCV finishes at $71K, TSM beats it with $79K.
All that does is overweight more recent returns and underweight the older ones. It is true that might be more representative of those who tilted in the past, but how is that a “better” comparison?

All I want to know when I compare TSM vs SCV is what might occur in the future. A graph that shows the growth of 10k at least equally weights results through time. To the extent the future will look like ANY past year, this is a better comparison. I have no reason to believe that the next decade will be more like 2010-2020 than 2000-2010. So why use a graph that over weights the former? How is that “better”?
I'm not trying to tell you what might occur in the future, because I don't know and because it's a fool's errand. My point was that most real investors didn't do as well over time with such a tilt as a chart showing one investment at a single point in time might show.
I don't think you're understanding. What you describe simply overweighs recent returns and underweighs the earlier returns. So it obviously benefits TSM, which outperformed more recently. I could flip the question and ask "how about a retiree who started with 30k and withdrew $100 monthly inflation adjusted?"
The answer is that SCV absolutely thrashes TSM, ending up with a balance more about seven times as large (94k vs 14k):
https://www.portfoliovisualizer.com/bac ... ion2_2=100

EDIT: Updated link

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Re: Hedge against SCV underperformance?

Post by 02nz » Wed Apr 01, 2020 12:07 am

Steve Reading wrote:
Tue Mar 31, 2020 11:59 pm
I don't think you're understanding. What you describe simply overweighs recent returns and underweighs the earlier returns. So it obviously benefits TSM, which outperformed more recently. I could flip the question and ask "how about a retiree who started with 30k and withdrew $100 monthly inflation adjusted?"
The answer is that SCV absolutely thrashes TSM, ending up with a balance more about seven times as large (94k vs 14k):
https://www.portfoliovisualizer.com/bac ... ion2_2=100

EDIT: Updated link
But presumably you're in the accumulation rather than decumulation phase. And even if you are a retiree, I'd hope you'd be wise enough not to be 100% invested in either TSM or SCV. Maybe SCV will pay off spectacularly again, but I don't think 100% SCV or even 100% equities is a gamble most retirees would want to take.

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Re: Hedge against SCV underperformance?

Post by Steve Reading » Wed Apr 01, 2020 12:27 am

02nz wrote:
Wed Apr 01, 2020 12:07 am
But presumably you're in the accumulation rather than decumulation phase. And even if you are a retiree, I'd hope you'd be wise enough not to be 100% invested in either TSM or SCV. Maybe SCV will pay off spectacularly again, but I don't think 100% SCV or even 100% equities is a gamble most retirees would want to take.
I am but how is that relevant? My entire point is that whatever looked good in the past for accumulators or retirees has nothing to do with whether it actually is good for accumulators/retirees and everything to do with overweight/underweight of different time periods.
02nz wrote:
Wed Apr 01, 2020 12:07 am
And even if you are a retiree, I'd hope you'd be wise enough not to be 100% invested in either TSM or SCV. Maybe SCV will pay off spectacularly again, but I don't think 100% SCV or even 100% equities is a gamble most retirees would want to take.
You're missing the point. Add 50% bonds to the portfolios if you wish. The magnitudes of the difference will be much smaller now. But the results will have the same directions (accumulators will look to have done better with 50/50 TSM/Bonds while retirees will have done better 50/50 SCV/Bonds). In fact, retirement portfolios of only SCV and bonds look extremely compelling. But now you know better right? :happy

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Re: Hedge against SCV underperformance?

Post by Nicolas » Wed Apr 01, 2020 9:35 am

livesoft wrote:
Tue Mar 31, 2020 5:21 pm
Buy the ticker MTUM. I own many shares of it.
Why is MTUM desirable? Why do you own it?
When you haven't got the coin you're always in the way — Geo. M. Cohan

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Re: Hedge against SCV underperformance?

Post by Call_Me_Op » Wed Apr 01, 2020 9:37 am

jco wrote:
Tue Mar 31, 2020 5:13 pm
There have been a lot of threads on small-cap value funds recently (or at least is appears that way to me, a relative newcomer). The general argument for SCV is that it those funds tend to have greater risk and volatility, but the reward should also be greater over the long-run. However, there can be times when SCV seriously under performs the total stock market.

