Investors Were Warned.

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Taylor Larimore
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Investors Were Warned.

Post by Taylor Larimore »

Bogleheads:

The quarantine for the Coronavirus has given me an opportunity to review some old posts.

I was somewhat surprised to read many old posts warning us about the risk in Small-Cap and Small-Cap Value Funds (Small-Cap Value Funds are the worst performing of all Morningstar style categories). These were some of the warnings that have come true:

12-18-99 by Taylor: "Before you rely on past returns "proving" Small Company Growth funds to be the worst performers, consider this from John Waggoner in USA today 12-17-99: "Small-Company growth funds soard 372% the past 10 years, vs. 183% for small-company value.

8-26-2000 by jdvmd54: "DFA people keep saying small will outperform in the future. That is simply wrong and misleading. No one really knows."

8-15-2001 Taylor quoting Bogle: "Much of the early data on small caps is terribly flawed."

8-31-2001 by Vanguard's Gus Sauter: "I do not believe there is any reason to suspect that a given style will provide long-term outperformance. -- By buying the entire market, you significantly reduce the risk that such a focused approach entails."

4-09-02 by mole1: Interview with Burton Malkiel: "But if small stocks do poorly, anyone who put half his assets there when the rest of the market has only 20%, will fell like an absolute idiot. That's why I think a total stock market index fund is not only the simplest, but the very best core investment for most people."

11-28-02 astigra posted interview with Jack Bogle: "The evidence to justify the claim of small-cap superiority is too fragile a foundation on which to base a long-term strategy."

6-30-2003 by Taylor: "Overweighting styles and sectors is not that important in the long-term, and may not make any difference at all." - Rick Ferri' There are many authorities that agree with Rick's statement. I happen to be one of them. Mr. Bogle is another."

8-12-03 Lucas McCain posted this Rick Ferri quote: "I am 100% convinced that slice and dice has much more to do with marketing than money management."

8-28-2003 Houge-Loughran Study: "We Find no evidence that value portfolios significantly outperform growth portfolios."

9-8-2003 Taylor posted interview with Jason Zweig: "The so-called 'small-cap premium' is a complete illusion."

10-04-2003 Rick Ferri: "By overweighting to small-value, you are also adding risk above and beyond stock market risk."

1-02-2004 by ChristineM on Value study abstract: "The value premium is a small, concentrated and dying phenomenon."

03-16-04 by hafis50: "An economic downturn after the bursting of a stock market bubble may adversely affect small caps and value stocks much more than TSM."

4-09-2006 by Taylor: "My own feeling is that you can't go wrong (especially in taxable accounts) owning Total Stock Market Index Fund which owns nearly all growth, blend, and value stocks."

8-16-2004 by Taylor: "In my opinion it is very difficult (and may be dangerous) to try to "beat the market."

8-23-2004 by travismorien quoting Charlie Munger (Buffett's business partner): The whole concept of dividing it up into "value" and "growth" strikes me as twaddle. It's convenient for a bunch of pension fund consultants to get fees prattling about, and a way for one advisor to distinguish himself from another."

9-17-04 by jijnxxx: "Slice & dicers frequently mention the Fama/French influence on their strategy of tilting away from the cap-weighted total market and towards value and small-stocks. It's interesting that Fama himself does not endorse this interpretation of his research."

12-18-04 by Taylor: "Gummy has a webpage showing annual and average Value and S&P 500 returns and volatility from 1928-2000, During this period, Value stocks experienced approximately 50% more volatility than Growth stocks."

4-29-2006: Wm. Coaker II quote: "In 1998-1999 when the S&P 500 gained 55.6%, small value lost 7.9%."

7-18-2006 by Steverino: "Also, beware that small stocks can get hammered in down markets."

9-23-2006: by Taylor: "It was not long ago that few investors wanted to own Small Cap Value (SCV).Those that did were sorry. 15 year returns: LCG 17.15%; SCV 11.34%"

6-15-007 Bogle Blog: "I'm not one for trying to guess which styles will outperform or underperform--or when--and the data clearly show such changes are anything but sustainable or predictable."

