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Buying Growth + Value funds rather than Total Market

Posted: Sat Sep 05, 2020 3:24 pm
by RockLobster
Hello!

So, I was wondering what everyone's thoughts are on the benefits/downsides of having a portfolio that weights value and growth in equal amounts? Case in point, my investment advisor (1% AUM, all passive VG funds average ER 0.12) has split up most of my portfolio as below:

Domestic
12% VIGAX - Growth
12% VVIAX - Value
5% VMGM - Mid Cap Growth
5% VMVAX - Mid Cap Value
5% VSGAX - Small cap growth
5% VSIAX - Small cap value

I asked him why he was doing this and he gave an answer along the lines of we win either way if value or growth does better, but my thought is why not just have 24% total market, 10% mid cap, 10% small cap? It looks like the total/mid/small funds sit right in the middle between value/growth so it seems overly complicated. Am I missing something?

I plan on keeping with this advisor but soon taking back my taxable account (and my 1%), so didn't want to have a conversation in too much detail with him because he might get suspicious of my intentions. Would appreciate any input you all have!

Re: Buying Growth + Value funds rather than Total Market

Posted: Sat Sep 05, 2020 4:08 pm
by JoMoney
The cynic in me believes advisors do stuff like that to make it look more complex then it needs to be, so that it looks like they're managing something.
You might have a harder time paying an adviser that was just buying a 'Total Market' fund and just letting it be as simple as that.

Re: Buying Growth + Value funds rather than Total Market

Posted: Sat Sep 05, 2020 4:18 pm
by absolute zero
He’s using more funds than necessary in order to make his job look more complicated. That way you’ll keep paying him.

Re: Buying Growth + Value funds rather than Total Market

Posted: Sat Sep 05, 2020 4:30 pm
by RockLobster
That’s what I thought. Even though the rest of his advice has been excellent (we’ve been paying $100/mo retainer, AUM in addition after we started a taxable account) this does seem more per formative than anything else. That being said he has been really good about using new money to keep allocations on track. I’m no math whiz but maybe putting all that extra money into value (for example) will work out better for the long run when/if value starts outperforming?

However, I haven’t really seen this strategy recommended by other people I follow like Merriman or White Coat Investor (Hi Jim if you’re reading this!)

Re: Buying Growth + Value funds rather than Total Market

Posted: Sat Sep 05, 2020 4:36 pm
by Robot Monster
You can see a comparison of the recent performances.

https://www.portfoliovisualizer.com/bac ... ion10_2=10

Re: Buying Growth + Value funds rather than Total Market

Posted: Sat Sep 05, 2020 4:50 pm
by nisiprius
Unfortunately you didn't say what the rest of the portfolio is, but if we allocate 100% stocks in those same proportions, the percentages become
VIGAX Vanguard Growth Index Admiral 27.28%
VVIAX Vanguard Value Index Adm 27.28%
VMGMX Vanguard Mid-Cap Growth Index Admiral 11.36%
VMVAX Vanguard Mid-Cap Value Index Admiral 11.36%
VSGAX Vanguard Small Cap Growth Index Admiral 11.36%
VSIAX Vanguard Small Cap Value Index Admiral 11.36%

If I change them all to other share classes in order to look at a longer period of time, I get:

VIGRX Vanguard Growth Index Investor 27.28%
VIVAX Vanguard Value Index Inv 27.28%
VOT Vanguard Mid-Cap Growth ETF 11.36%
VMVIX Vanguard Mid-Cap Value Index Investor 11.36%
VISGX Vanguard Small Cap Growth Index Inv 11.36%
VISVX Vanguard Small Cap Value Index Inv 11.36%

Versus un-split,

VLACX Vanguard Large Cap Index Investor 54.56%
VIMSX Vanguard Mid Cap Index Investor 22.72%
NAESX Vanguard Small Cap Index Inv 22.72%

Here's how they would have performed since the inception date for Vanguard Mid-Cap Growth ETF:

Source

Image

Yes, there are two curves on that chart.

But of course we can go one step farther. Whose idea was it to split the stock market into separate large-cap, mid-cap, and small-cap funds? Because if we simply replace everything with a single holding,

VTSMX Vanguard Total Stock Mkt Idx Inv 100.00%

not only is there little visible difference, the difference represents (a microscopic) outperformance by dumb simple, plain vanilla Total Stock.

Image

The cynic in me thinks the same cynical things as others. A charitable possibility is that the advisor actually believes that since growth and value cannot perform identically, splitting them and rebalancing them must create a balancing bonus. I don't want to go down that particular rabbit hole except to say many people really do believe this, and I believe they are all wrong.

Re: Buying Growth + Value funds rather than Total Market

Posted: Sat Sep 05, 2020 5:08 pm
by tibbitts
You have to ask him for clarification. My guess is that if this is deferred money, he's got some rebalancing scheme where he uses indicators to shift funds from one to another, maybe very frequently.

Re: Buying Growth + Value funds rather than Total Market

Posted: Sat Sep 05, 2020 5:11 pm
by whereskyle
RockLobster wrote: Sat Sep 05, 2020 3:24 pm Hello!