For those who have a SCV tilt, do you try to hedge against SCV under performance by also having an "opposite" tilt?
No, that would negate the advantage to a large extent. A better approach is bot to hold everything in SCV. Specifically, ensure you have enough high-quality bonds.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Hedge against SCV underperformance?

Post by livesoft » Wed Apr 01, 2020 10:12 am

Nicolas wrote:
Wed Apr 01, 2020 9:35 am
livesoft wrote:
Tue Mar 31, 2020 5:21 pm
Buy the ticker MTUM. I own many shares of it.
Why is MTUM desirable? Why do you own it?
it has great single day drops to buy on and great single day pops to sell on. It swing back and forth more than something like US Total Stock Market Index.
Wiki This signature message sponsored by sscritic: Learn to fish.

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Re: Hedge against SCV underperformance?

Post by Elysium » Wed Apr 01, 2020 10:37 am

MotoTrojan wrote:
Tue Mar 31, 2020 10:31 pm
Jags4186 wrote:
Tue Mar 31, 2020 10:24 pm
lgs88 wrote:
Tue Mar 31, 2020 10:15 pm

What's struck me about SCV (to which I maintain a small tilt, ~10% of my portfolio) is how it has seriously underperformed the broader market for nigh on two decades.
Where does this myth come from? Small Cap Value has crushed the SP500 over the past 2 decades. I see it keep getting repeated on this website recently.

Image

It certainly has underperformed the last 3 years, though.
It all came from 2000-2002 so in a couple years the previous 2 decade period may look less impressive, but I’ll take my chances over the long run. It’s amazing how much of a lead it seems to keep pulling but just setting the start to January 2003 makes it near equal.
I agree with you that this graph is very misleading since most of that came from 2000-02 when Tech crash happened.

Here is why this is wrong to use this data to back up claims for SCV:

1. Nearly no one was invested in SCV funds prior to 2000, the talk was all Tech and Growth, very few retail investors had any exposure to SCV
2. Most of the SCV proponents of today would have never invested in retail SCV funds prior to 2000, simply because outside of DFA which needed advisor access, there were no deep value funds.
3. Vanguard SCV fund existed, but it was a mediocre fund at best in terms of exposure to Value, or in terms of general performance when Growth boomed.
4. When evaluating persistence of returns across several years, we have to always rule out anomalous periods, 2000-02 is one such period, not just for the reasons I sited, but also because when Tech crashed, it was a contained event that limited itself to LCG stocks that were highly overvalued. That sort of bubble has not happened with Tech/LCG anytime since then.
5. This one time event benefited SCV for those 3 years, pushing it's 20 year returns when taken from 2000 to look as if retail investors would have benefited. In reality, almost no one received this benefit, at least no one in my knowledge on this forum can claim they were invested in SCV since 2000 consistently up until now. There may be one or two from the old forum still, but none of them are vocal on these SCV threads, so we have to assume it is negative.
6. Most people were drawn into SCV after looking at 2000-02, thinking that when LCG falls SCV will hold up better. They were misled thinking this is how SCV provides diversification, that when Growth zags Value zigs. But it hasn't happened that way. Both in 2008-09, and now since 2020, when Growth falls, Value falls even more.
7. Almost every vocal proponent of Value here got on to it after 2003, and they have underperformed the market.

All that said, no one knows future, but 17 years is a long time to underperform, when the idea was SCV has never underperformed for more than 15 years maximum.

Lastly, let us not forget, this is all because some people want to try and beat the market, they look at past data when no one actually were invested in retail funds to receive the backtested performance, and chased it, in hope for market beating strategies. When you try to beat the market, you do fall flat most of the time.

Once you decide there is no need to beat the market, you can end this conversation and instead focus on more important things in life.

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Re: Hedge against SCV underperformance?