8-17-2008 Taylor posted this Vanguard Quote: "After considering the evidence, Vanguard maintains that investors should generally hold market-weighted equity portfolios."

2/8/2015 JoMoney: "Portfolio Constituency Rules and Value Premium in the Small-Cap Value Space": "Our results may go a long way in explaining why the returns of market-based growth fund managers are statistically equal to returns of value fund managers over time

9-7-2017 Nisiprius: "There is not the slightest bit of support here for the idea that the value factor had any important effect in minimizing the effect of a bear market."

11/06/2018 Taylor: "According to a 90-year study by Bessembinder, when buy-and-hold portfolios of stocks are sorted by beginning market cap and held for a decade, large-cap portfolio returns are higher (153%) than the mean returns for small-cap portfolios (97%).

11/26/2018 Vanguard: "We believe that your portfolio should be style-neutral, not based toward either growth or value stocks."

Lesson learned: It can be expensive to ignore Boglehead Forum advice.

Best wishes.
Taylor
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Bogle64Pilot
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Re: Investors Were Warned.

Post by Bogle64Pilot »

And that is why I buy and hold ITOT. It’s the entire market and has plenty of international exposure for my tastes.
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Re: Investors Were Warned.

Post by arcticpineapplecorp. »

Bogle64Pilot wrote: Mon Aug 31, 2020 3:05 pm And that is why I buy and hold ITOT. It’s the entire market and has plenty of international exposure for my tastes.
itot since inception 1/20/2004 underperformed VTSAX (vanguard's total stock market index fund):

Image
source:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

so itot is less diversified (less stocks) and underperformed since it's inception. just saying.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: Investors Were Warned.

Post by pasadena »

I'm tempted to say "Past Bogleheads Advice Performance Is No Guarantee of Future Results" 8-) :D
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Re: Investors Were Warned.

Post by Greg in Idaho »

There's always tax loss harvesting :D
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Re: Investors Were Warned.

Post by White Coat Investor »

I'm looking forward to pulling this thread back up in 5 or 10 years when SV is the best performing asset class and LG has been underperforming for a while. It has swung back and forth for decades and likely will again.

The same kind of post could have been made about international stocks, but they'll come back in favor in a while.
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Re: Investors Were Warned.

Post by JoeRetire »

Taylor Larimore wrote: Mon Aug 31, 2020 3:01 pmLesson learned: It can be expensive to ignore Boglehead Forum advice.
It can be expensive to ignore the advice.

Of course since much of the advice here is contradicted by just as much other advice here, it can be expensive to follow the advice.

It's not hard to cherry pick examples to support any "you were warned" point you choose. Particularly if you are willing to go back 11 years to find it.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
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Re: Investors Were Warned.

Post by JoeRetire »

pasadena wrote: Mon Aug 31, 2020 3:54 pm I'm tempted to say "Past Bogleheads Advice Performance Is No Guarantee of Future Results" 8-) :D
I'd be tempted to say "Some Boglehead Advice is worth every penny we pay for it".
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
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vineviz
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Re: Investors Were Warned.

Post by vineviz »

Taylor Larimore wrote: Mon Aug 31, 2020 3:01 pm
Lesson learned: It can be expensive to ignore Boglehead Forum advice.
Or Lesson Learned: even experienced investors fall prey to the same behavior errors we see novice investors make.

Confirmation bias and performance chasing are hard habits to shake, it seems.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Investors Were Warned.

Post by MotoTrojan »

White Coat Investor wrote: Mon Aug 31, 2020 3:57 pm I'm looking forward to pulling this thread back up in 5 or 10 years when SV is the best performing asset class and LG has been underperforming for a while. It has swung back and forth for decades and likely will again.

The same kind of post could have been made about international stocks, but they'll come back in favor in a while.
I have found Taylor's posts from the early/mid 2000's still bashing on SCV even after a huge run and using back-tests with cherry-picked dates to justify a market portfolio. I also look forward to this.
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Re: Investors Were Warned.

Post by burritoLover »

Wow, Taylor is promoting large cap growth stocks now.
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Re: Investors Were Warned.

