Small Cap Value @ 100%

[invest2bfree]

I was doing some research and read that Japan after Interest Rates dropped only thing worked is small cap value and Real Estate.

It is just possible we might be entering a Japan type phase in US where we go sideways for a long time?

I just dont like REITS so my only option is Small Cap Value.

What do you guys think.

[minimalistmarc]

I think it is unwise to base investment decisions based on Japanese stock market history.

I will always stick with a global market weighted portfolio equities (and one day in the future, maybe global market weighted bonds)

[Triple digit golfer]

Terrible idea in my opinion completely avoid 95% or whatever of the market. Why would you put all your eggs in the idea that the U.S. might have a similar fate that Japan did?

[livesoft]

This is a great idea and well-matched to a total opposite of this other idea suggested yesterday afternoon:
viewtopic.php?t=319331&p=5351894

One of you definitely WILL turn out to make more money than the other.

[stan1]

Even if there are long term problems in the US it won't be "like Japan" and I wouldn't use what happened in Japan over the last 30 years to predict the future. Among other key differences are US demographics (positive population growth) and ability of US treasury to borrow substantial sums of money. I understand it would be comforting to find something from the past to help predict the future but there's just no way to do that.

[grok87]

Even if there are long term problems in the US it won't be "like Japan" and I wouldn't use what happened in Japan over the last 30 years to predict the future. Among other key differences are US demographics (positive population growth) and ability of US treasury to borrow substantial sums of money. I understand it would be comforting to find something from the past to help predict the future but there's just no way to do that.

agree. but there are lessons to be learned from the Japan lost 2 decades from a risk perspective. i.e. don't put all your eggs in one basket. in other words diversify as broadly as possible. to me that means owning a world stock index rather than say just the S&P 500 or just US small value stocks.

[invest2bfree]

Stan1,

I tend to disagree that US has a positive population growth.

If you take out immigration US population growth is slightly negative.

Also Immigration is coming down a lot and is not a big factor anymore.

Now it is a different story for Canada, they do have 1.7% immigration rate and thier property values reflect that.

One big problem for US is we are not net savers like Japan and we could have stagflation instead of mild deflation. This could have a major implications to our standard of living.

In 2 years when these lofty techs cannot produce growth they have baked into prices is when the market is going to right size.

[JimmyJammy]

I have a 5% SCV tilt but I'm not willing to go much beyond that. I prefer diversity.

[snailderby]

What will you do if small-cap value lags the total stock market for the next 10 years? Would you stick with your tilt? According to Eugene Fama and Kenneth French: “Negative equity premiums and negative premiums of value and small stock returns relative to market are commonplace for three- to five-year periods, and they are far from rare for ten-year periods. Given this uncertainty, investors who will abandon equities or tilts toward value or small stocks in the face of three, five, or even ten years of disappointing returns may be wise to avoid these strategies in the first place.” https://www.cfainstitute.org/en/researc ... j-v74-n3-6.

[willthrill81]

I tend to shudder when people try to compare Japan's stock market in 1989 to that of the U.S. now (or ever).

The cyclically adjusted price to earnings ratio (CAPE), the most widely used long-term valuation metric, reached almost 90 for Japan at its peak. The highest this ratio ever got for the U.S. at the peak of the dot-com bubble at 44. Right now, it's at 29. Those aren't even in the same state, let alone the same ballpark.

What will you do if small-cap value lags the total stock market for the next 10 years? Would you stick with your tilt? According to Eugene Fama and Kenneth French: “Negative equity premiums and negative premiums of value and small stock returns relative to market are commonplace for three- to five-year periods, and they are far from rare for ten-year periods. Given this uncertainty, investors who will abandon equities or tilts toward value or small stocks in the face of three, five, or even ten years of disappointing returns may be wise to avoid these strategies in the first place.” https://www.cfainstitute.org/en/researc ... j-v74-n3-6.

Precisely. While SCV in the U.S. has only lagged the S&P 500 once in a 20 year period, not many individual investors would be willing to be 100% SCV and then proceed to hold it for 20 years to finally see it outperform. And there's obviously no guarantee that it will outperform for any specific investor's time frame.

[MotoTrojan]

What will you do if small-cap value lags the total stock market for the next 10 years? Would you stick with your tilt? According to Eugene Fama and Kenneth French: “Negative equity premiums and negative premiums of value and small stock returns relative to market are commonplace for three- to five-year periods, and they are far from rare for ten-year periods. Given this uncertainty, investors who will abandon equities or tilts toward value or small stocks in the face of three, five, or even ten years of disappointing returns may be wise to avoid these strategies in the first place.” https://www.cfainstitute.org/en/researc ... j-v74-n3-6.

+1, value (HML) is currently in a 13 year drawdown, one of the worst in history (even looking back 200 years with some proxies for value) both in length and drawdown (59% at bottom).

OP, I would view what happened in Japan as evidence that SCV isn't doomed in a ZIRP environment, but I would not use it as evidence that it will outperform. If you weren't convinced of the factor tilts without that knowledge, then you weren't convinced at all.

I strongly believe in the value premium but not even I am brave enough to go 100%; I hold 35% S&P500 with the rest in global value funds, some of them quite deeply tilted (QVAL, IVAL, AVUV, FNDC).

If you really wanted to go with a 100% factor tilted portfolio I would do something more along the lines of 50/50 value/momentum, as discussed here:

https://alphaarchitect.com/2020/06/26/d ... -momentum/

[MotoTrojan]

I have a 5% SCV tilt but I'm not willing to go much beyond that. I prefer diversity.

I would just merge this into TSM. Even if SCV outperforms by 2% long-term after fees (I would be thrilled), you are gaining 10bp (not worth the complexity for me at-least).

[1789]

100% SCV seems a bit extreme

[rkhusky]

If you believe the Fama French 3-factor model, most long-only SV funds have a market beta close to 1, so you wouldn’t need to add a total market fund.

[Blue456]

100% SCV seems a bit extreme

Why is 100% LCV not extreme?