Post by randomguy » Wed Apr 01, 2020 11:12 am

02nz wrote:
Wed Apr 01, 2020 12:07 am
Steve Reading wrote:
Tue Mar 31, 2020 11:59 pm
I don't think you're understanding. What you describe simply overweighs recent returns and underweighs the earlier returns. So it obviously benefits TSM, which outperformed more recently. I could flip the question and ask "how about a retiree who started with 30k and withdrew $100 monthly inflation adjusted?"
The answer is that SCV absolutely thrashes TSM, ending up with a balance more about seven times as large (94k vs 14k):
https://www.portfoliovisualizer.com/bac ... ion2_2=100

EDIT: Updated link
But presumably you're in the accumulation rather than decumulation phase. And even if you are a retiree, I'd hope you'd be wise enough not to be 100% invested in either TSM or SCV. Maybe SCV will pay off spectacularly again, but I don't think 100% SCV or even 100% equities is a gamble most retirees would want to take.
I think you are trying to read too much into it. Steve is just pointing out the effects of sequence of returns. Neither TSM or SV will win all the time. Over the last 20 years accumulating, TSM has beaten SV. Look at the 20 year period ending in 2002, and you will get the exact opposite conclusion. If you look at a bunch the rolling periods, SV outperforms on TSM a majority of the time AND the wins tend to be large than the losses.

In reality, nobody is investing to maximizing portfolio value on 1 day. You aren't going to sell one one day. You are going to sell over 30 years. That means you aren't going to be selling at the peak/bottom.

SV brings in the possibility of underperformance (i.e. the the 5% of the last 15 years versus the 7%). That is the risk you are taking for the hopes of outperformance (i.e. the 7% of SV versus 5% of TSM). Deciding you are good enough with market returns is fine. Trying to get an extra 3% by doing SV is fine. Alternating between the 2 based on which one has performed the best lately though going to end up with you underperforming.

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Re: Hedge against SCV underperformance?

Post by Jags4186 » Wed Apr 01, 2020 11:25 am

Elysium wrote:
Wed Apr 01, 2020 10:37 am

I agree with you that this graph is very misleading since most of that came from 2000-02 when Tech crash happened.
Again, not true. Cut out 2000-2002 and look at every 10 year period starting 2003. SCV has beaten the SP500 in all 10 year periods with the exception of the following:

2006-2015
2009-2018
2010-2019

SCV has gotten crushed the last 2-3 years. Additionally, the SP500 has had a spectacular 2010-2019 decade. Essentially, what your argument has been "if we ignore the good SCV years, and the bad SP500 years, SCV has gotten crushed."

You can't invest in the past, and I don't know what the future holds, but the past shows me that the SP500 and SCV have both performed very well at different times. This is why I own both and rebalance annually.

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Re: Hedge against SCV underperformance?

Post by Steve Reading » Wed Apr 01, 2020 11:31 am

Jags4186 wrote:
Wed Apr 01, 2020 11:25 am
Elysium wrote:
Wed Apr 01, 2020 10:37 am

I agree with you that this graph is very misleading since most of that came from 2000-02 when Tech crash happened.
Again, not true. Cut out 2000-2002 and look at every 10 year period starting 2003. SCV has beaten the SP500 in all 10 year periods with the exception of the following:

2006-2015
2009-2018
2010-2019

SCV has gotten crushed the last 2-3 years. Additionally, the SP500 has had a spectacular 2010-2019 decade. Essentially, what your argument has been "if we ignore the good SCV years, and the bad SP500 years, SCV has gotten crushed."
While clearly true, I would reason against just cutting out 2000-2002. Just because “most of the outperformance” came from the Tech bubble doesn’t make it any less compelling. It’s Small Cap Value: of course we expect it to do fairly well during large cap technological busts. And the bust came years after SCV was discovered so its out of sample, which is compelling to me.

To cut it out or call its inclusion misleading is to imply such busts cannot happen again. To the extent they can, that period should absolutely be included.

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Re: Hedge against SCV underperformance?

Post by MotoTrojan » Wed Apr 01, 2020 11:35 am


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Re: Hedge against SCV underperformance?

Post by Uncorrelated » Wed Apr 01, 2020 11:55 am

I recently uncovered some evidence that value is correlated with inflation changes. And we know that bonds are negatively correlated with inflation changes (more specifically, interest changes. But interest changes are highly correlated with inflation). Although evidence is limited, I would conclude that a balanced portfolio of total stock market, SVC and bonds has all the necessarily components in place to 'hedge' the SCV exposure.