Post by Kenkat »

You may be right
I may be crazy
But it just may be a lunatic you're looking for
Turn out the light
Don't try to save me
You may be wrong for all I know
But you may be right
— Aristotle (or was it Pliny the Elder?)
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Re: Investors Were Warned.

Post by jason2459 »

arcticpineapplecorp. wrote: Mon Aug 31, 2020 3:42 pm
Bogle64Pilot wrote: Mon Aug 31, 2020 3:05 pm And that is why I buy and hold ITOT. It’s the entire market and has plenty of international exposure for my tastes.
itot since inception 1/20/2004 underperformed VTSAX (vanguard's total stock market index fund):

Image
source:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

so itot is less diversified (less stocks) and underperformed since it's inception. just saying.
ITOT has had better tax efficiency. I don't see anything wrong with either funds. They make an absolutely great TLH pair. There is a very small difference in count of stocks they each hold and at the very small market cap weightings that make very little difference. I would not call it less diversified.

With monthly additions in accumulation I can scroll across and see where the two have equal or very narrow outcomes in return.
https://www.portfoliovisualizer.com/bac ... ion2_2=100


Edit: I also had to look it up to confirm but ITOT has more holdings but I would not say it's more diversified or that it's a plus or negative.

As of this post according to their website:
ITOT: 3,557
VTI: 3529
Last edited by jason2459 on Mon Aug 31, 2020 4:12 pm, edited 3 times in total.
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Re: Investors Were Warned.

Post by CycloRista »

JoeRetire wrote: Mon Aug 31, 2020 4:00 pm
pasadena wrote: Mon Aug 31, 2020 3:54 pm I'm tempted to say "Past Bogleheads Advice Performance Is No Guarantee of Future Results" 8-) :D
I'd be tempted to say "Some Boglehead Advice is worth every penny we pay for it".
As a Tyrannosaurus Rex (deep pockets with very short arms), I can definitely identify with that one ;)
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Re: Investors Were Warned.

Post by arcticpineapplecorp. »

jason2459 wrote: Mon Aug 31, 2020 4:07 pm
arcticpineapplecorp. wrote: Mon Aug 31, 2020 3:42 pm
Bogle64Pilot wrote: Mon Aug 31, 2020 3:05 pm And that is why I buy and hold ITOT. It’s the entire market and has plenty of international exposure for my tastes.
itot since inception 1/20/2004 underperformed VTSAX (vanguard's total stock market index fund):

Image
source:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

so itot is less diversified (less stocks) and underperformed since it's inception. just saying.
ITOT has had better tax efficiency. I don't see anything wrong with either funds. They make an absolutely great TLH pair. There is a very small difference in count of stocks they each hold and at the very small market cap weightings that make very little difference. I would not call it less diversified.

With monthly additions in accumulation I can scroll across and see where the two have equal or very narrow outcomes in return.
https://www.portfoliovisualizer.com/bac ... ion2_2=100


Edit: I also had to look it up to confirm but ITOT has more holdings but I would not say it's more diversified or that it's a plus or negative.

As of this post according to their website:
ITOT: 3,557
VTI: 3529
thanks. I assumed it had 1500 stocks because it was a S&P1500 fund, but that was a mistake on my part. The Wilshire 5000 didn't have 5000 stocks. thanks for the correction.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: Investors Were Warned.

Post by Robert T »

.
I understand the sentiment that tracking error from the market makes it hard to stay the course. I think the message is that if investors do not think there can be long periods of underperformance of small cap value funds they will be disappointed and unlikely to stay the course with a tilted portfolio.
These were some of the warnings that have come true:
....
8-26-2000 by jdvmd54: "DFA people keep saying small will outperform in the future. That is simply wrong and misleading. No one really knows."
Hmm ... those dumb academics. Here’s the performance of Bernstein’s Academic Cowards since Sept. 2000....
https://www.portfoliovisualizer.com/bac ... tion6_2=50

Obviously no guarantees.
.
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Re: Investors Were Warned.

Post by McGilicutty »

Excellent post, Taylor. Some people just won't listen to reason.
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Re: Investors Were Warned.