So, I was wondering what everyone's thoughts are on the benefits/downsides of having a portfolio that weights value and growth in equal amounts? Case in point, my investment advisor (1% AUM, all passive VG funds average ER 0.12) has split up most of my portfolio as below:

Domestic
12% VIGAX - Growth
12% VVIAX - Value
5% VMGM - Mid Cap Growth
5% VMVAX - Mid Cap Value
5% VSGAX - Small cap growth
5% VSIAX - Small cap value

I asked him why he was doing this and he gave an answer along the lines of we win either way if value or growth does better, but my thought is why not just have 24% total market, 10% mid cap, 10% small cap? It looks like the total/mid/small funds sit right in the middle between value/growth so it seems overly complicated. Am I missing something?

I plan on keeping with this advisor but soon taking back my taxable account (and my 1%), so didn't want to have a conversation in too much detail with him because he might get suspicious of my intentions. Would appreciate any input you all have!
Dump the advisor, replace this part of your portfolio with VTI and add 1.09% to its annual return simply by reducing costs. You would never need to rebalance.

Or at least suggest this approach and see if the advisor can explain why you should not do that. For the record, that's what I would do.

Re: Buying Growth + Value funds rather than Total Market

Posted: Sat Sep 05, 2020 6:13 pm
by FIREchief
nisiprius wrote: Sat Sep 05, 2020 4:50 pm A charitable possibility is that the advisor actually believes that since growth and value cannot perform identically, splitting them and rebalancing them must create a balancing bonus. I don't want to go down that particular rabbit hole except to say many people really do believe this, and I believe they are all wrong.
I used to think like this (except on the vertical access, S&P 500 vs. extended market). I don't think like this any more. The "rebalancing bonus" is one of those almost universally accepted "truths" that isn't really true at all.... :twisted:

Re: Buying Growth + Value funds rather than Total Market

Posted: Sat Sep 05, 2020 6:14 pm
by FIREchief
RockLobster wrote: Sat Sep 05, 2020 4:30 pm That’s what I thought. Even though the rest of his advice has been excellent (we’ve been paying $100/mo retainer, AUM in addition after we started a taxable account) this does seem more per formative than anything else.
Am I reading this right? He's charging an extra $100 per month as a "retainer?" This over and above an AUM fee? Yikes!! I hope I misread that.... :?

Re: Buying Growth + Value funds rather than Total Market

Posted: Sat Sep 05, 2020 6:46 pm
by RetiredAL
JoMoney wrote: Sat Sep 05, 2020 4:08 pm The cynic in me believes advisors do stuff like that to make it look more complex then it needs to be, so that it looks like they're managing something.
You might have a harder time paying an adviser that was just buying a 'Total Market' fund and just letting it be as simple as that.
JoMoney - You are not cynic to believe that. I've experienced it first hand.

Wells Fargo Advisor's had my Dad's $350k Trust in a plan holding 50, a $150K IRA used a different plan of 30, and a second $100K IRA was in a 3rd plan of about 20. The first two plans had about a 50% overlap. The 3rd had totally different investments, but it's plan program was managed external to WFA and had another fee on top of the WFA fees.

It took me several years to convince him it could be done simply without an advisor.

Annual reviews were along the line of 'we selected well' if the accounts were up. If the market was down, 'oh well, it was a down year for everyone'.

Today, the Trust owns 2 equity ETF's and 2 bond ETF's. Most importantly, it's no longer generating gobs of un-needed taxable income each year. The IRAs, now combined and at Schwab, hold three equity ETF's and a bond fund.

Re: Buying Growth + Value funds rather than Total Market

Posted: Sat Sep 05, 2020 7:07 pm
by Elysium
RockLobster wrote: Sat Sep 05, 2020 4:30 pm That’s what I thought. Even though the rest of his advice has been excellent (we’ve been paying $100/mo retainer, AUM in addition after we started a taxable account) this does seem more per formative than anything else. That being said he has been really good about using new money to keep allocations on track. I’m no math whiz but maybe putting all that extra money into value (for example) will work out better for the long run when/if value starts outperforming?

However, I haven’t really seen this strategy recommended by other people I follow like Merriman or White Coat Investor (Hi Jim if you’re reading this!)
There are some behavioral aspects to this. As he said you win whether value or growth is in favor. While it is true that you will win with Total Market fund no matter what, some people may be tempted to chase performance with tilting when Growth is in favor (case in point many threads asking of investing in QQQ/VGT), and same is true when Value is in favor (SCV heads rejoice thread, and many other value tilting threads). When you are able to actually "see" that your Growth/Value fund is outperforming the market then psychologically you feel better, even though the other side is making it even with the market. This is because behavioral science says we tend to focus overly on our success and dismiss failure as bad luck. So long as there are no additional costs, there is nothing wrong in letting him do it this way.

The other possibility is that, he could end up slightly overweighting Value or Growth depending on which one is in favor, since the cycles tend to last for many years, some advisors incrementally overweight styles by following momentum. You have to ask him whether this is one of his plans. My guess is even if he doesn't plan to do this normally, he may be keeping that option open by splitting them this way.

Both methods are unnecessary in my view, and Total Market will do just fine. But this is not what I call a bad financial plan, you could much worse with someone pushing you into liquid alts and deep value tilting.