The very notion of hedging also appears paradoxical, since one presumably tilts towards SVC to improve portfolio efficiency or returns. As others have noted, any hedge away from SCV would compromise the improved portfolio efficiency and returns that you expect to capture from the tilt. If you are not sufficiently convinced that SCV had better odds than total stock market, don't tilt.

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Re: Hedge against SCV underperformance?

Post by Elysium » Wed Apr 01, 2020 6:07 pm

Jags4186 wrote:
Wed Apr 01, 2020 11:25 am
Elysium wrote:
Wed Apr 01, 2020 10:37 am

I agree with you that this graph is very misleading since most of that came from 2000-02 when Tech crash happened.
Again, not true. Cut out 2000-2002 and look at every 10 year period starting 2003. SCV has beaten the SP500 in all 10 year periods with the exception of the following:

2006-2015
2009-2018
2010-2019

SCV has gotten crushed the last 2-3 years. Additionally, the SP500 has had a spectacular 2010-2019 decade. Essentially, what your argument has been "if we ignore the good SCV years, and the bad SP500 years, SCV has gotten crushed."

You can't invest in the past, and I don't know what the future holds, but the past shows me that the SP500 and SCV have both performed very well at different times. This is why I own both and rebalance annually.
Value risk shows up at the absolute worst time, that is what has happened in the last 3 years, and in fact in 2008. This is one of the main reasons Larry switched his original Slice & Dice recommendation to a Larry portfolio that overweights Treasury Bonds with a smaller equity allocation focused only on SV, ISV, and EMV. If my memory is correct, he did this after the Great Recession as a general recommendation, prior to that he did this for his own personal portfolio.

How many who are tilting here are willing to do that? Say for instance have just 30% equity allocation to SV, ISV, and EMV, and the rest in Long Term Treasuries. This is a strategy with plenty of risks, an extreme portfolio with LTT at today's rates and a complete overweight into Value. Otherwise what you really are doing is increasing risk of your portfolio in hope for higher returns from the tilt which may never show up, and get crushed in drawdowns like this. Value tilted strategies at this time not only need to survive this drawdown, but recover in such spectacular fashion while at the same time Large Caps should perform poorly. In other words, you really need to have repeat of 2000-02. I won't be holding my breath for this.

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Re: Hedge against SCV underperformance?

Post by Northern Flicker » Wed Apr 01, 2020 6:16 pm

jco wrote:
Tue Mar 31, 2020 10:04 pm
BroIceCream wrote:
Tue Mar 31, 2020 8:26 pm
I don't understand the OP. Hedging against SCV implies that SCV is a major part of the portfolio. SCV [should and] is only a fraction in my portfolio (~10%). All of the other asset classes I have respresented ARE the hedge for each other (REITs, LCB, LCV, etc) . I bumped it up, because I'm willing to add the risk beyond the paltry 2% that SCV is in a TSM fund. The goal is to take advantage of the SCV risk premium, to bump up the TSM/SP500 returns.

One could easily say that having SCV is a hedge against having a large LCB tilt (which the default "haystack" is).
Let me try saying it a differently.

At least on the Bogleheads board, if someone is tilting toward a certain asset class (e.g., U.S. SCV), they presumably do so because they think that over the long run, this will lead to a greater return than the Total Stock Market (TSM) alone (presumably U.S.). However, the person tilting their portfolio (hopefully) knows that there will be perhaps long periods where SCV under performs the Total Stock Market. In that case, is there another asset class that the SCV tilter should hold in addition to SCV and TSM to "hedge" against SCV under performance.

The natural answer of course is, "Just hold the TSM and you'll never underperform the market", which is true by definition. But you can also never beat the market (which is just a fool's errand for most of us, but perhaps one can dream). But if you do want to take calculated risks to try to beat the market, is there an asset class investors often hold in addition to SCV in order to offset the periods SCV underperforms the market?
Tilting to a factor does not mean holding an asset class that tilts to the factor. Tilting to a factor means holding a portfolio that tilts to the factor. Holding growth to hedge the risk of value will cancel out the factor exposure and mean that you no longer are tilting to the factor.