Post by jason2459 »

Robert T wrote: Mon Aug 31, 2020 4:38 pm .
I understand the sentiment that tracking error from the market makes it hard to stay the course. I think the message is that if investors do not think there can be long periods of underperformance of small cap value funds they will be disappointed and unlikely to stay the course with a tilted portfolio.
These were some of the warnings that have come true:
....
8-26-2000 by jdvmd54: "DFA people keep saying small will outperform in the future. That is simply wrong and misleading. No one really knows."
Hmm ... those dumb academics. Here’s the performance of Bernstein’s Academic Cowards since Sept. 2000....
https://www.portfoliovisualizer.com/bac ... tion6_2=50

Obviously no guarantees.
.
Then change that to 80/20 vtsax/vtiax as recommended by Taylor for the equities portion. :beer

https://www.portfoliovisualizer.com/bac ... tion6_2=20
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Re: Investors Were Warned.

Post by rob »

I'm sorry but what's the end state of this post? I think we all have to be careful about dogma....
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Re: Investors Were Warned.

Post by Whakamole »

jason2459 wrote: Mon Aug 31, 2020 4:47 pm
Robert T wrote: Mon Aug 31, 2020 4:38 pm .
I understand the sentiment that tracking error from the market makes it hard to stay the course. I think the message is that if investors do not think there can be long periods of underperformance of small cap value funds they will be disappointed and unlikely to stay the course with a tilted portfolio.
These were some of the warnings that have come true:
....
8-26-2000 by jdvmd54: "DFA people keep saying small will outperform in the future. That is simply wrong and misleading. No one really knows."
Hmm ... those dumb academics. Here’s the performance of Bernstein’s Academic Cowards since Sept. 2000....
https://www.portfoliovisualizer.com/bac ... tion6_2=50

Obviously no guarantees.
.
Then change that to 80/20 vtsax/vtiax as recommended by Taylor for the equities portion. :beer

https://www.portfoliovisualizer.com/bac ... tion6_2=20
You just cut ten years off the chart because of when VTIAX was introduced, as the page noted.

Going back to 2001 by using a fund that was available back then (VGTSX, the non-admiral version of total international) - small caps still win :moneybag

https://www.portfoliovisualizer.com/bac ... tion6_2=20
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Re: Investors Were Warned.

Post by Chuck107 »

McGilicutty wrote: Mon Aug 31, 2020 4:42 pm Excellent post, Taylor. Some people just won't listen to reason.
+1
Alas, I find moderation of this forum too restrictive for my tastes, farewell.
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Re: Investors Were Warned.

Post by burritoLover »

I'd rather trust the substantial academic research and 100 years of data supporting the value premium than a bunch of talking heads with cherry picked data to fit their own biases.
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Re: Investors Were Warned.

Post by Grt2bOutdoors »

McGilicutty wrote: Mon Aug 31, 2020 4:42 pm Excellent post, Taylor. Some people just won't listen to reason.
I just bought more Small Value at a discount to Friday’s price.
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Re: Investors Were Warned.

Post by jason2459 »

rob wrote: Mon Aug 31, 2020 4:51 pm I'm sorry but what's the end state of this post? I think we all have to be careful about dogma....
No one knows what the end state will be. ""Past performance is no guarantee of future results". Or nobody knows nothing.
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Re: Investors Were Warned.

Post by mrspock »

rob wrote: Mon Aug 31, 2020 4:51 pm I'm sorry but what's the end state of this post? I think we all have to be careful about dogma....
I hope you realize the irony of this statement. Small cap investing is often put forth as fairly certain way to squeeze an extra 1-1.5% of alpha from a portfolio, compounding into a small fortune over the decades. The reality is, it's far from even "fairly certain", it's hotly debated, and there's a good chance it's complete and utter nonsense (an artifact of data mining) aka "Dogma".

The current best theory is that small cap value derives it's alpha from the additional risk an investor takes on. To which I say, if investing were that easy, people would just go find the equities with the highest volatility, create an ETF and just sit and collect the profits. Tons of books easily disprove this approach -- it just doesn't work.

So we are then left with what? Hope? Faith? Hardly sound investment principals. If you really want to take on more risk to get some additional return, I think it's much easier just to tilt to a heavier equity AA, vs risk decades of underperformance for some modest increase in returns which people could get in far more effective ways (e.g. saving more, reducing expenses, AA adjustments etc).
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Re: Investors Were Warned.

Post by burritoLover »

mrspock wrote: Mon Aug 31, 2020 5:01 pm
rob wrote: Mon Aug 31, 2020 4:51 pm I'm sorry but what's the end state of this post? I think we all have to be careful about dogma....
The current best theory is that small cap value derives it's alpha from the additional risk an investor takes on. To which I say, if investing were that easy, people would just go find the equities with the highest volatility, create an ETF and just sit and collect the profits. Tons of books easily disprove this approach -- it just doesn't work.
So, you're saying there's also no risk premium for equities over bonds then. Since you could just sit on an ETF of 100% equities and "collect the profits" over bonds and that doesn't make sense to you.
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Re: Investors Were Warned.

Post by Robert T »

.
Then change that to 80/20 vtsax/vtiax as recommended by Taylor for the equities portion. :beer

https://www.portfoliovisualizer.com/bac ... tion6_2=20
Confirmation bias. As humans - just human nature - we are all prone to it (Taylor, me, you, everyone). Yes we can change the time periods, allocation percentages, funds etc to support our respective narratives/ views of the world. We, as humans, are twice as likely to look for data points that ‘prove’ our respective views, than those that refute it. I was jut pointing out that one of the selected points Taylor was using to ‘prove’ small cap and small cap value have performed poorly was not true. We will all continue to be prone to confirmation bias. Just need to be aware of it (myself included).
.
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Re: Investors Were Warned.

Post by Robot Monster »

Is there a Boglehead pledge paddle for all those that dare to defy such warnings? Nothing like doling out red, hot spankings to the rebellious few.

I would like to officially cast a new warning into the wind...

"If you continue investing in Total Stock, you will endure much pain, and shed many tears, watching QQQ outperform."

You have now been warned.
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Re: Investors Were Warned.

Post by Carol88888 »

Whakamole wrote: Mon Aug 31, 2020 4:54 pm
jason2459 wrote: Mon Aug 31, 2020 4:47 pm
Robert T wrote: Mon Aug 31, 2020 4:38 pm .
I understand the sentiment that tracking error from the market makes it hard to stay the course. I think the message is that if investors do not think there can be long periods of underperformance of small cap value funds they will be disappointed and unlikely to stay the course with a tilted portfolio.
These were some of the warnings that have come true:
....
8-26-2000 by jdvmd54: "DFA people keep saying small will outperform in the future. That is simply wrong and misleading. No one really knows."
Hmm ... those dumb academics. Here’s the performance of Bernstein’s Academic Cowards since Sept. 2000....
https://www.portfoliovisualizer.com/bac ... tion6_2=50

Obviously no guarantees.
.
Then change that to 80/20 vtsax/vtiax as recommended by Taylor for the equities portion. :beer

https://www.portfoliovisualizer.com/bac ... tion6_2=20
You just cut ten years off the chart because of when VTIAX was introduced, as the page noted.

Going back to 2001 by using a fund that was available back then (VGTSX, the non-admiral version of total international) - small caps still win :moneybag

https://www.portfoliovisualizer.com/bac ... tion6_2=20
I think I know why. Large cap growth had a tremendous run until 2000. But afterwards, value and small and midcaps still eked out positive returns during the decade of 2000-2010 - the so-called "lost decade" for the S&P 500. I think we might see this reversal again after this bull market ends. Whenever that is......
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Re: Investors Were Warned.

Post by pasadena »

JoeRetire wrote: Mon Aug 31, 2020 4:00 pm
pasadena wrote: Mon Aug 31, 2020 3:54 pm I'm tempted to say "Past Bogleheads Advice Performance Is No Guarantee of Future Results" 8-) :D
I'd be tempted to say "Some Boglehead Advice is worth every penny we pay for it".
And more :)
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Re: Investors Were Warned.

Post by austin757 »

On a related note, I have been considering selling my Small-Cap fund (VB) and buying TSM instead. My reasoning is simplicity, but I'm not all that convinced about it outperforming TSM. I only have a slight capital gain on it and it would be small tax bill. Decisions, decisions...
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Re: Investors Were Warned.