While it is possible that a portfolio of small value and large growth would have better risk-return properties than the total market, you would either balance value and growth by holding roughly equal amounts of both, which still would give you a size tilt, or if you held say 90% large growth and 10% small value to zero out a size tilt, you would end up with a growth tilt.

Designing portfolios for factor exposures is not just holding mutual funds with names that match the factor names, although there are some professional investment advisors that design portfolios in that manner.
Risk is not a guarantor of return.

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Re: Hedge against SCV underperformance?

Post by Nicolas Perrault » Wed Apr 01, 2020 6:36 pm

MoneyMarathon wrote:
Tue Mar 31, 2020 5:27 pm
jco wrote:
Tue Mar 31, 2020 5:13 pm
The general argument for SCV is that it those funds tend to have greater risk and volatility, but the reward should also be greater over the long-run. However, there can be times when SCV seriously under performs the total stock market.
The historical data cited shows basically just two periods of outperformance, 1970s-early 80s and 2000s. There were other periods earlier, but I'd be careful about extrapolating to the future. I personally would never invest in small cap value.
SCV beat TSM in 28 of the 33 15-year periods between 1972 and 2019. Your "just two periods of outperformance" (1974-1983 and 2000-2010) make up almost half of the dataset (44%, 21 of the 48 years)! Here are the geometric mean outperformances for your two periods, all other years, all years, and years before 1972 (1972 is kind of a random starting point in my opinion, but it doesn't matter):

1974-1983: 10.1% above TSM
2000-2010: 7.8% above TSM
All other years: 3.5% below TSM.
All years 1972-2019: 1.7%
All years 1927-1971: 2.35%

Longest periods of underperformance 1927-2019:
*16 years (1984-1999, -3.5% vs TSM annualised)
*12 years (1946-1957, -0.8% vs. TSM annualised)
*9 years ongoing (2011-2020, -2.2% vs. TSM annualised at year end 2019, -4.5% vs. TSM annualised at month end March 2020).
MoneyMarathon wrote:
Tue Mar 31, 2020 5:27 pm
I'd be careful about extrapolating to the future.
No risk, no reward. SCV is one of the tools at the disposal of small investors that invest their own money to try to take on more risk than large investors that invest other people's money. Some investors, especially young ones, can tolerate 15 years+ of underperformance when investing their own money, but you may get fired if you do that as a fund manager.

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Re: Hedge against SCV underperformance?

Post by typical.investor » Wed Apr 01, 2020 8:30 pm

Uncorrelated wrote:
Wed Apr 01, 2020 11:55 am
I recently uncovered some evidence that value is correlated with inflation changes. And we know that bonds are negatively correlated with inflation changes (more specifically, interest changes. But interest changes are highly correlated with inflation). Although evidence is limited, I would conclude that a balanced portfolio of total stock market, SVC and bonds has all the necessarily components in place to 'hedge' the SCV exposure.
I agree. The valuation of Growth stocks is hurt more when future expected earnings are discounted by inflation. Today's valuation of Growth stocks becomes less.
Uncorrelated wrote:
Wed Apr 01, 2020 11:55 am
The very notion of hedging also appears paradoxical, since one presumably tilts towards SVC to improve portfolio efficiency or returns. As others have noted, any hedge away from SCV would compromise the improved portfolio efficiency and returns that you expect to capture from the tilt. If you are not sufficiently convinced that SCV had better odds than total stock market, don't tilt.
I don't see it as paradoxical. It's not anymore paradoxical than adding bonds to TSM to hedge the risk of a market collapse.

Anyway, I am about 30% value, 20% TSM and 50% bonds. The high bond holding is to deal with job loss in a market downturn, rather fixed expenses and the difficulty of getting a new job as one ages. Value of course is equity but it's also an inflation hedge in my mind. I am using 3X leveraged funds for some amount of my TSM allocation. Value and leveraged funds have dropped the most so of course that is what I am rebalancing into.

The alternative might be TIPS but they are so low return and only protect the amount you have in them. They also don't seem to do well in drops.

I'd like to increase my equity exposure but the spouse demands 50% in safe assets.

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