Post by jason2459 »

Robert T wrote: Mon Aug 31, 2020 5:06 pm .
Then change that to 80/20 vtsax/vtiax as recommended by Taylor for the equities portion. :beer

https://www.portfoliovisualizer.com/bac ... tion6_2=20
Confirmation bias. As humans - just human nature - we are all prone to it (Taylor, me, you, everyone). Yes we can change the time periods, allocation percentages, funds etc to support our respective narratives/ views of the world. We, as humans, are twice as likely to look for data points that ‘prove’ our respective views, than those that refute it. I was jut pointing out that one of the selected points Taylor was using to ‘prove’ small cap and small cap value have performed poorly was not true. We will all continue to be prone to confirmation bias. Just need to be aware of it (myself included).
.
I absolutely agree. We can all play around with past statistics until something agrees with what I want it to say. :mrgreen:
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Re: Investors Were Warned.

Post by Ed 2 »

Bogle64Pilot wrote: Mon Aug 31, 2020 3:05 pm And that is why I buy and hold ITOT. It’s the entire market and has plenty of international exposure for my tastes.
:sharebeer Same here! Vanguard Total Stock Market at Vanguard and ITOT at Fidelity. Never getting old! A friend of mine who is an active investor keep telling me “ I bought more of new cloud company high flyer today “ I replying “ I have it already “ . He asks “where?” I unswerving “ in my ITOT “
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Re: Investors Were Warned.

Post by absolute zero »

Wow what a disappointing thread.

"Stay the course! Don't performance chase! Those are the most important investing principles! Unless your portfolio is different than mine...in which case let me tell you about how much your portfolio sucks."
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Re: Investors Were Warned.

Post by muffins14 »

I hope that one day I can quote myself in a post about confirmation bias
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Re: Investors Were Warned.

Post by mrspock »

burritoLover wrote: Mon Aug 31, 2020 5:06 pm
mrspock wrote: Mon Aug 31, 2020 5:01 pm
rob wrote: Mon Aug 31, 2020 4:51 pm I'm sorry but what's the end state of this post? I think we all have to be careful about dogma....
The current best theory is that small cap value derives it's alpha from the additional risk an investor takes on. To which I say, if investing were that easy, people would just go find the equities with the highest volatility, create an ETF and just sit and collect the profits. Tons of books easily disprove this approach -- it just doesn't work.
So, you're saying there's also no risk premium for equities over bonds then. Since you could just sit on an ETF of 100% equities and "collect the profits" over bonds and that doesn't make sense to you.
What I'm saying is "risk premium" is just a model to understand how investors value different asset classes. But just that.... it's a model. By the very definition of a model it's prone to being over simplified, have input/output problems (i.e. garbage in, garbage out) or may simply not work if you sufficiently change the context in which it is applied (i.e. all of equities to specific groups of equities, time interval). It's pretty clear you cannot arbitrarily apply the idea of "risk premium" and go blindly applying it to every permutation of financial instruments under the sun.

A slightly different way to look at it: US equities as a whole more often than not, produce returns which exceed inflation by a healthy margin for fairly long stretches (say 5-10 years), and don't have long stretches where they lag inflation. Another asset class might have higher returns over 50 year periods, but what good is it if you have to wait multiple generations to finally collect on that "alpha"? In other words, the quality of regularity (i.e. the interval over which a trend repeats) is worth something and people shouldn't forget this.
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Re: Investors Were Warned.

Post by yules »

Looks like Taylor was bored today, lol

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zaboomafoozarg
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Re: Investors Were Warned.

Post by zaboomafoozarg »

I'll stick with my international and SCV for a couple more decades even though this forum makes fun of it.

Maybe I'll think about simplifying around retirement time.
Last edited by zaboomafoozarg on Mon Aug 31, 2020 8:47 pm, edited 2 times in total.
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Matigas
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Re: Investors Were Warned.

Post by Matigas »

So we use past performance to prove that past performance proves nothing?
columbia
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Re: Investors Were Warned.

Post by columbia »

Tilting to SCV means yamong on more risk, so I would hope investors have been rewarded in long run

Have they? I don't invest that way, but i presume it hasn't been a slam dunk.
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Re: Investors Were Warned.

Post by langlands »

mrspock wrote: Mon Aug 31, 2020 8:19 pm
burritoLover wrote: Mon Aug 31, 2020 5:06 pm
mrspock wrote: Mon Aug 31, 2020 5:01 pm
rob wrote: Mon Aug 31, 2020 4:51 pm I'm sorry but what's the end state of this post? I think we all have to be careful about dogma....
The current best theory is that small cap value derives it's alpha from the additional risk an investor takes on. To which I say, if investing were that easy, people would just go find the equities with the highest volatility, create an ETF and just sit and collect the profits. Tons of books easily disprove this approach -- it just doesn't work.
So, you're saying there's also no risk premium for equities over bonds then. Since you could just sit on an ETF of 100% equities and "collect the profits" over bonds and that doesn't make sense to you.
What I'm saying is "risk premium" is just a model to understand how investors value different asset classes. But just that.... it's a model. By the very definition of a model it's prone to being over simplified, have input/output problems (i.e. garbage in, garbage out) or may simply not work if you sufficiently change the context in which it is applied (i.e. all of equities to specific groups of equities, time interval). It's pretty clear you cannot arbitrarily apply the idea of "risk premium" and go blindly applying it to every permutation of financial instruments under the sun.

A slightly different way to look at it: US equities as a whole more often than not, produce returns which exceed inflation by a healthy margin for fairly long stretches (say 5-10 years), and don't have long stretches where they lag inflation. Another asset class might have higher returns over 50 year periods, but what good is it if you have to wait multiple generations to finally collect on that "alpha"? In other words, the quality of regularity (i.e. the interval over which a trend repeats) is worth something and people shouldn't forget this.
A minor quibble- in academic finance, alpha usually refers to excess riskless return. That's why AQR likes to call its factor investing (value or momentum) "smart beta." So the risk premium is by definition not alpha.

There's a constant tension between the risk premium and the "regularity" of its occurrence as you say. If the risk premium occurs too regularly, it becomes riskless and hence the premium goes away. The fact that the premium on US equities occurs so regularly is in fact known as the equity premium puzzle. Many economists are puzzled by the fact that the US stock market rose so much faster than inflation at such a regular pace. In other words, investors received a generous risk premium for taking on seemingly little risk. A puzzle seems to be building for the value factor in the opposite direction.
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Re: Investors Were Warned.

Post by yules »

Matigas wrote: Mon Aug 31, 2020 8:44 pm So we use past performance to prove that past performance proves nothing?
Only when it supports “Jack Bogle’s Words of wisdom”!
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Re: Investors Were Warned.

Post by White Coat Investor »

arcticpineapplecorp. wrote: Mon Aug 31, 2020 4:31 pm
jason2459 wrote: Mon Aug 31, 2020 4:07 pm
arcticpineapplecorp. wrote: Mon Aug 31, 2020 3:42 pm
Bogle64Pilot wrote: Mon Aug 31, 2020 3:05 pm And that is why I buy and hold ITOT. It’s the entire market and has plenty of international exposure for my tastes.
itot since inception 1/20/2004 underperformed VTSAX (vanguard's total stock market index fund):

Image
source:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

so itot is less diversified (less stocks) and underperformed since it's inception. just saying.
ITOT has had better tax efficiency. I don't see anything wrong with either funds. They make an absolutely great TLH pair. There is a very small difference in count of stocks they each hold and at the very small market cap weightings that make very little difference. I would not call it less diversified.

With monthly additions in accumulation I can scroll across and see where the two have equal or very narrow outcomes in return.
https://www.portfoliovisualizer.com/bac ... ion2_2=100


Edit: I also had to look it up to confirm but ITOT has more holdings but I would not say it's more diversified or that it's a plus or negative.

As of this post according to their website:
ITOT: 3,557
VTI: 3529
thanks. I assumed it had 1500 stocks because it was a S&P1500 fund, but that was a mistake on my part. The Wilshire 5000 didn't have 5000 stocks. thanks for the correction.
It used to. Fewer IPOs, most companies going private or out of business, more mergers and thus fewer stocks.
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Re: Investors Were Warned.

Post by EddyB »

I suppose Taylor will give us an accounting of any of his (and the other sources quoted here) warning or advice that hasn’t panned out, too? Or is this to suggest there have been none?
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Re: Investors Were Warned.

Post by 000 »

Investors were also warned, by none other than Jack Bogle, about valuations prior to the dot com crash.

Should they have taken some action in regard to that warning?
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Re: Investors Were Warned.

Post by Pepper11 »

Greg in Idaho wrote: Mon Aug 31, 2020 3:55 pm There's always tax loss harvesting :D
Absolutely! Literally the only good thing SCV ever did for me. Glad I got out when I did for Large Growth. Best investment decision I have made thus far.
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Re: Investors Were Warned.

Post by willthrill81 »

000 wrote: Mon Aug 31, 2020 9:06 pm Investors were also warned, by none other than Jack Bogle, about valuations prior to the dot com crash.

Should they have taken some action in regard to that warning?
Mr. Bogle was not nearly as dogmatic as many here with regard to the BH principles. For him, they were much more akin to 'strong guidelines' than 'strict rules'.

He timed the market at least once (quite successfully, though he later said that he didn't know any successful market timers).

He told investors to 'buy the haystack' as long as that 'haystack' was U.S. stock.

He was the father of index investing but was open to active investing if the costs were low (e.g. his stake in Wellington).

He eschewed value investing but had a significant holding in a fund with a decided value tilt (i.e. Wellington).

He eschewed gold and commodities but once recommended a 5% allocation to gold for an endowment fund.

None of that makes lessens his contributions or anything else. Quite the contrary, I admire that he was not closed minded to new or different ways to approach investing or to truly unique market opportunities.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Investors Were Warned.

Post by rob »

mrspock wrote: Mon Aug 31, 2020 5:01 pm
rob wrote: Mon Aug 31, 2020 4:51 pm I'm sorry but what's the end state of this post? I think we all have to be careful about dogma....
I hope you realize the irony of this statement. Small cap investing is often put forth as fairly certain way to squeeze an extra 1-1.5% of alpha from a portfolio, compounding into a small fortune over the decades. The reality is, it's far from even "fairly certain", it's hotly debated, and there's a good chance it's complete and utter nonsense (an artifact of data mining) aka "Dogma".

The current best theory is that small cap value derives it's alpha from the additional risk an investor takes on. To which I say, if investing were that easy, people would just go find the equities with the highest volatility, create an ETF and just sit and collect the profits. Tons of books easily disprove this approach -- it just doesn't work.

So we are then left with what? Hope? Faith? Hardly sound investment principals. If you really want to take on more risk to get some additional return, I think it's much easier just to tilt to a heavier equity AA, vs risk decades of underperformance for some modest increase in returns which people could get in far more effective ways (e.g. saving more, reducing expenses, AA adjustments etc).
I don't understand your larger point - and volatility <> risk.... If I read your reply correctly we should be only "total" market investors... I mostly agree (sans some topics around free float vs. actual for stock & bonds) but almost no one here does that, least of all the segment that is most vocal about the one true path. I'm not sure of the aim of the thread and it's value (intended pun :-) ) other than to call out a bad outcome with the benefit of hindsight. Yes... SCV has been poor for some time, so has international, emerging markets and others. Anything that has owned large tech US companies has done very well recently. With hindsight I would have loaded up on apple & uber and bit-coin....
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
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Re: Investors Were Warned.

Post by Robot Monster »

Taylor Larimore wrote: Mon Aug 31, 2020 3:01 pm 8-16-2004 by Taylor: "In my opinion it is very difficult (and may be dangerous) to try to "beat the market."
Since August 2004 VTI had a 9.47% CAGR, vs 12.29% for QQQ. Does this prove the advice was bad?
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Re: Investors Were Warned.

Post by whodidntante »

yules wrote: Mon Aug 31, 2020 8:40 pm Looks like Taylor was bored today, lol
We don't have to guess. He told us so in the first sentence of his post.
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